The Commissioner of Income-taxSalem v. M/s.R.R.K.Granites(formerly known as M/s.SalemDolerites Limited)LRN Buildings

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 29.08.2007CORAM:THE HONOURABLE MR.JUSTICE K.RAVIRAJA PANDIANANDTHE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMANTax Case (Appeal) Nos.1176 to 1178 of 2007 The Commissioner of Income-taxSalem. ... Appellant/ RespondentVs.M/s.R.R.K.Granites(formerly known as M/s.SalemDolerites Limited)LRN Buildings, Sarada College RoadSalem – 636 007. ...Respondent/ AppellantTax Case Appeal filed under Section 260-A of the Income-taxAct, 1961 against the order of the Income-tax Appellate Tribunal,'D' Bench, Chennai dated 8.9.2006 and made in I.T.A.No.679,680/Mds/1999 and 1653/Mds/2003 for the assessment years 1994-95,1995-96 and 1996-97 respectively 1. against the order of the Commissioner of Income Tax (Appeals) Chennai-34 dated 14.1.99 inITA NO.445C/98-99 A/Y 1994-95 against the order of the DyCommissioner of Income Tax Special Range, Salem-7 dated 30.3.1998PAN/GIR No.S-155 against the order of the Commissioner of IncomeTax (Appeal)VII, Chennai-34. 2. dated 8.1.99 in ITA NO.446C/98-99A/Y 1995-96 and against the order dated 30.3.1998 in PAN/GIR No.S-155 of Dy. Commissioner of Income Tax, Special Range, Salem -7 and3. against order of the Commissioner of Income Tax (Appeals) Salem636 007 dated 6.6.2003 ITA.NO.12/99-00 against the order of the Joint Commissioner of Income Tax Spl. Range, Salem dated 18.2.99 inPAN/GIR No.R-113 A/Y 1996-97.For Appellant : Mr.N.MuralikumaranJUDGMENT(Judgment of the Court was made by K.RAVIRAJA PANDIAN,J.) https://hcservices.ecourts.gov.in/hcservices/ The assessment years are 1994-95, 1995-96 and 1996-97. TheRevenue filed these appeals formulating the following commonquestions of law: "

Whether on the facts and in the circumstancesof the case, the Income Tax Tribunal is right in holdingthat quarry depletion expenses are allowable expenditurefor the assessment years 94-95(T.C.No.1176 of 2007,1995-96 (T.C.No.1177 of 2007) and 1996-97 (T.C.No.1178of 2007)?2. Whether on the facts and in the circumstances ofthe case, Section 35 E or 37 of Income Tax Act isattracted for claiming deduction of quarry depletionexpenses?3. Whether on the facts and in the circumstances ofthe case, the Tribunal is right in law in notconsidering the fact that no depreciation was allowableon deferred revenue expenditure despite the assessee hadbeen claiming the said amount as expenditure?2. As the facts in all the appeals are one and the same, thefacts pertaining to the assessment year 1994-95 are taken up fordiscussion.

The assessee/respondent was engaged in the business ofproduction of granite blocks. For the assessment year, 1994-95,pursuant to the notice under Section 148, assessee/respondent filedthe return on 31.10.1995 disclosing a loss of Rs.69,014/-representing unabsorbed depreciation for the assessment year 1991-92 and 1993-94. The return was processed under Section 143(1)(a)accepting the returned loss. Thereafter, another notice under Section 148 was issued 30.12.1996 and as per the request of theassessee, the return filed on 31.10.1995 was treated as the returnfiled in response to the notice. The assessee company has accountedthe quarry expenses and claimed depreciation in its books ofaccounts. In the income computation statement, the company claimedthe same as business expenditure. The assessing officer disallowedthe claim. The Commissioner of Income-tax (Appeals) upheld theorder of the assessing officer when an appeal was filed. On furtherappeal to the Tribunal, the Tribunal allowed the assessee's appeal.

