If the premises needed refurbishing to be fit for occupation then the works are generally capital and a revenue deduction will not be available. Revenue expenditure is taken into account while computing taxable profits and would be eligible for a tax deduction whereas on capital expenditure only depreciation can be claimed. Further, the relevant portions in the judgment rendered by the Full Bench in the case of Indus Motors Co. Pvt. The distinction between the nature of capital and revenue expenditure is important as only capital expenditure is included in the cost of fixed asset. 35. In fact, both the substantial questions of law involve the same issue as to whether the expenditure incurred by the assessee in respect of renovation of the leased premises and other expenses towards vasthu consultancy for setting up a new office is to be treated as capital expenditure or revenue expenditure. 3. Every business establishment occupies a physical place to conduct its business. Capital expenditures vs. revenue expenditures. Definitions . 1. Though there may be a narrow margin, this Court cannot venture into the computation details at this juncture and compel the Revenue to withdraw the appeal, which they refused to do nor this Court is inclined to dismiss the appeal by applying the said Circular. Capital expenditure assists a company in progressing the business while revenue expenditure helps maintain the business. 1st - University ... 56% average accuracy. Its effect is temporary, i.e. 7 months ago. 9,45,093/- towards future expansion and Rs. However, the tax will not include any interest thereon, except where chargeability of interest itself is in dispute. The explanation only meant that in the event any capital expenditure is incurred by the assessee, the provisions of Section 32 (1) shall be applicable as if the said structure or work is a building owned by the assessee. An expenditure that neither creates assets nor reduces a liability is categorised as revenue expenditure. Receipts and invoices keep the records of expenditures. The CIT(A) examined the floor wise break-up expenditure, samples of various types of work carried out, electrical work including the provision of entire wiring, cables, light fixtures, etc., and observed that from the description of the break-up of the expenditure claimed, the same included several items, which had been spent by the assessee on articles or things, which could be dismantled, removed and carried along at the time of vacating the rented premises and it is not so as if the assessee had not created a capital asset nor had obtained an enduring benefit. Its effect is long-term, i.e. In the decision in the case of Viswams, the Court considered a similar question. Capital Expenditure is capitalized as opposed to Revenue Expenditure, which is not capitalized. The Revenue preferred an appeal before the Tribunal seeking to set aside the order passed by the CIT(A) and to restore the order passed by the Assessing Officer. Capital expenditure constitutes those expenses that are typically incurred while acquiring capital assets or upgrading the current ones. Nor can a revenue deduction be claimed for the depreciation of capital assets or for any loss on the disposal of capital assets. 13. 30. 1. 32. This can be a payment is cash or can also be the exchange of some valuable item in exchange for goods or services. To be noted that this contention, which is canvassed before us, was not canvassed by the Revenue before the Tribunal nor there was any finding by the CIT(A) to that Nevertheless, this being a pure question of law, we are required to examine the correctness of his submission. At the risk of repetition, it is not out of place to mention here that the decision of the Division Bench of the Kerala High Court in the case of Indus Motors Co. Pvt. Thus, the preliminary objection raised by the learned counsel for the respondent – assessee is rejected. a) CAPITAL EXPENDITURE is money spent to buy fixed assets. An expense is a word very similar to expenditure but expense shows the deduction in the value of the asset while expenditure simply denotes the obtaining of as… 9. This means that by refurbishing, decorating or by doing interior work in the building, an enduring benefit was derived by the assessee for the period of occupation and therefore, is a capital expenditure and not revenue expenditure. In support of their contention, the assessee referred to the decisions in the case of, (i) CIT Vs. Ooty Dasaprakash [reported in (2000) 110 Taxmann 275 (Madras)]; and. Rent paid. The appeal was admitted on 09.1.2009 on the following substantial questions of law : “1. Whether an expenditure incurred by assessee in a particular case is a capital expenditure or revenue expenditure has to be decided on the facts of that case by applying the relevant tests. Copyright © TaxGuru. The Court took note of the decision in the case of Silver Screen Enterprises Vs. CIT [reported in (1972) 85 ITR 578] wherein the Punjab and Haryana High Court held that the amounts spent for construction of the verandah, office room, side room and bath rooms brought into existence an asset of enduring nature, that the replacement of old wooden chairs by steel chairs was to attract larger and better customers and that this would go to show that the lessee (the assessee therein) brought into being an asset of enduring nature. 1st - University . It was further pointed out that after the introduction of Explanation 1 to Section 32 of the Act, there is no scope left out at all for any interpretation since, by a legal fiction, the assessee is treated as a owner of the building for the period of his occupation and this would mean that by refurbishing, decorating or by doing interior work in the building, an enduring benefit was derived by the assessee for the period of occupation and therefore, it is a capital expenditure and not revenue expenditure. If repair cost is Rs. Capital expenditure is shown in the Balance Sheet, in asset side, and in the Income Statement (depreciation), but Revenue Expenditure is shown only in the Income Statement. 