MADNANI DEVELOPMENT CORPN. (P) LTD. v. COMMISSIONER OF INCOME-TAX, ORISSA

Case Details & Bench

Court: High Court
Hon'ble Judges: R.S. Pathak
Sabyasachi Mukharji
Judgment Date: 1986-07-16
Court Decision / Holding: The appeal is dismissed with costs.
Final Disposition: Appeal dismissed

Parties to the Case

Appellants / Petitioners

MADNANI DEVELOPMENT CORP. (P) LTD.

Respondents

Commissioner of Income-tax, Orissa

Legal Representation & Advocates

Counsels for Petitioners

• Govind Das
• J. R. Das

Counsels for Respondents

• S.C. Manchanda
• A. Subhashini
• K.C. Dua

Case Synopsis & Summary

Madnani Development Corp. (P) Ltd. v. Commissioner of Income-tax, Orissa concerns a contractor who, under a contract with the South-Eastern Railway Administration in 1964, purchased two plots of land at a total cost of Rs 68,241 to obtain ready earth for earthwork and other works for a new railway yard. After completing the contract, the lands were sold for Rs 23,000, causing a loss of Rs 45,241. The assessee claimed a deduction of Rs 30,045 in the assessment year 1966-67 as the value of earth excavated on the land; the deduction was treated as a revenue loss by the assessee, while the ITO disallowed the claim on the ground that it represented a capital loss. The Appellate Assistant Commissioner and the Tribunal took different positions, with the Tribunal allowing a view that the land was a wasting asset put to use, whereas the High Court held the loss to be capital. The Supreme Court, in an appeal against the Orissa High Court’s decision, considered whether the Rs 30,045 should be treated as capital loss or revenue loss. It held that the assessee was the full proprietor of the land for an indefinite period and treated the land as a fixed asset. In these circumstances, the two plots of land are capital assets and the loss is a capital loss. It dismissed the appeal with costs.

Provisions of Law Cited

Income Tax Act, 1961, s. 70

Submissions & Arguments

Contentions of Appellants / Petitioners

The applicants contended that the loss of Rs.30,045 on the lands acquired to obtain earth for fulfilling the railway contract should be treated as a revenue loss/expenditure; They relied on M.A. Jabbar v. Commissioner of Income-tax, Andhra Pradesh (1968) 68 ITR 493, 497-8 to support deduction for revenue expenditure on land leased for quarrying; The lands were shown as fixed assets in the balance-sheet and the contract was performed; The claim was that this was not a deal in land but a source of raw material; The argument was that the earth excavated constituted revenue expenditure and the asset (land) was not an enduring capital asset; The land was not stock-in-trade and was owned for an indefinite period, to be used for fulfilling contracts beyond the immediate project. The appellant urged that the High Court’s capital-loss finding should be reversed and the Rs.30,045 should be deductible as revenue expenditure.

Contentions of Respondents

The respondents argued that the loss on sale of the lands cannot be treated as revenue loss; The assessee was a contractor who owned the land for an indefinite period and used the land solely to obtain earth; The two plots were fixed assets, and the loss on sale should be treated as a capital loss; The earth excavated was the raw material, and the land remained a capital asset; The High Court’s conclusion that the loss is a capital loss was correct; The reliance on the Jabbar case was distinguished on the facts.

Cited Precedents (1)

Case Name	Citation	Treatment	Explanation
M.A. Jabbar v. Commissioner of Income-tax, Andhra Pradesh	[1968] 68 ITR 493	Distinguished	The current case differs because the land was owned as a fixed asset for an indefinite period, whereas Jabbar involved a short-term lease for quarrying; Jabbar treated lease expenditure as revenue, whereas the present case treats land as a capital asset.

Extracted Judgment Text

Exact text extracted from official judgment records.

A MADNANI DEVELOPMENT CORPN. (P) LTD. _v._ COMMISSIONER OF INCOME-TAX, ORISSA B JULY 16, 1986 [R.S. PATHAK AND SABYASACHI MUKHARJI,JJ.] ## [ _Income_ _Tax_ _Act,_ _1961-s._ _70--Assessee-A Contractor-Fur·_ \ _chased_ _two_ _plots_ _of lands for excavation_ _of land_ _to_ _fu.lfil_ _railway_ c _contract-After work completed lands_ _sold-Loss incurred-Whether_ _capital or revenue loss._ 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 rail- D way yard. For this purpose, the assessee purchased two pieces of land at a total cost ofRs.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, _t_ 66, 1966-67 and 1967-68. The claim of the assessee to a deduction and apportioned the amount in its accounts in assessment years 1965-of E 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 as JULY 16, 1986 [R.S. PATHAK AND SABYASACHI MUKHARJI,JJ.] sessee. The Income Tax Appellate Tribunal allowed the second appeal _J_ 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. F 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. G 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, hut· there was nothing to prevent the assessee from continuing as owner of H A B 220 SUPREME COURT REPORTS [1986) 3 S.C.R. ·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 assets, and the loss claimed by the assessee must be regarded as a capital loss. [222B-DJ _M.A. Jabbar_ v. _Commissioner of Income-tax, Andhra Pradesh,_ [ 1968) 68 ITR 493, 497-8 distinguished. CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1649 (NT) of 1974 --.., / C From the Judgment and Order dated 25.1.1974 of the Orissa HighCourtinS.J.C.No. lllof1972. D E F G H 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 SouthEastern 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 outside the railway land the assessee found it expedient to buy two pieces of 1 and 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 MADNAN! DEVELOPMENT CORP. _v._ C.l.T. [PATHAK,J.J 221 ; the total cost to Rs.68,241. Soon after the work was over, the assessee A 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 B 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 1%5-66. The claim of the assessee to a deduction of Rs.30,045 for the assessment year 1966-67 was disallowed on the grnund that it represented a capital loss. The assessee proceeded in # l \. year 1967-68. The Income-tax Officer accepted the claim for the assesment year 1%5-66. The claim of the assessee to a deduction of Rs.30,045 for the assessment year 1966-67 was disallowed on the grnund 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 c 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 D 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 or a revenue loss? It is not in dispute that the assessee did not deal in land. It was a contractor ##### + E 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 thi,s 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 F its balance-sheet. ......; ~ Learned counsel for the assessee relies on _M.A. Jabbar_ v. _Com-_ _missioner 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 G 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 H ,.,. ' . ### } \ A B c D SUPREME COURT REPORTS [1986] 3 S.C.R. 222 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.