2013 (12) TMI 1 - AT - Income Tax

Expenses on repairs Revenue or capital Expenditure Held that - The expenses were incurred to carry out changes in the manufacturing area on the direction of licensing authority - no new asset has been created by incurring said expenditure and the said expenditure was incurred to facilitate to run the factory Following CIT V/s Associated Cement Companies Ltd. 1988 (5) TMI 2 - SUPREME Court - What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of enduring benefit. If the advantage consists merely in facilitating the assessee s trading operations or enabling the management and conduct of the assessee s business to be carried on more effectively or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future Decided against Revenue.

Summary

Issues:
1. Classification of expenditure as revenue or capital in nature for assessment year 2006-07.

Analysis:
The case involves an appeal by the department against the order of the ld. CIT(A) directing the AO to allow the expenditure incurred by the assessee on repairs as revenue expenditure. The department argued that the expenditure gives enduring benefit and should be considered capital expenditure. The assessee, engaged in pharmaceutical manufacturing, made repairs to its factory to comply with FDA regulations. The AO treated the expenditure as capital, disallowing it as revenue. The assessee contended that the repairs did not create new assets and were necessary for smooth business operations, making it revenue expenditure. The ld. CIT(A) agreed with the assessee, directing the AO to allow the expenditure as revenue. The department appealed the decision.

The department argued that the repairs were not routine but carried out due to FDA directives, providing enduring benefit. Citing legal precedents, the department contended that the expenditure should be considered capital. The assessee, on the other hand, maintained that the repairs facilitated factory operations without creating new assets, making it revenue expenditure. The Tribunal analyzed the nature of the advantage gained from the expenditure, referring to legal judgments. It noted that if the expenditure facilitated trading operations without creating new capital assets, it should be considered revenue. The Tribunal found that the repairs were carried out to remove obstructions and facilitate manufacturing activities, not to create new assets. Therefore, it upheld the ld. CIT(A)'s decision that the expenditure was revenue in nature.

The Tribunal concluded that the repairs undertaken by the assessee were to enable smooth manufacturing operations without creating new capital assets. Citing legal precedents, the Tribunal held that expenditure incurred to remove obstructions or restrictions during the course of business is revenue expenditure if it does not result in acquiring capital assets. As the repairs were aimed at facilitating manufacturing activities and not creating new assets, the Tribunal upheld the decision that the expenditure was revenue in nature. The Tribunal rejected the department's appeal, affirming the order to treat the expenditure as revenue.