Government Grants for developing infrastructural facilities are “Capital Receipts”: Madras High Court
The division bench of Madras High court recently, in an appeal filed by the Revenue against the Tamil Nadu Tourism Development Co., held that the expenses incurred by the company in respect of maintenance of the Thiruvalluvar statue, which is a public property must be treated as a “revenue expenditure.” Further, the Court observed that the government grants for developing infrastructural facilities made to the company are “capital receipts for the purpose of Income Tax Act, 1961.”
Coming to the facts of the case, the respondent-company’s claim for deduction towards income from lease/ franchise of hotels, Thiruvalluvar statue expenses, Grants from Government etc. were disallowed by the Assessing Officer. The disallowance was partly rejected by the Tribunal on appeal. Hence, the matter was brought before the High Court.
The Revenue urged that the expenses incurred by the assessee for the maintenance of the Thiruvalluvar statue is need to be categorized as “capital expenditure.” Further, the receipt of grants by the assessee from the Central Government revenue in nature since such amount has been used by the assessee for improving existing facilities. It was further submitted that the money received by the assessee for meeting revenue expenditure has not been utilised by the assessee and therefore the receipt by the assessee has to be treated as a revenue receipt only.
On behalf of the assessee, it was submitted that the expenses incurred by the assessee for the maintenance of the Thiruvalluvar statue is revenue expenditure as the statue is not owned by the assessee. It was further stated that it was the State Government who directed the assessee to maintain the same. Further, the grants given by the Government of India, to the assessee were capital grants for developing infrastructural facilities.
The division bench comprising of Justice S Manikumar and Justice D.Krishnakumar observed that “Benefit of enduring nature is not the sole or exclusive test to decide, whether a particular expenditure is a capital or revenue.”
The Court after discussing the terms “capital expenditure” and “revenue expenditure” in detail, observed that “Capital expenditure enhances the productivity or the earning capacity. Whereas, the Revenue expenditure does not enhance, neither the value or the earning capacity. But the condition of the asset is retained. Capital expenditure derives benefits beyond the current accounting period. They are nonrecurring in nature. Whereas, the revenue expenditure is incurred on regular basis. The benefits are relatively for a shorter period. Expenditure incurred in the day-to-day business, is revenue expenditure. Initial expenditure incurred for acquiring a capital asset is capital in nature. Whereas, the expenditure incurred inrepair works, maintenance and repainting costs, do not value of the asset or the earning capacity of the assessee, but only maintains the asset.”
“The statue in dispute, is not on the asset side of the Corporation, as it is not owned by the Corporation. The expenses incurred in maintaining of the statue is incurred in consonance with the activities of the business of the assessee. The expenditure incurred is not for the purpose bringinginto existence of any or advantage on the capital side, but for running the business or working it with a view to earn profit, it is a revenue expenditure”.
While confirming the order of the ITAT, the Court observed that, “maintenance of the statue, may endure some benefit towards the conduct of the assessee’s business, but the expenditure incurred cannot, at any rate, to be said as an advantage to the assessee in its capital field and thus the expenditure would be capital in nature, so as to disallow the expenditure incurred for maintenance of Thiruvalluvar statue by security charges, electricity charges, establishment charges and expenses for providing protective coating with poly silicon to the statue”.
Regarding the issue of receipt of Government grants, it was held that “both the Appellate Authority and Tribunal, have rightly held that the expenditure from the grant was capital in nature. When the grants were to be utilized for a capital asset, but some of the projects, dropped, receipts should be treated only as capital in nature. Reasoning of the Tribunal, on the issue as to whether the expenditure incurred from the grant is capital receipt or revenue is convincing”.
Read the full text of the Judgment below.