25,000, whitewash expenses are Rs. We quote the relevant portions in the decision of the Division Bench in the case of Indus Motor Co. (P) Limited, which read as hereunder : “24. Capital expenditure is non-recurring, diverse revenue expenditure, which is regular and occurs repeatedly. Accordingly, the appeal filed by the Revenue before the Tribunal was dismissed. Thus, the tax effect in the above tax case appeal is only Rs.48,19,376/-, which is less than the limit prescribed of Rs.50,00,000/-. As has been observed above, whether an expenditure incurred by assessee in a particular case is a capital expenditure or revenue expenditure has to be decided on the facts of that case by applying the relevant tests. 19,000; the amount to be expensed is However, during the course of arguments before the CIT(A), the assessee conceded that certain expenditure can be capitalized and requested for depreciation and in respect of other expenses, they stated that they should be treated as revenue expenditure. 1 to section 32 (1) will not apply. The asset's cost (except for the cost of land) will then be allocated to depreciation expense over the useful life of the asset. It is submitted by the learned counsel for the respondent – assessee that the tax and surcharge on taxable income of Rs.4,07,80,300/- is Rs.1,49,86,760/- and after the order was passed by the Commissioner of Income Tax (Appeals) [for short, the CIT(A)] dated 09.7.2007, the Assessing Officer had given effect to the said order of the CIT(A) vide order dated 31.12.2010 passed under Sections 143(3) read with Section 147 of the Act, in which, the tax and surcharge on the total income was quantified at Rs.2,76,66,350/- and that if this is taken, the tax amount would be Rs.1,01,67,384/-. By the same Amendment Act, 1986, Sub-Section (1A) stood interpolated as Explanation 1 to Section 32 of the Act with effect from 01.4.1988. 2. Usually the cost is recorded in a balance sheet account that is reported under the heading of Property, Plant and Equipment. Usually the cost is recorded in a balance sheet account that is reported under the heading of Property, Plant and Equipment. Capital expenditures are purchases of significant goods or services that will be used to improve a company's performance in the future. No.230 of 2013 dated 20.1.2014], the matter was referred to a Full Bench. 7 months ago. Any expenses incurred with the aim of improving its useful life or earning capacity of the asset comes under capital expenditure. The amount of each period's depreciation expense is also credited to the contra-asset account Accumulated Depreciation. 1. Thus, on account of not applying the correct legal principle to the facts, an erroneous order was passed by the CIT(A), which was affirmed by the Tribunal without assigning any reasons. Therefore, it is submitted that the Revenue should be permitted to pursue their appeal before this Court. Played 27 times. The Assessing Officer noted that the expenditure of Rs. In fact, the assessee had also admitted that they were granted agency by M/s.Malaysian Airlines and that they had to design the showroom with a particular design as instructed by the said Airlines. Capital expenditure may include the following expenditures:- Expenditure incurred on the … The assessee is in the business of running a travel agency and filed their return of income for the assessment year under consideration (2003-04) on 01.12.2003 returning a total income of Rs.1,79,95,145/-. He is the sole author of all the materials on AccountingCoach.com. Examples of differences between Capital and Revenue expenditure . Vs. DCIT [ITA. The tax at the relevant time was stated to be 35% and the amount would be Rs.51,64,735/- and the surcharge at 5% being Rs.2,58,365/- and the total tax effect would be Rs.54,23,100/-, which is well above the threshold limit of Rs.50 lakhs. 27. Examples of revenue expenditures include the amounts spent on repairs and maintenance, selling, general and administrative expenses. 4. 24. 20. Edit. A capital expenditure is an amount spent to acquire or significantly improve the capacity or capabilities of a long-term asset such as equipment or buildings. Section 32 of the Act deals with depreciation. 6. The following points of difference between capital expenditure and revenue expenditure gives the importance of the distinction: 1. And, 2. Mr. Karthik Ranganathan, learned Standing Counsel for the Revenue submits that if the appeal filed by the Revenue is allowed, the order passed under Section 154 of the Act dated 27.3.2012 would become infructuous, that and consequently, the order passed by the Assessing Officer has to be restored and the tax has to be computed and not only that, the rate of depreciation is to be ascertained and a complete reworking has to be done by the Assessing Officer and that this cannot be done in this appeal under Section 260A of the Act by raising substantial questions of law, which has been admitted by a Division Bench of this Court. In the above decision, it was pointed out that so far as the expenditure incurred as contemplated in the explanation is concerned, a legal fiction is created, by which, the assessee, enjoying a leasehold right on a building, is treated as the owner of the building. HM Revenue and Customs (HMRC) has recently updated its guidance on the most common errors. Expenditure means spending on something. Now, we move on to consider the case on merits. A revenue expenditure is an amount that is spent for an expense that will be matched immediately with the revenues reported on the current period's income statement. In our considered view, no such remand is warranted in the instant case as we have found that the entire details were made available by the assessee to the Assessing Officer as well as to taxguru.in the CIT(A) and that they examined all the factual Had the CIT(A) taken note of Explanation 1 to Section 32 of the Act in all probabilities, the result of the appeal would have been different. Maintained by V2Technosys.com, Appeal Number : Tax Case Appeal No. All Rights Reserved. Further, ‘tax effect’ shall be tax including applicable surcharge and cess. 2. 