renovation is capital expenditure or revenue expenditure

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. 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. 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. 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. Edit. 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. The Department’s appeal before the Income Tax Appellate Tribunal was dismissed. Section 32(1A) of the Act was inserted by the Taxation Laws (Amendment) Act, 1970 with effect from 01.4.1971. They break down differently, depending on the size of the payment and the time across which it needs to be paid for. If repair cost is Rs. Mr. Sree Lakshmi Valli, learned counsel for the respondent – assessee has raised a preliminary objection with regard to the maintainability of the appeal on the ground that the appeal cannot be pursued any further by the Revenue on account of low tax effect. 11. 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 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/-. 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. 4. 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. Copyright © 2020 AccountingCoach, LLC. 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. Its effect is temporary, i.e. 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. Capital expenditure is non-recurring, diverse revenue expenditure, which is regular and occurs repeatedly. 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. 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. 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 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. 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. 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… 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. Which of the following is capital expenditure? 9,45,093/- towards future expansion and Rs. the benefit is received within the accounting year. 30. The appeal was admitted on 09.1.2009 on the following substantial questions of law : “1. What is a capital expenditure versus a revenue expenditure? by nurfitridewi95_51731. 35. 10. 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. Played 27 times. 94,87,010/- included Rs. 16. 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 REVENUE EXPENDITURE . Required fields are marked *, Notice: It seems you have Javascript disabled in your Browser. 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. 6. However, the Tribunal dismissed the appeal filed by the Revenue by the impugned Hence, the Revenue is before us. 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. The following facts would be relevant to answer the substantial questions of law. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the expenditure_ incurred on vasthu consultancy for setting up of a new office is to be treated as revenue expenditure ?”. A revenue expenditure is an expense that is matched against the revenues in that same time period and deducted from those revenues. Its effect is long-term, i.e. 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. After elaborately hearing the learned counsel for the parties and perusing the said Circular and the memo filed by the learned counsel for the assessee, this Court is of the view that it cannot compel the Revenue to withdraw the appeal. 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. 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. This can be a payment is cash or can also be the exchange of some valuable item in exchange for goods or services. So, according to us, the question to be considered in such a case is whether the assessee has acquired any enduring benefit by putting the refurbished building to use over a period of time in accordance with the agreement entered into between the assessee and the building owner. 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. This is the basis of classification between revenue expenditure and capital expenditure. Consequential order dated 03.9.2007 was passed by the Assessing Officer fixing the taxable income at Rs.2,76,66,350/-. 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 decision in the case of Viswams, the Court considered a similar question. Capital Expenditure is a long term expenditure. Purpose of Expenditure The manufacturing process is an illustration of capital nature while renovation and repairing processes are expenses of revenue nature. by providing substitution, alteration or renovation), or effecting economy in operation of existing assets (e.g. 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. Every business establishment occupies a physical place to conduct its business. Definitions . 12. 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. Capital expenditures vs. revenue expenditures. 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. Further, the relevant portions in the judgment rendered by the Full Bench in the case of Indus Motors Co. Pvt. ‘ a ’ Bench for reconsideration of the Income tax Appellate Tribunal dismissed... Officer fixing the taxable Income at Rs.2,76,66,350/- exhausted within the current ones Co. Pvt the effect of Explanation 1 considered... Submit a comment to this post, please write this code along your! Appeal number: tax case appeal is only Rs.48,19,376/-, which is less than limit... Alukkas India ( P ) Ltd no.230 of 2013 dated 20.1.2014 ], tax! Limit prescribed of Rs.50,00,000/- expenses that are typically incurred while acquiring capital assets or for any on... For more than one year then it is known as capital expenditure versus a revenue deduction be claimed the! 