TaxTMI 
TaxTMI 
2024 (4) TMI 1409
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.... brief are that the assessee, a private company, is carrying on the business of manufacturing, processing, assembling, altering, cutting, improving, designing, trading etc of spare part & accessories etc for Motorcycle, automobiles and general-purpose engines. Earlier the factory of the assessee was situated at rented premises at No-87, D1, Malur 2nd Phase, KIDB Industrial Area, Nosigere, Hubli. During the year under consideration, the assessee shifted its factory from above-mentioned rented premises to owned premises at Plot No. 6-O to 6-P, 4th phase, Hulimangala Hoskote Village, Malur Industrial Area, Malur Taluka. On account of shifting of the factory from old premise to new premise, the assessee claimed to have incurred expenditure for sum of Rs. 1,13,40,045/- which were debited to the profit and loss account as a revenue expenses. 5. However, the AO held that the expenditure incurred on shifting of factory from old site to new site is in the nature of enduring benefit. Hence, the same is to be considered as capital expenditure. Thus, the AO disallowed the same and added to the total income of the assessee. However, the AO allowed depreciation on the same at 10% amounting to....
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.... upon several judicial precedents to contend that expenses incurred for shifting of a factory or business from one place to another are generally treated as revenue expenditure when no new asset comes into existence and when the expenditure merely facilitates the carrying on business. It was submitted that the tests laid down by the Hon'ble Courts clearly show that the character of expenditure depends upon the nature and purpose of the expenditure and not merely on the duration of the benefit derived. 7.2 The assessee therefore submitted that the shifting expenses incurred were purely operational in nature and were incurred for the purpose of running the business more efficiently. Since no new asset was created and no expansion of the profit-making apparatus took place, the expenditure should be allowed as revenue in nature under section 37(1) of the Act. The assessee in support of its contention placed reliance on the several case laws which are as follow: 1. Empire Jute Co. Ltd. v. CIT - 124 ITR 1 (SC) 2. CIT v. Associated Cement Companies Ltd. - 38 Taxman 110A (SC) 3. CIT v. Ramaraju Surgical Cotton Mills - Supreme Court 4. Loyal Super Fabr....
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....f the present case where the assessee shifted machinery and factory equipment to another location. 7.6 The learned CIT(A) also relied upon the decision of the Hon'ble Karnataka High Court in the case of CIT v. Wipro Ltd. (2014) 41 taxmann.com 190 (Karnataka). In that case, the High Court held that expenditure incurred for shifting old machinery to make way for installation of new machinery could give the assessee an enduring benefit of better and more efficient production over a period of time and therefore such expenditure could not be treated as revenue expenditure allowable under section 37(1) of the Act. Applying the same reasoning, the learned CIT(A) held that the shifting of machinery and equipment in the present case also resulted in enduring benefit and therefore had to be treated as capital expenditure. 7.7 The learned CIT(A) further referred to the principle laid down in British Insulated and Helsby Cables Ltd. v. Atherton [1925] 10 Tax Cases 155 (HL) wherein it was held that expenditure incurred once and for all with a view to bringing into existence an asset or advantage for the enduring benefit of trade should ordinarily be treated as capital expenditure. The lea....
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....ion 37(1) of the Act. 10. On the other hand, the learned DR before us supported the orders of the Assessing Officer and CIT(A), submitting that the expenditure is capital in nature. It was argued that shifting the factory from a rented premises to an owned premises provides a long-term structural advantage and enduring benefit to the assessee. The activity involved dismantling and reinstallation of machinery, which is not routine but affects the business setup. Relying on judicial precedents, it was contended that such relocation results in improved efficiency and better operational conditions over time. Therefore, the expenditure cannot be treated as revenue merely because no new asset is directly created. The ld. DR submitted that the enduring benefit test is satisfied and the expenditure was rightly capitalized, warranting no interference. 11. We have heard the rival contentions of both the parties and perused the materials available on record. The short issue before us is whether the expenditure of Rs.1,13,40,045 incurred on shifting of factory from rented premises to its own premises is to be treated as capital or revenue in nature in the given facts and circumstances. T....
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....ained unchanged, the expenditure was only part of the operating cost incurred in the process of earning profits. Therefore, the payment was held to be revenue expenditure 11.2 Further, reliance has been placed by the assessee on the decision of the Hon'ble Madras High Court in CIT vs. Loyal Super Fabrics reported in 304 ITR 78. In that case, the assessee had shifted its factory due to external compulsion arising from public objection and environmental issues. The Revenue had relied on Sitalpur Sugar Works Ltd (supra) to contend that the expenditure was capital in nature. However, the Hon'ble High Court distinguished the facts and held that the expenditure was revenue in nature. The Hon'ble Court observed that the shifting was not undertaken for improving profitability or gaining an advantage but was necessitated for the very survival of the business. It was further observed that the assessee had in fact lost certain advantages due to shifting, and any benefit arising was only incidental. The Hon'ble Court emphasized that the test of enduring benefit is flexible and cannot be applied in isolation without considering the surrounding circumstances. Where shifting is compelled by bu....
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....ne the issue from an alternative and practical perspective having regard to the peculiar facts of the case and the passage of time. The assessment year involved is A.Y. 2017-18 and as on date almost a decade has elapsed. In such a situation, even if the contention of the Revenue is accepted that the impugned expenditure is capital in nature, the inevitable consequence would be that the assessee would be entitled only to depreciation on the said amount over the subsequent years. However, giving effect to such a conclusion at this stage would lead to serious practical and administrative difficulties. If the expenditure of Rs.1,13,40,045/- is capitalised, the assessee would be entitled to depreciation year after year on the written down value. For instance, assuming a depreciation rate of 10%, the allowance would have to be computed successively across multiple years by reducing the written down value each year. This would require re-computation of income for A.Y. 2017-18 and for all subsequent assessment years, verification of depreciation claimed, reconciliation with books of account, and corresponding adjustments to the written down value of the block of assets. Such an exercise wo....