renovation is capital expenditure or revenue expenditure

The learned counsel for the respondent – assessee has also referred to the order passed by the Assessing Officer under Section 154 of the Act dated 27.3.2012 to substantiate her contention that the tax and surcharge on total income has to the reckoned as Rs.2,76,66,350/-consequent upon the order passed by the CIT(A) dated 09.7.2007. The factual position has been pointed out by us in the preceding paragraphs and it will be worthwhile to reiterate that the entire details of the expenditure incurred by the assessee for all the branch offices spread over the country were produced before the Assessing The expenses incurred were for providing furniture, interior decoration and office equipment and also consultation charges. Mr. Karthik Ranganathan, learned Standing Counsel for the Revenue is right in his submission that the Tribunal has not given any independent reasons as to why the order passed by the CIT(A) needs to be sustained. FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT. 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 ? If you are new to accounting, the difference between capital expenditures and revenue expenditures can seem a bit confusing. Consequential order dated 03.9.2007 was passed by the Assessing Officer fixing the taxable income at Rs.2,76,66,350/-. 35. 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. Neither an asset is acquired nor the value of an asset is increased. Usually the cost is recorded in a balance sheet account that is reported under the heading of Property, Plant and Equipment. 94,87,010/- included Rs. Section 32 of the Act deals with depreciation. 10. 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. 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. 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. Error: You have unsubscribed from this list. This offer is not available to existing subscribers. If it creates an asset or reduces a liability, it is categorised as capital expenditure. Business. No.230 of 2013 dated 20.1.2014], the matter was referred to a Full Bench. Expenditure means spending on something. Also in another decision in Urban Infrastructure Venture Capital Ltd. v Dy CIT (2015) 119DTR (Mum) (Trib) 322 the bench held that since none of the repair and renovation/interiors expenditure entailed any structural change or extension or improvement of the building therefore Expln. 1st - University . On a reading of the impugned order passed by the Tribunal, we find that the Tribunal referred to the order passed by the Assessing Officer in paragraph 2 of its order and the order passed by the CIT(A) in paragraph 3, and extracted the relevant portions of the order passed by the CIT(A) in paragraph 4 and the findings of the Tribunal appear to be in paragraph 6. Purchase a building Rent a building All that the Tribunal stated is that the Departmental Representative could not place any justifiable reasons or contra material to convince the Tribunal to take a different view than the one taken by the CIT(A) in respect of both the issues. Read more about the author. Generally renovation expenditure undertaken in respect of premises are considered to be revenue in nature as it does not add to the capital value of the asset which is being renovated. He is the sole author of all the materials on AccountingCoach.com. 2,50,000 and of improvement in electrical wiring system is Rs. Capital versus Revenue expenditure . 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. 27. Section 32(1A) of the Act was inserted by the Taxation Laws (Amendment) Act, 1970 with effect from 01.4.1971. 12. 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/-. 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. It is true that the Tribunal, while affirming the order passed by the First Appellate Authority namely the CIT(A) would be well justified in concurring with the First Appellate But, being the last forum, which can go into the factual aspect, it is expected of the Tribunal to give independent reasons as to why they seek to sustain the order passed by the CIT(A). by nurfitridewi95_51731. Capital expenditure may include the following expenditures:- Expenditure incurred on the … 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. Nos.4,14 and 15 of 2015 dated 18.8.2015]. Further, the relevant portions in the judgment rendered by the Full Bench in the case of Indus Motors Co. Pvt. Revenue Expenditure and Capital Expenditure of India! 32. Every expenditure has its own purpose from the business point of view and the classification between the capital expenditures and revenue expenditures is the most regular common problem for accountants since it has a significant impact … Examples of differences between Capital and Revenue expenditure . Ltd. was referred to a Full Bench for reconsideration of the decision rendered in Joy Alukkas India (P) Ltd. As stated earlier, revenue nature expenditures are recurring in nature and capital nature expenditures are non-recurring in nature. 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. 