9911796707
TMI Blog2014 (10) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... to the employees can be treated as capital expenditure. The expenditure was incurred on labour, i.e., wages - it would be a “revenue expenditure” unless there are special or specific reasons why it should be treated as capital in nature, the expenditure being akin to raw material - after the oil rigs were acquired by the assessee as a capital asset, they had to be made operational and functional - This was the very business or the activity, which was undertaken by the assessee - The activity required expenditure in the form of salary to workers - It was in the nature of running expenses - Drilling operations being the very business of the assessee, expenditure incurred to make the rig operational would be covered and should be treated as “revenue expenditure”, whereas the cost of the rig would fall and should be treated as a “capital expenditure” – thus, the order of the Tribunal is upheld – Decided against revenue. - ITA 142/2002 - - - Dated:- 18-9-2014 - Sanjiv Khanna And V. Kameswar Rao,JJ. For the Appellant : Mr.Balbir Singh, Sr.Standing Counsel with Mr.Abhishek Singh Baghel, Mr.Arjun Harkauli, Advs. For the Respondent : Through ORDER Sanjiv K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure or to reduce his headache the assessee had brought/purchased a ready to use plant and machinery from the market. In either case the principle for computing the cost of plant and machinery would remain the same. He further held that in the latter case, it was not material whether the assessee was assembling the plant and machinery in his own premises. No part of such expenditure should be debited to profit and loss account and allowed as a revenue expenditure. 5. Aggrieved, the respondent assessee preferred an appeal and the Commissioner of Income Tax (Appeals) (CIT(A), in short) called for details of expenditure incurred and perused the same. He noticed that the major expenditure was related to consumption of stores and spares (Rs. 55,17,748.90) , sub-contract charges (Rs. 18,06,300/-) , salaries (Rs.38,91,263.52), travelling and conveyance (Rs.32,90,757.35) , loans (Rs.1,66,94,413/-) and other financing charges (Rs.26,13,851/-). The last two amounts were incurred for the acquisition of the rigs. He observed that it was not disputed that out of the three rigs, one had become operational in the previous year, whereas the other two became operational in the subsequent y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the help of rigs and carry out drilling operations and thereafter to give the said oil rigs on hire. 9. The line between capital or revenue expenditure in-spite the settled principles is beset with difficulties and an onerous task. In M.K. Brothers Private Limited versus Commissioner of Income Tax, (1973) 3 SCC 30, the Supreme Court held that the answer does not depend upon the fact whether the amount spent is large or small, paid in lumpsum or in instalment, but upon the purpose for which the payment was made and the expenditure incurred. The nature and quality of payment was determinative and decisive. The test, whether the payment was made to acquire a capital asset or for running of business and working with a view to produce profits is helpful. The principal or the main test normally applied is that of enduring benefit but the Supreme Court in Empire Jute Company Limited versus Commissioner of Income Tax, (1980) 124 ITR 1 (SC) cautioned that in spite of palpable advantages, the test may break down and what is material to be considered is the nature of the advantage in the commercial sense. If the advantage consists of merely facilitating assets in trading operations or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmined by looking at what is the true nature of the asset which is acquired and not by the fact whether it is a payment in ―lump sum‖ or in an instalment. In applying the test of an advantage of an enduring nature, it would not be proper to look at the advantage obtained, as lasting forever. The distinction which is required to be drawn is, whether the expense has been incurred to do away with, what is a recurring expense for running a business as against an expense undertaken for the benefit of the business as a whole ; (iv) an expense incurred for acquisition of a source of profit or income would in the absence of any contrary circumstance, be in the nature of capital expenditure. As against this, an expenditure which enables the profit-making structure to work more efficiently leaving the source or the profit making structure untouched would be in the nature of revenue expenditure. In other words, expenditure incurred to fine tune trading operations to enable the management to run the business effectively, efficiently and profitably leaving the fixed assets untouched would be an expenditure of a revenue nature even though the advantage obtained may last for an ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome, which refers to income generated during two particular points of time by a person without impoverishing oneself. It was observed that accounting and reporting standards are based upon conventions or standards designed to achieve what are perceived to be the desired objectives of financial accounting and reporting. Word expense it was elucidated would include depreciation in form of outflow caused due to depletion of assets. Referring to the Framework for the Presentation and Preparation of Financial Statements published by the International Accounting Standards Board, the word expense would mean decreases in economic benefits during the accounting period in the form of outflows and depletions of assets or incurrence of liabilities. Thus, the word expense will take into account decreases in future economic benefits relating to an asset. Referring to Section 37 of the Act, it was held that emphasis is placed on business and commercial considerations rather than pure legal and technical aspects. Thus, primacy is to be given to practical and business point of view and not on juristic classification. The expression capital or revenue expenditure must be construed in a b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... production. Money spent to acquire the quota right, it was observed would entitle the assessee to acquire more raw material to increase profitability of the profit making apparatus and would undoubtedly be revenue expenditure as it was a part of the operating cost. However, the said example relates to already existing or ongoing industry. Outgoing whether it was revenue or capital, it was highlighted, should depend upon practical and business point of view, rather than juristic classification of legal rights. The question should be judged in the context of business necessity or expediency; was the expenditure a part of assessee s working expenditure or a part of process of profit earning; whether the expenditure was necessary to acquire a right of permanent character, the possession of which was a condition for carrying on trade etc? 13. In the facts of the present case, we notice that the expenditure was incurred on labour, i.e., wages. Normally, it would be a revenue expenditure unless there are special or specific reasons why it should be treated as capital in nature, the expenditure being akin to raw material. We have already noticed the factual matrix of the present cas ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
