Rural development deduction, revenue expenditure, and outstanding liabilities: Tribunal principles on ownership, business purpose, and depreciation base.

Expenditure on an approved rural development programme was treated as deductible under section 35CC(1) because the assessee did not acquire ownership of the public school building renovated on Government or panchayat land, so section 35CC(2) was not attracted. Contribution to the railways for a platform and allied facilities was held to be revenue expenditure, as it secured business convenience rather than a capital asset or enduring ownership benefit. Old trade liabilities could not be added back merely because they remained outstanding for more than three years, since limitation does not extinguish the debt absent remission or cessation. Depreciation was also to be computed without reducing the subsidy from the written down value on the facts considered.

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Issues: (i) Whether expenditure incurred on a rural development programme was deductible under section 35CC(1) without attracting section 35CC(2) on the footing that the assessee did not become the owner of the asset created; (ii) whether contribution made to the railways for construction of a platform and related facilities was capital or revenue expenditure; (iii) whether old trade liabilities could be added back merely because they were outstanding for more than three years; and (iv) whether depreciation was to be computed after reducing subsidy received from the written down value of fixed assets.

Issue (i): Whether expenditure incurred on a rural development programme was deductible under section 35CC(1) without attracting section 35CC(2) on the footing that the assessee did not become the owner of the asset created.

Analysis: The programme was approved as a rural development programme and the work was undertaken on Government and panchayat land under permissions and resolutions requiring the completed school building to be handed back for public use. The assessee only spent money to renovate and extend an existing public school and to provide allied facilities. The circumstances showed that the assessee never intended to acquire ownership of the structure, and the statutory requirement of divestment under section 35CC(2) presupposes that ownership first vested in the assessee. The proper test was the purpose of the expenditure and the surrounding facts, not a presumed effect of ownership merely because money was spent.

Conclusion: The deduction under section 35CC(1) was admissible and section 35CC(2) did not apply, in favour of the assessee.

Issue (ii): Whether contribution made to the railways for construction of a platform and related facilities was capital or revenue expenditure.

Analysis: The payment secured better loading and unloading facilities at the railway siding and did not give the assessee an advantage of enduring ownership or a capital asset. The expenditure was incurred wholly and exclusively for business convenience and was consistent with the earlier view taken in the assessee's own case for the preceding year.

Conclusion: The expenditure was revenue in nature and allowable, in favour of the assessee.

Issue (iii): Whether old trade liabilities could be added back merely because they were outstanding for more than three years.

Analysis: Mere lapse of time does not extinguish the underlying liability; it only bars enforcement in a court of law. There was no evidence of remission, cessation, or abandonment by the creditors. The existence of an unpaid liability therefore could not justify the addition.

Conclusion: The addition was not sustainable, in favour of the assessee.

Issue (iv): Whether depreciation was to be computed after reducing subsidy received from the written down value of fixed assets.

Analysis: The issue was covered by the existing judicial view relied upon by the Tribunal and the appellate authority, under which the subsidy did not require reduction from the written down value for depreciation purposes on the facts considered.

Conclusion: The assessee's method was accepted and the Revenue's objection failed, in favour of the assessee.

Final Conclusion: The Revenue failed on all the contested grounds, and the appellate relief granted to the assessee was upheld in full.

Ratio Decidendi: For section 35CC, the relevant inquiry is whether the assessee actually acquired ownership of the asset created by the expenditure; where the assessee merely executes an approved public development programme on Government or panchayat land and hands the asset back for public use, section 35CC(2) is not attracted.

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