2013 (10) TMI 1290 - AT - Income Tax

Capital expenditure or Revenue Expenditure - assessee has incurred huge expenditure in laying cables for providing cable connections to domestic viewers - Commissioner of Income-tax (Appeals) held that the cable laying expenditure was revenue in nature and therefore, deductible while computing the income of the assessee - held that - even though the cables are laid by the assessee for carrying on business, the cables laid down by the assessee did not satisfy the basic features of a capital asset. The question of enduring benefit in the present case is only relative . It is related to safeguarding and protection of the cable laid down underground or drawn over the electric poles. If an external agency interferes and the cables are damaged, the assessee has no course of action. The assessee can neither retrieve the cable profitably, nor can it protect the cables by itself. In these circumstances, the cost involved in laying the cables is a sunk cost even though the assessee may get the benefit out of the cable for a period of more than one year. That longevity of the facility alone cannot make the cable as a capital asset in the hands of the assessee. The assessee does not have physical possession of the cable and once laid down, it is gone for all. - cable laying expenditure in the hands of the assessee is revenue in nature. - Decided against Revenue.

Summary

Issues: Appeal against the order of Commissioner of Income-tax (Appeals) directing treatment of cable laying expenditure as revenue expenditure instead of capital expenditure for assessment years 2003-04 and 2005-06.

Analysis:
1. Nature of Expenditure:
- The Revenue contended that the expenditure on cable laying should be treated as capital expenditure due to enduring benefit.
- The assessee argued that the expenditure was revenue in nature as it was necessary for carrying on the business.
- The Assessing Officer disallowed the expenditure, treating it as capital and allowing depreciation.
- The Commissioner of Income-tax (Appeals) accepted the assessee's contention, considering the cables as not meeting the criteria of a capital asset due to lack of control and reusability.
- The Tribunal agreed with the Commissioner's findings, stating that the cables did not provide an enduring benefit and the cost was a sunk cost, leading to the conclusion that the expenditure was revenue in nature.

2. Control and Ownership of Cables:
- The cables were laid on public properties under licenses, making it impossible for the assessee to retrieve or control them once laid.
- The inability to protect or profitably retrieve the cables, even in case of damage, indicated a lack of ownership or control over the cables.
- The Tribunal emphasized that the longevity of the facility alone did not classify the cables as a capital asset, as the assessee did not have physical possession of the cables after laying them.

3. Reopening of Assessments:
- The assessee raised cross-objections against the reopening of assessments under section 147 of the Income-tax Act, 1961.
- The Tribunal dismissed these cross-objections as academic, considering the main issue decided in favor of the assessee regarding the nature of the expenditure.
- Consequently, both the appeals by the Revenue and the cross-objections by the assessee were dismissed by the Tribunal.

In conclusion, the Appellate Tribunal upheld the decision of the Commissioner of Income-tax (Appeals) regarding the treatment of cable laying expenditure as revenue expenditure, emphasizing the lack of enduring benefit and ownership control over the cables. The Tribunal also dismissed the cross-objections against the reopening of assessments, as the main issue was decided in favor of the assessee.