2014 (10) TMI 225 - HC - Income Tax

Expenses on establishing Green Belt and depreciation - The AO refused to treat it as capital investment, much less as part of plant and machinery and disallowed depreciation Tribunal allowed the same as revenue expenditure - Held that - The Tribunal was of the view that the expenditure incurred for the arrangement of Green Belt answers the description of revenue expenditure and since it was incurred before the commencement of production and business, it can be capitalized - The Tribunal has undertaken extensive discussion regarding the nature of the expenditure that is incurred for arranging the Green Belt - once it is not in dispute that the expenditure for arranging Green Belt was incurred before the commencement of production and in the process of creating asset, it deserves to be capitalized. The Tribunal, in a way, accepted the contention of the assessee that the Green Belt was treated as plant and machinery in the insurance policies and the same analogy can be adopted in the context of taxation also - when the field of income tax is governed by its own norms, in the form of rules and notifications, if not the provisions of the Act itself, for classification of items of expenditure and the like, there was absolutely no basis to adopt the one, which was indicated in an insurance policy, which has absolutely nothing to do with taxation thus, the order of the Tribunal is set aside which directed that the expenditure incurred for arranging the Green Belt by the assessee be treated under the heading of plant and machinery - Decided partly in favour of revenue.

Summary

Issues:
1. Treatment of expenditure incurred for establishing Green Belt as capital investment.
2. Disallowance of depreciation claimed on the expenditure.
3. Classification of Green Belt expenditure as part of plant and machinery.
4. Justification for capitalizing the expenditure incurred before the commencement of production.

Issue 1: Treatment of Green Belt Expenditure:
The respondent established a Fertiliser Plant and incurred expenditure for establishing a Green Belt. The Assessing Officer disallowed depreciation claimed on the expenditure, refusing to treat it as capital investment. The Commissioner (Appeals) upheld this decision, leading to an appeal before the Tribunal. The Tribunal held that the expenditure for the Green Belt can be capitalized as revenue expenditure incurred before production commenced. However, the Tribunal directed that the capitalized amount be treated under the heading of plant and machinery. The appellant argued that the Green Belt cannot be considered part of plant and machinery, contrary to the Tribunal's view.

Issue 2: Disallowance of Depreciation:
The Assessing Officer and the Commissioner disallowed the depreciation claimed on the Green Belt expenditure. The Tribunal, after extensive discussion, determined that the expenditure was revenue in nature and not capital expenditure. Therefore, the question of whether the Green Belt qualifies as plant and machinery became irrelevant. The Tribunal concluded that the expenditure, though revenue in nature, could be capitalized due to being incurred before production commenced.

Issue 3: Classification of Green Belt Expenditure:
The Tribunal directed that the expenditure incurred for the Green Belt be treated under the heading of plant and machinery. The Tribunal justified this decision by citing the analogy of the Green Belt being treated as plant and machinery in insurance policies. However, the Court found this reasoning far-reaching and unrelated to tax laws' classification norms. Consequently, the Court set aside the Tribunal's direction to treat the expenditure under the heading of plant and machinery.

Issue 4: Capitalization of Expenditure Before Production:
The Tribunal's decision to allow capitalization of the Green Belt expenditure incurred before production raised concerns about its classification under plant and machinery. The Court partially allowed the appeal, setting aside the Tribunal's direction to treat the expenditure under plant and machinery. Instead, the Court directed that the amount qualifies for capitalization in creating assets, without being categorized as plant and machinery. The Court emphasized the need to adhere to tax laws' norms for expenditure classification, rather than relying on unrelated analogies from insurance policies.

In summary, the judgment addressed the treatment of expenditure for establishing a Green Belt at a Fertiliser Plant, focusing on the capitalization of the expenditure, disallowance of depreciation, classification as plant and machinery, and justification for capitalizing the expenditure before production commenced. The Court clarified that while the expenditure could be capitalized as revenue expenditure incurred before production, it should not be classified under the heading of plant and machinery, emphasizing the importance of adhering to tax laws' norms for expenditure classification.