2008 (1) TMI 583 - HC - Income Tax

Capital or Revenue Expenditure- The assessee replaced the old mono sound system in its Cinema theatre with new dolby stereo system and claimed it as a revenue expenditure. The Assessing Officer held that it was capital expenditure. The Commissioner (Appeals) dismissed the appeal filed by the assessee. The Tribunal held that the expenditure would amount to revenue expenditure. Held that- if the assessee had not increased its income in any way the expenditure on such change of sound system could not be considered capital in nature. Appeal dismissed.

Summary

Issues:
1. Whether the expenditure incurred for replacing the old mono sound system with a new stereo system should be treated as revenue or capital expenditure?

Analysis:
The judgment of the court was delivered by K. L. Manjunath J. The Revenue challenged the findings of the Income-tax Appellate Tribunal regarding the treatment of an expenditure incurred by the assessee for replacing the old mono sound system with a new stereo system. The Assessing Officer initially treated the expenditure as capital, but the Tribunal reversed this decision, considering it as a revenue expenditure. The main issue revolved around whether the change in the sound system should be categorized as a capital or revenue expenditure.

The assessee replaced the old mono sound system with a new dolby stereo system during the relevant assessment year and treated it as a revenue expenditure. The Assessing Officer disagreed, deeming it a capital expenditure, leading to an order of assessment. The Commissioner of Income-tax (Appeals) upheld this decision, prompting the assessee to appeal to the Income-tax Appellate Tribunal. The Tribunal, noting that the change improved the sound system rather than merely repairing it, classified it as a revenue expenditure, thereby allowing the appeal. This decision was contested by the Revenue.

During the proceedings, the counsel for the Revenue cited the judgment in CIT v. Saravana Spinning Mills P. Ltd., arguing that the sound system change should be treated as capital expenditure, not revenue. Conversely, the senior counsel for the assessee referenced judgments in CIT v. Ramaraju Surgical Cotton Mills and Empire Jute Co. Ltd. v. CIT, emphasizing that the nature of the expenditure, whether revenue or capital, should be determined by specific tests. The counsel for the assessee contended that the change did not result in increased income and should be considered a revenue expenditure.

The court analyzed relevant Supreme Court judgments, including CIT v. Saravana Spinning Mills P. Ltd. and CIT v. Ramaraju Surgical Cotton Mills, to determine the nature of the expenditure. It was established that even if an expenditure is revenue in nature, it may not qualify as a current repair under the Income-tax Act. Considering the facts, the court concluded that the replacement of the sound system did not lead to increased revenue for the assessee. As there was no significant benefit or income enhancement due to the change, the court upheld the Tribunal's decision, classifying the expenditure as a revenue expenditure. Consequently, the appeal by the Revenue was dismissed.