Capital expenditure vs.Revenue expenditure â€“ A synopsis

Direct Taxes (including International Taxation) | By ALOK PATNIA | Last updated on Oct 5, 2017

The most seeked upon parameters to judge whether expenditure is revenue or capital is to consider whether ownership is created or not. Therefore where a company contributes huge amount for electric lines and where a company contributes for school building for which the ownership shall vest with Municipal Corporation it was held to be revenue expenditure. Further, where for the purpose of getting raw material at a place near to its factory, the assessee has contributed amount for construction of railway lines. The rights and ownership of which shall obviously lie with the Government. Hence, it is revenue in nature. Payment to workers of retrenchment compensation on closure of business (Revenue or Capital) – Â Â Where only one unit of business is closed down then its Revenue expenditure and where the entire business is closed down then itâ€™s a Capital expenditure. Replacement of parts (Revenue or Capital) â€“It is revenue expenditure unless it increases physical output capacity and which can be quantified. For example â€“ if replacement of a particular part increases the installed capacity from 1 lakh units to 1.5 lakh units then itâ€™s a Capital expenditure. However, where only petrol engines are replaced by diesel engines then its Revenue expenditure as there has been no creation of new assets. Whether the following deductions are allowable as deduction or not?

S. No	PARTICULARS	ALLOWABILITY	REMARKS
1	Cost of shifting the plant to another place	Â Â Â Â NO	Capital expenditure
2	Annual sum paid for use pf goodwill	Â Â Â Â YES	Revenue expenditure
3	Payment of royalty correlated with production YES	Â Â Â Â YES	Revenue expenditure
4	Advertisement expenditure by putting a neon sign board	Â Â Â Â NO	Capital expenditure
5	Embezzlement of cash by an employee	Â Â Â Â YES	Revenue expenditure
6	Amount spend for suit filed against a person for infringing trademark	Â Â Â YES	Revenue expenditure
7	Sum paid for training of employees	Â Â Â YES	Revenue expenditure
8	Traveling expenses of a Director paid on a foreign tour for negotiation of purchase of machinery	Â Â Â YES	Revenue expenditure
9	Compensation paid to widow and children of deceased employee as per order of court	Â Â Â YES	Revenue expenditure
10	Â Stock lost/destroyed by fire	Â Â Â Â YES	Revenue expenditure
11	Interest paid on money borrowed for dividend payment	Â Â Â Â YES	Revenue expenditure
12	Consultancy fees paid for improvement of quality	Â Â Â Â YES	Revenue expenditure
13	Replacement cost of petrol engine by diesel engine	Â Â Â Â YES	Revenue expenditure
14	Legal expenses incurred in defending a suit against Director of the Company	Â Â Â Â YES	Revenue expenditure
15	Voluntary Gratuity paid to legal heirs of executives who died abroad	Â Â Â Â YES	Revenue expenditure

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S. No	PARTICULARS	ALLOWABILITY	REMARKS
1	Cost of shifting the plant to another place	Â Â Â Â NO	Capital expenditure
2	Annual sum paid for use pf goodwill	Â Â Â Â YES	Revenue expenditure
3	Payment of royalty correlated with production YES	Â Â Â Â YES	Revenue expenditure
4	Advertisement expenditure by putting a neon sign board	Â Â Â Â NO	Capital expenditure
5	Embezzlement of cash by an employee	Â Â Â Â YES	Revenue expenditure
6	Amount spend for suit filed against a person for infringing trademark	Â Â Â YES	Revenue expenditure
7	Sum paid for training of employees	Â Â Â YES	Revenue expenditure
8	Traveling expenses of a Director paid on a foreign tour for negotiation of purchase of machinery	Â Â Â YES	Revenue expenditure
9	Compensation paid to widow and children of deceased employee as per order of court	Â Â Â YES	Revenue expenditure
10	Â Stock lost/destroyed by fire	Â Â Â Â YES	Revenue expenditure
11	Interest paid on money borrowed for dividend payment	Â Â Â Â YES	Revenue expenditure
12	Consultancy fees paid for improvement of quality	Â Â Â Â YES	Revenue expenditure
13	Replacement cost of petrol engine by diesel engine	Â Â Â Â YES	Revenue expenditure
14	Legal expenses incurred in defending a suit against Director of the Company	Â Â Â Â YES	Revenue expenditure
15	Voluntary Gratuity paid to legal heirs of executives who died abroad	Â Â Â Â YES	Revenue expenditure

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