2018 (7) TMI 1631 - HC - Income Tax

Nature of expenditure - expenditure made by the appellant to the sub-tenant inducted by it in an earlier year for resuming the sub-tenanted portion of Wallace House for its own business use - revenue or capital - Held that - The principles are plain that when one is examining an expenditure in connection with property, one has to see what is the dominant purpose of making this expenditure. If it results in acquisition of any right to property, whether free hold, lease hold or a mere right to possession, having some kind of permanence and of enduring nature the expenditure is capital. But if the expenditure is pre-dominantly for expansion of business although it results in acquisition of some capital, then the business purpose of the expenditure is paramount. The expenditure has to be taken as revenue. In the present case, it is just not established how the business of the assessee was perceived to grow out of the property acquired by them by negotiating the eviction of the said occupants. In fact, through the negotiation the assessee acquired some kind of an enduring right of possession over the occupied area of the said premises surrendered to them by those occupants. It had the incidents of permanence. In those circumstances we agree with the revenue that the expenditure was capital in nature.- decided against assessee

Summary

Issues:
1. Determination of whether the expenditure incurred by the appellant was capital or revenue in nature.
2. Examination of the dominant purpose of the expenditure in connection with the property to ascertain its nature as capital or revenue expenditure.

Analysis:
1. The case involved a dispute regarding the nature of expenditure incurred by the appellant in evicting sub-tenants and distributors from certain premises for business purposes. The appellant contended that since they did not have permanent interest in the property and the expenditure was for business growth, it should be considered revenue expenditure. However, the Income Tax Appellate Tribunal and the Commissioner of Income Tax held the expenditure to be capital in nature, leading to the present appeal under Section 260A of the Income Tax Act, 1961.

2. The court examined the legal principles distinguishing capital expenditure from revenue expenditure. It was emphasized that any expenditure resulting in the formation of capital is considered capital expenditure, while revenue expenditure is integral to the profit-earning process of a business. The court referred to various precedents to illustrate this distinction, highlighting that if the expenditure leads to the acquisition of a right to property with permanence and enduring nature, it is classified as capital expenditure.

3. The court analyzed previous judgments where similar property-related expenditures were considered either capital or revenue based on the dominant purpose of the expenditure. It was established that if the expenditure primarily aimed at expanding the business and acquiring enduring rights over the property, it would be deemed capital in nature. In this case, the negotiation and eviction of sub-tenants and distributors resulted in the appellant acquiring an enduring right of possession, indicating a capital nature of the expenditure.

4. Based on the principles and precedents discussed, the court concluded that the expenditure incurred by the appellant in evicting occupants and acquiring possession of certain premises was capital in nature. The court dismissed the appeal, upholding the decision that the expenditure was not revenue expenditure but fell under the category of capital expenditure. The judgment favored the revenue authorities, emphasizing the enduring nature and permanence of the rights acquired by the appellant through the expenditure.

5. The court's decision was based on the understanding that the expenditure led to the acquisition of an enduring right of possession over the property, indicating a capital nature rather than a revenue nature. The judgment highlighted the importance of examining the dominant purpose of the expenditure in connection with the property to determine its classification as either capital or revenue expenditure. The court's analysis focused on the business growth aspect and the enduring benefits obtained through the expenditure, leading to the conclusion that it was capital in nature.