Holding

The loss is a capital loss because the land purchased by the assessee is a capital asset.

Summary

Madnani Development Corp., a contractor, bought two parcels of land to obtain earth for a railway construction contract and later sold the land at a loss of Rs.45,241. The company treated the loss as a revenue expense (cost of earth) and claimed a deduction of Rs.30,045 for the assessment year 1966-67. The Income‑Tax Officer disallowed the claim as a capital loss; the Appellate Assistant Commissioner upheld the disallowance, but the Income Tax Appellate Tribunal allowed the claim on the ground that the land had become a wasting asset. The Commissioner appealed to the High Court, which held the loss to be a capital loss. On special leave, the Supreme Court examined whether the loss was capital or revenue in nature and held that the land was a capital asset, so the loss was a capital loss. Consequently, the appeal was dismissed with costs.

Issues considered

Whether the loss of Rs.30,045 incurred by Madnani Development Corp. on the sale of land used for earth excavation is a capital loss or a revenue loss under the Income Tax Act, 1961.

Legislation cited

Income Tax Act, 1961s. 70

Subjects

capital lossrevenue lossIncome Tax Actsection 70fixed assetcontractorland as capital assetdeductionwasting assetSupreme Court

Judgment

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
contract-After work completed lands sold-Loss incurred-Whether c
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,
and apportioned the amount in its accounts in assessment years 1965-
t 66, 1966-67 and 1967-68. The claim of the assessee to a deduction 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-
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
220 SUPREME COURT REPORTS [1986) 3 S.C.R.

A ·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
B
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.

Govind Das and J .R. Das for the Appellant.

S.C. Manchanda, Miss A. Subhashini and K.C. Dua for the
D
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
E Reference and answering the following question in favour of the re-
venue 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?"
F
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 construc-
tion of a new railway yard. As it was required to supply earth outside
G
the railway land the assessee found it expedient to buy two pieces of
1and 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
H
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 asses-

l \.
ment 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
and it had acquired the land for the purpose of obtaining a ready
E
supply of earth in order to fulfil the contract with the Railway Ad-
ministration. 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
SUPREME COURT REPORTS [1986] 3 S.C.R.
222
A 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."
B
The facts in the present case are entirely different. Here, the
assessee was full proprietor of the two pieces of land and for an indefi-
nite 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.
c 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
D
liable to be dismissed.

The appeal is dismissed with costs.

A.P.J. Appeal dismissed.

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