A Clash Of Interests

A subject that has created much controversy ever since income tax laws have been enacted is whether certain expenses incurred by taxpayers can be categorised as capital or revenue expenses. A revenue expenditure gets full deduction for income tax purposes. While capital expenditure is entitled to depreciation only, namely, it gets written off over a number of years instead of in one year, as in case of revenue expenditure. Obviously, there is a clash of interest. While the taxpayer prefers to write off expenses in one year, it is beneficial to revenue if it is written off in different years, by way of depreciation. These conflicting interests have led to many litigations on `capital vs revenue' claims.

The latest decision on this issue is from the Supreme Court in the case CIT vs Bombay Dyeing and Manufacturing Company Ltd JT 1996 (6) SC 68. The tax department took two issues to the SC and on both these issues, the decision went in favour of the taxpayer.

The first issue was whether the professional charges paid by an assessee company to its solicitors for effecting amalgamation of a company carrying on complimentary business were a revenue expenditure incurred wholly and exclusively for the purpose of business. Based on its earlier decision in Bombay Steam Navigation Company Private Ltd vs CIT Bombay 56 ITR 52, the Supreme Court confirmed the ITAT's view that the expenditure could be allowed as revenue expenditure. The decision in Bombay Steam Navigation also pertains to the amalgamation of two shipping companies. The assessee-company took over the assets of the other company and part of the price was treated as a loan secured by a promissory note. The loan was to carry a simple interest of 6 per cent.

The question that came up was whether the interest paid upon the loan was deductible as revenue expenditure. The SC held that it was an expenditure deductible under Section 10(20(xv) of the IT Act 1922. It was held that the transaction of acquisition of the asset was closely related to the commencement and carrying on of the assessee's business and, therefore, interest paid on the unpaid balance of the consideration for the assets acquired had, in the normal course, to be regarded as expenditure for the purpose of the business which was carried on in the accounting periods.

In the course of the judgment, the court referred to its earlier decision in State of Madras vs G J Coelho (531 TR 186) wherein it was held that the interest on the amount borrowed for acquiring a capital asset was deductible as revenue expenditure. It is true, that in the said decision this court reaffirmed the well-established principle that any expenditure laid out for acquiring an asset of a permanent character would be capital expenditure, it held at the same time that inasmuch as the acquisition of the other company was in the course of carrying on of the assessee's business, the interest paid thereon was deductible under Section 10(2) (xv) of the IT Act 1922.

The second matter related to allowance of an amount of Rs 2,25,000 being a contribution made by the company to the Maharashtra Housing Board towards the construction of tenements for its workers. The IT department considered this as an expenditure of a capital nature. The court did not agree with the Revenue's view and accepted the assessee's contention that the expenditure in question brought into existence no capital asset to the assessee company as the tenements remained the property and the assets of the Housing Board. The assessee-company acquired no ownership rights in the said tenements. The ITAT further said that there was no obligation on the assessee-company to provide workers tenements constructed by the Housing Board and that the benefit of better and cheaper housing in this case, obtained by the industrial workers of the assessee-company, did not constitute a direct benefit of an enduring nature to the assessee. The expenditure, it observed, was incurred merely with a view to carrying on the business of the assessee-company more efficiently by having a contended labour force.

The department's application under Section 256(2) having been rejected by the HC, the matter was taken by it to the Supreme Court. Applying the earlier decisions in the cases of L H Sugar Factory & Oil Mills (P) Ltd vs CIT UP 125 ITR 293 (SC) & CIT vs T V Sundaram Iyengar & Sona (P) Ltd 186 ITR 276), the court held that the expenditure in question was a revenue expenditure.

The decisions on two matters on the issue of capital vs revenue tangle bring out the position that the assessee was unnecessarily dragged to the SC by the IT department for these claims when these were covered by the earlier decisions of the apex court.

Further, the revenue involved was also not substantial. If the department had done its homework properly after comparing the facts of this case with the facts and ratios of the decisions applied by the SC in deciding the cases, they would have decided not to pursue these issues.

Thus considerable expenses on litigation and waste of time in pursuing the cases could have been avoided. Anyhow, it is never too late to do so.