2016 (10) TMI 355 - HC - Income Tax

Nature of expenditure - revenue or capital - main ground for disallowance of the expenses by the Assessing Officer was that the said expenses were capitalized in the books of accounts of the assessee - Held that - As decided in Ghanshyam Steel Work Ltd 2010 (5) TMI 831 - GUJARAT HIGH COURT the so called new unit was merely an expansion of the existing business of the assessee and was not setting up of a new business and as such the expenses incurred in this regard were allowable as revenue expenses. Considering the fact that the Assessing Officer had not considered the claims of each of the items of expenditure incurred by the assessee from the angle as to whether the same were in the nature of revenue or capital expenditure, the matter has been restored to the Assessing Officer to look into the nature of the expenses and consider as to whether the same are allowable under Section 36(1)(iii) or Section 37 of the Act. Merely because the expenses have been capitalized in the books of account, the same cannot be a final wording in the tax proceedings unless these entries of books of account are in consonance with the IT provisions. - Decided in favour of the assessee and against the revenue

Summary

Issues:
Challenge to judgment and order by Income-tax Appellate Tribunal regarding addition of revenue expenditure as capital in nature under Section 37 of the Income Tax Act, 1961.

Analysis:
The appellant-revenue challenged the Tribunal's decision upholding the addition of revenue expenditure as capital in nature. The assessee claimed expenditure as revenue, but the Assessing Officer deemed it capital expenditure. The CIT (Appeals) partially deleted the addition, and the Tribunal upheld the deletion of interest payment but removed the remaining addition. The main contention was whether the Tribunal erred in upholding the deletion of the addition on account of revenue expenditure being capital in nature.

The revenue argued that the assessee initially treated the expenditure as capital in its books and could not change it later. Citing a Supreme Court decision, the revenue contended that the expenditure was for an initial outlay and acquisition of a capital asset. On the other hand, the assessee maintained that the expenses were allowable revenue expenditure, relying on a similar case precedent where expenses for expanding an existing business were considered revenue expenses under Section 36(1)(iii) or Section 37.

The Tribunal, following a previous case, noted that capitalization in books does not conclusively determine tax treatment unless consistent with tax provisions. Referring to a similar case, the Court held that expenses for expanding an existing business were allowable as revenue expenses. The Court found no infirmity in the Tribunal's decision, as the issue was akin to the precedent case. Consequently, the appeals were dismissed in favor of the assessee, confirming the Tribunal's order.

In conclusion, the judgment addressed the dispute over treating certain expenses as revenue or capital in nature under the Income Tax Act. The Court upheld the Tribunal's decision, emphasizing that capitalization in books alone does not dictate tax treatment, and expenses for expanding an existing business could be considered allowable revenue expenditure. The judgment provided clarity on the tax treatment of such expenses, drawing from relevant legal precedents and statutory provisions.