S. 32 Understanding Depreciation with case laws

Depreciation – a non-cash expenditure allowed under Income Tax Act, 1961 following block concept. Under the block concept, all the assets falling within the same class and subject to same rate of depreciation are clubbed together and considered as single asset. Any alterations to the value of the block have to be strictly in accordance with the provisions of Chapter IV D of Income Tax Act, 1961.

As per section 32 of Income Tax Act, 1961, a assessee is entitled to claim depreciation on fixed assets only if the following conditions are satisfied:

1. Assessee must be owner of the asset – registered owner need not be necessary.

2. The asset must be used for the purposes of business or profession.

3. The asset must be used during the previous year.

The use of the asset during the previous year may be active use or passive [ie., kept ready for use]. I shall elaborate this topic at later part of this article

Now let us go through some Judicial decisions in respect of deprecation.

Unabsorbed Depreciation:

Additional Depreciation :

Classification of Assets.

Concept of Block of Assets :

As per the provisions of section 43(6) of the Income Tax Act, the WDV of block of assets as at start of the year has to be adjusted as follows so as to arrive at closing WDV:

– It has to be increased by actual cost [as per section 43(1)] of any asset falling within in the block acquired during the previous year.

– Thereafter, It shall be reduced by ‘moneys payable’ in respect of asset sold/discarded/demolished or destroyed during the previous year.

It has been held in Ashok Betelnut Case [ mad. ] that moneys payable represents gross sale consideration where as the contrary has been held in the case of Essar Shipping Limited case.

No deletion is permitted from the value of the block except when the asset is sold, discarded, demolished or destroyed. e.g., in case of theft of an asset, no deletion is permitted from the block of asset since the asset is neither sold nor demolished nor destroyed nor discarded.

– Further, scrap value, if any of any asset has to be reduced.

The question of deduction of scrap value from the block arises only when the asset is not sold.

Now lets analyse a interesting concept arising in relation to claiming of depreciation. In earlier part of this article, I have laid down the essential for claiming depreciation. One of the requirements was that asset must be used during the previous year. For the purposes of Income Tax Act, a previous year is a distinct unit. In case an asset is discarded by the business but not sold, section 43(6) permits the scrap value of the asset to be reduced from the block in the previous year in which such asset is discarded. The assessee is entitled to claim depreciation on the residual value of such discarded asset [ie., Opening WDV of such asset less scrap value] even though such discarded asset is not used for the purposes of business or profession in such year and subsequent years.

In case of CIT v. Yamaha Motor India Private Limited (2009) 226 CTR (Del) 304, the assessee claimed depreciation on discarded assets which were written off during the previous year. The AO disallowed the claim on the ground that the assets were not used for the purposes of business during the previous year. It was held that that the term ‘used’ appearing in section 32(1) comprise of both active use and passive use. Further, the expression ‘used for the purposes of business’ used in section 32(1) has to be read harmoniously with the term “discarded” meaning thereby that the assessee is entitled to claim depreciation as far as discarded asset is concerned if the asset has been used for the purposes of business in earlier years. Adopting a realistic approach and harmonious construction, the expression ‘used for the purposes of business’ appearing in section 32 when used in respect of discarded asset would mean that the use in the business need not necessarily be in the relevant previous year but in earlier previous years. Any other interpretation would lead to an incongruous situation because on the one hand the depreciation is allowed on discarded asset after allowing inter alia adjustment for scrap value, yet, on the other hand use would be required of the discarded machinery which use is not possible.

To conclude, the decision of the delhi high court is logical considering the existing provisions of the Act as regards allowability of depreciation on discarded asset. Either the Act must permit the residual value of the discarded asset to be written off completely in the year in which the asset is discarded or the interpretation adopted in the aforesaid judgement has to be accepted

