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Commissioner Of Income Tax vs Kanpur Colonisers (P) Ltd.

High Court Of Judicature at Allahabad|23 May, 2008

JUDGMENT / ORDER

JUDGMENT Sudhir Agarwal, J.
1. At the instance of Revenue, the Income Tax Appellate Tribunal, Allahabad Bench, Allahabad has referred under Section 256(2) of the Income-tax Act, the following question of law for the opinion of this Court:
Whether on the facts and in the circumstances of the case, the Tribunal was justified in allowing the expenditure of Rs. 1,72,763/- incurred on agricultural operation by the assessee?
2. Brief necessary facts to understand the dispute are as under. The assessee M/s Kanpur Colonisers (Pvt), Ltd. Is a coloniser dealing in purchase and sale of land. Certain land which it had purchased during the period in question, and had not been sold to prospective buyers, the assessee resorted to plantation of eucalyptus trees thereon, wherefor incurred an expenditure of Rs. 1,72,763/- in the assessment year in question, namely, 1986-87. The assessee claimed the aforesaid expenditure as revenue expenditure but it was not accepted by the assessing authority and he treated it to be an expenditure of capital nature. The appeal preferred by the assessee against the assessment order was dismissed by the Commissioner of Income-tax Appeals (Kanpur) vide order dated 6.4.1988 and relying on Apex Court's decision in Commissioner of Agricultural Income Tax, Kerala v. Kailas Rubber Co. Ltd. , Kerala High Court's decision in Travancore Tea Estates Co. Ltd. v. Commissioner of Income-tax , Madras High Court's decision in Beverley Estates Ltd. v. Commissioner of Income-tax, Madras and Kerala High Court's decision in Clen Leven Estates Ltd. v. Commissioner of Income-tax, Kerala , it upheld the view taken by the assessing authority. However, the Tribunal in the appeal of the assessee took a different view relying upon Apex Court's decision in 76 ITR 650 (though no such decision appeared in the said ITR at the page referred) and held that the decision relied upon by the Commissioner of Income-tax (Appeals) are distinguishable and has no application to the case in hand. Aggrieved thereto the Revenue has got the aforesaid question referred for adjudication by this Court.
3. It is argued on behalf of the Revenue that the Tribunal has erred in relying on assessee's explanation that plantation of eucalyptus trees was not done on the land which was acquired and instead it was a new land and was treated to be stock in trade and, therefore, the expenditure incurred thereon was liable to be treated as revenue expenditure, and, the Tribunal without considering the issue which was up for consideration, has wrongly held that the expenditure in question was liable to be treated as revenue expenditure instead of capital expenditure. The citation it has given in support of its finding is non est.
4. We have heard learned Standing Counsel appearing for the Revenue and perused the record. From the record it is evident that the assessee was not engaged in the business of agriculture or sale of agricultural products. It has undergone plantation of eucalyptus trees till the land in question is developed for onward sale. The question as to how in these circumstances, the expenditure incurred on plantation of trees would be dealt with, has to be considered in the light of admitted facts as also legal position settled by the various Courts including the Hon'ble Apex Court.
5. It is evident from the facts that the assessee was not dealing with agricultural business or plantation of trees. Admittedly, he was dealing with purchase and sale of land. After purchasing the land in question, he proceeded for plantation of eucalyptus trees till the land is further developed for the purpose of colonization and sale to prospective buyers. Thus the expenses incurred thereon were for the purpose of bringing into existence a new asset or obtaining a new advantage. Such an expenditure would not be an expenditure of revenue nature but it would be a capital expenditure. Had the expenditure been incurred for augmenting value of land by developing it as such, the same could have been treated to be a revenue expenditure but here eucalyptus plantation was for incidental purpose and the said plantation cannot be said to be a part of agricultural land as such. There is nothing on record to show that the assessee proceeded to grow eucalyptus trees for sale as part of the land in the course of business of colonization. On the contrary, the intention clearly appears to be, for the time being, while the land was yet to be developed for the purpose of colonization, eucalyptus trees were planted so as to be sold subsequently. In order to ascertain as to what would constitute capital expenditure or revenue expenditure, one of the simple tests which is normally applied is whether the expenditure is incurred to preserve and maintain an already existing asset or to bring a new asset into existence or to obtain new advantage. Though in slightly different context, but when the expenditure can be said to have been incurred on current repairs wouold constitute revenue expenditure or capital expenditure, came to be considered before the Apex Court in Ballimal Naval Kishore v. C.I.T. and the Apex Court approved the test formulated by Hon'ble Chhagla, C.J. In New Shorrock Spinning and Manufacturing Co. Ltd. v. CIT (Bombay) where it was observed:
The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage.
6. Referring to the above decision, the apex Court in CIT Madurai v. Sarvana Spinning Mills (P) Ltd affirmed the same and reiterated the above test observing that if the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of revenue nature but it would be capital expenditure. The Court further observed in para 14 of the judgment in Sarvana Spinning Mills (supra) as under:
Whether expenditure is revenue or capital in nature would depend upon several factors, namely, nature of expenditure and nature of business activity etc.
7. Though the assessee claimed and treated plantation as stock in trade but considering the facts of this case it is difficult to uphold the contention of the assessee that eucalyptus trees planted by him could be treated to be stock in trade. The decision referred to by the Tribunal, i.e., 76 ITR 650 is a wrong citation as there is no such decision in the journal. In our view, the Apex Court's decision in Kailas Rubber Co., 60 ITR 435 (supra) would be more apt to be referred where the assessee was dealing in latex rubber and was getting income from rubber trees in the shape of latex. For the said purpose, he had planted rubber trees on the land but in the course of time, the old rubber trees ceased to be productive and being unyielding were sold. It was held that the said rubber trees formed part of capital asset of the respondent and was not taxable as agricultural income as defined under the Agricultural Income Tax Act, 1950. The aforesaid decision has been followed in Travancore Rubber & Tea Company Ltd. v. Commissioner of Income-tax Trivendrum .
8. We, therefore, answer the question in favour of Revenue and against the assessee holding that the Tribunal erred in treating the expenditure incurred by the assessee towards the plantation of eucalyptus trees as revenue expenditure and the same could not have been treated to be expenditure incurred on agricultural operation by the assessee.
9. The reference is answered accordingly.
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Title

Commissioner Of Income Tax vs Kanpur Colonisers (P) Ltd.

Court

High Court Of Judicature at Allahabad

JudgmentDate
23 May, 2008
Judges
  • S Harkauli
  • S Agarwal