17. After analyzing all the factual details and taking note of the submissions made by the assessee’s representative that they proposed to restrict their claim, the CIT(A) passed the order dated 09.7.2007. The assessment was completed under Section 143(1) of the Act on 10.12.2004. 28. According to us, by adding Explanation 1 to Section 32(1), Parliament has manifested its legislative intention to treat the expenditure incurred by the assessee on leasehold building as capital expenditure and therefore, Explanation 1 to Section 32(1) cannot be subjected to any other interpretation. FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT. Furthermore, this Court, while exercising its jurisdiction under Section 260A of the Act, would not be justified in examining the computation of tax and more particularly when there is a discrepancy in the figures computed by the respondent – assessee and that of the As noticed above, according to the assessee, the tax effect is Rs.48,19,376/-and according to the Revenue, the tax effect is Rs.54,23,100/-. Nos.4,14 and 15 of 2015 dated 18.8.2015]. It was further pointed out that after the introduction of Explanation 1 to Section 32 of the Act, there is no scope left out at all for any interpretation since, by a legal fiction, the assessee is treated as a owner of the building for the period of his occupation and this would mean that by refurbishing, decorating or by doing interior work in the building, an enduring benefit was derived by the assessee for the period of occupation and therefore, it is a capital expenditure and not revenue expenditure. In the light of the said Explanation, it has become immaterial as to whether the assessee is the owner of the building or the lessee and there is no scope left for any interpretation since, by legal fiction, the assessee is treated as the owner of the building for the period of their occupation. The effect of Explanation 1 was considered in the decision in the case of Madura Coats. In the light of the above discussions, the above tax case appeal is allowed, the orders passed by both the CIT(A) as well as the Tribunal are set aside and the order passed by the Assessing Officer is restored. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the expenditure incurred in respect of renovation of leased premises is to be treated as revenue expenditure in spite of Explanation 1 to Section 32 of the Act ? Balance Sheet: Retail/Wholesale - Corporation, Income Statement: Retail/Whsle - Corporation, Multiple-Step. In the above tax case appeal, an assessment order was passed under Section 143(3) dated 10.3.2006 assessing the total income at Rs.4,07,80,300/- and computing income tax and surcharge at Rs.1,49,86,760/-. As stated earlier, revenue nature expenditures are recurring in nature and capital nature expenditures are non-recurring in nature. If it creates an asset or reduces a liability, it is categorised as capital expenditure. On appeal, the Commissioner of Income Tax (Appeals), by order dated 09.7.2007, partly allowed the appeal by directing the Assessing Officer to modify the impugned assessment order by allowing a sum of Rs.60,42,076/- and Rs.87,14,311/- as deduction and to also withdraw the depreciation allowed on these sums. In your case if office renovation expense is incurred for office building and the benefits from such expenditure is enjoyed for more than one year then it has to be capitalized to the buildings account ( buildings cost would increase) So far as the question regarding the expenditure incurred by the assessee for refurbishing the building taken on lease is concerned, we are of the considered opinion that after the introduction of Explanation 1 to Section 32(1) of the Act, there is no scope left at all for any interpretation since, by a legal fiction, the assessee is treated as the owner of the building for the period of his occupation. All expenditure incurred in acquiring fixed assets, or improving the existing ones by increasing its efficiency (e.g. A capital expenditure is an amount spent to acquire or significantly improve the capacity or capabilities of a long-term asset such as equipment or buildings. Capital expenditures (CAPEX) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, or equipment. 18. A depreciation it is a expenses that has directly impact on Profit and profit become revenue for the company so deprecation it is revenue expenditure. 94,87,010/- included Rs. Difference/Distinction between Capital and Revenue Expenditures: The cost of installing an air conditioning unit in an automobile or replacement of a power unit attached to a machine by one of greater capacity should be treated as a capital expenditure. 12. Save. (ii) CIT Vs. Kishan Chand Chellaram (India) P. Ltd. [reported in 130 ITR 385 (Madras)] and few other decisions. nurfitridewi95_51731. In fact, both the substantial questions of law involve the same issue as to whether the expenditure incurred by the assessee in respect of renovation of the leased premises and other expenses towards vasthu consultancy for setting up a new office is to be treated as capital expenditure or revenue expenditure. Any expenditure the benefit of which enjoyed by the business for more than one year then it is known as capital expenditure . Revenue Generation: If the expenses made by the firm helps in the generation of revenue for the current accounting period, it is considered as an operational expense. The funds required for the purchase of the storage facility is considered a capital expenditure. Aggrieved by that, the assessee filed an appeal before the CIT(A) contending that the expenses incurred by them for doing the interiors of the premises taken on lease cannot be treated as a capital expenditure, but as a revenue expenditure. You are already subscribed. 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