Depreciation on leasing? An ageing puzzle

Under the Income Tax law, two most important conditions for tax depreciation claim pertain to ownership and usage of the asset. As is the case on any other contentious matter, history is replete with judicial pronouncements by courts on this subject. Though the condition on usage is more or less a settled issue,ownership condition still continues to keep the judiciary engaged particularly as new models of businesses are evolving. Entitlement of depreciation in a lease transaction has witnessed the maximum debate in recent times. The moot question being who shall be eligible to claim depreciation in a lease transaction — whether the lessor (person who hires or leases the asset for a consideration) or the lessee (who hires for business use).Before we dwell on leasing transactions, I must add that the issue on hire purchase is a law which has been settled way back in 1943. An administrative circular clarifies that where the terms of agreement provide that the asset shall eventually become the property of the hirer or confer on the hirer an option to buy the asset,the transaction shall be regarded as one of hire-purchase and he would be entitled to depreciation. The administrative guideline was predominantly dealing with a situation of a movable asset, though, without any specific reference. On the other hand, a land mark Supreme Court judgement in 1999 in the case of Mysore Minerals clarified that the condition of ownership must be assigned a wider meaning — any one in possession of property in his own title exercising such dominion over the property as would enable others being excluded and having right would be the owner. The fact that a formal deed was not executed and registered under the law would not be of relevance. In one stroke, the apex court diluted the definition of ownership and took a liberal view.

Of course, the law was subsequently amended to provide that insofar as the condition for legal ownership of an immovable property is concerned. In common parlance, a lease is understood as hiring of an asset for a periodic payment; parties involved in the transaction are classified as lessor and lessee whilst the periodic payment to be made by lessee is termed as lease rental. From an accounting standpoint, simplistically, lease can be classified in three forms– finance lease, operating lease and hire purchase. A lease is classified as a finance lease if it is for the entire economic life of the asset and under the lease arrangement all risks and rewards incidental to the ownership of the asset is transferred to the lessee.

The International Accounting Standards Committee defines finance lease as an arrangement where all the risks and rewards incident to ownership of an asset are with the lessee. Any lease other than a finance lease is operating lease. On the other hand, if under the lease agreement, the lessee/hirer has an option to acquire the asset at the end of the identified lease period, such arrangement shall classify as hire purchase.

Interestingly, the last part of definition is in conformity with the 1943 Board guideline, thereby suggesting the wisdom of the Indian administration.Admittedly, the line of distinction between a finance lease and a hire purchase is blurred and leaves a lot to interpretation. Interestingly, the interpretation of various forms of lease has been ratified and applied by different courts from time to time; the determination of whether a lease is a finance lease or operating lease or is in the nature of a hire purchase arrangement depends on the facts and substance of the transaction rather than the form of such arrangement. Indian Accounting Standard 19 on ‘Leases’ provide that in case of an operating lease, the lessor shall be eligible to claim depreciation in respect of leased asset; whereas in an finance lease the lessee becomes the economic owner of the asset and, therefore, should be entitled to claim depreciation on the leased asset.Under the Income tax Act, 1961, a tax payer is eligible to claim depreciation on an asset provided the asset is owned by such person and is being used for the purpose of his business. There is plethora of precedents where the claim of depreciation has been denied by tax authorities in case either or both of these tests are not met.The twin tests of ‘ownership’ and ‘use’ for claiming depreciation become even more critical in lease transactions, wherein the owner of the assets foregoes the possession and use of the asset; whilst the assets is used by lessee for his business.

The principles governing eligibility of lessor to claim tax depreciation under the lease arrangement is enunciated by administrative guidance issued by the CBDT in circulars 9/1943 and 2/2001. These circulars do not distinguish between the two kinds of lease arrangements and provides that in a lease, other than a hire purchase, the lessor is eligible to claim depreciation, provided the tests of ‘ownership’ and ‘use of the asset’ are satisfied. The circulars indirectly shows the thumbs down to accounting treatment of lease by providing that classification of asset in accordance with Accounting Standard 19 will not have implications on the allowance of depreciation to the lessor under the income tax laws. After the issuance of administrative guidance on depreciation in leasing transcations, there is no ambiguity insofar as depreciation in an operating lease situation is concerned. On the contrary, in case of finance lease there has been prolonged controversy over the determination of ownership of the leased asset and therefore the eligibility of lessor to claim depreciation on the asset leased under a finance lease arrangement. The principles for claiming tax depreciation provided unique planning opportunity to taxpayers and throw the issue open for varying interpretation.Increasingly, finance companies began funding purchase of asset under a finance lease arrangement. This mechanism enabled the financing companies to reduce their taxable income base by claiming depreciation as deduction against the income.

