Business expenditure – Section 37(1) – Capital or revenue expenditure – Payment made by assessee under agreement to an entity for additional infrastructure for augmenting continuous supply of electricity – No asset acquired – Expenditure revenue in nature and allowable

Business expenditure – Section 37(1) – Capital or revenue expenditure – Payment made by assessee under agreement to an entity for additional infrastructure for augmenting continuous supply of electricity – No asset acquired – Expenditure revenue in nature and allowable

Under an agreement to establish additional infrastructure facility to ensure uninterrupted power supply to it, the assessee made a lump sum payment to a company. The A.O. held that the amount paid by the assessee was to improve its asset and was non-refundable and even if the assessee received ‘services’ from the company in future, it would be separately governed by a ‘separate shared services agreement’ and hence the amount paid was not ‘wholly and exclusively’ for the assessee’s business and that it was spent towards the acquisition of a capital asset. The A.O. disallowed the expenditure claimed u/s 37(1) and also rejected the assessee’s alternate claim to depreciation.

The Commissioner (Appeals) held that the expenditure was capital expenditure, but allowed depreciation. The Tribunal held that the expenditure was revenue in nature and allowed the assessee’s claim for deduction.

On appeal by the Revenue, the Madras High Court upheld the decision of the Tribunal and held as under:

‘i)    The Tribunal had rightly examined the nature of the transaction and held that the lump sum payment made by the assessee for the development of infrastructure for uninterrupted power supply to it was revenue expenditure u/s 37(1).

ii)    Though the assessee had parted with substantial funds to the company, the capital asset continued to remain the property of the company.’