2023 (10) TMI 329 - HC - Income Tax

Nature of expenses - re-characterizing revenue expenses incurred by as capital expenditure by AO - correct approach in law and on the facts adopted or not? - Tribunal reversed the view taken by the CIT(A) and the AO took note of the fact that in AY 2012-13, the AO had accepted the stand of assessee that the expenses incurred by it were on the revenue account, and not capital expenditure - HELD THAT - As perusal of the aforesaid extract from the assessment order would show that what worried the AO was that the respondent/assessee had made no effort to earn income. As a matter of fact, the proposition put forth by the AO that since there is no income chargeable under Section 28 of the Act, therefore, no expenses could be claimed by an assessee under Sections 30 to 37 of the Act, in our view, is completely unsustainable.This position has also been affirmed by the Tribunal. We are in complete agreement with the approach adopted by the Tribunal. The AO, in our opinion, asked the wrong question and, therefore, got the wrong answer. We may also note that during the course of arguments, we had asked Mr Maratha as to whether he had placed on record the order of the Tribunal concerning AY 2012-13. AO in the abovementioned AY, consciously stepped away from the line of inquiry which was adopted in AY 2012-13. In the AYs in issue, i.e., AY 2014-15 and AY 2013-14, the emphasis of the AO was that expenses incurred were directed towards building a brand for utilization in the future. Consequently, as noted above, the AO s approach, or rather we may say concern, was that the respondent/assessee was not earning revenue. This approach, as observed above, was completely misdirected. Therefore, for the reasons given above, we are not inclined to interfere with the impugned order. Decided against revenue.

Summary

Issues Involved:
The judgment concerns the condonation of delay in filing and re-filing appeals for Assessment Year (AY) 2014-15 and AY 2013-14. The main issue before the court was whether the Assessing Officer had correctly re-characterized revenue expenses as capital expenditure.

Issue 1: Condonation of Delay
The applications were moved by the appellant seeking condonation of a 7-day delay in filing and a 104-day delay in re-filing the appeals for AY 2014-15 and AY 2013-14. The respondent did not oppose the prayers, and the delay was condoned, leading to the disposal of the applications.

Issue 2: Re-characterization of Expenses
The appeals sought to challenge a common order passed by the Tribunal regarding the re-characterization of revenue expenses as capital expenditure. The AO had disallowed expenses incurred by the respondent/assessee, leading to a dispute. The Tribunal reversed the view taken by the CIT(A) and the AO, emphasizing the respondent's stand on the nature of expenses in previous years.

Details of the Judgment:
The respondent had initially declared a loss in the ROI, which was later assessed at a different amount by the AO. The AO disallowed expenses, noting that the respondent had not earned revenue from its business activities. The CIT(A) upheld this decision, leading to the appeal with the Tribunal. The AO's concern was that the respondent had not made efforts to earn income, leading to the disallowance of expenses as capital expenditure.

The Tribunal considered the respondent's technology use in previous years and reversed the AO's decision. The AO's approach was deemed misdirected as the expenses were aimed at building a brand for future utilization. The court found that no substantial question of law arose for consideration, and the appeals were closed. The parties were directed to act based on the digitally signed copy of the judgment.