In a recent ruling, the Madras High Court ruled that a company cannot reclassify an expenditure initially recorded as capital in its books of accounts and later claim it as revenue for tax benefits.
Sabare International Ltd filed a Tax Case Appeal concerning an amount of Rs. 2,38,89,114 for the assessment year 2007-08. The company capitalized the expenditure in its books but claimed it as revenue expenditure in its income tax computation.
The assessing officer categorized the expenditure as capital expenditure under Section 35D of the Income Tax Act allowing 1/5th of the amount for the assessment year. On appeal, the Commissioner of Income Tax (Appeals) upheld the order of the Assessing Officer.
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The case was taken to the Chennai Bench of the Income Tax Appellate Tribunal ( ITAT ) which partially allowed the appeal. The tribunal divided the expenses into Rs. 56,96,988 as revenue expenditure ( operational expenses ) and Rs. 1,81,92,126 as capital expenditure ( capacity expansion-related costs ).
The ITAT justified the division by explaining the inherent nature of the expenses. The tribunal explained operational expenses were incidental to running the business and qualified as revenue expenditure and costs related to capacity expansion or asset creation were capital in nature as they contributed to long-term benefits and were appropriately covered under Section 35D of the Income Tax Act, 1961.
Aggrieved, the petitioner approached the Madras High court arguing that all expenses were incurred in the ordinary course of business and should qualify as revenue expenditure. The revenue argued that the expenses were rightly categorized based on their nature and since the assessee had capitalized the entire expenditure in its own financial records.
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The bench comprising Justice R. Suresh Kumar and Justice C. Saravanan found no fault in the assessment and determined that the appellant could not claim the entire amount as revenue expenditure after having capitalized it in their records.
The court upheld the ITAT’s decision and the appeal was dismissed
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