In other instances, the owner of the assets resorted to sale-and-lease back mechanism with the objective of realising value from tax depreciation on the asset by enabling the buyer (or lessor) claim depreciation on inflated cost of asset. However, in most such instances, the courts have held the transaction was a colourable device to evade taxes and disallowed the deprecation claim. Though the eligibility of a lessor to claim depreciation in finance lease has been a matter of debate courts have become increasingly alert on misuse of tax depreciation shield under the garb of finance lease. In a recent landmark decision of Marico Industries, a Mumbai Tribunal held that in a finance lease it is the lessee who becomes the owner of the assets for all economic purposes and therefore the depreciation on the leased asset shall be available to the lessee and not the lessor.

The Tribunal applied the principles enunciated by the Apex court in Asea Brown Boveri’s case ( though not on a tax related matter ) wherein the court held that a finance lease is essentially a financing arrangement whereby the lessee assumed the ownership of the asset in as much as it is the borrower who chooses the property to be purchased, takes delivery, enjoys the use of occupation of the property, bears the wear and tear and takes the risk of loss or damage. The decision of the Tribunal could well prove to be a turning point insofar as the claim of depreciation in a finance lease in concerned. Though the decision of Tribunal is not the last word on the question of law; nevertheless the ruling could take away the heat from long drawn debate over availability of depreciation in a finance lease Whilst the finality on the issue would need more time, tax payers and tax advisers would anxiously await the Supreme Court’s decision, which is soon expected to hear a sizeable bundle of appeals arising out of inconsistent High Court decisions. I would hope that the court would lay down principles, taking into consideration the inconsistency in the past decisions and align the decision (to some extent) with definitions under the Indian and International accounting standards. Of course, the facts of each individual case would be the deciding factor in each judgment.

Sec 43A of the IT Act Vs. AS 11

Suppose a machine was imported for one lakh US dollars when the exchange rate was Rs 45 per dollar. Both in the accounting records as well as in the tax records, the transaction would have been recorded debiting the asset concerned with Rs 45 lakh. But should the asset be financed by supplier’s credit or a specific borrowing for the purpose, the two records would now start pursuing divergent courses with any increase in the actual repayment due to devaluation of the rupee meanwhile vis-À-vis the dollar, swelling the actual cost of the fixed asset in the tax records even while leaving the accounting records undisturbed as it was On the contrary, any appreciation in the rupee vis-À-visthe dollar would have the opposite effect in the tax records while leaving the accounting records undisturbed once again. These then in brief are the respective mandates of Section 43A of the Income-tax Act, 1961 and Accounting Standard 11 (AS 11). AS 11 does not tinker with non-monetary items which fixed assets are. Instead, any notional increase or decrease in the rupee liability on the balance sheet date on the touchstone of the exchange rate prevailing on that date is required to be recognised with a corresponding debit or credit to the profit and loss account.Sagacious shift

Prior to the amendment made by the Finance Act, 2002 to Section 43A, a chronic tinkering was contemplated — any increase or decrease in rupee liability in respect of fixed assets acquired on deferred payment terms or with borrowed funds on account of fluctuation in the exchange rate between the currency in which the payment is required to be made vis-À-vis the rupee, was required to be added or, as the case may be, subtracted from the actual cost of the fixed asset each time there was a change in the exchange rate, thus giving rise to the nightmarish possibility of repeated tinkering with the asset account given the day-to-day fluctuations witnessed in the currency market, especially if the currency in which the payment is required to be made happens to be a floating currency. Mercifully, the amendment made a sagacious shift in favour of recognising the increase or decrease in such liability only at the time of actual payment, thus dispensing with the need to chronically tinker with the asset account for every notional increase or decrease in the rupee liability. To be sure, the objectives of a fiscal law and accounting standards cannot always be the same. AS 11 is right on notional increase or decrease in rupee liability being recognised at the balance-sheet date given the fact that otherwise the balance sheet would be guilty of under- or over-valuation of a liability. It is also right in not tinkering with the cost of the fixed asset given the fact that no increase or decrease in the fair value of the asset accrues merely on the strength of the gyrations in the currency market.

Cost of asset

One can understand a fiscal law providing for a heightened tax incentive such as depreciation on fixed asset and pro tanto there would be a divergence between the written-down value (WDV) of an asset in the tax records vis-À-vis its accounting records. While this may be unavoidable, the gulf between the two sets of records can be bridged by agreeing not to disagree at least on the issue of the cost of the asset. The I-T Act should allow any increase in the rupee payment on account of acquisition of a fixed asset as expenditure in one shot instead of condescending to amortise the same by way of depreciation. And when there is a reduction in rupee payments, the same should be treated as income straightaway. AS 11 is not payment fixated like Section 43A. Instead, it mandates revaluation of all monetary items on the balance sheet date. In other words, it has a balance sheet fixation which of course is understandable. One area where the two can converge is the cost of the asset — the I-T Act should emulate AS 11 in not tinkering with it in view of the fact that gyrations in the currency market by themselves do not add to, or detract from, the value of the asset.

