2023 (10) TMI 1444 - HC - Income Tax

Nature of expenses - amount spent on projects for establishing and operating hospitals - demarcation between capital expenditure and revenue expenditure - AO treated the expenditures as capital in nature. CIT (A) and the ITAT have recorded a concurrent finding holding the expenditures as revenue in nature - HELD THAT - Admittedly, the agreement between assessee and GHMT and DSGMC was terminated and obligations under the agreement were discharged. Though expenditure was incurred, no capital asset or advantage of enduring benefit was brought in by the assessee after the termination of the agreement. In Assam Bengal Cement 1954 (11) TMI 2 - SUPREME COURT , it is held that if the expenses are incurred not for the purpose of bringing in the asset or advantage for the enduring benefit but for running the business, such expenses are treated as revenue expenditures. Therefore, the expenses incurred in entering into an agreement merely for expansion of existing business and not for setting up of a new business, are to be treated as revenue expenditures . Decided in favour of assessee.

Summary

Issues:
1. Whether the expenditure on projects for establishing and operating hospitals should be considered revenue or capital expenditure.
2. Whether the disallowance of a specific amount towards non-recoverable project costs was rightly set aside by the ITAT.

Analysis:
1. The appeal involved a dispute regarding the nature of expenditure incurred by a multi-specialty hospital for establishing and operating hospitals. The Revenue contended that the expenditure should be treated as capital expenditure due to the enduring benefit derived from the construction/expansion of the hospital. On the other hand, the Assessee argued that the expenses were revenue in nature as they were incurred during the regular course of business operations and not for acquiring any enduring benefit. The ITAT allowed the Assessee's appeal, considering the expenditure as revenue in nature. The High Court upheld the ITAT's decision, emphasizing that since no enduring benefit was acquired after the termination of the collaboration agreement, the expenses were rightly treated as revenue expenditure.

2. The second issue revolved around the disallowance of a specific amount towards non-recoverable project costs. The Revenue contended that the expenditure should be considered capital in nature due to the enduring benefit derived from the construction/expansion of the hospital. However, the Assessee argued that the expenses were revenue in nature as they were incurred for the purpose of managing the hospitals and not for a new or separate business. The High Court, relying on the principles laid down in Assam Bengal Cement Co. Ltd. Vs. CIT, held that expenses incurred for the expansion of an existing business, without acquiring any enduring benefit, should be treated as revenue expenditures. Therefore, the High Court dismissed the appeal, favoring the Assessee and confirming the orders of the CIT (A) and the ITAT.

In conclusion, the High Court dismissed the appeal by the Revenue, answering the questions of law in favor of the Assessee and confirming the orders passed by the CIT (A) and the ITAT.