2005 (11) TMI 37 - HC - Income Tax

Expenditure- Capital or Revenue - Whether Tribunal was right in law in allowing the expenditure of a sum on constructing the ground floor over existing basement floor as revenue expenditure under section 37(1) even though a new permanent capital asset has been brought into existence? - assessee had put up the ground floor over the existing basement floor only to have the business premises according to the specifications put forth by TVS Suzuki Limited and further there is a clear-cut stipulation in the lease deed that reimbursement of the expenditure is not possible from the owner of the premises. Hence in view of the business exigencies the assessee had put up the construction in and by which the assessee would not get any capital asset - question is answered in the affirmative against the Revenue and in favour of the assessee

Summary

Issues:
Whether the expenditure on constructing the ground floor over the existing basement floor can be treated as revenue expenditure under section 37(1) of the Income-tax Act, even though a new permanent capital asset has been brought into existence.

Analysis:
The case involves an appeal by the Revenue against the order of the Income-tax Appellate Tribunal regarding the treatment of an expenditure incurred by the assessee for constructing a ground floor over an existing basement floor. The assessee, a dealer in two-wheelers, claimed the construction cost as revenue expenditure, which was disallowed by the Assessing Officer. The Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal ruled in favor of the assessee, prompting the Revenue to file the tax case appeal.

The key question raised was whether the expenditure should be considered capital or revenue expenditure based on the principles established by the Supreme Court. The Supreme Court's decision in CIT v. Madras Auto Service P. Ltd. [1998] 233 ITR 468 provided the framework for determining capital versus revenue expenditure. The Court emphasized that expenditure leading to the creation of a capital asset is considered capital expenditure, while expenses for business advantage or reduced business costs are treated as revenue expenditure.

Applying the Supreme Court's principles to the present case, the High Court found that the construction of the ground floor was done to meet the specifications of TVS Suzuki Limited and did not result in the acquisition of a capital asset by the assessee. The expenditure was incurred to obtain a business advantage in the form of reduced rent, as stipulated in the lease deed. Therefore, the High Court concluded that the expenditure should be treated as revenue expenditure, aligning with the decision in CIT v. Madras Auto Service P. Ltd.

In light of the above analysis and the principles laid down by the Supreme Court, the High Court dismissed the Revenue's appeal and ruled in favor of the assessee. The judgment highlighted the business exigencies that led to the construction and the absence of a capital asset acquisition, ultimately supporting the treatment of the expenditure as revenue expenditure under section 37(1) of the Income-tax Act.