2009 (1) TMI 7 - HC - Income Tax

Expenses on modernization of units - administrative expenses tribunal hold that though the expenses had been capitalized in the books of accounts, this would not be conclusive of the nature as to whether the expenditure was of a capital nature or revenue nature tribunal s decision that as the new unit was part of the existing business and there was unity of control and interlacing of the units, the expenses incurred for the setting up of a new unit, would be of a revenue nature, is correct

Summary

Issues:
- Treatment of expenditure as revenue or capital nature
- Allowance of administrative expenses incurred for renovation
- Dispute over the nature of expenditure for modernization and expansion

Analysis:
1. The main issue in this case revolved around the treatment of expenditure incurred by the assessee for the modernization and expansion of its units. The Revenue contended that the expenditure should be treated as capital in nature as it had been capitalized in the books of accounts. However, the Income-tax Appellate Tribunal allowed the expenditure as revenue in nature, leading to the appeal by the Revenue.

2. The Assessing Officer and the Commissioner of Income-tax had initially disallowed the expenditure under the head of administrative expenses, stating that it was capital in nature as it provided an enduring benefit. The Assessing Officer capitalized the expenditure, leading to a dispute over whether the expenses should be treated as revenue or capital in nature.

3. The tribunal considered the arguments put forth by the assessee, highlighting that the administrative expenses were estimated and not actual, and were allocated towards the renovation and modernization of the units. The tribunal also noted that the assessee's aim was to enhance the capacity of its sugar mills through the expansion of existing units.

4. After examining the facts and arguments presented, the tribunal concluded that the expenses incurred for the modernization and expansion should be treated as revenue expenditure. The tribunal relied on previous court decisions to support its stance, emphasizing that in a continuing business, expenses for renovation of existing units should be considered revenue in nature. Therefore, the tribunal held that the administrative expenses were of a revenue nature due to the continuity of the business.

5. Ultimately, the High Court upheld the tribunal's decision, stating that no interference was necessary as the tribunal had correctly applied the law to the facts of the case. The court agreed with the tribunal's conclusion that the entire expenditure should be allowed as revenue expenditure, eliminating the need for depreciation on such expenses.

6. The High Court dismissed the appeals, stating that no substantial question of law arose for consideration, thus affirming the tribunal's decision regarding the treatment of expenditure for modernization and expansion as revenue in nature.