TaxTMI 
TaxTMI 
1993 (2) TMI 35
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....the purposes of boring a tube well. The assessee claimed deduction of that amount on the ground that it was revenue expenditure. The Income-tax Officer disallowed that claim on the ground that boring of tube well was not the business of the assessee and that the expenditure was incurred for the purposes of creation of an asset and, therefore, it was capital expenditure in nature. While passing the assessment order, the Income-tax Officer also passed an order in the following terms : ". . . . Charge interest under section 216." This order was passed by the Income-tax Officer as he found that the assessee had underestimated the advance tax payable by it and thereby reduced the amount payable in the first two instalments. The amount of interest was worked out at Rs. 41,410. The assessee challenged the assessment order and also the order passed under section 216 by filing a composite appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner agreed with the finding of the Income-tax Officer that the expenditure of Rs. 10,051 was not revenue in nature and that merely because a capital asset had not come into existence, the nature of the expenditure did n....
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....tube-well was required to be caped and it became useless for all practical purposes. Thus, even after the expenditure of Rs. 10,051, no capital asset came into existence. He submitted that, for these two reasons, viz., (i) that the amount was spent for the purpose of obtaining water which was required for the business of the company, and (ii) because no asset came into existence, the expenditure should have been regarded as revenue expenditure and should have been allowed by the Income-tax Officer. In support of his contention, the learned advocate for the assessee relied upon the following observation made by the Bombay High Court in CIT v. Associated Cement Companies Ltd. [1974] 96 ITR 650 (headnote): "When an expenditure is made not only once and for all but with a view to bringing into existence an asset or advantage for the enduring benefit of a trade such an expenditure is properly attributable not to revenue but to capital. But a payment made to remove the possibility of a recurring disadvantage cannot be considered as payment made to secure an enduring advantage." Relying upon this observation, it was submitted that the expenditure of Rs. 10,051 was made by the assess....
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....nnual business expenses. Moreover, in this case, as a result of the expenditure, a capital asset did come into existence though it became useless thereafter as the water which was obtained therefrom was not found suitable. Therefore, even if the test laid down in the case of Associated Cement Companies Ltd. is applied, it will have to be held that the expenditure incurred by the assessee for boring a tube-well was capital in nature and was, therefore, rightly disallowed. We may also refer to the decision of this court in CIT v. Shri Digvijay Cement Co. Ltd. [1986] 159 ITR 253 to which our attention was invited by learned counsel appearing for the Revenue wherein this court has held that, in order to determine whether an expenditure is of the nature of revenue or capital, the aim and object of the expenditure should be considered. An expenditure would be capital in nature, if it is made with a view to bringing into existence an asset or advantage of enduring nature and it is not at all necessary that it should have had that result. Therefore, even though the tube-well became useless in the sense that water obtained therefrom was not found suitable, it cannot be said that the expe....
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....garded as void, or, in any case, invalid. In order to support his contention, the learned advocate for the assessee drew our attention to some decisions of different High Courts. He first invited our attention to the decision of the Bombay High Court in Spaco Carburetors (India) Ltd. v. M. A. Ajinkya, CIT [1990] 186 ITR 360, wherein it is held that the question whether interest is or is not to be charged under section 216 arises only after the assessment is completed. The mere fact that the order under section 216 is found on the same sheet of paper on which the order of assessment is passed will not make the two orders one. For taking this view, the Bombay High Court also relied upon section 246 under which the assessment order and the order charging interest under section 216 are separately appealable. This decision has no direct bearing on the question which arises for our consideration, but it was relied upon only with a view to show that the order under section 216 is an independent order. What was further submitted on this premise was that, for that reason, it should be a complete order in the sense that it must record a necessary finding and should contain reasons in supp....
