2012 (6) TMI 63 - AT - Income Tax

ITAT decision: Disallowed expenses treated as revenue expenditure. CIT(A) upheld for godown maintenance.

The ITAT allowed the assessee's appeal, directing the AO to treat the disallowed expenses of Rs. 34,80,019/- as revenue expenditure instead of capital ... Capital expenditure vs Revenue expenditure - expenditure incurred on repairing of godowns damaged in Tsunami disaster - Revenue contended the same as capital expenditure on basis of quantum of expenditure - Held that:- CIT(A) has rightly observed that no inference can be drawn from the facts of the case that new asset has been credit, neither the AO has pointed out any such creation of the new asset. It is further observed the expenditure incurred for godown maintenance for the past five years has been allowed by the revenue as revenue expenditure. Hence, the same is allowed as revenue expenditure - Decided in favor of assessee. Upfront fee for term loan - Prepayment penalty charges - assessee submitted that expenses were incurred in relation to obtaining bank loans by shifting the same from Consortium of Banks to ABN AMRO Bank against the Floating Crane on which depreciation has been claimed starting from FY 2003-04 - no new asset came into existence - Held that:- There is no need to further capitalize the upfront fee for term loan in connection with the transfer of the loans from one bank to another against prepayment penalty charges paid to the existing banks. Especially when the subsequent loan as bearing is having less rate of interest i.e. 10% as against the existing term loan of three banks which is 15% - Decided in favor of assessee. Issues Involved:1. Disallowance of Rs. 34,80,019/- as capital expenditure by the Assessing Officer.2. Treatment of Rs. 20,18,744/- as revenue expenditure by the CIT(A).Issue-wise Detailed Analysis:1. Disallowance of Rs. 34,80,019/- as Capital Expenditure:Facts and Arguments:- The assessee, engaged in Stevedoring & Clearing Agents business, filed a return for A.Y. 2006-07, disclosing an income of Rs. 3,17,66,597/-. The total income was assessed at Rs. 3,76,21,360/-.- The Assessing Officer disallowed Rs. 34,80,019/- under 'Bank Charges', treating it as capital expenditure. This included Rs. 14,24,000/- as 'Upfront fee for term loan' and Rs. 20,56,019/- as 'Prepayment penalty charges'.- The assessee argued that these were revenue expenses incurred to finance the acquisition of capital goods, which were already capitalized, and the expenses were for obtaining loans or reducing loan costs.CIT(A) Decision:- The CIT(A) upheld the AO's decision, stating the expenditure resulted in an enduring benefit by acquiring new machinery, thus should be capitalized.ITAT Decision:- The ITAT noted that the expenses were for shifting loans from a consortium of banks to ABN AMRO Bank to reduce interest costs. The assessee had already capitalized the initial loan expenditure.- The ITAT concluded that there was no need to further capitalize the upfront fee and prepayment penalty charges as the assessee did not acquire any additional asset of enduring nature.- The ITAT set aside the orders of the revenue authorities and directed the AO to treat the expenses as revenue expenditure, allowing the appeal of the assessee.2. Treatment of Rs. 20,18,744/- as Revenue Expenditure:Facts and Arguments:- The AO treated Rs. 20,18,744/- debited in the P&L account for repair and maintenance as capital expenditure, citing section 30 of the IT Act.- The assessee argued that the expenses were for godown maintenance, necessary for preventing accidents and complying with Port Authorities' guidelines. Historical data showed similar expenses incurred over past years.CIT(A) Decision:- The CIT(A) observed that the expenses were for normal maintenance and not for creating a new asset. The amount spent was not substantial compared to the overall asset size, and no new asset creation was pointed out by the AO.- The CIT(A) allowed the expenditure as revenue expenditure, directing the AO to delete the addition.ITAT Decision:- The ITAT upheld the CIT(A)'s decision, noting that the expenditure was consistent with past practices and necessary for maintaining the godowns. The revenue's appeal was dismissed.Conclusion:- The ITAT allowed the assessee's appeal regarding the disallowance of Rs. 34,80,019/-, directing the AO to treat the expenses as revenue expenditure.- The ITAT dismissed the revenue's appeal, upholding the CIT(A)'s decision to treat Rs. 20,18,744/- as revenue expenditure for godown maintenance.