2016 (4) TMI 525 - AT - Income Tax

Disallowance of e mobilization expenses - revenue v/s capital expenditure - Held that - Four rigs were acquired as an expansion of the existing business of the assessee company to charter hire the rigs which was admittedly set-up in the earlier years and no new business had been set up with acquisition of these four new rigs nor any new source of income has come to existence as there is a unity of management, control and interlacing in the business of the assessee company , we , therefore, in view of our detailed discussions and reasoning as above hold that the mobilization expenses incurred by the assessee company is to be allowed as revenue expenditure. Once the expenditure is found to be allowable as revenue expenditure as per provisions of the Income Tax Act,1961, the same are to be allowed as revenue expenditure under the Act while computing income chargeable to tax even if the tax-payer has given different treatment in its books of accounts by capitalizing the same in its books of accounts instead of debiting it to the Profit and Loss Account. This is the mandate of the Income Tax Act,1961 which has to be followed as the taxes can only be collected by the authority of law. In our considered view based on our above discussions and reasoning, the addition made by the A.O. and confirmed by the CIT(A) is ordered to be deleted. - Decided in favour of assessee

Summary

Issues Involved:
1. Classification of expenditure as capital or revenue.
2. Adjustment of additional income declared during a survey against the addition made by the AO.

Issue-wise Detailed Analysis:

1. Classification of Expenditure as Capital or Revenue:

The assessee company, engaged in the business of giving rigs on hire, claimed expenditure of ?3,43,28,180/- incurred on mobilization of rigs and interest paid on debentures as revenue expenditure. The AO disallowed this claim, treating the expenses as capital expenditure since they were capitalized in the books of accounts as per the Companies Act. The CIT(A) upheld this decision, stating that the expenses incurred were for bringing an asset or advantage of enduring nature and therefore should be capitalized. The CIT(A) also noted that the assessee company failed to provide sufficient documentary evidence to prove that the rigs were operational during the assessment year.

Upon appeal, the Tribunal observed that the business of the assessee company was an existing and continuing one, and the acquisition of new rigs was an expansion of this business. The Tribunal held that the mobilization expenses incurred for transporting and installing the rigs at client sites were revenue in nature, as the rigs were available for hire and ready to be put to use upon acquisition. The Tribunal relied on the judgments of the Hon’ble Delhi High Court in CIT v. Triveni Engineering and Industries Limited and CIT v. Relaxo Footwear Limited, which supported the view that expenses incurred in the expansion of an existing business are revenue in nature. Consequently, the Tribunal allowed the mobilization expenses and interest on debentures as revenue expenditure.

2. Adjustment of Additional Income Declared During a Survey Against the Addition Made by the AO:

The assessee company also contended that an additional income of ?1,25,00,000/- declared during a survey should be adjusted against the addition made by the AO. The CIT(A) rejected this plea, stating that the additional income offered during the survey was in the nature of income and could not be adjusted against the capitalized expenditure. The Tribunal, having allowed the mobilization expenses as revenue expenditure, found this issue to be academic and infructuous and dismissed the alternative plea.

Conclusion:

The Tribunal allowed the appeal filed by the assessee company, holding that the mobilization expenses and interest on debentures were revenue in nature and should be allowed as deductions while computing the income chargeable to tax. The alternative plea regarding the adjustment of additional income declared during the survey was dismissed as infructuous. The order pronounced in the open court on 11th April 2016 concluded that the appeal was allowed.