Assets brought into existence for enduring benefit of business to be treated as Capital Expenditure & not Revenue Expenditure: Karnataka HC

The Karnataka High Court while upholding the order of the tribunal held that asset was brought into existence for the enduring benefit of the business and therefore, the same has to be treated as capital expenditure and not revenue expenditure.

The assessee, M/s Bioplus Life Sciences Pvt. Ltd had started a new Unit at Hosur in the financial year 2004-05 by taking over machinery and properties of M/s V.B.Medicare Pvt. Ltd., Hyderabad on lease.

The work of development of ‘SUCRALOSE’ in relation to a new product was started in the financial year 2005-06 in the Hosur Unit. The product was developed in the financial year 2006-07. Thus, the assessee had produced a new product from which enduring benefit was derived.

The question arose before the court was whether expenditure of the assessee was a capital expenditure or a revenue expenditure.

The Court took into consideration the principle laid down by the Supreme Court in the case of Alembic Chemical Work Cooperation Ltd. wherein it was held that if the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure.

The court noted that the aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure.

The division bench of Justice Alok Aradhe and Justice H.T. Narendra Prasad while noting the circumstances of the case held that an asset was brought into existence for the enduring benefit of the business and therefore, the same has to be treated as capital expenditure.

The court further said that the expenditure has not been made for bringing into existence an asset for running of the business or working with it with a view to produce profits. Therefore, the same cannot be treated as revenue expenditure.