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2012 (11) TMI 52 - AT - Income TaxWhether expenditure incurred by the assessee for construction of structures on railway property for smooth handling of containers is revenue in nature AO disallowed the expense by invoking the provisions of section 35D as in the nature of preliminary expenses - Held that - Expenditure in question cannot be termed as preliminary expenses - By incurring the expenses, the assessee did not acquire any new asset having enduring benefit - expenses were incurred for smooth running of existing business by constructing rams for loading & unloading and no permanent structure came into existence, rather the expenses were incurred for replacement and repairs of existing structures like rams etc. In favor of assessee
Issues Involved:
1. Whether the expenditure incurred by the assessee amounting to Rs. 1,00,25,500 for construction of structures on railway property for smooth handling of containers is revenue in nature or capital in nature. 2. Applicability of Section 35D of the Income-tax Act, 1961 to the expenditure incurred by the assessee. Issue-wise Detailed Analysis: 1. Nature of Expenditure: Revenue or Capital The primary issue in this case was whether the expenditure of Rs. 1,00,25,500 incurred by the assessee for constructing structures on railway property for smooth handling of containers should be classified as revenue expenditure or capital expenditure. The assessee argued that the expenditure was for the construction of temporary structures like ramps for smooth loading and unloading of containers, which were subject to heavy wear and tear and required frequent replacement. The assessee maintained that these expenditures did not result in the acquisition of any capital asset and were necessary for the smooth handling of its business operations, thus qualifying as revenue expenditure. The Assessing Officer (AO) disagreed, contending that the expenditure resulted in an enduring benefit to the assessee and should be treated as capital expenditure. The AO allowed only 1/5th of the expenditure, treating the remaining amount as capital expenditure, thereby making an addition of Rs. 80,20,400 to the income of the assessee. The Commissioner of Income Tax (Appeals) [CIT(A)] overturned the AO's decision, holding that the expenditure was indeed revenue in nature. The CIT(A) observed that the structures were temporary and required frequent replacement due to heavy wear and tear, and did not result in any permanent structure. The CIT(A) relied on several case laws, including "Empire Jute Co. Ltd vs. CIT (1980) 124 ITR 1 (SC)" and "CIT vs. Gujarat Mineral Development Corporation (1981) 132 ITR 377 (Guj)," to support the view that the expenditure was revenue in nature. 2. Applicability of Section 35D The second issue was whether Section 35D of the Income-tax Act, 1961, which pertains to amortization of certain preliminary expenses, applied to the expenditure incurred by the assessee. The AO invoked Section 35D, arguing that the expenditure was incurred in connection with the extension of the assessee's industrial undertaking. The assessee countered this by stating that the provisions of Section 35D were not applicable as the assessee was not an industrial undertaking and the expenditure did not fall under any of the categories specified in sub-section (2) of Section 35D. The CIT(A) agreed with the assessee, noting that the expenditure was not listed under the specified categories in Section 35D and was incurred in the regular course of business for the smooth running of the existing business. The CIT(A) further noted that the expenditure did not result in the acquisition of any new asset with enduring benefit, and thus, could not be classified as preliminary expenses under Section 35D. Conclusion The Income Tax Appellate Tribunal (ITAT), Bangalore, upheld the decision of the CIT(A), concluding that the expenditure incurred by the assessee was revenue in nature and not capital expenditure. The ITAT also agreed that Section 35D was not applicable to the expenditure in question, as it was incurred for the smooth running of the existing business and did not result in the acquisition of any new asset. Consequently, the appeal of the department was dismissed.
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