By G. Srinivasan.

1. Introduction :

According to section 37(1) any expenditure not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".

Thus, according to section 37(1) expenditure is allowable as a business expenditure if following three pre-conditions are satisfied :

(i)          If the same is not falling under sections 30 to 36.

(ii)         If the expenditure is not a capital expenditure.

(iii)        If the expenditure is not a personal expenditure of assessee.

Therefore, if above stated three conditions are satisfied then expenditure can be allowed as business expenditure.

2. Capital expenditure—Scope :

The expression "capital expenditure" has not been defined in the Income-tax Act, 1961. This makes the meaning of the expression more elastic in its application to the facts of each case. According to Mohanlal Hargovind of Jubbulpore Vs. CIT (1949) 17 ITR 473 (PC) it must be construed in a business sense as there may be rules of construction applicable.

3. Revenue expenditure—Scope :

According to R.S. Radha Kishan Kapoor Vs. CIT (1963) 47 ITR 938 (All) revenue expenditure are operational in their prospective and solely intended for the furtherance of the enterprises. They are generally running expenditure incurred in earning profit and incurred with the primary object of an immediate return or acquisition of assets which are not of lasting value and are likely to get exhausted or consumed in the process of return or very little number of returns.

4. Difference between capital or revenue expenditure—Tests therefore :

In Pingle Industries Ltd. Vs. CIT (1960) 40 ITR 67 (SC) it was held by the Apex Court that whether an expenditure is capital or revenue in character is one of common occurance. Its frequency, however, has not served to elucidate the test with any degree of certainty and precision.

Thus, a single test or principle or criterion is not paramount or conclusive or universal application. Further, according to Atherton Vs. British Insulated & Helsby Cables Ltd. (1925) 10 Tax Case 155 (HL) when an expenditure is made, not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but capital.

5. Test of enduring benefit :

In relation to the test of enduring benefit the settled legal position as can be culled out from various judgments is that : what is material is to consider the nature of the advantage in a commercial sense and it is only where the advantage is in capital field that the expenditure would be disallowable. If advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. By enduring is meant "enduring in the way that fixed capital endures" and it does not connote a benefit that endures in the sense that for a good number of years, it relieves the assessee of revenue payment or disadvantages. The words "payment" and "enduring" are only relative terms and the synonymous with perpetual or everlasting. In the case of Empire Jute Co. Ltd. Vs. CIT (1980) 124 ITR 1 (SC), the Supreme Court held that "There may be cases where the expenditure, even if incurred for obtaining an advantage of enduring benefit may none the less, be on revenue account and the test of enduring benefit may break down".

6. Expenditure incurred for repairing office building—Latest Gujarat High Court's decision :

In Indian Ginning & Pressing Co. Ltd. Vs. CIT (2001) 252 ITR 577 (Guj): (2002) 19 SITC 386 (Guj) the test of enduring benefit was applied by Gujarat High Court while deciding controversy as regard to expenditure incurred for repairing and renovating office building.

(i) Factual Matrix :

The assessee-company is a Private Limited Company, carrying on business of giving of cotton waste and pressing of cotton bales as well as business in straw boards and rental income from godown. The assessee-company claimed Rs. 2,05,509 towards building repairs relating to godown and office building. A further sum of Rs. 29,592 incurred on bore expenses and both the expenses were claimed to be revenue in nature and hence deductible under section 37(1).

The assessing officer disallowed same and treated it as capital expenditure. However, first appellate authority allowed assessee's appeal and held that expenditure are revenue in nature.

But, on revenue's appeal the Tribunal held that not only the old asset has been completely changed but its use had also been changed, that is to say, the old godown had lost completely its identity and a totally new asset in its place had come into existence because improvement made were quite substantial. The Tribunal therefore, upheld the view of the assessing officer that expenditure incurred was capital in nature.

(ii) High Court's decision :

Applying the principle of enduring benefit as decided in Empire Jute Co.'s case (supra) the Gujarat High Court held that the facts on record shows that the assessee was having a business asset, namely godown, which was used as creche for children of female workers employed in factory. The said business asset has now been put to different use, i.e., for purpose of the administrative office. In other words, the business asset has retained its character and only its use has changed. The use at both the point in time i.e., before and after the expenditure was incurred relates to the business of the assessee.

Admittedly, in the present case, there is no addition to or expansion of the profit making apparatus of the assessee. The income earning capital i.e., fixed capital remains as it was prior to the incurring of the expenditure in question. Therefore, the Tribunal was not right in law when it held that the expenditure in question was capital in nature inasmuch as the assessee has made the existing premises suitable for office purposes i.e., to say put its more profitable use.