1 to section 32 (1) will not apply. 2. However, the tax will not include any interest thereon, except where chargeability of interest itself is in dispute. We further hold that whether an expenditure incurred by the assessee is a capital expenditure or revenue expenditure is to be decided on the facts of each case by applying the relevant tests.”. However, the Tribunal dismissed the appeal filed by the Revenue by the impugned Hence, the Revenue is before us. Every business establishment occupies a physical place to conduct its business. 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. 17. 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) HM Revenue and Customs (HMRC) has recently updated its guidance on the most common errors. With regard to the consultancy charges, which were incurred by the assessee to the tune of87,14,311/-, the CIT(A) pointed out that it did not represent any expenditure incurred by the assessee towards creation of any capital asset or obtaining an enduring benefit. (iii) in the case of Indus Motor Co. (P) Ltd. 8. Capital expenditure constitutes those expenses that are typically incurred while acquiring capital assets or upgrading the current ones. 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/-. 33. 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/-. Examples of revenue expenditures include the amounts spent on repairs and maintenance, selling, general and administrative expenses. And, 2. These details were once again placed before the CIT(A), when the assessee filed appeal against the assessment order. It’s not enough to say that capital expenditures are everything that revenue expenditures aren’t. To learn more, see the Related Topics listed below: Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. Capital expenditures vs. revenue expenditures. 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. A revenue expenditure is an expense that is matched against the revenues in that same time period and deducted from those revenues. 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. The Assessing Officer, on perusal of the records, which were placed before him, examined the same based on the various establishments, which the assessee had through out the country and accordingly completed the assessment vide order dated 10.3.2006. 2. Consequently, the substantial questions of law are answered in favour of the Revenue. The Madras High Court held that the expenditure incurred in the renovation and redecoration of rooms in a hotel is a revenue expenditure and not a capital expenditure. it is not exhausted within the current accounting year-its benefit is received for a number of years in future. (ii) CIT Vs. Kishan Chand Chellaram (India) P. Ltd. [reported in 130 ITR 385 (Madras)] and few other decisions. 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/-. The Court further pointed out that the Tribunal committed an error by allowing the expenditure incurred on repairs of the rented building as taxable expenditure under Section 37(1) of the Act ignoring Explanation 1 to Section 32 of the Act. Capital Expenditure and Revenue Expenditure DRAFT. As the Division Bench entertained a doubt as to the correctness of the decision of the Division Bench of the Kerala High Court in the case of Joy Alukkas India Private Limited Vs. ACIT [ITA. 3. The learned counsel for the assessee submits that the matter may be remanded to the Assessing Officer or the CIT(A) to enable the assessee to once again canvass the factual. Day-to-day operating expenses such as salaries, office supplies, advertising, sales commissions, utilities and telecommunications would be considered revenue expenditures. 7 months ago. Copyright © TaxGuru. 18. 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. 23. The distinction between the nature of capital and revenue expenditure is important as only capital expenditure is included in the cost of fixed asset. 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. 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. 1. 28. by providing substitution, alteration or renovation), or effecting economy in operation of existing assets (e.g. 5. Join our newsletter to stay updated on Taxation and Corporate Law. 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. Hence, the tax effect in the above tax case appeal would be as follows : 5. Balance Sheet: Retail/Wholesale - Corporation, Income Statement: Retail/Whsle - Corporation, Multiple-Step. The CIT(A) took note of the various categories of expenses incurred by the assessee and from the details given in paragraph 5 of the order passed by the CIT(A) dated 09.7.2007, it is clear that the assessee had spent substantial funds in creating office space with a particular design to suit their requirement. Ltd., read as follows : “33. Ultimately, the Full Bench of the Kerala High Court in the decision reported in (2016) 382 ITR 0503 reiterated that the observations and opinion expressed by Division Bench in the case of Joy Alukkas India (P) Ltd., for holding that the expenditure incurred by the assessee in the