By TIOL News Service

MUMBAI, JUNE 04, 2018: THE ISSUE IS - Whether enduring benefit if any, earned by a retailer while expanding his existing business by way of opening new stores, will not render expenditure incurred for purpose of setting up of new stores as capital expenditure. YES IS THE ANSWER.

Facts of the case:

The assessee company is engaged in the business of organised retail, i.e. sourcing and selling of fruits, vegetables, food article, groceries, fast moving consumer goods and other goods of daily use through its different outlets. For the A.Y under consideration, it had filed the return declaring loss of Rs.293,34,33,890/-, which was subject to a scrutiny assessment, wherein the AO noted that the assessee had added some new stores/outlets in the same line of business. In the books of account, assessee had debited such expenditure under the head 'Project Development Expenditure' which was not debited in the P&L A/c, but considered as a part of Capital Work-in-Progress. While filing its return, the assessee claimed that a part of such expenditure amounting to Rs.60,79,24,773/- debited under the head 'Project Development Expenditure' was revenue in nature, and since it was incurred for purposes of a business already in existence, the same was an allowable expenditure u/s 37(1). The explanation furnished by assessee was not found satisfactory by the AO, who noted that in the books of account, the assessee had shown such expenditure as pre-operative in nature. He therefore disallowed the same and added it to the total income of assessee. On appeal, the CIT(A) directed the AO to allow such expenditure as revenue expenditure.

Tribunal held that,

++ it is not in dispute that the business of retailing being carried out by assessee commenced in the earlier period. So far as the expenditure in question is concerned, the same is stated to have been incurred in the process of setting-up new retail outlets. It is also not in dispute that in the new outlets, assessee is continuing with its existing business of retailing. Therefore, factually speaking, the adding of new stores/outlets is nothing but an expansion of the existing line of business, i.e. retailing. So far as the nature of expenditure of Rs.60,79,24,773/- is concerned, a perusal of the details reveal that the expenditure is on account of salaries, machinery and other repairs, travelling and conveyance, professional fee, electricity expenses, telephone expenses, etc. The items of expenditure clearly shows that it is revenue in nature and, in fact, the AO also does not dispute the said position. Pertinently, the objections of AO were – firstly, that the expenses are pre-operative in nature; secondly, that such expenses would provide enduring benefit to the business; and, thirdly, that assessee has itself treated such expenses in the books of account to be capital in nature by debiting it in capital work-in-progress account;

++ so far as the objection of AO, based on the treatment accorded by the assessee in its books of account is concerned, the same cannot be determinative of the issue on hand inasmuch as it is the applicable legal position which would govern the allowability of expenditure and not merely the manner in which it has been treated in the account books. So far as the stand of the Revenue that it provides enduring benefit to the business of the assessee is concerned, the same does not ipso facto justify the treatment of such expenditure as capital in nature having regard to the facts of the case. Notably, in the instant case, the business of retail is already set-up and the impugned expenditure, which is otherwise revenue in nature, relates to expansion of the existing line of business and not for a new line of business. Thus, even if such expenditure was to provide an enduring benefit to the business, the same is in revenue field and thus is liable to be treated as revenue expenditure.

(See 2018-TIOL-785-ITAT-MUM)