2003 (5) TMI 20 - HC - Income Tax

Expenditure incurred in restoring the swimming pool and the boundary wall revenue/capital expenditure - Whether the swimming pool and the boundary wall have been constructed or reconstructed at the court s order that does not make any difference in the nature of expenses. Once the expenses are on the assets, which are of enduring nature that expenditure should be allowed as capital expenditure - Tribunal has committed error in allowing the expenses in question as revenue expenses.

Summary

Issues:
1. Classification of expenditure as revenue or capital.
2. Allowability of expenses incurred in restoring swimming pool and boundary wall.

Analysis:

Issue 1: Classification of expenditure as revenue or capital
The case involved determining whether the expenses incurred by the assessee in restoring the swimming pool and boundary wall should be treated as revenue or capital expenditure. The Income-tax Officer and the Commissioner of Income-tax (Appeals) considered the construction of swimming pool and boundary wall as assets of enduring nature, leading to the view that the expenses should be treated as capital expenditure. However, the Tribunal disagreed and allowed the expenses as revenue expenditure, relying on the decision of the Supreme Court in CIT v. Kalyanji Mavji and Co. [1980] 122 ITR 49. The Department argued that expenses on enduring assets should be treated as capital expenditure, citing the Karnataka High Court's decision in Senapathy Synams Insulations (P.) Ltd. v. CIT [2001] 248 ITR 656.

Issue 2: Allowability of expenses incurred in restoring swimming pool and boundary wall
The Tribunal's decision to allow the expenses as revenue expenditure was based on the premise that the swimming pool and boundary wall existed prior to demolition, and their restoration was necessary for the business. The Department contended that expenses on enduring assets should be considered capital expenditure regardless of whether they were constructed or reconstructed due to a court order. The court emphasized that the nature of expenses depends on the enduring nature of the assets, and in this case, the swimming pool and boundary wall were of enduring nature, warranting treatment as capital expenditure. Consequently, the Tribunal was deemed to have erred in allowing the expenses as revenue expenditure, and the judgment favored the Revenue against the assessee.

In conclusion, the High Court held that the expenses incurred by the assessee in restoring the swimming pool and boundary wall, which were assets of enduring nature, should be treated as capital expenditure rather than revenue expenditure. The decision was based on the principle that expenses on enduring assets are considered capital expenditure, irrespective of whether they were constructed or reconstructed. Therefore, the judgment was in favor of the Revenue and against the assessee, leading to the disposal of the reference accordingly.