JUNE 04, 2018

By Subhashree R

AWAY from the limelight on the classification of expenditure on deep discounts offered by e-commerce companies as capital or revenue, ITAT, Delhi in Turner India International v. DCIT - 2018-TIOL-795-ITAT-DEL was also seized with a somewhat similar question. Issue was the allowability of relocation expenses incurred on shifting of capacitors, UPS etc., and on accommodation, food and travel of employees. While the assessee claimed it as revenue expenditure, the revenue authorities sought to classify it as capital expenditure.

There is a plethora of cases decided by Tribunals and High Courts as well as the Supreme Court, yet, the issue has not yet attained finality. For instance, in Madura Coats v. Income Tax Officer, - 2003-TIOL-302-ITAT-MAD-TM the Third Member went on to hold in favour of the assessee that expenses incurred on shifting of administrative office from Madurai to Bangalore were revenue in nature. It is the nature of the expense rather than its quantum or enormity that would decide whether it was revenue or capital. Not every expenditure which gives an enduring benefit would necessarily be capital in nature.

Coming to the facts of Turner, the assessee had moved to a new premises and hence, shifted its assets and employees to a more centrally located place in Mumbai. Holding that the shifting of an office is not a regular phenomenon and that by moving to a centrally located place, the assessee would derive enduring advantage, the ITAT upheld the order of the DRP in this regard. However, this decision appears to be focusing on just one test - that is whether the expenditure is a recurring one or a one -time feature entailing enduring benefit. The question remains whether shifting of an office is the same as setting up or creation of a new business premises.

In the oft-quoted judgement of Sithalpur Sugar Works Ltd - 2002-TIOL-2677-SC-IT, the Supreme Court held that expenses incurred on shifting of factory- dismantling of machinery and setting it up in a different, better location would be capital expenditure since there was improvement in the profit making apparatus. The assessee had shifted the factory since raw material of good quality was not available at the earlier site and it was also ravagedby floods. However, numerous other judgments have relied on theruling of the Supreme Court in Empire Jute - 2002-TIOL-238-SC-IT-LB, as regards the test of enduring benefit that 'It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test'. Thus it may be inferred that enormity of the expense or frequency may not bring it under the realm of capital expenditure.

Businesses operate in a dynamic environment and there can be a number of reasons - administrative convenience, statutory requirement, environmental concerns, requirement of additional space and so on for a business to relocate within a state or outside. Let us take a look at a few interesting decisions.

i. Shifting of office to save business from discontinuance [2012-TII-175-ITAT-DEL-TP] - has been held to be an expenditure in the capital field. The assessee had shifted its office to avoid the risk of sealing of the premises by the metro authorities. However, for purposes of comparison to apply transfer pricing provisions, the expenditure was to be considered as an 'abnormal' expenditure and was not included.

ii. Shifting of plant and machinery consequent to sale of land [2013-TIOL-1439-ITAT-HYD] - has been held to be revenue expenditure since it did not lead to any enduring benefit, increase in capacity etc.

iii. Shifting occasioned by internal pressures is capital while that occasioned by external pressure may be revenue [2006-TIOL-514-HC-MAD-IT] - The High Court of Madras concluded the nature of benefit accruing to the assessee who shifted the factory owing to public unrest over it effluent treatment measures, was revenue in nature. The Court was of the opinion that if the shifting of the factory as on account of labour unrest, the expense would have been capital in nature. It opined that ' If the very survival of an assessee, in the existing place itself is at stake, the question of applying the test of enduring benefit does not arise'.

iv. Store relocation expenses [2016-TIOL-1200-ITAT-DEL] - in case of the assessee engaged in the business of selling pizza were held to be in the ordinary course of the business and hence revenue in nature.

v. Expenses to shift old machinery to make way for new machinery [2013-TIOL-876-HC-KAR-IT] - has been held to be capital expenditure since it would give the assessee enduring benefit of better and efficient production for some period. However, expenditure on relocation of assets within the factory has been held to be revenue in nature by other high courts [2006-TIOL-78-HC-MAD-IT], [2015-TIOL-2961-HC-MUM-IT] and the issue is pending before the Supreme Court.

vi. Expenses on shifting of corporate office and personnel [2015-TII-340-ITAT-JAIPUR-TP] - can qualify as revenue expenditure since it only facilitates business and no asset is created. In the facts of the case, the Court had approved the charging of the expenses to the amalgamation reserves.

vii. Expenses in relation to shifting of administrative office [2003-TIOL-302-ITAT-MAD-TM] - post the merger of three companies was held to be revenue in nature on the reasoning that no asset was created; a businessman would try to ensure some benefit out of every expenditure and further ensuring that such benefit endured for a long time would not make it capital in nature.

viii. Expenses in relation to relocation incurred after the date of approval of merger [2008-TIOL-97-ITAT-DEL-SB] would be in nature of restructuring expenses and should be amortised as per Section 35DD and cannot be allowed as deduction under Section 37(1). The assessee had taken decision to shift its office from Delhi to Kolkata in order to improve synergy with its sister concern and obtained permission from the Registrar. Later a decision was taken to merge the entities. The assessee argued that the decision to relocate was a commercial decision and the expenses would qualify for deduction under Section 37. However, it was held that since the actual shifting took place after the approval of the proposal of merger, the expenses incurred wholly and exclusively in connection with the merger and would have to be amortised as per Section 35DD.

ix. Expenditure on shifting of machinery would be capital [2003-TIOL-1172-HC-MAD-IT] in nature while shifting allowance paid to employees would be revenue in nature.

x. Expenditure on legal opinion regarding relocation [2003-TIOL-1171-HC-KOL-IT] has been held to be revenue in nature.

The argument of capital expenditure may appear logical when the factory itself is relocated, as in the case of Sitalpur Sugar, however,it does not seem to be a correct inference when the relocation is occasioned by factors beyond the control of the assessee; the administrative office is relocated; or when expenditure on accommodation or food of employees involved in shifting is capitalized. While assessees have been granted relief based on facts and the interpretation of 'enduring benefit', the issue is likely to remain a bone of contention between the assessee and the revenue authority. Thus, businesses need to factor in the same while taking decisions regarding relocation for various reasons including amalgamation/ merger, exhaustion of area-based exemptions or ease of operations.

[The author is an Advocate, Direct Tax Practice, Lakshmi kumaran & Sridharan, New Delhi and the views expressed in this article are strictly personal.]