Ordinary Dunnage is Revenue Expenditure: ITAT Follows Earlier Rulings to Delete ₹1.11 Cr Addition for Central Warehousing Corporation [Read Order]

The appeal arose from the order dated 10 February 2024 passed by the CIT(A), for Assessment Year (AY) 2016–17. The assessee, Central Warehousing Corporation, a public sector undertaking engaged in warehousing and related activities, had filed its return declaring income of ₹190.85 crore.

During scrutiny assessment, the AO disallowed ₹1.11 crore claimed as “dunnage expenses,” treating the same as capital in nature on the ground that such expenditure provided an enduring benefit to the assessee.

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According to the AO, dunnage materials were part of the warehousing infrastructure and thus created a capital asset. The AO, therefore, added the amount to the income of the assessee while computing total income under section143(3) of the Income Tax Act, 1961. Aggrieved, the assessee preferred an appeal before the CIT(A), which was dismissed, prompting the present appeal before the Tribunal.

The assessee contended that the authorities had erred in treating the dunnage expenditure as capital despite the issue having already been settled in the assessee’s favour for Assessment Years 2012–13 and 2017–18.

It was argued that “ordinary dunnage” comprises temporary flooring materials, such as jute or wood planks, used only once for the protection of goods stored in warehouses and discarded thereafter. Given its one-time use and negligible life span, the cost could not be said to create a capital asset.

Counsel for the assessee relied heavily on the Tribunal’s decision in ITA No. 353/Del/2021 (AY 2017–18) and ITA No. 5449/Del/2017 (AY 2012–13), where similar disallowances had been deleted. In those decisions, the ITAT had distinguished between “special dunnage”, which has a life expectancy exceeding five years and is capitalised, and “ordinary dunnage,” which is consumed within a year and hence constitutes revenue expenditure.

The assessee further argued that this consistent accounting practice had been accepted by the Revenue in earlier years and there was no change in the factual matrix warranting a different view for AY 2016–17.

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The Departmental Representative, relying on the findings of the lower authorities, argued that both types of dunnage were used for the same purpose, facilitating storage, and therefore formed part of the capital structure of the business.

It was submitted that the expenditure led to the acquisition of an asset with enduring benefit, which should rightly be capitalised.

After hearing both parties, the Tribunal noted that the issue was identical to that adjudicated in the assessee’s own case for AYs 2012–13 and 2017–18.

The Co-ordinate Bench in those years had categorically held that while special dunnage, having a longer life, was rightly capitalised, ordinary dunnage, which is consumed and rendered unusable within a year, must be treated as revenue expenditure.

The Tribunal emphasised that the Revenue had accepted this accounting treatment consistently in prior assessments and had not pointed out any distinguishing facts in the present year. It was observed that the life expectancy of the material was the key factor determining the capital or revenue nature of expenditure.

Since the ordinary dunnage was used only once and did not provide any enduring advantage, it could not be regarded as a capital asset.

Quoting from the 2017–18 order, the Tribunal reiterated that there was “no illegality or irregularity in the view that because of the single use within a year in respect of ordinary dunnage, the expenditure thereon has to be taken as revenue expenditure and no addition on that score could be made.”

Relying on its earlier decisions and following the principle of consistency, the two-member bench comprising Avdhesh Kumar Mishra (Accountant Member) and Yogesh Kumar U.S. (Judicial Member) directed the deletion of the ₹1.11 crore addition made by the AO and confirmed by the CIT(A). The appeal filed by the assessee was accordingly allowed.

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