2018 (11) TMI 377 - AT - Income Tax

Disallowance of expenditure on licence fee - claimed by the assessee as a revenue expenditure - as per AO the expenditure was incurred for the purpose of setting up of Retail outlet, therefore, the expenditure was capital in nature - assessee paid signing fee for the training of the dealers and its staff and supervision and coordination of the construction of the retail outlet - Held that - Since the unit was commissioned on 01.10.2005 and the expenditure was incurred during the construction period before commencement of the business, the said expenditure cannot be related to the expenditure of the impugned assessment year. AR did not provide details with regard to the dates of training given by the Reliance Industries to dealers and the staff. Similarly no break up of the expenses incurred for the training and construction related activities were submitted. The signing fee was one time payment which was related to the setting up of construction of Reliance petrol pump unit and the expenditure was incurred prior to the commencement of the business, therefore, we are unable to accept the contention of the assessee that the expenditure be treated as revenue expenditure for the year under consideration. Since the expenditure was incurred before the commencement of business, the expenditure required to be capitalized in respect of relevant asset and allow the depreciation or the same should be amortized as per section 35D of the Act AO has rightly treated the expenditure as capital expenditure and allowed the depreciation - decided against assessee.

Summary

Issues involved:
Disallowance of expenditure claimed as revenue expenditure and capitalization of the same.

Detailed Analysis:

1. Disallowed Expenditure:
- The appeal was filed against the disallowance of expenditure of ?3,00,000 claimed by the assessee as a revenue expenditure and capitalizing the same.
- The Assessing Officer (AO) disallowed the expenditure as it was neither incurred nor accrued in the impugned assessment year, holding it as capital expenditure for setting up a retail outlet.
- The AO observed that the expenditure was related to the setting up of the retail outlet, hence capital in nature.

2. Appeal to CIT(A) and Tribunal:
- The assessee appealed to the CIT(A) against the AO's order, which was confirmed by the CIT(A).
- The matter was then taken to the Tribunal by the assessee for further consideration.

3. Arguments Before Tribunal:
- The assessee argued that the expenditure was for training, non-refundable, and one-time, related to the impugned assessment year.
- The assessee provided the dealership agreement as evidence and relied on a previous case to support their claim.

4. Revenue vs. Capital Expenditure:
- The Departmental Representative (DR) argued that the expenditure was not incurred or accrued during the year under consideration.
- The DR contended that the expenditure was for setting up the retail outlet, hence capital in nature, and should be capitalized.
- A comparison was made with a different case involving franchise fees to distinguish the nature of the expenditure.

5. Tribunal's Decision:
- The Tribunal noted that the expenditure was paid before the commencement of business and related to setting up the retail outlet.
- Lack of specific details on training dates and expenses breakdown led to the rejection of the claim for revenue expenditure.
- The Tribunal upheld the AO's treatment of the expenditure as capital expenditure and allowed depreciation.

6. Conclusion:
- The Tribunal found no reason to interfere with the orders of the AO and CIT(A), upholding the treatment of the expenditure as capital expenditure.
- The appeal of the assessee on this ground was dismissed, and the decision was pronounced on 3rd August 2018.