Learned counsel appearing for the revenue has verystrenuously contended that the order of the Tribunal is contrary tothe statutory provision, in the sense, the assessee companyviolated the statutory provision Section 37 of the Income-tax Act, which provides that any expenditure incurred has to be claimed inthe year in which the expenses have been incurred and cannot bespread over to subsequent years. https://hcservices.ecourts.gov.in/hcservices/

We heard the argument of the learned counsel for therevenue and perused the material on record.

The undisputed facts are that the respondent was grantedgranite quarry lease for ten years and it incurred a totalexpenditure of Rs.89,25,321/- towards development of quarries suchas clearing of overburdens to reach granite dyke for production. This expenditure was incurred for exploitation of the granite forthe entire lease period of ten years. The respondent treated thisexpenditure as deferred Revenue expenditure and claimed 1/10th ofit spreading over for ten years. Though such claim of therespondent was allowed by the assessing officer for earlier years, the claim made by the respondent for the assessment years underconsideration was negatived. The Tribunal taking into considerationof the nature of business of the respondent has held that deferredrevenue expenditure was not strange to the Income-tax Act. Thoughthe Revenue expenditure has to be allowed in its entirety in theyear in which it was incurred, in the case on hand, since chargingthe entire expenditure on an year would give distorted picture ofprofit and loss of the respondent, it was appropriate to spreadover the expenditure over a period of ensuring years so as toarrive at true working result of the Company.

In the case of MADRAS INDUSTRIAL INVESTMENT CORPORATIONLIMITED VS. COMMISSIONER OF JINCOME-TAX reported in (1997) 225 ITR802, the appellant Company issued debentures in December 1966 atdiscount. The total discount on the issue of Rs.1.5 crores amountedto Rs.3 lakhs. For the assessment year 1968-69, the appellantcompany wrote off Rs.12,500/- out of the total discount of Rs.3lakhs being the proportionate amount of discount for the period ofsix months ending with June 30, 1967, taking into account theperiod of 12 years which was the period of redemption and dividingthe discount of Rs.3 lakhs over the period of 12 years. On theabove facts, while answering the question whether appellant couldwrite off the discount which is a revenue expenditureproportionally each year over the period for redemption, the Supreme Court held thus: "Ordinarily, revenue expenditure which is incurredwholly and exclusively for the purpose of businessmust be allowed in its entirety in the year in which itis incurred. It cannot be spread over a number of yearseven if the assessee has written it off in his books, over a period of years. However, the facts may justifyan assessee who has incurred expenditure in aparticular year to spread and claim it over a period ofensuing years. In fact, allowing the entire expenditurein one year might have a very distorted picture of theprofits of a particular year. Issuing debentures is aninstance where, although the assessee has incurred the https://hcservices.ecourts.gov.in/hcservices/ liability to pay the discount in the year of issue ofdebentures, the payment is to secure a benefit over anumber of years. There is a continuing benefit to thebusiness of the company over the entire period. Theliability should, therefore, be spread over the periodof debentures. "

The facts of the present case are similar to the abovereferred Madras Industrial Investment Corporation case. Althoughthe respondent incurred the entire expenditure of developing thequarry in a particular assessment year, the expenditure so incurredis to secure the benefit of making the quarry ready forexploitation over a number of years. There is a continuing benefitto the business of the respondent over the entire lease period often years. Therefore, the facts of the case justify the spreadingover of the claim for the lease period.

For the reasons aforesaid, we find no question of law isinvolved in these appeals for entertainment. The Tax Case appealsare dismissed. Sd/-Asst. Registrar./true copy/Sub Asst. Registrar.uskTo1. The Asst. Registrar, Income-tax Appellate Tribunal Bench D Rajaji Bhavan, III Floor, Besant Nagar, Chennai. 90.2. The Commissioner of Income Tax (Appeals) – VII, Chennai.34.3. The Deputy Commissioner of Income-tax, Special Range, Salem – 7 https://hcservices.ecourts.gov.in/hcservices/

4. The Commissioner of Income Tax, Salem5. The Commissioner of Income Tax (Appeals)Salem.1 cc to Mr.N. Muralikumaran, Advocate, SR. 54009Tax Case (Appeal) Nos.1176 to 1178of 2007TEJ (CO)kk 14/9