1982 (12) TMI 10 - HC - Income Tax

Court rules installation charges as revenue expenditure, allowable deduction for business profits.

The High Court held that the expenditure of Rs. 6,26,016 and Rs. 1,50,640 incurred by the assessee on installation charges was revenue expenditure, ... Business Expenditure Issues Involved:1. Whether the sum of Rs. 6,26,016 and Rs. 1,50,640 was a revenue expenditure laid out or expended wholly and exclusively for the purpose of the assessee.2. If the expenditure was incurred in a year prior to the relevant assessment year, whether it was allowable as a deduction in computing the profits and gains of the assessee's business for the said assessment year.Issue-wise Detailed Analysis:1. Revenue Expenditure:The primary issue was whether the expenditure of Rs. 6,26,016 and Rs. 1,50,640 incurred by the assessee on installation charges could be classified as revenue expenditure. The assessee, a company engaged in heavy civil engineering works, incurred these expenses to fix concrete mixers and other machinery at various construction sites temporarily. The Income Tax Officer (ITO) disallowed these claims, stating that installation charges are capital in nature and should be capitalized, allowing only depreciation. The Appellate Assistant Commissioner (AAC) upheld this view, emphasizing that installation charges are part of the cost of machinery and plant, thus capital in nature.The Tribunal, however, disagreed, stating that the nature and purpose of the expenditure should be considered in the context of the assessee's business. The Tribunal noted that the assessee's business involved moving machinery to different sites, and the installation was temporary, akin to a traveling business like a circus. Therefore, the Tribunal concluded that the expenditure was revenue in nature, incurred wholly and exclusively for the business's purpose, and directed the income-tax authorities to accept the assessee's claim.2. Allowability of Prior Year Expenditure:The second issue was whether the expenditure incurred in a year prior to the relevant assessment year could be allowed as a deduction in the assessment years 1964-65 and 1965-66. The Tribunal rejected this question, noting that the I.T. authorities had disallowed the claim solely on the ground that it was capital expenditure, not on the basis of the timing of the expenditure. The Tribunal refused to refer this question to the court as it was not raised or discussed before any of the authorities below.Court's Analysis:The High Court examined whether the disallowance on the ground of capital expenditure was justified. The court noted that the Tribunal had correctly refused to entertain the second question regarding the timing of the expenditure since it was not raised earlier. The court emphasized that the distinction between capital and revenue expenditure depends on the facts and circumstances of each case and should be determined by commercial trading principles and business necessity.The court referred to various judicial precedents, including the observations of Lord Reid in Regent Oil Co. Ltd. v. Strick and the Supreme Court in Bombay Steam Navigation Co. (1953) Pvt. Ltd. v. CIT, to highlight that the expenditure must be viewed in the context of its necessity for the business and its role in the profit-earning process. The court concluded that the expenditure in question was necessary for the efficient earning of profits and was incidental to the business, thus qualifying as revenue expenditure.Conclusion:The High Court answered the question in the affirmative, holding that the sum of Rs. 6,26,016 and Rs. 1,50,640 was revenue expenditure laid out wholly and exclusively for the purpose of the assessee's business. The court ruled in favor of the assessee and directed that the parties bear their own costs.