2012 (10) TMI 59 - HC - Income Tax

Revenue expenditure versus capital expenditure - hire-purchase v/s agreement of lease - Held that - There is a lot of difference between the purchase, hire-purchase and lease agreement. In this case the terms indicate that the provider of the machines was required to maintain the machines and, therefore, he was entitled to take the rent also as per the terms of the agreement, and the petitioner, in the any relevant year could not have exercised his right to purchase the Air Conditioner, his right to purchase the Air Conditioner could have been exercised after expiry of certain period of time. Therefore, in that situation, there was an agreement for lease only - in favour of assessee. Revenue expenditure v/s capital capital expenditure - Held that - the fee paid to the Architect, some expenses incurred on old capital work in progress which was abandoned and cost of damaged cabinets it is not in dispute that the project could not be accomplished because of the reason that the place where it was to be undertaken had a poor quality of soil and all the construction already damaged. - The other articles bought by the assessee also got damaged and, therefore, in that fact situation, the Tribunal was fully justified in holding that such expenditure which may be pre-operational expenditure for a project can be treated to be a revenue expenditure actually and not a capital expenditure - in favour of assessee.

Summary

Issues:
1. Interpretation of lease agreement as hire-purchase or lease.
2. Justification of expenses on lease-rent as revenue expenditure.
3. Allowance of payment of subsidy amount as revenue expenditure.
4. Treatment of expenditure on abandoned project as revenue or capital expenditure.
5. Allowance of expenditure on employee get-together, picnic, etc. as revenue expenses.

Analysis:

Issue 1:
The appellant argued that the lease agreement was a hire-purchase agreement, not a lease, and thus the expenses should be treated as capital expenditure. However, the respondent contended that the agreement was indeed a lease, as per the terms and conditions, and the option to purchase the air conditioners was not exercised during the relevant assessment year. The court referred to legal principles to determine the nature of the agreement and concluded that the transaction remained a lease until the purchase option was exercised.

Issue 2:
Regarding the justification of expenses on lease-rent as revenue expenditure, the Tribunal held that the subsidy paid to the school was a liability of the assessee under an agreement with the Employees' Union, aligning with the welfare scheme of the Industrial Disputes Act, 1947. The court upheld this reasoning, citing a similar judgment by the Bombay High Court, and dismissed the revenue's appeal.

Issue 3:
The court addressed the treatment of expenditure on an abandoned project as revenue or capital expenditure. The appellant claimed the expenditure was abortive due to adverse conditions at the proposed site, while the revenue authorities considered it capital expenditure. Relying on precedents, the court held that since no new industrial asset came into existence, the expenditure was revenue in nature, supporting the Tribunal's decision.

Issue 4:
In the context of allowing expenditure on employee-related activities as revenue expenses, the court referenced a previous dismissal of a similar issue in another case. Following the precedent, the court ruled against the revenue, stating that the issue did not raise a question of law, and consequently dismissed the appeal.

This detailed analysis of the judgment covers the various issues involved and the court's reasoning behind each decision, providing a comprehensive overview of the legal aspects discussed in the case.