26 distinct circumstances to differentiate between capital and revenue expenditures

The word ‘capital’ connotes permanency and capital ex­penditure is closely akin to the concept of securing something, tangible or intangible property, corporeal or incorporeal right, so that it could be of a lasting or enduring benefit to the enterprise in issue. Revenue expenditure, on the other hand is operational in its perspective and solely intended for the furtherance of the enterprise. This distinction, though simple and well accepted, yet is susceptible to modification under peculiar and distinct circumstances.”

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Distinct circumstances to differentiate between capital and revenue expenditures

  1. Where expenditure has to be incurred for capital assets not owned by the assessee but by third parties like the-Governmental municipal authorities etc., such expenditure is de­ductible as revenue business expenditure.
  2. Commission of 40% paid to agents—Sanjivi & Co. v CIT [1966] 65 ITR 156.
  3. Expenses incurred for protection of capital assets of a business, which have already been acquitted Plastic Products Ltd. v CIT [1966] 62 ITR 209.
  4. Expenses of civil litigation in connection with maintaining an existing title to assets of the business. Transport Co. [P] Ltd. v CIT [1962] 46 ITR 1009.
  5. Initial expenses and renewal expenses incurred on securing a trade mark CIT v Century Spinning & Weaving Co. [1947] 15 ITR 105.
  6. Initial payment made under—Own Your Telephone Scheme.
  7. Amounts paid in advance out of price remaining unrecovered—CIT v Mysore Sugar Co. Ltd. [1962} ITR 249 (SC).
  8. Expenditure incurred in connection with “Kuries” Bank of Cochin Ltd. v CIT [1963] 50 ITR 311.
  9. Amounts paid to owner to take over the management and control of the entire business with all the powers and privileges of the original owner—CIT v P.N. Ethiraj [1962] 46 ITR 484.
  10. Expenditure incurred by a surgeon on his study tour to keep abreast of the latest tech­niques in surgery and treatment and to maintain his efficiency in the profession-CIT v Dr. P.N. Bell [1972] 84 ITR 25.
  11. Payment to the State to obtain monopoly rights to run buses through a route. Jugat Bus Service v CIT [1950] 28 ITR 13.
  12. Expenditure incurred to secure overdraft facilities with a bank for the purposes of its business—Jeevanlal Ltd. v CIT [1969] 74 ITR 753.
  13. Compensation paid to a director upon termination of his services, provided it is in the interest of the company—Indian Copper Corp. Ltd, v CIT [1960] 38 ITR 544.
  14. Expenditure to oppose the threatened nationalization of the Industry—Morgan v Tata & Lyle Ltd. [1954] 26 ITR 193.
  15. Expenditure for penalling walls to cover up cracks and ugly spots in a Cinema Theatre held on lease—Regal Theatre v CIT [1966] 59 ITR 449.
  16. Legal expenses on investigating and preparing accounts to ascertain the taxable busi­ness profits—C. Ag. IT v Annapurna Fanning & Fisheries Ltd, [1962] 44 ITR 640.
  17. Legal expenses in connection with resolving a winding up petition by some shareholder-Or v Jagajit Distilling & Allied Industries Ltd. [1961] 41 ITR 328.
  18. Amount paid to the contractee for allowing the contractor to finish the unfinished con­tracts was allowed as revenue expenses—CIT v Desment (India) [1982] 138 ITR 382 [Bom].
  19. Compensation or other payment made to terminate the service of a servant or a manag­ing agent in the interest of business—Noble Ltd. v Mitchell 11 TC 372.
  20. Any tax imposed by a local authority on the business of a company—Simbholi Sugar Mills Ltd. v CIT [1962] 45JTR 125.
  21. Expenditure incurred on levelling of land to be used as a playground by its workers and members of its staff—Teksons PvL Ltd. v CIT [1979] 120 ITR 745.
  22. Liability to the foreign company on the date of devaluation arising out of the import of its stock-in-trade was allowable as a trading loss—CIT v Samuel Osborn [1982] 135 ITR 799 (Cal).
  23. A lump-sum payment made prior to the year in question may be allowable in that year as business expenditure if it is referable to the earning of the profit of the year in ques­tion. Hindustan Aluminium Corpn. Ltd, v CIT [1983] 144 ITR 474 (Cal.).
  24. Expenditure incurred in connection with obtaining property on lease and in connection with the execution of the lease agreement 4s revenue expenditure and deductible as such—CIT v Bank of India [1987] 168 ITR 731 (Bom).
  25. Expenditure incurred in replacing old electric wiring in a cinema house is allowable as revenue expenditure, where the change of electric wires is necessitated due to wearing out and does not in any way alter the Cinema—CIT v Eagle Theaters [1987] 65 ITR 93 (Del).
  26. Expenditure incurred on replacement of thatched roof with asbestos sheets and barbed wire fence with compound was revenue expenditure—CIT v B V Ramachandrappa [1991] 191 ITR 34.
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