The Income Tax Appellate Tribunal (ITAT), Rajkot Bench, has recently, in an appeal filed before it, held that road construction expenses incurred to provide easy and smooth access from highway to factory are allowable as business expenditure.
The aforesaid observation was made by the Rajkot ITAT, when an appeal was preferred before it by the assessee, Rudraksh Detergent& Chemicals Pvt., as against the order of the Commissioner of Income Tax (Appeals), (CIT(A)), Rajkot, dated 27/01/2020, arising in the matter of assessment order passed under Section 143(3) of the Income Tax Act, 1961 , relevant to the Assessment Year 2011-12.
The only issue raised by the assessee in its appeal being that the CIT (A) has erred in confirming the order of the AO by treating the expenses incurred on the construction of road for Rs. 11,95,705/,- as capital in nature, the facts in brief were that the assessee was a private limited company , engaged in the business of manufacturing of detergent soap and powder and transportation. And the assessee, in the year under consideration, had incurred cost of Rs. 11,95,705/- on the construction of road, to provide the easy and smooth access from the highway to the factory.
As per the assessee, it had been incurring such expenses year after year as the life of the road constructed by it was very short, as during rainy season, the road always gets damaged. Thus, the assessee claimed that such expenses should be treated as revenue in nature or if it is treated as capital in nature, then also it should be allowed 100% depreciation of the cost on the construction of such land.
However, the AO disagreed with the submission of the assessee on the reasoning that the benefit out of the impugned road construction expenses was enduring in nature, opinioning that as such the materials used in the construction of road was long lasting and therefore that the same cannot be allowed as deduction by treating it as revenue in nature.
Thus the AO disallowed the claim of the assessee and treated the impugned expenditure as capital in nature by allowing depreciation thereon. And aggrieved by the same, the assessee preferred an appeal to the CIT (A).
The assessee before the CIT (A), besides reiterating the contentions made before the AO, further contended that the land on which road was constructed was owned by the Government, and hence that as such, the ownership of the land and the road does not lie with the assessee even after construction of the road. It added that only the approach road from the main highway to the factory was constructed solely for the smooth and efficient running of business, and thus, that the cost incurred on the construction of road amounting to Rs. 11,95,705/- cannot be treated as capital in nature.
However, the learned CIT (A) disregarded the contention of the assessee by observing that the issue at hand had already been decided by his predecessor CIT(A)-II, Rajkot, in the assessee’s own case for AY 2010-11, wherein the decision cited by the assessee have been considered, and further that respectfully following the said decision of his predecessor CIT(A) in the identical facts in assessee’s own case for Asst. Year 2010-11, the contention of the assessee is rejected and the addition sustained. And, it is by being aggrieved by the same that the assessee has preferred the instant appeal before the Rajkot ITAT.
With Shri Vimal Desai, the A.R for the assessee contending that the impugned expenses were incurred by the assessee year after year and therefore that the same cannot be treated as capital in nature, Shri B. D. Gupta, Sr. DR ,on the other hand, vehemently supported the order of the authorities below.
Hearing the opposing contentions of either sides and perusing the materials available on record, the ITAT Bench consisting of T. R. Senthil Kumar, the Judicial Member, along with Waseem Ahmed, the Accountant Member, observed :
“There is no ambiguity that the assessee shall gain the benefit out of the road expenses incurred by it. But the benefit is in the nature of smooth and efficient running of the business. As such, the benefit to the assessee, though enduring in nature, but the same is not on a capital transaction, rather it directly relates to the revenue transaction of the assessee. Thus, the same i.e. road expenses cannot be categorized as capital in nature.”
“Besides the above, we also note that there is not coming any fixed assets into existence out of such expenditure. Thus in the absence of any fixed assets, we are of the view that the impugned expenses cannot be treated as capital in nature”, the ITAT Panel added.
Thus , allowing the assessee’s appeal, the Rajkot ITAT ruled :
“Based on the above, it seems to us that the assesse is not enjoying any benefit of enduring nature out of the expenditures discussed above. Hence, we set aside the finding of the learned CIT (A) and direct the AO to delete the addition made by him.”
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