2020 (11) TMI 144 - HC - Income Tax

Lump sum payment for development of infrastructure for uninterrupted power supply - revenue expenditure u/s 37(1) - Whether Tribunal was right in holding that the lump sum expenditure incurred for obtaining uninterrupted power supply for 14 years is allowable in one year though the same will result in distorted profit of the assessee? - HELD THAT - The instant case, though the assessee has parted with substantial funds to M/s.Ford India Private Limited, the capital asset continued to remain the property of M/s.Ford India Private Limited. Issue as to whether for the same asset, M/s.Ford India Private Limited claimed depreciation and the assessee is claiming exemption under Section 37 of the Act, cannot be a relevant factor. As rightly submitted by Ms.N.V.Lakshmi, learned counsel for the respondent/assessee that this was never the case of the Revenue before the authorities or before the Tribunal. Thus, we are of the considered view that the Tribunal rightly examined the nature of transaction and held that expenditure to be in the Revenue field. - Decided against revenue.

Summary

Issues:
1. Whether lump sum payment for development of infrastructure for uninterrupted power supply is considered revenue expenditure under section 37(1) of the Income Tax Act, 1961?
2. Whether lump sum expenditure incurred for obtaining uninterrupted power supply for 14 years is allowable in one year despite resulting in distorted profit of the assessee?

Issue 1: Lump Sum Payment for Infrastructure Development
The case involved an appeal by the Revenue challenging the order of the Income Tax Appellate Tribunal regarding the nature of a payment made by the assessee to ensure uninterrupted power supply. The Assessing Officer initially held the payment to be capital expenditure as it was considered to improve the assessee's asset. The Commissioner of Income Tax (Appeals) also agreed that the expenditure was capital in nature but allowed an alternate claim of depreciation. However, the Tribunal, in the impugned order, held the expenditure to be revenue in nature, dismissing the Revenue's appeal as infructuous. The Revenue contended that the enduring benefit of continued power supply indicated capital expenditure, citing a Supreme Court decision. On the other hand, the respondent argued that the expenditure was a business expense necessary for uninterrupted power supply, supported by various court decisions.

Issue 2: Allowability of Lump Sum Expenditure
The second issue revolved around whether the lump sum expenditure incurred for obtaining uninterrupted power supply for 14 years should be allowable in one year, potentially distorting the assessee's profit. The Revenue argued that both parties benefited from the transaction, with the assessee claiming an exemption under Section 37 of the Act. The respondent contended that the expenditure was a business expense to ensure uninterrupted power supply, citing relevant court decisions. The Tribunal's decision to treat the expenditure as revenue was upheld, emphasizing that the nature of the transaction and the enduring benefit did not warrant capital treatment. The Court found that the Revenue's argument regarding depreciation and exemption under Section 37 was not raised earlier and thus not relevant to the case.

In conclusion, the High Court dismissed the Tax Case Appeals, upholding the Tribunal's decision that the lump sum payment for infrastructure development and uninterrupted power supply was revenue expenditure under Section 37(1) of the Income Tax Act, 1961. The Court answered the substantial questions of law against the Revenue, emphasizing the proper test of enduring advantage and the specific facts of the case.