2013 (12) TMI 161 - AT - Income Tax

Expenses u/s 37(1) - Held that - The expenditure are in the nature of salary, electricity, audit fee etc. incurred for expansion of existing line of business that is setting up of more number of stores/speciality stores or for maintenance of already established stores - Operations of these stores at various locations is one composite business and once business had been started then the expenditure can not be linked only to the stores which became operational during the year under consideration. When the expenditure is incurred for the purpose of expansion of business which is already in existence and, which is in the nature of revenue, then the same is allowable as revenue expenditure irrespective of the treatment given by the assessee to such expenditure in its books of account - Following CIT vs. Kothari Auto Parts Manufacturers Pvt. Ltd. 1975 (12) TMI 28 - BOMBAY High Court - These expenditures did not create any asset and also did not provide enduring benefit to the business of the assessee so as to say that the expenditure was capital in nature - Assessee has filed the details mentioning job description of each of the employees alongwith amount paid to him describing also that how much TDS has been deducted. Without pointing out any defect and without bringing any adverse material on record, Ld. CIT(A) has observed that assessee has failed to prove that the expenditure was made wholly and exclusively for the purpose of business of the assessee - The observation of CIT(A) cannot be upheld - The assessee itself has disallowed a sum of ₹ 51,23,957/- out of the aforementioned amount of ₹ 3,64,49,545/- under the provisions of section 40A(7)/40A(9)/43B of the Act - An amount of ₹ 3,13,25,588/- should be allowed to the assessee on account of revenue expenditure - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of claim for deduction under Section 37(1) in respect of revenue expenditure.
2. Treatment of expenditure as capital or revenue in nature.
3. Compliance with provisions of Section 40A(7)/40A(9)/43B of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Disallowance of claim for deduction under Section 37(1) in respect of revenue expenditure:

The Assessee, engaged in trading and merchandising, claimed Rs. 3,64,49,545 as revenue expenditure under Section 37(1). The AO disallowed this claim, arguing that the expenditure was capital in nature and should be capitalized as 'Capital Work-in-Progress'. The AO noted that the expenditure was shown as pre-operative expenses in the balance sheet and could not be treated as revenue for tax purposes. The CIT(A) upheld the AO's decision, stating that the Assessee failed to prove that the expenditure was incurred wholly and exclusively for business purposes.

2. Treatment of expenditure as capital or revenue in nature:

The Assessee argued that the expenditure was for expanding its existing business, which had already commenced operations with two stores in Bangalore and Hyderabad. The Assessee cited several judicial precedents, including Kedarnath Jute Manufacturing Company Limited and CIT vs. Bhor Industries Ltd., to support the claim that revenue expenditure should be allowed in the year it is incurred, regardless of its treatment in the books of accounts. The Tribunal agreed with the Assessee, noting that the expenditure did not create any asset or provide an enduring benefit, and thus, should be treated as revenue expenditure.

3. Compliance with provisions of Section 40A(7)/40A(9)/43B of the Income Tax Act:

The Assessee had already disallowed Rs. 51,23,957 under Sections 40A(7), 40A(9), and 43B in its computation of income. The Tribunal noted that the Assessee's claim for deduction was limited to Rs. 3,13,25,588 (Rs. 3,64,49,545 minus Rs. 51,23,957). The Tribunal held that this amount should be allowed as revenue expenditure, as the Assessee had provided sufficient details and job descriptions of employees to substantiate that the expenditure was incurred for business purposes.

Conclusion:

The Tribunal concluded that the expenditure of Rs. 3,13,25,588 should be allowed as revenue expenditure, as it was incurred for the expansion of the Assessee's existing business and did not result in the creation of any asset or enduring benefit. The appeal filed by the Assessee was allowed, and the disallowance made by the AO and upheld by the CIT(A) was overturned.