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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 220 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 221 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 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. 223