2021 (12) TMI 652 - HC - Income Tax

Nature of expenditure - Revenue expenditure or capital expenditure - expenditure incurred by the Appellant for raising floor height of Godown - as submitted submitted that as the expenditure was incurred only at the instance of the Customer to meet specific requirement of the Customer and the purpose and object of incurring this expenditure was to ensure continuity of business with the Customer and that to at enhanced rates - HELD THAT - Appellant by spending the amount did not bring into existing any new asset. The expenditure was incurred wholly and solely to ensure that the existing business with the Customer which was offering attractive returns to Appellant was continued uninterrupted. The expenditure incurred by Appellant had direct relation to the business with the customer because Appellant also received corresponding increased compensation from the customer. Appellant also incurred the expenditure notwithstanding that the volume of the space available in the ware-house would get reduced for the business with the Customer would survive. There was a benefit by way of continuing business with the Customer or increase in compensation from the Customer. Appellant achieved both these objectives by incurring the expenditure. We are satisfied with the explanation given by Appellant that it was for the purpose of conducting its business and increase in profit. The expenditure so incurred is related to the carrying on or conducting of ware-house business of Appellant and hence it should be regarded as an integral part of the profit earning process. The expenditure therefore cannot be treated as capital expenditure but should be treated as revenue expenditure. The substantial question of law is answered accordingly.

Summary

Issues:
Whether the expenditure incurred for raising floor height of a godown can be considered as revenue expenditure or capital expenditure.

Analysis:
The appellant, a warehouse keeper, raised the floor height of their warehouse due to severe water logging issues during monsoon, which damaged goods stored in the warehouse. The expenditure of ?10,70,000 was incurred to prevent water damage to goods stored by a major customer, ensuring business continuity and increased compensation. The appellant argued that the expenditure was solely to maintain existing business and not to create a new asset.

The respondent contended that the nature of the expenditure determines its classification as revenue or capital, with enduring advantages being considered capital expenditure. The Assessing Officer and ITAT held the expenditure as capital. Both parties cited the Ballimal Naval Kishore case, emphasizing that expenditure to preserve existing assets qualifies as revenue expenditure.

The court referred to various precedents to determine the nature of the expenditure. It was established that if the expenditure is integral to profit-making and not for acquiring a permanent asset, it qualifies as revenue expenditure. The court found that the appellant's expenditure was directly related to business continuity and profit increase, not for acquiring a new asset, making it revenue expenditure.

Based on the analysis, the court concluded that the expenditure of ?10,70,000 was revenue expenditure, integral to the profit-making process. The court upheld the appellant's argument that the expenditure was for conducting business and increasing profit, thus not capital expenditure. The substantial question of law was answered in favor of the appellant, and the appeal was disposed of accordingly.