Business expenditure — Capital or revenue expenditure — Tests — Ware-house business — Expenditure incurred to raise floor level of existing godown to avoid damage to goods and to retain customers — No new asset created — Expenditure incurred for carrying on and conducting business and forming integral part of profit-earning process — Deductible revenue expenditure

Business expenditure — Capital or revenue expenditure — Tests — Ware-house business — Expenditure incurred to raise floor level of existing godown to avoid damage to goods and to retain customers — No new asset created — Expenditure incurred for carrying on and conducting business and forming integral part of profit-earning process — Deductible revenue expenditure

The assessee was a warehouse keeper. Due to flooding during the rains, when the customer’s goods which were clothing material manufactured for export got damaged the customer cautioned the assessee that if no remedial measure was taken it would have to change its business arrangement with the assessee. Therefore, the assessee raised the floor height to preserve the goods of its customers. Thereafter, the customer raised the warehousing charges from Rs. 1.20 per sq. ft. per week to Rs. 1.50 per sq. ft. per week.

On the question whether the expenditure incurred by the assessee for raising the floor height was revenue expenditure as claimed by the assessee or capital expenditure as claimed by the Department, the Bombay High Court held as under:

“i) The test to be applied whether an expenditure is revenue expenditure or not depends on whether the expenditure is related to the carrying on or conduct of the business and is an integral part of the profit-earning process. If the expenditure is so connected with the carrying on of the business that it may be regarded as an integral part of the profit-earning process, the expenditure cannot be treated as a capital expenditure but is revenue expenditure.

ii) The expenditure was incurred by the assessee wholly and solely to ensure that the existing business with the customer, which offered attractive returns to it was continued uninterrupted. The expenditure incurred by the assessee had direct relation to the business with the customer because the assessee had also received corresponding increased compensation from the customer. The expenditure did not bring into existence any new asset. There was a benefit by way of continuing business with the customer or increase in compensation from the customer. The assessee had achieved both these objectives by incurring the expenditure. The assessee had satisfactorily explained that the expenditure was for the purpose of conducting its business and increase in profit. The expenditure so incurred was related to the carrying on or conducting of warehouse business of the assessee and hence, it was as an integral part of the profit-earning process. The expenditure, therefore, could not be treated as capital expenditure but should be treated as revenue expenditure.”