2014 (3) TMI 1226 - HC - Income Tax

Elevator component expenses create enduring benefits, qualify as capital expenditure not revenue deduction

The Bombay HC upheld concurrent findings of CIT(A) and Tribunal disallowing business expenses claimed by the assessee. The court held that expenditure on ... Allowability of business expenses - expenditure on components, depreciation claim on cars, club subscription expenses, and denial of depreciation on cars - HELD THAT:- We find that the whole attempt is to seek re-appreciation and re-appraisal of the factual materials. Upon scrutinizing the entire material produced, both, CIT (A) and the Tribunal held that the majority of the expenditure is on account of materials used for development of prototype and other components, the utilized costs of the material used by the appellant in the new project. The authorities found that assessee had created a facility of procuring components of the elevator through local vendors. Earlier these components were procured by importing and there was no manufacturing facility in India, though the same was created for that purpose. Testing towers had been erected and the expenditure incurred on the testing of elevator had already been capitalized by the assessee. Once the finding of fact is that all the materials are for creating the manufacturing facility and which has definitely an enduring benefit, namely for a long time, then, it is not something that the appellant can claim to be a temporary or transitory one. The reasoning of the order of the Tribunal goes to show that the Tribunal has applied the correct tests and rejected the relief. We are of the opinion that though the judgment in the case of Empire Jute Co. Ltd. [1980 (5) TMI 1 - SUPREME COURT] has been relied upon even before the Tribunal, the Tribunal found that the principle therein can have no application to the case of appellant. The Supreme Court on facts in that case, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. Supreme Court found in the case before it that the appellant was carrying out business of manufacture of jute. The working time agreement was entered between the members of an association restricting the number of working hours per week, for which the mill shall be entitled to work their looms. After referring to the clause of the agreement, what the Hon'ble Supreme Court found was that the appellant had purchased loom hours from four different jute manufacturing concerns and had paid a correct sum. The Tribunal held that the expenditure incurred by the assessee was in the nature of revenue expenditure and hence deductible in computing the profits. The High Court held that the amount paid was for purchase of loom hours and in the nature of capital expenditure. It was not therefore tenable. This expenditure incurred for the purpose of removing the restriction on the number of working hours with a view to increase its profits, was revenue in nature. By purchase of loom hours no new asset has been created and there is no addition or expansion of the profit-making apparatus of the assessee. The costs of additional loom hours did not add to the fixed capital to the looms. Tests and the propositions which have been culled out from this judgment can be applied, provided the facts and circumstances in each case warrant such application. Once it is not a universal proposition and must be applied in the facts and circumstances of each case, then, we have no doubt that the concurrent findings do not give rise to any substantial question of law. Equally, the nature of the expenses claimed as club subscription have been rightly disallowed. It is not a matter where we can re-appreciate the evidence on record. In fact, the finding of fact is that no evidence has been produced to suggest that such expenses were incurred wholly and exclusively for the purpose of business. The expenditure is personal in nature. In these circumstances, even this aspect does not give rise to any substantial question of law. Depreciation on Cars if the appellant is entitled to the benefit in terms of the judgment rendered by this Court, even then we are of the view that no substantial question of law arises on that issue. The appellant is entitled to claim depreciation on the vehicles/cars in the subsequent years. By clarifying that the observations of the Tribunal are restricted to the AY in question, it would be open for the appellant to press such claim in future and seek relief in terms thereof. Issues Involved: Appeal challenging Tribunal's order on substantial questions of law regarding expenditure on components, depreciation claim on cars, club subscription expenses, and denial of depreciation on cars.Expenditure on Components:The appellant argued that the expenditure was on consumables used during testing, not for creating a manufacturing facility. The Tribunal and Commissioner misunderstood this, but the High Court found that the majority of the expenditure was on materials for developing a prototype and creating a manufacturing facility. The Tribunal correctly applied tests and rejected the relief, as the materials had an enduring benefit for a long time.Depreciation Claim on Cars and Club Subscription Expenses:The appellant also claimed depreciation on cars and club subscription expenses. The High Court found that the club subscription expenses were personal in nature and not wholly and exclusively for business purposes. Regarding depreciation on cars, the Court clarified that the appellant could claim depreciation in subsequent years but no substantial question of law arose on this issue.Application of Legal Principles:The Court referred to a Supreme Court judgment involving distinguishing between capital and revenue expenditure based on specific facts and circumstances. The Court emphasized that each case must be decided based on its own facts, and the principles from the judgment can be applied if the circumstances warrant it. The Court concluded that the concurrent findings did not give rise to any substantial question of law.Final Decision:After considering all arguments and clarifications, the Court found that the appeal did not raise any substantial question of law and deserved to be dismissed. The appeal was accordingly dismissed.