2009 (1) TMI 444 - HC - Income Tax

Court affirms Ghosunda Dam expenditure as revenue but disallows guest house expenses.

The court affirmed the ITAT's decision that the expenditure on the construction of Ghosunda Dam was revenue expenditure, benefiting the assessee's trade ... Capital or Revenue Expenditure- The return for the assessment year 1991-92 was filed by the assessee on December 13, 1991, showing a total income of Rs.341,99,319. However, a revised return was filed by the assessee on January 4, 1993, showing a loss of Rs.43,72,27,027. In the revised return, the assessee claimed deduction under section 37 of the Act of 1961 on account of investment in construction of Ghosunda Dam as revenue expenditure. The expenditure was incurred by the assessee in construction of part of the dam inasmuch as it required a large quantity of water for day-to-day operation of its super smelter located at Charideria. The Assessing Officer disallowed the same on the ground that the expenditure incurred in construction of Ghosunda Dam was of capital nature. That apart, the deduction claimed by the asses see in respect of expenditure on the guest house was also disallowed by the Assessing Officer. Commissioner (Appeals) and Tribunal allowed the expenditure. Held that- appeal filed by revenue partly allowed. Order passed for treating the expenditure incurred by the assessee in construction of the Ghosunda Dam as revenue expenditure is affirmed. However the order for reducing the guest house expenses disallowed by the assessing officer from Rs. 15,40,667 to Rs. 4,07,522 is set aside and the order passed by the Assessing Officer is restored. Issues Involved:1. Whether the expenditure on the construction of Ghosunda Dam is of capital or revenue nature.2. Whether the expenditure on the guest house is allowable under the specific provisions of section 37(4) and 37(5) of the Income-tax Act.Issue-wise Detailed Analysis:1. Expenditure on the Construction of Ghosunda Dam:The primary issue was whether the expenditure incurred by the assessee on the construction of Ghosunda Dam should be treated as capital or revenue expenditure. The Assessing Officer (AO) disallowed the expenditure, considering it to be of a capital nature. The Commissioner of Income-tax (Appeals) [CIT(A)] reversed this decision, treating the expenditure as revenue in nature. The Income-tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, emphasizing that the expenditure facilitated the assessee's trade operations, thereby enabling more efficient and profitable business conduct.The court noted that the super smelter plant required a large quantity of water for its day-to-day operation. The dam, owned by the State Government, was modified by the assessee to ensure water availability, without acquiring any ownership rights. The court referred to various judgments, including the Supreme Court's decision in Empire Jute Company Ltd. v. CIT [1980] 124 ITR 1, which highlighted that not all advantages of enduring nature should be treated as capital expenditure. The court concluded that the expenditure was operational, intended for the furtherance of the enterprise, and thus, should be treated as revenue expenditure. Consequently, the court affirmed the ITAT's decision, answering the question in favor of the assessee and against the Revenue.2. Expenditure on the Guest House:The second issue concerned the disallowance of guest house expenses. The AO disallowed Rs. 15,40,667, which the CIT(A) reduced to Rs. 4,07,522. The ITAT upheld the CIT(A)'s decision. The Revenue contended that the expenses were not allowable under sections 37(4) and 37(5) of the Income-tax Act, citing the Supreme Court's decision in Britannia Industries Ltd. v. CIT [2005] 278 ITR 546. The court agreed with the Revenue, noting that the language of the statute clearly excluded expenses towards rents, repairs, and maintenance of guest houses.The court held that the CIT(A) was not justified in reducing the disallowance made by the AO. Consequently, the court set aside the ITAT's order regarding the guest house expenses and restored the AO's original disallowance of Rs. 15,40,667. This question was answered in favor of the Revenue and against the assessee.Conclusion:The appeal by the Revenue was partly allowed. The court affirmed the ITAT's decision treating the expenditure on the construction of Ghosunda Dam as revenue expenditure. However, it set aside the ITAT's decision regarding the guest house expenses, restoring the AO's original disallowance. No order as to costs was made.