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....e existence of the element of mens rea. In this context, the Allahabad High Court held that, if, at the time when the estimate is filed, there is proper basis and justification shown for it, then it cannot be said that it is an underestimate. It further held that the question whether the assessee had some justification for the estimate filed or that it was an underestimate is to be examined with reference to the time when it was filed, as the assessee, while making the estimate, is not required to project himself in future. The Allahabad High Court also held that charging interest under section 216 is not automatic. It is discretionary and, for the exercise of discretion, the Income-tax Officer is required to examine the matter from the viewpoint as to whether the estimate filed by the assessee was in fact an underestimate. The Kerala High Court in Travancore Tea Estates Co. Ltd. v. CIT [1985] 153 ITR 444, was also called upon to examine the question of charging interest under section 216. It considered the scope of section 216 and has observed as under (at page 450) : "This section must be seen in two parts. The first part concerns the finding of the Income-tax Officer, at t....
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....mated the amount of advance tax payable by it. According to the Revenue, it was implicit when the Income-tax Officer decided to charge interest that the assessee had underestimated the advance tax payable by it. In this context, this court examined section 216 and held that on a plain reading of section 216, it is clear that interest could not have been levied under that section unless the Income-tax Officer had found that the assessee had underestimated the advance tax payable by him. The finding that there was underestimate of the advance tax payable by the assessee was a pre-condition for levy, of interest and unless such a finding was recorded, no interest could have been levied. Emphasising the use of the word "may", this court further observed that it clearly shows that the Income-tax Officer has a discretion to levy or not to levy interest. The discretion has, no doubt, to be exercised judicially and not arbitrarily. The question of exercising such a discretion would arise only when the Income-tax Officer finds that the assessee had underestimated the advance tax payable by him. It is needless to say that the finding which the Income-tax Officer is required to record has to ....
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....sh High Court that where there is underestimate of advance tax on account of underestimation of current income, section 216 is not attracted. (See Vazir Sultan Tobacco Co.'s case [1980] 122 ITR 251 (AP)). In Hindusthan Sanitary Ware and Industries Ltd.'s case [1989] 180 ITR 21, the Calcutta High Court had to consider a point similar to the one which arises for our consideration in this reference. In that case, there was deficiency in payment of the first instalment and the second instalment of advance tax. The Income-tax Officer, therefore, charged interest under section 216. The levy of interest was challenged on the ground that levying of interest under section 216 being discretionary, unless there is a finding regarding default by the assessee, the Income-tax Officer cannot charge interest. As against that, it was contended on behalf of the Revenue that, as charging of interest is not penal in character, no formal order was necessary. It was also contended that it is not necessary that a finding has to be recorded regarding default of the assessee before interest can be charged. It was also contended that levy of interest under section 216 is mandatory and not discretionary. The....
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....est under section 216 is not mandatory but is directory. We agree with the reasons given in this behalf in the decisions which were cited before us We would only like to add that underestimation or difference may arise as a result of an honest mistake because of unforeseen circumstances or for some other justifiable reasons. It could not have been the intention of the Legislature to levy interest in such cases also as that would have made the provision unreasonable and harsh. The Legislature has, therefore, thought it fit to confer discretion on the Income-tax Officer not to direct the assessee to pay interest even though he finds that the assessee had underestimated the advance tax payable by him and thus the amount payable on account of the first two instalments was thereby reduced or that the assessee had, under section 213, wrongly deferred payment of advance tax on a part of his income. The words "reduced" and "wrongly deferred " suggest a deliberate or intentional act on the part of the assessee. Though the underestimation contemplated by clause (a) will, in all cases, result in reduction of the amount payable as advance tax, the under estimation itself may not always be, or ....
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....e-tax Officer has to perform under section 216 is a quasi-judicial function. An order passed under section 216 is made appealable under section 246. Section 216 itself requires fulfilment of two conditions upon which the order for payment of interest can be passed. For all these reasons, recording of the requisite finding and giving reasons in support thereof are contemplated by section 216 and, in the absence of the requisite finding or reasons in support thereof, the order passed by the Income-tax Officer, ordinarily, will have to be regarded as invalid. It may, however, happen that the Income-tax Officer might have, while making the assessment, held an inquiry in this behalf by inquiring from the assessee the reasons for underestimation or deferment of payment of advance tax. In such case, it may not become necessary for him to hold a fresh inquiry under section 216 after passing the assessment order, and if the requisite findings and the reasons are recorded in the assessment order, then the order passed by the Income-tax Officer under section 216 may not be regarded as invalid. So far as the facts of this case are concerned, it is not in dispute that the Income-tax Officer ....