2007 (6) TMI 149 - HC - Income Tax

Capiatal or revenue expenditure The amount paid by the assessee for taking land and building on lease for 20 years claimed as revenue expenditure but AO treated as capital expenditure HC rejected the order of AO and consider the said amount as revenue expenditure

Summary

Issues:
1. Whether upfront lease rent charges paid for taking land and building on lease for setting up a new unit is a revenue expenditure.

Analysis:
The case involved an appeal against the order of the Income-tax Appellate Tribunal regarding the treatment of upfront lease rent charges paid for taking land and building on lease for setting up a new unit. The assessee claimed the amount as revenue expenditure in their returns. However, the Assessing Officer treated the payment as capital expenditure, stating that it was the discounted value of the lease amount payable over 20 years and that the assessee projected it as capital in their books to boost profits. The Commissioner of Income Tax (Appeals) upheld the Assessing Officer's decision, emphasizing that the expenditure could not be treated as revenue when projected as capital in the books. The Income Tax Appellate Tribunal, citing a previous case, allowed the appeal, leading to the current appeal by the Revenue.

In a previous case, where the assessee paid lease rent for 47 out of 48 years as a lump sum, the Tribunal allowed the deduction, considering the expenditure as incurred wholly and exclusively for business purposes. Referring to an Apex Court decision, the High Court held that expenditure should be viewed from a commercial standpoint to determine if it is revenue or capital. The Court noted that if the rent was paid annually, it would be considered revenue expenditure, and paying it as a lump sum did not change its character. Based on this precedent, the Court found no substantial question of law for consideration and dismissed the appeal.

The judgment reaffirmed that the nature of expenditure, whether revenue or capital, depends on the commercial perspective and purpose. It clarified that paying lease rent as a lump sum does not alter its classification as revenue expenditure if it would have been considered as such when paid annually. The decision highlighted the importance of assessing expenditures based on their business intent and impact, rather than the method of payment.