2002 (4) TMI 29 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the sum of Rs. 5,30,503 incurred on old wing of the hotel building owned by the assessee was not a capital expenditure? The law which the apex court laid down in Assam Bengal Cement Co. Ltd. v. CIT still holds good, which is extracted as follows The aim and object of the expenditure would determine its character, namely, whether it was capital expenditure or revenue expenditure. If the expenditure was made for acquiring or bringing into existence all asset or advantage for the enduring benefit of the business, it was properly attributable to capital and was of the nature of capital expenditure. If, on the other hand, it was made for running the business or working it with a view to produce profits, it was revenue expenditure. - In our view no referable question of law has arisen from the order of the Tribunal. The finding of the Income-tax Appellate Tribunal is purely a finding of fact

Summary

Issues:
1. Determination of whether the expenditure incurred by the assessee-company for modernization falls under revenue or capital expenditure.

Analysis:
The case involved the question of whether the sum incurred on the old wing of a hotel building owned by the assessee was capital or revenue expenditure. The assessee, a hotel company, claimed certain expenses as revenue expenditure for repairs, replacements, and improvements. The Assessing Officer disallowed a portion of the claimed amount as capital expenditure. In appeal, the Commissioner of Income-tax (Appeals) reduced the disallowed amount. The Income-tax Appellate Tribunal, considering various factors, held that the disallowed sum was not sustainable as capital expenditure. The Revenue then applied for reference under section 256(1) of the Income-tax Act, but the Tribunal declined to refer the questions proposed by the Revenue. The main issue was whether the expenditure for modernization was revenue or capital in nature.

The legal arguments presented by both sides revolved around the distinction between capital and revenue expenditure. The Revenue argued that any expenditure providing an enduring benefit should be considered capital expenditure. They cited various court decisions to support their position. On the other hand, the respondent-assessee argued that if the expenditure facilitated trading operations or enhanced business efficiency without affecting fixed capital, it should be treated as revenue expenditure. They also relied on several judicial precedents to bolster their stance.

The court delved into the concept of capital expenditure, highlighting that it involves acquiring assets or benefits of lasting nature for the enterprise. In contrast, revenue expenditure is operational and intended for the immediate furtherance of the business. The judgment referenced key legal principles from past cases to distinguish between capital and revenue expenditure, emphasizing the enduring nature of the benefit acquired. The court noted that the determination of whether an expense is capital or revenue is primarily a question of fact, guided by the aim and object of the expenditure in relation to the business's enduring benefit or profit generation.

Ultimately, the court found that no question of law arose from the Tribunal's order, as it was a factual finding not warranting interference. The reference was returned unanswered, indicating that the expenditure incurred by the assessee for modernization did not qualify as capital expenditure based on the facts and circumstances of the case.

This detailed analysis of the judgment showcases the court's thorough examination of the legal principles governing the classification of expenditure as either revenue or capital, providing clarity on the factors influencing such determinations in taxation matters.