TAX PLANNING THROUGH DEPRECIATION

DEPRECIATION AS A TOOL FOR TAX PLANNING :

Depreciation can be used as an effective tool for tax planning. According to section 32 (1), depreciation can be claimed in respect of building, machinery, plant or furniture and w.e.f. assessment year 1999-2000 depreciation on intangible assets such as know-how, patent rights, copyrights, trade marks, licenses, franchises, or any other business or commercial rights acquired on or after 1.4.98 can also be claimed, which are owned by the assessee and used for the purposes of business or profession.

It may be noted that for the purpose of depreciation “Building” includes roads, bridges, culverts ,wells and tubewells. Likewise, plant and machinery includes Typewriters, Photocopiers, Telex & Fax Machines, Computers, Tools and Books (used by the professionals). Depreciation is allowed at prescribed percentage, which varies between 5% to 100% for various blocks of assets on the written down value. However, as per second proviso to section 32(1),depreciation shall be restricted to 50% of the prescribed percentage in respect of such asset which is acquired by the assessee during the previous year and put to use for the purpose of business or profession for a period of less than 180 days in that previous year. Another important point is that the first proviso to section 32(1) , which provided for full deduction of the actual cost of any machinery or plant costing upto Rs.5,000,has been omitted by the Finance Act , 1995 with effect from Assessment Year 1996 -97. However depreciation on professional books has been allowed at the rate of 100% with effect from Assessment Year 1996-97.

CLAIMING 100% DEPRECIATION & REDUCING TAX LIABILITY :

Wind mills and other special devices including electric generators and pumps running on wind energy, bio-gas plant, bio-gas engines, agricultural and municipal waste conversion devices producing energy and electrically operated vehicles including battery powered or fuel-cell powered vehicles, solar power generating systems etc., are some of the items included in machinery and plant which are eligible for 100% depreciation. An existing industry having considerable taxable profits may plan diversification in the industries and can claim 100% depreciation in respect of the new plant and machinery. In the recent past many companies have successfully done such tax planning, which is absolutely within the legal frame work and in accordance with the Govt. policy to promote investments in certain sectors.

IS IT MANDATORY TO CLAIM DEPRECIATION OR IS TAX PLANNING POSSIBLE BY DEFERRING THE CLAIM ?

In the case of – CIT v. Mahendra Mills and ors. [2000] 243 ITR 56 (SC). Supreme court has held that the provision for claim of depreciation is for the benefit of the assessee. If he does not wish to avail of that benefit for some reason, the benefit cannot be forced upon him. It is for the assessee to see if the claim of depreciation is to his advantage. Income under the head ‘ Profits and gains of business or profession’ is chargeable to income-tax under section 28 and income under section 29 is to be computed in accordance with the provisions contained in sections 30 to 43A. The argument that since section 32 provides for depreciation it has to be allowed in computing the income of the assessee cannot in all circumstances be accepted in view of the bar contained in section 34. If section 34 is not satisfied and the particulars are not furnished by the assessee his claim for depreciation under section 32 cannot be allowed. Section 29 is thus to be read with reference to other provisions of Act. It is not in itself a complete code.

If the revised return is a valid return and the assessee has withdrawn the claim of depreciation it cannot be granted relying on the original return when the assessment is based on the revised return. Allowance of depreciation is calculated on the written down value of the assets, which written down value would be the actual cost of acquisition less the aggregate of all deductions “actually allowed” to the assessee for the past years. “Actually allowed” does not mean “notionally allowed”. If the assessee has not claimed deduction of depreciation in any past year it cannot be said that it was notionally allowed to him. A thing is “allowed” when it is claimed. A subtle distinction is there when we examine the language used in section 16 and sections 34 and 37 of the Act. It is rightly said a privilege cannot be a disadvantage and an option cannot become an obligation. The Assessing Officer cannot grant depreciation allowance when the same is not claimed by the assessee.

