2011 (3) TMI 1810 - AT - Income Tax

Land development expenses treated as capital expenditure in ITAT decision for assessment year 2005-06

The ITAT upheld the CIT(A)'s decision that land development expenses were correctly treated as capital expenditure due to the assessee's treatment of the ... - Issues:1. Treatment of land development expenses as revenue or capital expenditure.2. Taxability of provision for warranty.Analysis:1. The appeals were filed by the assessee and the revenue for the assessment year 2005-06 against the CIT(A)'s order. The assessee, engaged in manufacturing batteries, declared a loss in its return of income. The Assessing Officer (AO) noted the sale of an immovable property and related expenses claimed as revenue expenditure. The AO treated the expenses as capital expenditure. The CIT(A) upheld the capital expenditure treatment, leading to appeals. The ITAT found the assessee had treated the land as a capital asset, evident from declaring income as long-term capital gain. The ITAT held the assessee cannot change the land's nature for sale purposes and confirmed the addition as capital expenditure.2. Regarding the provision for warranty, the available provision and actual expenses incurred were analyzed. The ITAT agreed with the CIT(A) that a scientific basis was used to estimate future liabilities for warranty. The expenses matched the provision made, indicating a fair and reasonable estimation. The ITAT upheld the CIT(A)'s decision on the provision for warranty. Consequently, the appeal by the assessee was dismissed, and the revenue's appeal was also dismissed.