2018 (5) TMI 1628 - AT - Income Tax

Tribunal Upholds CIT(A) Decision on Revenue Expenditure (1)

The Tribunal affirmed the CIT(A)'s decision, allowing expenses of Rs. 60,79,24,773 under Section 37(1) of the Income Tax Act, 1961 as revenue expenditure. ... Nature of expense revenue or capital - enduring benefit or not - expenses incurred in the process of setting-up new retail outlets. - Project Development Expenditure - Capital work in progress - Held that:- the expenditure is on account of salaries, machinery and other repairs, travelling and conveyance, professional fee, electricity expenses, telephone expenses, etc - which clearly shows its revenue nature - though it is debited in the books of account as capital work-in-progress, that the same have been claimed as revenue expenditure u/s 37(1) - as per the case of Taparia Tools Ltd. vs JCIT, [2015 (3) TMI 853 - SUPREME COURT] appeal of revenue is dismissed - decided in favor of assessee. Issues Involved:1. Deletion of disallowance of expenses made under Section 37(1) of the Income Tax Act, 1961.2. Classification of expenses as revenue expenditure versus capital expenditure.3. Treatment of expenses in the books of accounts versus for taxation purposes.4. Enduring benefit to the business and its impact on the nature of expenditure.Issue-wise Detailed Analysis:1. Deletion of Disallowance of Expenses Made Under Section 37(1) of the Income Tax Act, 1961:The Revenue challenged the deletion of disallowance of expenses amounting to Rs. 60,79,24,773/- made under Section 37(1) of the Income Tax Act, 1961 by the CIT(A). The Assessing Officer had disallowed these expenses, treating them as capital in nature. The CIT(A), however, held these expenses to be revenue in nature and allowed the claim of the assessee.2. Classification of Expenses as Revenue Expenditure Versus Capital Expenditure:The core issue was whether the expenses incurred by the assessee for setting up new retail outlets should be classified as capital expenditure or revenue expenditure. The assessee argued that these expenses were for the expansion of an existing business and should be treated as revenue expenditure. The CIT(A) supported this view, referencing similar decisions in other cases, including Reliance Footprint Ltd. vs ACIT and Reliance Supply Chain Solutions Ltd. vs DCIT, where such expenses were treated as revenue in nature.3. Treatment of Expenses in the Books of Accounts Versus for Taxation Purposes:The Assessing Officer noted that the assessee had treated the expenses as capital expenditure in its books by debiting them to the 'Capital Work-in-Progress' account. However, for taxation purposes, the assessee claimed these expenses as revenue expenditure. The Tribunal held that the treatment of expenses in the books of accounts is not determinative of their nature for tax purposes. The applicable legal position would govern the allowability of expenditure, as supported by the Supreme Court's reasoning in Taparia Tools Ltd. vs JCIT.4. Enduring Benefit to the Business and Its Impact on the Nature of Expenditure:The Revenue contended that the expenses provided an enduring benefit to the business and should thus be treated as capital expenditure. The Tribunal, however, concluded that the expenses were for the expansion of the existing line of business and did not result in the creation of any fixed or enduring asset. Therefore, even if the expenses provided an enduring benefit, they were in the revenue field and should be treated as revenue expenditure. This view was supported by the Supreme Court's judgment in Empire Jute Co. Ltd.Conclusion:The Tribunal affirmed the CIT(A)'s decision, holding that the expenses amounting to Rs. 60,79,24,773/- were revenue in nature and allowable under Section 37(1) of the Income Tax Act, 1961. The Tribunal dismissed the Revenue's appeals, including those in the cases of M/s. Reliance Digital Retail Ltd. and M/s. Reliance Hyper Realty Ltd., applying the same reasoning as in the lead case.Order:The appeals of the Revenue were dismissed, and the order of the CIT(A) was affirmed. The decision was pronounced in the open court on 16th May, 2018.