2019 (1) TMI 1141 - HC - Income Tax

Claim of revenue expenditure - spreading over of the amounts, paid as license fees for the purpose of managing a berth in the Port - deferred liability for the twenty years, fully paid in that assessment year - Held that - The spreading over of the amounts, paid as license fees for the purpose of managing a berth in the Port, was perfectly justified, especially looking at the fact that the liability incurred was for the purpose of retaining such rights over a period of 20 years. In the subject year, the assessee had a reasonable expectation of continuing the right obtained for a period of 20 years and hence the spreading over of the liability incurred in that year, to the 20 years in which the right would have been retained by the assessee was proper and is a revenue expenditure. Herein though there was an extinguishment of right there was no such extinguishment of a right created in a capital asset. In fact, the earlier year also when the assessee had acquired rights for 20 years and the liability for the entire years was met by the assessee in that particular year, we found the assessee entitled to claim the same as revenue expenditure. There was no acquisition of a capital asset or a right of a permanent character. There was found justification in the spreading over of the liability in the 20 years in which the right to operate in favour of the assessee was available. Having found that there was no acquisition of capital asset there would also be no transfer or extinguishment of such right created in a capital asset. We hence uphold the order of the Tribunal for the assessment year 2001-02 answering the question of law in favour of the assessee and against the Revenue.

Summary

Issues:
1. Claim of revenue expenditure for assessment years 2000-01 and 2001-02.

Detailed Analysis:

Issue 1: Claim of Revenue Expenditure for Assessment Year 2000-01
The appellant obtained the right to manage a berth in Chennai Port from a sister concern for ?1,75,00,000, valid for 20 years. The appellant claimed ?8,75,000 as revenue expenditure for the first year (2000-01), but the Assessing Officer treated it as capital expenditure. The first appellate authority allowed the claim, citing relevant Supreme Court decisions. The Tribunal upheld the claim as short-term capital loss for the next year (2001-02) when the right was canceled by the Government. The Tribunal considered the claim as revenue expenditure for 2000-01 and dismissed the Revenue's appeal. The issue revolved around whether the expenditure was revenue or capital in nature.

Issue 2: Claim of Revenue Expenditure for Assessment Year 2001-02
In the subsequent year (2001-02), the appellant lost the right to manage the berth due to Government cancellation. The appellant claimed the remaining amount of ?1,66,25,000 as revenue expenditure, which the AO disallowed but the first appellate authority treated as short-term capital loss. The Tribunal upheld this treatment. The key question was whether the loss incurred due to agreement cancellation constituted revenue or capital expenditure.

The Court analyzed relevant precedents like Madras Industrial Investment Corporation Ltd. and Empire Jute Co. Ltd. to determine the nature of the expenditure. It was established that the liability incurred for managing the berth was revenue expenditure spread over 20 years. As there was no acquisition of a capital asset, the expenditure was considered revenue in nature. The Court upheld the Tribunal's decision in favor of the appellant for both assessment years, rejecting the Revenue's appeals. The judgment clarified the distinction between revenue and capital expenditure based on the business necessity and profit-making process, ultimately ruling in favor of the appellant in both instances.