IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.5855 OF 2008 (Arising out of SLP(C) No.7115 of 2007)

 SHREYANS INDUSTRIES LTD., PUNJAB          ...APPELLANT (S)

VERSUS

COMMR. OF INCOME TAX-I, LUDHIANA ...RESPONDENT(S)

O R D E R

Leave granted.

Appellant is running a Paper Mill at Ahmedgarh in District Sangrur, Punjab.  It is

engaged in the business activity of manufacturing paper.

During the previous year relevant to the Assessment Year 1996-1997, appellant

applied to the Pollution Control Board and the Forest Department to allow it to discharge its

effluent water from its Mill to Village Tallewal.  The Department of Environment & Forest

agreed to provide forest land for open drain to be constructed by the assessee (user agency)

for carrying its effluent to Tallewal drain subject to certain conditions.  One of the conditions

was that the appellant  will  transfer 4.063 hectare non-forest land in favour of the Forest

Department.  That was done.

The  main  controversy  which  arises  for  determination  in  this  Civil  Appeal  is

whether an  amount of  Rs.70,79,862/- incurred by  

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the appellant on construction of open drain for disposal of effluents is Revenue Expenditure,

as claimed by the appellant.  According  to  the  Department  the  expenditure  was  on

Capital  

Account, particularly, when the appellant has debited the building account to the extent of

Rs.70,79,862/-.  It may also be noted that CIT(Appeals) as well as the Tribunal held that the

expenditure incurred was on Revenue Account.  However, aggrieved by the decision of the

Tribunal the matter was carried by the Department in appeal to the High Court.  Before the

High  Court  the  Department  submitted that  the  following  substantial  question  of  law be

framed:

“Whether on the facts and circumstances of the case, the Tribunal

was justified in law in allowing the expenditure of Rs.70,79,862/- incurred by

the  assessee  under  the  head  “Building  Account”,  for  the  construction  of

drainage  for  disposal  of  effluents  by  treating  the  same  as  Revenue

Expenditure, while ignoring  the facts that the assessee had acquired an asset

of enduring benefit in nature and enjoys exclusive rights for the usage of the

same?”  

The basic question which the High Court was required to answer was whether the

assessee (appellant) had acquired assets of  enduring benefit?   This  was the key question

which is in-built in the question quoted hereinabove.   For that purpose the High Court  

was required to examine the terms and conditions  on which the  Forest  Department had

permitted the appellant to construct an open  

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drain.  The High Court was required to consider the effect of diversion of forest land.  It is

not in dispute that the open drain runs for approximately fourteen kilometers.  It is not in

dispute that it cuts through the forest land.  It is not in dispute that in lieu of this diversion,

non-forest land came to be surrendered by the appellant in lieu of the forest land.    Further,

the appellant was required to raise plantation on both sides of the open drain.  Under the

terms and conditions it was stipulated that the Forest Department shall have afforestation on

both sides of drain having tree growth with an amount of Rs.1.62 lacs to be paid by the user

agency (appellant) for raising and maintenance of plantation.  Further, even with regard to

open drain, the terms and conditions make it very clear that the open drain will be lined to

avoid any seepage/leakage of effluent in due course of time.  None of the terms and conditions

imposed by the Forest Department have been examined the above circumstances for deciding

the question framed hereinabove.   

As stated above, framing of a proper substantial question of law is a mandatory

requirement under Section  260A of the Income Tax Act.  It is very similar to Section 100 of

C.P.C.  Without framing or re-framing of such a question the High Court could not have

reversed  the  concurrent  finding  given  by  C.I.T.(Appeals)  as  well  as  by  the  Tribunal.

However, at the same time, we make it clear that the matter needs to be examined by the

High Court in  proper perspective and  for that purpose,  we have given  

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reasons to indicate the effect of forest diversion.  After noticing the facts the High Court has

to apply tests laid down by the various Judgment of this Court.  We do not wish to express

any opinion on the merits of the case.

Suffice  it  to  state  that  since  the  High  Court  has  not  formulated  a  correct

substantial question of law and since the High Court is required to take into account all the

above mentioned facts and circumstances of the case, we set aside the impugned order and

remit the matter to the High Court for fresh consideration in accordance with law.   

Accordingly, the Income Tax Appeal No. 277 of 2004 shall stand restored to the file

of the High Court and the matter is remitted to the High Court for fresh consideration in

accordance with law.  The appeal is allowed with no order as to costs.

....................J. [ S.H. KAPADIA ]

New Delhi, ....................J September 23, 2008 [ B. SUDERSHAN REDDY ]