2011 (10) TMI 603 - AT - Income Tax

Summary

Issues Involved:
The judgment addresses the issue of whether the expenditure incurred in respect of the factory building is capital or revenue expenditure.

Expenditure Nature - Capital or Revenue:
The case involved an appeal by the Revenue for assessment year 2006-07 concerning the treatment of expenditure incurred in respect of the factory building. The Revenue contended that the expenditure of Rs. 52,71,300/- was of capital nature as it resulted in enduring benefit to the business of the assessee. The assessing officer disallowed the expenditure, treating it as capital in nature, as new floors and roof had come into existence. The ld. CIT (Appeals) held that the expenditure was in the nature of current repairs and allowable as revenue expenditure, citing the decision in the case of Honda Siel Cars India Ltd. Vs. ACIT. The ld. Sr. DR argued that the replacement of the roof and flooring had created new assets, making the expenditure capital in nature. However, the ld. AR of the assessee contended that no new space or capacity was created, and the expenditure was for current repairs to preserve the existing factory building. The Tribunal analyzed the provisions of section 30(a)(ii) and held that since no new assets or enduring benefit had been created, the expenditure was to be treated as revenue expenditure, in line with the decision in Honda Siel Cars India Ltd. Vs. ACIT.

Legal Analysis and Decision:
The Tribunal referred to the Explanation to section 30 inserted by the Finance Act, 2003, which states that expenditure in the nature of capital expenditure is not allowable as deduction. It emphasized the test of whether the expenditure was incurred for current repairs to preserve an existing asset or to create a new asset or advantage of enduring benefit. The Tribunal found that the replacement of the asbestos roof with steel sheets and the re-doing of the damaged shop floor did not create new assets or increase capacity. The expenditure was deemed to be on repairs of the existing floor and roof, integral parts of the factory building. The Tribunal concluded that since no new assets or enduring benefits had been derived, the expenditure was rightly treated as revenue expenditure by the ld. CIT (Appeals). Therefore, the appeal filed by the Revenue was dismissed, upholding the order allowing the relief to the assessee.