Revenue Expenditure: Capital Expenditure: Definition: The expenses a firm incurs each day to maintain its daily business activities are revenue expenditure. 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The following points of difference between capital expenditure and revenue expenditure gives the importance of the distinction: 1. 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. 34. 19,000; the amount to be expensed is The total amount spent on capital expenditures during an accounting year is reported under investment activities on the statement of cash flows. In this regard, the learned counsel has referred to the circular issued by the Central Board of Direct Taxes in Circular No.3 of 2018 dated 11.7.2018. Usually the cost is recorded in a balance sheet account that is reported under the heading of Property, Plant and Equipment. 22. 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. 23. 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. 1. All expenditure incurred in acquiring fixed assets, or improving the existing ones by increasing its efficiency (e.g. 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. It’s not enough to say that capital expenditures are everything that revenue expenditures aren’t. 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. 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. Rent paid. 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. Consequential order dated 03.9.2007 was passed by the Assessing Officer fixing the taxable income at Rs.2,76,66,350/-. Save. Nos.4,14 and 15 of 2015 dated 18.8.2015]. 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. b) REVENUE EXPENDITURE is money spent on the daily running expenses of the business. A capital expense generally gives a lasting benefit or advantage. The CIT(A) considered the stand taken by the assessee and after taking note of the various works done by the assessee in the leased premises, pointed out that huge expenditure had been incurred by the company by way of fixing doors, both wooden as well as aluminium, collapsible shutters, mirrors, partitions, false ceiling etc., and providing various types of furniture for executives and functions. They are either expensed in the income statement (revenue expenditures) or capitalized as fixed assets in the balance sheet (capital expenditures). Capital Expenditure is a long term expenditure. 13. Required fields are marked *, Notice: It seems you have Javascript disabled in your Browser. (iii) in the case of Indus Motor Co. (P) Ltd. 28. 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. FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT. 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. 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. Now, we move on to consider the case on merits. Which of the following is capital expenditure? 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. 21. 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. Capital expenditures are purchases of significant goods or services that will be used to improve a company's performance in the future. Ltd. was referred to a Full Bench for reconsideration of the decision rendered in Joy Alukkas India (P) Ltd. 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. 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. 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 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. The revenue expenditures just maintain the earning capacity of the business. 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. Definition of Capital Expenditure. Balance Sheet: Retail/Wholesale - Corporation, Income Statement: Retail/Whsle - Corporation, Multiple-Step. 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. 32. However, the Tribunal dismissed the appeal filed by the Revenue by the impugned Hence, the Revenue is before us. For example, the cost of putting vinyl siding on the exterior walls of a wooden property is a capital expense. 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. 16. 6. In the decision in the case of Viswams, the Court considered a similar question. 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 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. According to the learned counsel, the tax effect in this appeal would be Rs.48,19,376/-, which is less than the limit of Rs.50 lakhs prescribed in the said Circular and therefore, the Revenue cannot prosecute this appeal any further. 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. 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 Department’s appeal before the Income Tax Appellate Tribunal was dismissed. Revenue Expenditure. 2. Its effect is long-term, i.e. Renovations and expenses that extend the useful life of your property or improve it beyond its original condition are usually capital … 9,45,093/- towards future expansion and Rs. 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. This can be a payment is cash or can also be the exchange of some valuable item in exchange for goods or services. 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. With the above submissions, the learned counsel for the respondent – assessee prays for dismissal of this appeal. 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. 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