Case Law Details
NPR Auto Parts Manufacturing India Pvt. Ltd. Vs ITO (ITAT Bangalore)
Factory Shift ≠ Capital Asset – ITAT Al-lows ₹1.13 Cr as Revenue, Calls Out “Enduring Benefit” Overreach
In NPR Auto Parts Manufacturing India Pvt. Ltd., the Bangalore ITAT examined whether factory shifting expenses (₹1.13 crore) from rented premises to owned premises are capital or revenue in nature.
The Assessing Officer and CIT(A) treated the ex-penses as capital, relying on the “enduring benefit” theory and decisions like Sitalpur Sugar Works.
However, the ITAT disagreed and held:
- The assessee merely relocated existing opera-tions within the same industrial area.
- Expenses were limited to dismantling, transportation, and reinstallation of existing machinery.
- No new asset was created, and the profit-making apparatus remained un-changed.
Relying on Empire Jute Co. Ltd. and Loyal Super Fabrics, the Tribunal clarified:
- Enduring benefit test is not conclusive.
- Real test = whether there is capital field advantage or structural change.
- If expenditure only facilitates business opera-tions, it is revenue in na-ture.
The Tribunal distinguished Sitalpur Sugar Works, noting that case involved fundamental business restructuring, whereas here it was mere relocation.
Practical knockout punch by ITAT:
Even assuming it were capital:
- Allowing depreciation over years would create massive recomputation across multiple AYs.
- The issue is largely timing difference (revenue-neutral over time).
- Hence, insisting on capitalization would cause “herculean compliance burden with no real tax gain.”
FULL TEXT OF THE ORDER OF ITAT BANGALORE
The present appeal has been instituted by the assessee against the order of the NFAC, Delhi u/s 250 of the Act dated 19.04.2025 relevant for AY 2017-18
2. The assessee in the appeal memo has raised multiple grounds which are numbered as Ground Nos. 1 to 10. The Ground Nos. 1, 8, 9 & 10 are general grounds and accordingly, such grounds do not require any separate and independent adjudication. Hence, the same are hereby dismissed as infructuous.
3. The issue raised by the assessee through Ground Nos. 2 & 3 is that the learned CIT(A) erred in confirming the disallowances of shifting expenses of Rs. 1,13,40,045/- by treating the same as capital expenditure.
4. The facts in brief are that the assessee, a private company, is carrying on the business of manufacturing, processing, assembling, altering, cutting, improving, designing, trading etc of spare part & accessories etc for Motorcycle, automobiles and general-purpose engines. Earlier the factory of the assessee was situated at rented premises at No-87, D1, Malur 2nd Phase, KIDB Industrial Area, Nosigere, Hubli. During the year under consideration, the assessee shifted its factory from above-mentioned rented premises to owned premises at Plot No. 6-0 to 6-P, 4th phase, Hulimangala Hoskote Village, Malur Industrial Area, Malur Taluka. On account of shifting of the factory from old premise to new premise, the assessee claimed to have incurred expenditure for sum of Rs. 1,13,40,045/- which were debited to the profit and loss ac-count as a revenue expenses.
5. However, the AO held that the expenditure incurred on shifting of factory from old site to new site is in the nature of enduring benefit. Hence, the same is to be considered as capital expenditure. Thus, the AO disallowed the same and added to the total income of the assessee. However, the AO allowed depreciation on the same at 10% amounting to Rs. 11,34,000/- only.
6. The aggrieved assessee preferred an appeal before the learned CIT(A). Before the learned CIT(A), the assessee submitted that the AO erred in treating the shifting expenses of Rs. 1,13,40,045/- as capital expenditure. It was explained that during the year, the assessee had shifted its factory premises from the earlier location at Malur Industrial Area to another site within the same industrial estate. The shifting was undertaken mainly because the assessee moved from rented premises to its own premises. For this purpose, the assessee incurred expenses relating to transportation of machinery, shifting of office equipment, electrical items, books of accounts, computers, raw materials, finished goods and other assets from the old site to the new site. These expenses were incurred only to relocate the existing business operations and not for acquisition of any new asset.
