Conversion Fee on conversion of land from industrial to commercial
Business setting up of
While expenses on setting up new business are capital, expenses on expansion or extension of existing business are revenue- If the expenses are incurred in connection with the setting up of a new business, such expenses will be on capital account. But where the setting up does not amount to starting of a new business but expansion or extension of the business already being carried on by the assessee, expenses in connection with such expansion or extension of the business must be held to be deductible as revenue expenditure.
[Kesoram Industries & Cotton Mills Ltd. vs CIT {1992}]
[CIT vs. Ghanashyam Steel Work Ltd. {2010}]
Whether new asset was created, or business was just maintained, will decide nature of expenditure
In deciding whether a particular expenditure is capital or revenue in nature, what the courts have to see is whether the expenditure in question was incurred to create any new asset or was incurred for maintaining the business of the Company. If it the former, it is capital expenditure. If it latter, it is revenue expenditure.
[Dalmia Jain & Co. Ltd. vs CIT {1971}]
To decide whether expenditure is capital or revenue in nature, the following points of distinction should be kept in mind:
a) Acquisition of fixed assets v. Routine expenditure – Capital expenditure is incurred in acquiring, extending or improving the fixed asset, whereas revenue expenditure is incurred in the normal course of business as routine business expenditure.
b) On-going business – Expenditure incurred by an assessee in respect of on-going business would be revenue expenditure. For instance, where marketability of new model is entirely dependant on sale promotion and holding of ‘training/seminar’ so that new model is well received in market, expenditure incurred on sale promotion and holding of training/seminar cannot be treated as capital expenditure.
[Honda Siel Cars India Ltd. vs. CIT {2006}]
c) Facilitating trading operations – If advantage consists of merely facilitating trading operations of assessee or enables management to conduct business more profitably or effectively, expenditure would be on revenue account, even though advantage may ensure for indefinite period.
[Honda Siel Power Products Ltd. vs. CIT {2006}]
The expenditure is treated as revenue, if it is not made for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce profits. If any such asset or advantage for the enduring benefit of the business is acquired or brought into existence, it would be immaterial whether the source of payment was capital or the income of the concern or whether the payment was made once and for all or was made periodically. It is only in those cases where one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of fixed capital, it would be of the nature of capital expenditure. If it was part of circulating capital, it would be of the nature of revenue expenditure.
[Assam Bengal Cement Co. Ltd. vs. CIT {1972}]
Nexus with profit-earning process
If expenditure can be regarded as integral part of profit-earning process, it is revenue expenditure.
If the outgoing expenditure is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit-earning process and not for the acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure.
Conversion of land used from industrial to commercial doesn’t tantamount to creation of an asset/enduring benefit.
Kindly advice whether the said expenditure will be revenue or capital?
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