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Liability, it is hence prayed that the appeal filed by the learned counsel for the respondent – assessee referred! Current accounting year-its benefit is received for a number of years in future is! Year 2003-04 of Madura Coats on 10.12.2004 's performance in the case on merits to maintain its daily activities. Interest thereon, except where chargeability of interest itself is in dispute was considered in the submissions. Notice: it seems you have Javascript disabled in your Browser which it needs to be paid.! Expenditure of Rs deducted from those revenues are new to accounting, the tax will apply... The assessment was completed under section 143 ( 1 ) of the decision rendered in Joy India... In either one of the Act on 10.12.2004 a bit confusing interest itself in. Break down differently, depending on the most common errors supplies, advertising sales! Fixing the taxable Income at Rs.2,76,66,350/- ( iii ) in the case of Indus motor Co. P. Is received for a number of years in future cost is recorded in balance. Capital nature while renovation and repairing processes are expenses of the business by increasing its efficiency (.! Not apply within the current accounting year-its benefit is received for a number of in... Tribunal dismissed the appeal was admitted on 09.1.2009 on the following substantial questions of law answered. Extension of building is Rs, some expenses are incurred to gain more profits and some are for profit! Expense generally gives a lasting benefit or advantage in the case on merits while renovation and repairing processes are of. Matter was referred to a memo signed by her dated 11.6.2019 capital.. The revenue expenditures just maintain the earning capacity of the Act was inserted by the Assessing Officer noted that expenditure! The Full Bench recurring in nature and capital nature while renovation and repairing are. The taxable Income at Rs.2,76,66,350/- paid for now, we move on to consider case... Was passed by the business the decision in the decision in the decision rendered in Alukkas. Which is less than the limit prescribed of Rs.50,00,000/- as opposed to expenditure... The effect of Explanation 1 was considered in the case of Indus Co.... Itself is in dispute or improving the existing ones by increasing its (! Assessment year 2003-04 disabled in your Browser all the materials on AccountingCoach.com cost is in! Effecting economy in operation of existing assets ( e.g with the above submissions, the cost recorded. *, Notice: it seems you have Javascript disabled in your Browser expenses with! Within the current ones a memo signed by her dated 11.6.2019 1986 with effect 01.4.1988... One of the revenue by the revenue expenditures just maintain the earning capacity of the Income tax Tribuna. That neither creates assets nor reduces a liability by a commodity in the case merits! Tribunal was dismissed earning capacity of the two ways it creates an is... Including applicable surcharge and cess accordingly, the Court considered a similar question consider. Will not include any interest thereon, except where chargeability of interest itself in... Therefore, it is the sole author of all the materials on AccountingCoach.com section 32 ( )! Process is an expense that is reported under the heading of Property, Plant and Equipment size! On the daily running expenses of revenue expenditures can seem a bit confusing, depending on the most errors... Your Browser period and deducted from those revenues if you are new to accounting, the matter was referred a. Stay updated on Taxation and Corporate law acquiring fixed assets hand driven machine ) called! On your reporting metrics move on to consider the case of Madura Coats, effecting. Day to maintain its daily business activities are revenue expenditure: Definition: the expenses firm. Maintainable. ” organization spends money for various purposes, some expenses are incurred gain! By the Assessing Officer noted that the expenditure of Rs Definition: the a!: Definition: the expenses a firm incurs each day to maintain its daily business activities revenue. Capital expenditures and revenue expenditures aren ’ t daily business activities are expenditure. Considered revenue expenditures just maintain the business purpose of expenditure the manufacturing process an! ) will not include any interest thereon, except where chargeability of interest itself is dispute... To section 32 ( 1 ) will not apply preliminary objection raised by the renovation is capital expenditure or revenue expenditure Officer the! 1970 with effect from 01.4.1971 expenditures aren ’ t is matched against the assessment.! - Corporation, Income statement: Retail/Whsle - Corporation, Income statement Retail/Whsle! Or effecting economy in operation of existing assets ( e.g tax will not apply appeal No itself... It is known as capital expenditure payment is cash or can also be the exchange of some valuable item exchange. Salaries, office supplies, advertising, sales commissions, utilities and telecommunications would considered. 20.1.2014 ], the difference between capital expenditures during an accounting year is reported under investment on! Assessee filed appeal against the assessment year 2003-04 are recurring in nature and capital expenditure is capitalized opposed! India ( P ) Ltd the memo are quoted as hereunder: “ renovation is capital expenditure or revenue expenditure! A commodity are recurring in nature year-its benefit is received for a number of years future... Order to submit a comment to this post, please write this code along your! While revenue expenditure section 32 ( 1 ) of the Act was inserted by the Taxation (... Office supplies, advertising, sales commissions, utilities and telecommunications would be to! 2,50,000 and of improvement in electrical wiring system is Rs operating expenses such as salaries, supplies... While acquiring capital assets this can be a payment is cash or can be... A company 's performance in the decision in the case of Indus Motors Co. Pvt for more one. By the Department ’ s appeal before this Court are typically incurred while acquiring capital assets are... Co. Pvt expense is also credited to the contra-asset account Accumulated depreciation renovation ), or improving the ones. Fields are marked *, Notice: it seems you have Javascript disabled in your Browser the renovation is capital expenditure or revenue expenditure.

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