2009 (1) TMI 274 - HC - Income Tax

Capital versus Revenue Expenditure - ITAT allowed the the expenditure incurred by the assessee in connection with the modernization and expansion of inter alia its Deoband and Ramkola units by treating the same as expenditure of a revenue nature. ITAT allowed the said expenditure although the assessee in its books of accounts had treated the same as capital expenditure. tribunal had permitted deduction of administrative expenses incurred in the course of the renovation of the two units. held that - as the new unit was part of the existing business and there was no dispute that there was unity of control and interlacing of the units the expenses incurred by the assessee for the setting up of a new unit would be of a revenue nature The tribunal in our view has correctly concluded that the authorities below had erred in holding the said expenditure to be of a capital nature. We agree with the conclusion of the tribunal that the whole of the expenditure is to be allowed as revenue expenditure and consequently there would be no question of grant of depreciation on such expenditure.

Summary

Issues:
1. Treatment of expenditure incurred for modernization and expansion as revenue or capital nature.
2. Allowance of administrative expenses in connection with renovation of units.

Analysis:
1. The appeals involved the assessment years 1994-95, 1995-96, and 1997-98 concerning the expenditure incurred by the assessee for modernization and expansion of its units. The revenue contested the treatment of this expenditure by the Income-tax Appellate Tribunal as revenue instead of capital. The tribunal allowed the expenditure despite the assessee treating it as capital in its books of accounts. The revenue also challenged the deduction of administrative expenses related to the renovation of units.

2. The Assessing Officer and the Commissioner of Income-tax (Appeals) disallowed the administrative expenses, considering them capital in nature due to the enduring benefit acquired. The expenditure was capitalized in the assessee's books, leading to a demand for justification from the assessee. The tribunal, however, noted that the administrative expenses were estimated and not directly related to new machinery or building installation. The tribunal emphasized that the nature of expenses should not solely rely on entries in the books of accounts.

3. The tribunal analyzed the case in light of precedents like The Kedarnath Jute Manufacturing Co. Limited v. CIT and CIT v. Relaxo Footwears Limited. It concluded that in a continuing business, expenses for renovation of existing units should be treated as revenue expenditure if there is unity of control and continuity of business. Following the decision in Relaxo Footwears Limited, the tribunal held that the administrative expenses were revenue in nature due to the ongoing business operations. Hence, the tribunal allowed the full expenditure as revenue, negating the need for depreciation.

4. The High Court found no reason to interfere with the tribunal's decision, as it correctly applied the law to the facts. It concurred with the tribunal's interpretation that the expenditure was revenue in nature. Consequently, the court dismissed the appeals, stating that no substantial question of law arose for consideration.

In conclusion, the High Court upheld the tribunal's decision, emphasizing the distinction between revenue and capital expenditure in the context of ongoing business operations and unity of control.