2016 (2) TMI 711 - HC - Income Tax

Nature of payment - revenue v/s capital expenditure - Held that - Here the capital assets has never come into existence and the I.T.A.T. has allowed travelling expenses or ore testing charges only as revenue expenditure. This treatment is only in dispute before us. The travelling expenses or manganese ore testing charges pertaining to the existing mine allowed by the I.T.A.T. in the present facts cannot be directly corelated with the acquisition of any capital asset. We, therefore, do not find anything wrong with said exercise undertaken by the I.T.A.T. Also it is clear that study undertaken by the foreign company ie M/s. Seltrust Engineering Company Limited, U.K. was in connection with working of assessee s existing mines and optimization of the assessee s existing product. It did not relate in any way to proposed new plants. In view of undisputed findings on facts mentioned supra, the above logic also holds good here. - Decided in favour of assessee Expenditure on construction of house of labourer - revenue v/s capital expenditure - Held that - The scheme framed by the State Government and the M.I.D.C. basically was to construct houses for industrial employers. In the matter before us, the employer is put under obligation and accordingly on a nominal premium of ₹ 1/, it has leased out certain lands to the Central Government. The houses upon it are constructed by the Central Government and assessee has been treated as lessee thereof. The ownership and title of the structure vested in the Government and the assessee has to pay rent of ₹ 2.50 per unit per month to the Government. After expiry of period of lease, the assessee has option to purchase said structure or then it is open to the Government to remove the same and to return back the land. Thus, the basic difference in scheme before us & one looked into in Commissioner of Income Tax vs. National Machinery Manufacturers Ltd. (1991 (3) TMI 115 - BOMBAY High Court ) is apparent. In this situation, when the structure does not vest in the assessee and it has to pay monthly rent thereof to the Government, the expenditure incurred by the assessee thereon has been rightly treated as a revenue expenditure.- Decided in favour of assessee

Issues Involved:
1. Whether the payments made to D.S. Basu of M/s Dastur & Co., and others are revenue expenditure.
2. Whether the payment made to Mountain States Research & Development U.S.A. is revenue expenditure.
3. Whether the payment made to Seltrust Engineering Co. Ltd. is revenue expenditure.
4. Whether the amount incurred in the construction of houses for laborers is revenue expenditure.

Detailed Analysis:

Issue 1: Payments to D.S. Basu of M/s Dastur & Co.
The Income Tax Appellate Tribunal (I.T.A.T.) held that the payment of Rs. 86,554 to D.S. Basu of M/s Dastur & Co. was revenue expenditure. The department contended that this should be treated as capital expenditure, arguing that the distinction between existing projects and new projects should not affect the nature of the expenditure. The I.T.A.T. found that the expenditure was related to the existing business operations and thus qualified as revenue expenditure. The High Court supported this view, noting that the expenditure did not result in the acquisition of any capital asset.

Issue 2: Payment to Mountain States Research & Development U.S.A.
The I.T.A.T. also held that the payment of Rs. 81,885 to Mountain States Research & Development U.S.A. was a revenue expenditure. The department argued similarly that this should be treated as capital expenditure. The I.T.A.T. found that this expenditure was incurred to improve the profitability of the existing business, thus qualifying it as revenue expenditure. The High Court upheld this finding, emphasizing that the expenditure did not result in any enduring benefit or capital asset.

Issue 3: Payment to Seltrust Engineering Co. Ltd.
The I.T.A.T. concluded that the payment of Rs. 8,06,254 to Seltrust Engineering Co. Ltd. was a revenue expenditure. The department challenged this, arguing it should be treated as capital expenditure. The I.T.A.T. found that the study by Seltrust Engineering was related to optimizing the existing mining operations and did not pertain to any new plant or project. The High Court agreed, noting that the expenditure was directly related to improving the existing business operations and thus was rightly classified as revenue expenditure.

Issue 4: Construction of Houses for Laborers
The I.T.A.T. held that the amount of Rs. 29,52,638 incurred in the construction of houses for laborers was a revenue expenditure. The department argued that this should be treated as capital expenditure. The I.T.A.T. found that the ownership and title of the houses vested in the government, and the assessee was merely a lessee paying nominal rent. The High Court upheld this finding, noting that the expenditure did not result in the acquisition of any capital asset by the assessee and was thus correctly treated as revenue expenditure.

Conclusion:
The High Court answered all four questions against the department and in favor of the assessee, affirming the I.T.A.T.'s findings that the expenditures in question were revenue in nature. The judgment emphasized that the expenditures did not result in the acquisition of any capital assets or enduring benefits, and were related to the existing business operations.

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