2013 (10) TMI 429 - HC - Income Tax

Amount paid for preparation of project report, a revenue expenditure of capital expenditure Held that - If the expenditure incurred was in respect of the same business, and was for expansion of the existing business and there was unity of control and common funds, then such expenditure could be treated as business expenditure. But, if a new asset has come into existence which was of enduring benefit, then such expenditure would be of capital nature In the present case, feasibility report was for the same and subsisting business with common administration and fund Further, no new asset was created Decided against the Revenue.

Summary

Issues:
Whether the expenditure of Rs. 1,50,000/- paid for the preparation of a project report was revenue or capital in nature.

Analysis:
The case involved an appeal by the Revenue under Section 260A of the Income Tax Act, 1961, concerning the Assessment Year 1995-96 for 'Enpro India Ltd'. The Assessing Officer disallowed the expenditure of Rs. 1,50,000/- paid for the feasibility report of a bulk carrier, deeming it as capital expenditure. The Commissioner of Income Tax (Appeals) upheld this decision, stating that the expense should be added to the value of the asset for depreciation calculation since the bulk carrier was an asset of capital nature. However, the Tribunal reversed this finding, emphasizing that the feasibility study was conducted to manage the existing business more efficiently, not for expansion into a new business.

The Tribunal's decision was based on the premise that the feasibility study was carried out to enhance the efficiency and smooth functioning of the ongoing business operations. It highlighted that the expenditure was aimed at managing the existing business setup better, rather than creating a new business or asset. The enduring benefit test, typically used to determine capital or revenue expenditure, was discussed in light of the case law. The judgment referred to a previous Delhi High Court case, emphasizing that if the expenditure was incurred for an existing business's expansion and there was unity of control and common funds, it could be treated as business expenditure.

Considering the tests applied and the Tribunal's findings, the High Court ruled in favor of the respondent/assessee, stating that the feasibility report expenditure was revenue in nature. The Court concluded that since the study was conducted for the same ongoing business, with no new asset created or implemented, the expenditure did not qualify as capital in nature. As a result, the appeal was disposed of with no costs awarded.

This detailed analysis of the judgment showcases the deliberation on whether the expenditure for the project report was revenue or capital in nature, highlighting the Tribunal's reasoning, the application of legal tests, and the ultimate decision by the High Court in favor of the respondent.