NON-CLAIMING OF DEPRECIATION :

Non-claiming of depreciation may at times be more beneficial rather than claiming it. Accordingly one may plan not to claim depreciation in a particular year and to claim the same in a subsequent year, in which depreciation can be claimed at a higher written down value due to non-claiming of depreciation in the earlier year. In this process the benefit of depreciation is not lost but it is deferred only.

In the following situations it is advisable not to claim the depreciation-

i) In case where certain deductions and allowances like brought forward investment allowance may lapse for insufficiency of profits, in a particular year, if the depreciation is claimed.

ii) In case of non-corporate assessees expecting higher profit in the subsequent year or years, if their present income is falling in lower tax bracket, as claim of depreciation in the subsequent years will help them reducing the taxable profits and thereby saving tax, which would have been payable at a higher rate considering the slab rates.

Non-claiming of depreciation may be used for avoiding the provisions of section 50. It may be noted that profit on sale of depreciable asset is treated as Short Term Capital Gain under section 50. Therefore, if any person desires to hold an asset for the purpose of re-sale at a future date, particularly in cases where such asset is retained for such period which may entitle him to claim it as a long term asset, then it is advisable not to claim depreciation on the same. In such a process, the profit on sale of the asset will be beyond the mischief of sec. 50 and shall be treated as Long Term Capital Gain (LTCG). As a result such assessee will be entitled to the benefit of cost inflation index as well as the concessional rate of tax on LTCG.

Further w.e.f. assessment year 1997-98 depreciation can be carried forward for 8 assessment years only, as such it has become more important to claim it only in the year in which taxable profit arises.

CLAIM OF DEPRECIATION ONLY WHEN AN ASSET IS USED FOR BUSINESS :

One of the stipulation for claiming depreciation under section 32(1) is that the assessee had used the asset for the purpose of business or profession. When an asset will be considered to have been used, has been a matter of controversy. Some important Judicial views are as under :-

Punjab National Bank Ltd. v. CIT 141 ITR 886 (Del.)– That depreciation had to be allowed in full on the lifts and the air-conditioning plant since they were being used by the assessee for the purpose of its business, the fact that they might also be utilised by the tenant of one of the floors or customers or visitors did not make any difference. Plant or machinery could be said to be used by somebody else if such other person has control over the same. It is the control which determines who is using it. “User” means not only getting benefit, but also controlling, running, stopping, repairing, replacing, etc.

Whittle Anderson Ltd. v. CIT 79 ITR 613 (Bom.)- The word “used” should be understood in a wide sense so as to embrace passive as well as active user ; when machinery is kept ready for use at any moment in a particular factory under an express agreement from which taxable profits are earned, the machinery can be said to be “used” for the purposes of the business which earned the profits although it was not actually worked. Western India Vegetable Products Ltd. v. CIT 26 ITR 151 (Bom.)- When a business is established and is ready to commence then it can be said of that business that it is set up; but before it is ready to commence business it is not set up. There may however be an interval between the setting up of the business and the commencement of the business and all expenses incurred during that interval would be permissible deductions.

CWT v. Ramaraju Surgical Cotton Mills Ltd. 63 ITR 478 (SC)- A unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up. It is only when the unit has been put into such a shape that it can start functioning as a business or a manufacturing organisation that it can be said that the unit has been set up.

CIT v. Industrial Solvents and Chemicals (P) Ltd. 119 ITR 608 (Bom.)– Even if the finished product obtained by the assessee could be termed as sub-standard, it cannot be contended that because the end product then obtained was not of proper standard, the business of the assessee cannot be said to have been set up though the plant was being worked.

Grasim Industries Ltd. v. CIT 32 TTJ 329 (Bom-Trib.)- A company need not have actually commenced production to claim depreciation. It was enough if it was merely ready to produce. The bench ruled that the plant was “ready for” business in fiscal 1992-93, and hence eligible for claiming depreciation.

TREATMENT OF REPAIRS- WHETHER ON REVENUE OR CAPITAL ACCOUNT :

It is more or less an age old tradition to treat only small repairs to an asset as revenue expenditure. However, there are occasions when heavy repairs are undertaken and/or one whole item of Plant & Machinery may require replacement. The taxing authority tends to immediately jump to the conclusion that the same is on capital account. The assessee also succumbs to the assertion of the authorities under ignorance of law. The result, no appeal thereby inviting heavy taxation.