above case was not a capital expenditure, but was only revenue expenditure were based on facts of that case, that the relevant test was applied by the Division Bench and that the observation made by the Division Bench in paragraphs 29 and 30 in the decision in the case of Joy Alukkas India (P) Ltd., had to confine to the facts of that case. A broader example which will help to distinguish between revenue expenditures and capital expenditures can be done with the example of a purchase of a storage facility of a company. It is the process of causing a liability by a commodity. According to us, on a reading of Explanation, it is categoric and clear 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 lease hold right on a building is treated as the owner of the building. Which of the following is capital expenditure? 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. Revenue Expenditure: Capital Expenditure: Definition: The expenses a firm incurs each day to maintain its daily business activities are revenue expenditure. Nor can a revenue deduction be claimed for the depreciation of capital assets or for any loss on the disposal of capital assets. All these decisions are pressed into service by Mr. Karthik Ranganathan, learned Standing Counsel for the Revenue to substantiate his argument that Explanation 1 to Section 32 of the Act is an answer to the assessee’s case and that the CIT(A) was not justified in allowing the expenditure to be treated as a revenue expenditure. 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. b) REVENUE EXPENDITURE is money spent on the daily running expenses of the business. 16. They are either expensed in the income statement (revenue expenditures) or capitalized as fixed assets in the balance sheet (capital expenditures). 1 to section 32 (1), even if assessee was not owner of such building during the period of occupation. 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. Save. 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. 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. The business expenditures are of two types:- Capital expenditures Revenue expenditures Capital expenditures Definition and explanation of capital expenditures: An expenditure is a capital expenditure if the benefit of the expenditure extends to several trading years. This appeal, filed by the Revenue, under Section 260A of the Income Tax Act, 1961 (for short, the Act), is directed against the order dated 04.7.2008 made in ITA. For the above reasons, the Revenue has to necessarily succeed in this appeal. Required fields are marked *, Notice: It seems you have Javascript disabled in your Browser. 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. Conversely, if they were capable of being used/were used before the refurbishment then a revenue deduction should be possible for at least some of the expenditure. 31. 25. 7 months ago. After referring to various other decisions, the Court pointed out that the extensive repairs and renovations carried out by the assessee cannot be said to be incurred to preserve and maintain an already existing asset since many new objects have been brought into as could be seen from the list of construction made and thus, the object of expenditure made by the assessee is definitely to bring a new asset into existence to obtain new advantage further giving enduring benefit to the assessee. 4. 25. 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/-. Its effect is long-term, i.e. 3. 2300/Mds/2007 on the file taxguru.in of the Income Tax Appellate Tribuna, Chennai ‘A’ Bench for the assessment year 2003-04. It was omitted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 with effect from 01.4.1988. In the decision in the case of Viswams, the Court considered a similar question. 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. business expense that is made to acquire an asset or to improve the capacity of an asset 1st - University ... 56% average accuracy. Explanation 1 to Section 32(1)(i) does not intend to lay down that whenever expenditure has been incurred by the assessee for the purpose of business or profession on the construction of any structure or doing of any work in or in relation to or by way of renovation or improvement to the building, then such expenditure has to be mandatorily treated as capital expenditure. 2. 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. 22. No. 11. Receipts and invoices keep the records of expenditures. Maintained by V2Technosys.com, Appeal Number : Tax Case Appeal No. Accordingly, the appeal filed by the assessee was partly allowed and the Assessing Officer was directed to modify the assessment order by allowing the amounts of Rs.60,42,076/- and Rs.87,14,311/-. In the decision of the Kerala High Court in the case of Indus Motors Co. (P) Ltd., the Division Bench elaborated the effect of Explanation 1 to Section 32 of the Act. 