2018 (12) TMI 48 - HC - Income Tax

Allowable business expenditure u/s 37 - expenditure incurred by the appellant for purchasing laboratory equipments as per Government Order - Held that - In the instant case, the amounts incurred by the assessee was for installation of equipments in the Government Laboratory to facilitate examination of the samples received by the laboratory, which also includes samples of the assessee. The assessee s business is thus benefited; but, at the same time, the assessee has no ownership over the equipments purchased and hence it is not a capital investment. That apart, for getting the samples examined by the laboratory, the assessee would need to pay examination fees as is required by any other agency which sends samples for examination. The findings of the AO to disallow the claim of revenue expenditure, upheld by the Appellate Authority and the Tribunal on the premise that the expenditure incurred will not be a revenue expenditure entitled for deduction, cannot be upheld. When the assessee has been conferred with a monopoly of dealing in liquor and testing of the same and ensuring its quality is expedient to its business and the money expended for providing the facilities to an independent government agency, without any acquisition by itself is a revenue expenditure - assessee is entitled to treat the expenses, incurred by them for upgrading of infrastructure in the government laboratory, as per the directions of the Government, which owns the Corporation, as revenue expenditure. - Decided in favour of assessee.

Summary

Issues:
1. Whether the expenditure incurred for purchasing laboratory equipment is revenue in nature?
2. Whether the Tribunal should have allowed the appeal?
3. Whether the appellant is allowed to claim deduction under section 37 of the Income Tax Act, 1961?

Analysis:
1. The case involved an appeal against the Income Tax Appellate Tribunal's order regarding the assessment year 2010-2011. The appellant, a wholesale trader of liquor, incurred expenses for setting up infrastructure in the Excise Division's laboratory. The Assessing Officer disallowed the expenses, considering them as capital expenditure. The Tribunal, without relying on a Delhi High Court decision, held that the expenses did not contribute to the business or goodwill. The appellant argued that the equipment purchased under a Government Order was installed in a government laboratory, not owned by the appellant, and thus should be considered revenue expenditure for business facilitation.

2. The appellant cited the Government Order directing the purchase of equipment essential for liquor sample examination. The Senior Counsel for the Government of India referred to a Supreme Court decision and a Madras High Court case to argue against the exemption of expenses, stating that expenses for business betterment do not qualify as revenue expenditure. The Supreme Court's rulings in various cases were discussed to determine the nature of expenditure and its impact on business operations.

3. The Supreme Court's distinction between capital and revenue expenditure was highlighted, emphasizing that expenditure facilitating day-to-day business operations without acquiring tangible or intangible rights can be considered revenue expenditure. In this case, the equipment installation in the government laboratory benefited the appellant's business without ownership rights, making it a revenue expenditure. The Court held in favor of the appellant, allowing the expenses for infrastructure upgrade in the government laboratory as revenue expenditure, as directed by the Government. The Tribunal's decision to disallow the claim was overturned, granting the appellant the right to treat the expenses as revenue expenditure.