Some situations when repairs/replacement may be treated as Revenue expenditure and Capital expenditure are given below – 1. A factory has got 2 or 3 electric motors. If one of them is worn out and replaced by a new motor of similar capacity involving a heavy cost, in such case, the expenses would be treated as revenue expenditure. The entirety of Plant & Machinery in a factory is to be treated as one unit capable of carrying on the business. If any one part of that unit, say an electric motor in this instance, is replaced by another motor of similar capacity, it is a repair to the whole gamut of Plant & Machinery and therefore allowable as revenue expenditure.

2.If the same factory is reconstructed by replacing the old Plant & Machinery by new ones of bigger capacity then it will be a clear case of reconstruction and the cost of new Plant & Machinery will be treated as capital expenditure.

3.If a wall is constructed as covered by the obligation of a tenant as per conditions of a leasehold property, such cost incurred for reconstruction of the wall will be treated as revenue expenditure. It is a case similar to the replacement of a few units of worn out railway track by a company out of its entire long track, which was held as revenue expenditure by the courts.

4.Cost of replacement of petrol engine of a bus by a diesel engine to continue to run it will also be treated as revenue expenditure.

5.A fleet owner purchases a second hand car with a view to use its parts to repair his own other cars. It is a simple case of revenue expenditure as the car was purchased for using its parts to repair the other cars and not to run it as a car.

6.A company undertook extensive repairs to its own building by repairing/replacing some columns and beams and plastering with cement with the process of guniting which involves heavy expenses. As in such case no structural alteration was made to the building and the assessee carried out only those repairs which were absolutely necessary to preserve and maintain the building, the expenditure was not capital expenditure. The magnitude of the repair was in consonance with the magnitude of the wear and tear the building had suffered.

7.A Company doing business in automobile parts takes lease of an old building, the owner of which is incapable of repairing/reconstructing the same. The lessee company wants to reconstruct the building at its own cost to run its business. In such a case, it may be stated that expenditure was incurred to relieve the assessee from a series of future revenue outgoings and therefore the expenditure would be on revenue account and therefore allowable as such.

8.Expenses incurred on arrear repairs to restore the property to usable state are treated as revenue expenditure.

9.In case heavy expenses are incurred for extensive repairs to a lease property without bringing into existence a new asset, the cost incurred had to be allowed as general revenue expenditure, even if not as current repairs.

10.In case of a cinema hall premises taken on monthly rent with no long term lease if expenses are incurred to remove defects in cinema building pursuant to direction of an order of the District Magistrate in order to get a renewal of the cinema hall license, the entirety of such expenses partakes the nature of repairs under a statutory direction. The same are therefore allowable as general revenue expenditure.

11.Magnitude of an expenditure on repairs is immaterial consideration in deciding whether it is on a revenue account or capital account. It is the nature of alteration, renovation, repairs etc. which is relevant.

12.Due to fire in factory and office premises, as also residential quarters of the Managing Director, if expenses are incurred for repairs and reconstruction, such expenditure incurred for putting the original building in proper working shape does not bring into existence a new building. As such the same is considered as revenue expenditure

13.An assessee manufacturing cars contributed an amount necessary to improve nearby approach roads belonging to the Government. The money spent was not to bring about any asset or advantage of enduring benefit to the assessee, but to run the business effectively and conveniently and hence, in such case the amount is deductible as revenue expenditure, though it was spent voluntarily by the assessee in view of business interest.

14.If expenses are incurred by a cotton mill towards remodelling of furniture in its own retail depots, such expenditure is deductible on revenue account.

15.If an assessee has taken three buildings on a short term lease and effected improvement to those by construction of partition walls, wall panelling, show windows etc. the expenses so incurred will be treated on revenue account in view of the facts that the assessee was not the owner of the premises and there was no longer term lease in favour of the assessee.

FACTORS RELEVANT TO DETERMINE THE NATURE OF EXPENSES ON REPAIRS :

1.If the repair is not resulting into a new asset or any additional asset, it will be revenue expenses otherwise it will be capital expenditure.

2.If the expenses are incurred on ground of commercial expediency, the same may be considered as revenue expenditure.

3.If any expenses are essentially incurred for reconstruction or modification as per direction of any statutory authority, it may be treated as revenue expenditure.

4.In determining the nature of expenditure, the nature of assessee’s business and overall circumstances have to be considered. No uniform test can be applied to all situations.

The above list of items are not complete, but it is not possible to cover as the list is very vast. In case of any clarification or feedback please contact me at [email protected].

(Republished With Amendments)