Full Judgment Text
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PETITIONER:
MADNANI DEVELOPMENT CORPN. (P) LTD.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, ORISSA
DATE OF JUDGMENT16/07/1986
BENCH:
PATHAK, R.S.
BENCH:
PATHAK, R.S.
MUKHARJI, SABYASACHI (J)
CITATION:
1987 AIR 564 1986 SCR (3) 219
1986 SCC (3) 477 JT 1986 244
1986 SCALE (2)36
ACT:
Income Tax Act, 1961-s. 70-Assessee-A Contractor-
Purchased two plots of lands for excavation of land to
fulfil railway contract-After work completed lands sold-Loss
incurred-Whether capital or revenue loss.
HEADNOTE:
The assessee-company while carrying on business as a
Contractor entered into a contract with the Railway
Administration, inter alia, for the execution of earth work
required for the construction of a new railway yard. For
this purpose, the assessee purchased two pieces of land at a
total cost of Rs.68,241. Soon after the work was over, the
assessee sold both lands for a sum of Rs.23,000, thereby
sustaining a loss of Rs.45,241. The assessee treated this as
the value of the excavated earth, and apportioned the amount
in its accounts in assessment years 1965-66, 1966-67 and
1967-68. The claim of the assessee to a deduction of
Rs.30,045 for the assessment year 1966-67 was disallowed by
the Income-tax Officer on the ground that it represented a
capital loss. The Appellate Assistant Commissioner dismissed
the first appeal of the assessee. The Income Tax Appellate
Tribunal allowed the second appeal of the assessee on the
ground that the land formed a wasting asset and by constant
digging of the earth the land had become unserviceable.
In the Reference, on the question whether the loss of
Rs.30,045 claimed by the assessee is a capital loss or a
revenue loss, the High Court held that the loss of the said
amount claimed by the assessee was a capital loss and,
therefore, the assessee was not entitled to a deduction.
Dismissing the appeal of the assessee-company to this
Court,
^
HELD: The assessee was full proprietor of the two
pieces of land and for an indefinite period. The reason for
acquiring the land was no doubt to provide a ready supply of
earth to the work site nearby, but there was nothing to
prevent the assessee from continuing as owner of
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the land even after the railway contract had been executed
and putting it to any other use. The land was treated by the
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assessee as its fixed asset. In all the circumstances of the
case, the two pieces of land must be regarded as capital
assets, and the loss claimed by the assessee must be
regarded as a capital loss.[222B-D]
M.A. Jabbar v. Commissioner of Income-tax, Andhra
Pradesh, [1968] 68 ITR 493, 497-8 distinguished.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1649
(NT) of 1974
From the Judgment and Order dated 25.1.1974 of the
Orissa High Court in S.J.C. No. 111 of 1972.
Govind Das and J.R. Das for the Appellant.
S.C. Manchanda, Miss A. Subhashini and K.C. Dua for the
Respondent.
The Judgment of the Court was delivered by
PATHAK J. This appeal by special leave is directed
against the judgment of the High Court of Orissa disposing
of an Income-tax Reference and answering the following
question in favour of the revenue and against the assessee:
"Whether in the facts and circumstances of the
case, the loss of Rs.30,045 claimed by the
assessee is a capital loss or a revenue loss?"
The assessee is a private limited company carrying on
business as a contractor. In April 1964 it entered into a
contract with the South-Eastern Railway Administration for
the execution of earth work, bridge work and other
miscellaneous works required for the construction of a new
railway yard. As it was required to supply earth outsidethe
railway land the assessee found it expedient to buy two
pieces of land from which earth could be excavated and
conveniently taken to the work site. One piece of land was
acquired at a cost of Rs.53,196 during the calendar year
1964 corresponding to the assessment year 1965-66, and the
other piece of land was acquired for Rs.15,045 during the
calendar year pertaining to the assessment year 1966-67,
bringing
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the total cost to Rs.68,241. Soon after the work was over,
the assessee sold both lands for a sum of Rs.23,000, thereby
sustaining a loss of Rs.45,241. The assessee treated this as
the value of the excavated earth, and apportioned the amount
in its accounts in the following manner, Rs.8,196 as the
cost of the earth for the assessment year 1965-66, Rs.30,045
towards the earth excavated in the assessment year 1966-67,
and Rs.7,000 towards the earth excavated for the assessment
year 1967-68. The Income-tax Officer accepted the claim for
the assesment year 1965-66. The claim of the assessee to a
deduction of Rs.30,045 for the assessment year 1966-67 was
disallowed on the ground that it represented a capital loss.
The assessee proceeded in first appeal to the Appellate
Assistant Commissioner of Income-tax but the appeal was
dismissed. A second appeal was allowed by the Income-tax
Appellate Tribunal on the ground that the land formed a
wasting asset and by constant digging of the earth the land
had become unserviceable. On a reference being made to the
High Court of Orissa at the instance of the Commissioner of
Income-tax on the question of law set forth earlier the High
Court held that the loss of Rs.30,045 claimed by the
assessee was a capital loss and therefore, the assessee was
not’entitled to a deduction.
The question in this appeal before us is a short one.
Can it be said that the loss of Rs.30,045 is a capital loss
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or a revenue loss? It is not in dispute that the assessee
did not deal in land. It was a contractor and it had
acquired the land for the purpose of obtaining a ready
supply of earth in order to fulfil the contract with the
Railway Administration. The land was not its stock-in-trade.
What it needed as raw material for the purpose of the
contract was loose earth and this it obtained by the process
of excavation from the land. Moreover, the two pieces of
land were shown as fixed assets by the assessee itself in
its balance-sheet.
Learned counsel for the assessee relies on M.A. Jabbar
v. Commissioner of Income-tax, Andhra Pradesh, [1968] 68
I.T.R. 493, 497-8 but that is a case where the land was
taken on lease for a limited period of 11 months with the
right to enter, occupy and use for a quarrying purpose and
to render marketable and carry away sand within or on the
land. This Court held that the lease money paid by the
assessee was deductible as revenue expenditure. The Court
referred to the short period of the lease, which indicated
that the lease was not an asset of an enduring nature, that
the only right under the lease was to take away the sand
lying on the land, and in fact as the sand lay on the
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surface no question arose of digging and excavating for the
sand, and no operations were to be performed on the land.
The Court laid great emphasis on the circumstance that the
assessee did not acquire the land. Therefore, the Court held
that the assessee "did not acquire any fixed or capital
asset of an enduring nature."
The facts in the present case are entirely different.
Here, the assessee was full proprietor of the two pieces of
land and for an indefinite period. The reason for acquiring
the land was no doubt to provide a ready supply of earth to
the work site nearby, but there was nothing to prevent the
assessee from continuing as owner of the land even after the
railway contract had been executed and putting it to any
other use. The land was treated by the assessee as its fixed
asset. In all the circumstances of the case, the two pieces
of land must be regarded as capital assests, and the loss
claimed by the assessee must be regarded as a capital loss.
The High Court is right in the view taken by it, and
the appeal is liable to be dismissed.
The appeal is dismissed with costs.
A.P.J. Appeal dismissed.
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