Revenue treatment of shifting costs and MAT relief for sick companies upheld on relocation and net worth principles.

Expenditure incurred solely for shifting existing plant, machinery, equipment, files and records from one premises to another, without installation of new assets, increase in capacity, or creation of an enduring capital advantage, is revenue expenditure and remains allowable. The MAT exclusion for a sick industrial company under clause (vii) of Explanation 1 to section 115JB(2) applies from the year the company becomes sick until the year in which net worth first becomes equal to or exceeds accumulated losses, inclusive of that year. On both points, the assessee succeeded and the Department's appeal failed.

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Issues: (i) Whether expenditure incurred for shifting existing plant, machinery, equipment, files and records from one location to another was revenue expenditure or capital expenditure. (ii) Whether the assessee was entitled to deduction under clause (vii) of Explanation 1 to section 115JB(2) of the Income-tax Act, 1961 for the assessment year in which its net worth first became positive.

Issue (i): Whether expenditure incurred for shifting existing plant, machinery, equipment, files and records from one location to another was revenue expenditure or capital expenditure.

Analysis: The expenditure was incurred only for relocation of existing assets and office material consequent upon sale of the earlier premises. No new plant or machinery was installed, no increase in capacity or capital structure resulted, and no asset of enduring nature came into existence. The shifting expenses therefore did not bring into existence a new advantage in the capital field.

Conclusion: The expenditure was revenue expenditure and was allowable. The finding was in favour of the assessee.

Issue (ii): Whether the assessee was entitled to deduction under clause (vii) of Explanation 1 to section 115JB(2) of the Income-tax Act, 1961 for the assessment year in which its net worth first became positive.

Analysis: The assessee had been declared a sick industrial company and a revival package was under implementation. Its net worth, which had been negative, first became positive during the relevant assessment year. On a proper reading of the provision, the deduction period begins with the year in which the company becomes sick and continues until the year in which net worth becomes equal to or exceeds accumulated losses, inclusive of that year.

Conclusion: The deduction under clause (vii) of Explanation 1 to section 115JB(2) was applicable. The finding was in favour of the assessee.

Final Conclusion: The Department's appeal failed on all substantive grounds and the relief granted by the appellate authority was sustained.

Ratio Decidendi: Expenditure incurred merely for shifting existing plant and machinery without creation of a new asset or enduring advantage is revenue in nature, and the MAT exclusion for sick companies applies up to and including the year in which net worth first becomes positive.

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