Expenditure on expansion of business, treated as revenue expenditure

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The assessee gave a dual treatment of expenditure on expansion of business – Capital Expenditure in the books of accounts but revenue expenditure for filing income tax return. As the expenditure was for expansion of existing business, the Commissioner of Income Tax allowed the same as revenue expenditure for claiming deduction against tax.

Assessee – company was engaged in business of trading and merchandising of goods and services opening of stores at various places was one composite business of assessee. In balance-sheet for assessment year under consideration, it had shown capital work-in-progress amounting to Rs. 9.40 crores. Out of said amount, it had claimed an amount of Rs. 3.64 crores as revenue expenditure. It submitted that expenditure was in nature of salary, electricity, audit fee, etc. and it was essentially incurred in process of expansion of existing line of business. Assessing Officer disallowed impugned expenditure on plea that assessee could not give dual status to expenditure, i.e., as capital expenditure in books of account and as revenue for income-tax purposes. Said expenditure did not create any asset and also did not provide enduring benefit to business of assessee. Whether expenditure was allowable as revenue expenditure in year under consideration irrespective of fact that assessee had given dual status to such expenditure in books of account.

Held for the case:

• There is no dispute to the fact that the assessee has shown a turnover of Rs. 4.75 crores in relation to its stores, which were made operational during the year at Bangalore and Hyderabad. Before the Assessing Officer it was the case of the assessee that it is in the process of expansion of its business and thus the expenditure has been incurred in relation to expansion of business. It was also submitted that the expenditure which is in the nature of salary, electricity, audit fee, etc. is essentially incurred for expansion of existing line of business, i.e., setting up of more number of stores/speciality stores under planned format or for maintenance of already established stores. These submissions have not been controverted by the Assessing Officer and disallowance is made mainly on the ground that the assessee cannot give dual status to the expenditure, i.e., as capital in books of account and as revenue for income-tax purposes. However, such view of the Assessing Officer cannot be upheld in view of the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT.

• From the submissions made by the assessee, it is also clear that opening of stores at various places was one composite business of the assessee and in that course the assessee had started operation of its stores at Bangalore and Hyderabad. It was the contention of the assessee that operation of these stores at various locations is one composite business and once business had been started then the expenditure cannot be linked only to the stores which became operational during the year under consideration. Such submission of the assessee has not been controverted by the Assessing Officer. It is not the case of the Assessing Officer that the assessee had not incurred such expenditure for its business. In the letter submitted by the assessee before Assessing Officer it is clearly mentioned that when the expenditure is incurred for the purpose of expansion of business, which is already in existence and which is in the nature of revenue, then the same is allowable as revenue expenditure irrespective of the treatment given by it to such expenditure in the books of accounts. No material has been brought on record by the Assessing Officer to negate such submission made by the assessee. Therefore, it has to be held that the expenditure incurred by the assessee was for the purpose of expansion of its business and the same is in the nature of revenue being mostly paid to employees. The expenditure did not create any asset and also did not provide enduring benefit to the business of the assessee so as to say that the expenditure was capital in nature. Therefore, the expenditure was allowable as revenue expenditure in the year under consideration irrespective of the fact that assessee has given dual status to such expenditure in the books of account vis-à-vis computation of income filed alongwith return.

• The Commissioner (Appeals) observed that the assessee has merely given the names, designation and amount paid with reference to salary without giving any proof of work actually being done. The assessee in the details so filed has mentioned job description of each of the employee alongwith amount paid to him describing also that how much TDS has been deducted. In the note it is clearly mentioned that the assessee has employed these persons for carrying out market research work. Therefore, it cannot be said that assessee did not provide the necessary details. Therefore, even for the additional reasons described by the Commissioner (Appeals), the disallowance cannot be upheld.