2013 (9) TMI 737 - HC - Income Tax

Whether the expense is a capital expenditure of revenue expense in nature Held that - Entire expenditure as disclosed in the annual report was on the construction of the works of capital nature i.e. hatcheries, which were under construction. The assessee could not produce the document to bifurcate expenses, which were expended on the construction of hatcheries and those which were expended in the regular business of the Corporation. The findings that the assessee could not explain the expenses, which were incurred on business of the Corporation is a finding of fact - Expenses claimed under the head of work in progress on the units under construction, were of enduring inseparable advantage from the projects to the assessee-corporation - Any administrative expense, which are made on the construction having enduring advantage to the assessee has to be treated as capital expense. It cannot be treated as revenue expenses of the organization Decided against the Assessee.

Summary

Issues:
- Assessment of expenses for the assessment years 1983-84 and 1984-85
- Classification of administrative expenses as revenue or capital in nature
- Justification of disallowance of expenses by the Tribunal

Analysis:
For the assessment years 1983-84 and 1984-85, the Tribunal referred questions regarding the admissibility of expenses totaling Rs.4,53,258/- and Rs.6,23,262/- respectively. The key issue revolved around whether these administrative expenses were revenue or capital in nature. The applicant, a public sector corporation involved in fisheries development, claimed these expenses as revenue in their revised returns. However, the Assessing Officer (A.O.) did not accept this claim due to lack of verifiable bifurcation between capital and revenue expenses, especially during ongoing construction projects. The Tribunal upheld the disallowance of these expenses, emphasizing the need for the assessee to prove the reasonableness of such expenses.

In response to the applicant's arguments citing relevant case laws, the Tribunal maintained that the expenses incurred on the ongoing construction projects were of enduring benefit to the corporation, thus classifying them as capital expenses. The Tribunal highlighted the inability of the assessee to differentiate between expenses related to construction projects and regular business activities, leading to the conclusion that these administrative expenses were capital in nature. Citing precedents, the Tribunal emphasized that expenses providing enduring advantage to the corporation must be treated as capital expenses, not revenue expenses.

Ultimately, the Tribunal ruled in favor of the revenue authority, affirming the disallowance of the claimed administrative expenses. The decision was based on the finding that the expenses incurred on construction projects had enduring benefits for the corporation, aligning with the classification of such expenses as capital rather than revenue. The judgment emphasized the importance of proper documentation and substantiation of expenses to differentiate between revenue and capital expenditures, ultimately impacting the tax liability of the assessee.

In conclusion, the Tribunal's decision in both assessment years favored the revenue authority, rejecting the assessee's claim for treating administrative expenses as revenue expenditures. The judgment underscored the significance of establishing the enduring advantage of expenses to determine their classification as either revenue or capital in nature, highlighting the need for clear documentation and justification in such matters.