1983 (1) TMI 14 - HC - Income Tax

Court rules construction expenditure as capital, not revenue. Ruling emphasizes established tests for expenditure nature.

The court ruled that the expenditure incurred by the assessee for constructing a new shop constituted a capital expenditure rather than revenue ... Charitable Trust, Exemption For Charitable Trust Issues: Determination of whether the expenditure incurred by the assessee for constructing a new shop should be treated as revenue expenditure or capital expenditure.Analysis:The judgment pertains to an assessment year where the assessee was required by municipal authorities to shift his business to a new location and construct a new shop. The assessee claimed that the construction cost should be treated as revenue expenditure as he was compelled to build on land not his own. The Income Tax Officer (ITO) rejected the claim, leading to an appeal before the Appellate Assistant Commissioner (AAC), who dismissed the appeal due to uncertainty regarding the lease duration. Subsequently, the Tribunal, citing a similar case, held that the construction cost should be treated as revenue expenditure under section 37 of the Income Tax Act, 1961.The primary contention raised by the Revenue was that the expenditure resulted in the creation of a capital asset, thus not eligible for treatment as revenue expenditure. Reference was made to a previous court decision where expenditure for converting a godown into a cinema theatre was considered capital in nature. Conversely, the assessee argued that the shop was not constructed for initiating a new business and since it was to be gifted to the municipality after seven years, the expenditure should be deemed revenue in nature.The court emphasized the need to apply established tests to determine the nature of expenditure in each case. It highlighted that the construction of the shop led to the creation of a capital asset, which could not be considered advantageous for a limited period due to the lack of evidence regarding the seven-year possession transfer. The court also differentiated the present case from a previous Orissa High Court decision involving a hotel lease, where the expenditure was deemed revenue due to a contractual obligation, which was absent in the current scenario.Ultimately, the court concluded that the expenditure incurred by the assessee was of a capital nature, as it resulted in the creation of a lasting asset. The absence of proof regarding the limited nature of the advantage gained from the construction led to the rejection of the assessee's claim for revenue treatment. The court ruled against the assessee, directing them to bear the costs of the reference.In summary, the judgment revolved around the classification of expenditure as revenue or capital, with the court ultimately determining that the construction cost incurred by the assessee for a new shop constituted a capital expenditure due to the creation of a lasting asset, thereby rejecting the claim for revenue treatment.