2018 (7) TMI 1173 - HC - Income Tax

Revision u/s 263 - affirmation made by the Tribunal of the electricity charges for the period prior to the purchase being taken as capital expenditure - Order erroneous and prejudicial to revenue - Held that - No discussion by the AO of having accepted the claim of the assessee that the remittance of prior electricity charges under One Time Settlement Scheme was a revenue expenditure. The learned counsel for the assessee has relied on Annexure-C reply submitted before the AO to contend that the specific claim along with the demand letter received from the KSEB was produced before the AO. However, that is not to say that the AO had come to a conclusion as to whether the claim was allowable as a revenue expenditure. The AO erroneously did not disallow electricity charges paid; claimed as revenue expenditure, erroneously assuming that the charges are for the subject year. There is hence erroneous assumption of facts and wrong application of law. It cannot also be said that the claim raised as revenue expenditure is a plausible view, for the reasoning already supplied by us that the electricity charges for the period prior to sale was a hidden cost which had to be settled by the assessee after the sale. We are of the opinion that there was an erroneous decision entered into by the AO which could have been revised under Section 263, provided there is a prejudice caused to the Revenue. The mere fact that capital expenditure could be claimed as depreciation cannot avoid the prejudice caused to the Revenue. First of all, the capital expenditure could be claimed as depreciation only in the course of a period of years. Then it would depend upon whether there was any profit earned by the assessee in the subsequent years. Further the question whether prejudice is caused has to be examined on the tax liability for the subject year and not the anticipated claims that could arise in the future years which again is dependent on various elastic factors. We are of the opinion that there is clear prejudice caused to the revenue - decided against assessee

Summary

Issues:
1. Whether the appellate tribunal was justified in upholding the Commissioner of Income Tax's order under Section 263 of the Income Tax Act?
2. Whether the electricity charges for the period prior to the purchase should be treated as revenue or capital expenditure?

Analysis:
1. The case involved the purchase of a premises with plant and machinery, where the assessee settled pending electricity dues for the period before the purchase under a One Time Settlement Scheme. The assessee claimed this sum as revenue expenditure, which was initially accepted but later revised under Section 263 of the Income Tax Act. The Tribunal affirmed part of the revision order related to treating electricity charges as capital expenditure. The key argument was whether the AO's decision was erroneous and prejudicial to the Revenue, as two views were possible. The assessee contended that there was no prejudice to the Revenue, as even if treated as capital expenditure, depreciation could be claimed, offsetting profits. However, the Government's counsel argued that the expenditure should be treated as capital to prevent prejudice to the Revenue.

2. The High Court analyzed the situation where the electricity charges were settled after the purchase of plant and machinery, concluding that it was a hidden cost necessitated for further utilization, making it a capital expenditure. Referring to a similar case, the Court emphasized that for a revision under Section 263, there must be an erroneous decision causing prejudice to the Revenue. The Court found that the AO had not properly assessed the claim as revenue expenditure, leading to an erroneous assumption of facts and wrong application of law. Despite the possibility of claiming depreciation on capital expenditure, the Court held that prejudice to Revenue was evident, as tax liability for the subject year should be considered, not future claims. Therefore, the Court ruled in favor of the Revenue, rejecting the appeal and leaving the parties to bear their costs.