2016 (12) TMI 1849 - AT - Income Tax

Nature of expenditure - power and fuel charges - assessee bear cost of additional power infrastructure to be established by electricity supplier - AR submitted that when the outgo did not create any asset for the assessee it was a revenue expenditure allowable u/s.37(1) - HELD THAT - There is no dispute that there was a agreement between assessee and M/s. Ford India Pvt. Ltd by which latter leased out a property to the assessee. M/s. Ford India Pvt. Ltd was to supply electricity to the assessee for the factory in the leased property based on a shared services agreement. M/s. Ford India Pvt. Ltd had given notice to the assessee for terminating the shared supply agreement w.e.f. 1st January, 2009 is also not doubted. Electricity was an essential input for carrying on the manufacturing activity of the assessee and there can be no two opinions on this. To ensure supply of uninterrupted electricity, assessee had to agree with M/s. Ford India Pvt. Ltd to part finance the total cost of additional power infrastructure to be established by M/s. Ford India Pvt. Ltd. M/s. Ford India Pvt. Ltd would not have supplied electricity after 1st January, 2009 but for assessee agreeing to part finance the cost of the project for establishing additional power infrastructure - additional power infrastructure created was the sole property of M/s. Ford India Pvt. Ltd and assessee had no ownership over any part of the said asset. The only benefit assessee derived was supply of uninterrupted electricity, without which it could have not functioned. In this situation, the said expenditure in our opinion can only be treated as revenue expenditure which ensured continued electricity supply. The payment did not result in any enduring benefit but only enabled the assessee to carry on its day to day activities. Just because additional power infrastructure was an asset in the hand of the M/s. Ford India Pvt. Ltd, we cannot say that amount given by the assessee to M/s. Ford India Pvt. Ltd was a capital outgo. The expenditure was incurred wholly and exclusively for the business of the assessee and it did not create any asset for the assessee. It only ensured continued supply of electricity without interruption. In such circumstances, in our opinion, the expenditure was rightly claimed by the assessee as revenue outgo. Lower authorities in our opinion fell in error in disallowing the claim. - Decided in favour of assessee.

Summary

Issues:
- Delay in filing the appeal by the Department
- Allowance of depreciation on capital expenditure
- Disallowance of claim as capital expenditure
- Nature of expenditure: revenue or capital

Delay in filing the appeal by the Department:
The Department's appeal was delayed by three days, but the condonation petition was filed, and the reason for the delay was considered justified. The Authorized Representative did not object, and the delay was condoned, admitting the appeal.

Allowance of depreciation on capital expenditure:
The assessee, engaged in manufacturing motor vehicle parts, claimed a sum as revenue outgo under section 37(1) of the Act. The Assessing Officer disallowed the claim, stating that the expenditure resulted in enduring benefits to another entity and was not a routine business expenditure. The Commissioner of Income Tax (Appeals) upheld the capital expenditure view but allowed depreciation on the sum, considering it as creating an intangible asset for the assessee.

Disallowance of claim as capital expenditure:
The Revenue challenged the allowance of depreciation by the Commissioner of Income Tax (Appeals), arguing that the expenditure did not result in an intangible asset for the assessee. The Departmental Representative contended that while the expenditure was capital outgo, it did not create an intangible asset for the assessee.

Nature of expenditure - revenue or capital:
The dispute revolved around whether the expenditure should be treated as revenue or capital. The authorities noted that while the expenditure ensured continued electricity supply, it did not result in any enduring benefit or asset creation for the assessee. The Appellate Tribunal held that the expenditure was rightly claimed as a revenue outgo, as it was incurred solely for the business of the assessee and ensured the uninterrupted supply of electricity.

In conclusion, the Appellate Tribunal allowed the cross objection of the assessee, considering the expenditure as a revenue outgo. The Revenue's appeal became infructuous and was dismissed.