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… Definition of Capital Expenditure. Explanation 1 to Section 32(1)(i) does not intend to lay down that whenever expenditure has been incurred by the assessee for the purpose of business or profession on the construction of any structure or doing of any work in or in relation to or by way of renovation or improvement to the building, then such expenditure has to be mandatorily treated as capital expenditure. Capital Expenditure Capital expenditure includes costs incurred on the acquisition of a fixed asset and any subsequent expenditure that increases the earning capacity of an existing fixed asset. 34. Now, we move on to consider the case on merits. Capital expenditure assists a company in progressing the business while revenue expenditure helps maintain the business. The learned counsel for the respondent – assessee has referred to a memo signed by her dated 11.6.2019. 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. Therefore, it is submitted that the Revenue should be permitted to pursue their appeal before this Court. No costs. The Assessing Officer noted that the expenditure of Rs. Revenue Expenditure: Capital Expenditure: 1. By referring to paragraph 4 of the said Circular, it is submitted that for the purposes of the said Circular, ‘tax effect’ means the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of the issues, against which, appeal is intended to be filed. Business expenditures are accounted for in either one of the two ways. The learned Standing Counsel for the Revenue relies upon the following decisions : (i) in the case of CIT, Madurai Vs. Madura Coats [reported in (2012) 19 Taxmann.com 74 (Madras)]; (ii) in the case of CIT, Madurai Vs. Viswams [reported in (2019) 105 Taxmann.com 289 (Madras)] and. The Department’s appeal before the Income Tax Appellate Tribunal was dismissed. 7. Examples of capital expenditures include the amounts spent to acquire or significantly improve assets such as land, buildings, equipment, furnishings, fixtures, vehicles. All expenditure incurred in acquiring fixed assets, or improving the existing ones by increasing its efficiency (e.g. If repair cost is Rs. A reading of the above Explanation clearly shows that where the business or profession of the assessee is carried on in a building, which is not owned by him, but has been leased out, in respect of which the assessee holds a lease or other right of occupancy, if any expenses are incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of the said Clause shall apply as if the said structure or work is a building owned by the assessee. 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. We thus answer the reference holding that the ratio of the judgment of the Division Bench in Joy Alukkas case as expressed in paragraph 28 of the judgment needs no reconsideration. Further, ‘tax effect’ shall be tax including applicable surcharge and cess. by attaching power motor to hand driven machine) are called capital expenditure. 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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 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. It is submitted by the learned counsel for the assessee that the entire details were furnished before the CIT(A) and if at all this Court comes to the conclusion that the effect of Explanation 1 to Section 32 of the Act has not been considered, the matter may be remanded to the CIT(A) or to the Assessing Officer for a fresh consideration. Be that as it may, we are required to decide the substantial questions of law, which were framed at the time of admission of this appeal. 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. 1. Its effect is temporary, i.e. 20. 1. the benefit is received within the accounting year. Edit. Knowing whether business expenditure is revenue or capital is essential to the preparation of correct accounts and tax returns, but it is sometimes difficult to decide what is the right treatment. 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. With the above submissions, the learned counsel for the respondent – assessee prays for dismissal of this appeal. 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The Income tax Appellate Tribuna, Chennai ‘ a ’ Bench for the assessment 2003-04. Significant goods or services or can also be the exchange of some valuable item in exchange for goods or that! Its daily business activities are revenue expenditure 2,50,000 and of improvement in electrical system! The contra-asset account Accumulated depreciation in progressing the business expenditures will show up differently on your reporting metrics not.!, office supplies, advertising, sales commissions, utilities and telecommunications would be relevant to the. Walls of a wooden Property is a capital expense generally gives a lasting benefit advantage... Expenses a firm incurs each day to maintain its daily business activities are revenue.! New to accounting, the revenue before the CIT ( a ) capital expenditure the payment and the across! Motors Co. Pvt business activities are revenue expenditure: Definition: the expenses firm. Taxguru.In of the business for in either one of the storage facility is considered a similar question noted that revenue...