7. The assessee further submitted that the shifting of factory premises did not result in creation of any new capital asset nor did it bring into existence any new profit-earning activity. The plant and machinery remained the same and continued to operate as be-fore. The shifting only facilitated the smooth continuation of the business at another place. Therefore, the expenditure was incurred in the course of carrying on the business and was wholly and exclusively for business purposes. It was also pointed out that the expenses mainly consisted of transportation charges, crane charges and other incidental expenses for shifting the existing plant and machinery and other assets. Such expenditure does not enhance the capacity, efficiency or life of the assets and therefore, the same cannot be regarded as capital in nature. The assessee further contended that merely because some benefit may last for a longer period, it cannot automatically be treated as capital expenditure. The real test is whether the expenditure results in creation of an asset or advantage in the capital field. In the present case, no such asset or enduring advantage in the capital field was created. The shifting only enabled the assessee to conduct its business operations more efficiently at a different location while leaving the fixed capital structure untouched. Hence, the expenditure was in the nature of business expenditure allowable under section 37(1) of the Act.
7.1 The assessee also relied upon several judicial precedents to contend that expenses incurred for shifting of a factory or business from one place to another are generally treated as revenue expenditure when no new asset comes into existence and when the expenditure merely facilitates the carrying on business. It was submitted that the tests laid down by the Hon’ble Courts clearly show that the character of expenditure depends upon the nature and purpose of the expenditure and not merely on the duration of the benefit derived.
7.2 The assessee therefore submitted that the shifting expenses incurred were purely operational in nature and were incurred for the purpose of running the business more efficiently. Since no new asset was created and no expansion of the profit-making apparatus took place, the expenditure should be allowed as revenue in nature under section 37(1) of the Act. The assessee in support of its contention placed reliance on the several case laws which are as follow:
1. Empire Jute Co. Ltd. v. CIT — 124 ITR 1 (SC)
2. CIT v. Associated Cement Companies Ltd. — 38 Tax-man 110A (SC)
3. CIT v. Ramaraju Surgical Cotton Mills — Supreme Court
4. Loyal Super Fabrics v. Commissioner of Income Tax (Appeals) —Madras High Court (Appeal No. 1048 of 2006)
5. Jayant Packaging (P.) Ltd. v. DCIT — [2021] 128 com 2 (Chennai Tribunal)
6. British Insulated and Helsby Cables Ltd. v. Atherton (HL decision laying down capital vs revenue test)
7.3 These decisions were relied upon to demonstrate that expenditure incurred for shifting of factory premises or facilitating business operations without creating any new as-set or enduring advantage in the capital field should be treated as revenue expenditure.
7.4 However, the learned CIT(A), after considering the submissions of the assessee and examining the materials on record, rejected the contention of the assessee that the shifting expenses should be treated as revenue expenditure and upheld the action of the Assessing Officer in treating the same as capital expenditure. The learned CIT(A) observed that the assessee had incurred expenditure of Rs. 1,13,40,045 for shifting facto-ry equipment from the old premises to a new premises. The nature of the expenses included crane charges, shifting charges and supervision charges incurred for dismantling and relocating machinery and other factory equipment. According to the learned CIT(A), the shifting of the factory from one location to another resulted in an enduring benefit to the assessee by enabling the business to operate in a better and more efficient environment over a period of time. Therefore, the expenditure could not be regarded as a routine business expenditure incurred for day-to-day operations.
7.5 The learned CIT(A) further noted that the facts of the present case were similar to the decision of the Hon’ble Supreme Court in the case of Sitalpur Sugar Works Ltd. v. CIT (1963) 49 ITR 160 (SC), wherein the assessee had dismantled its factory at one place and shifted it to another location by transporting machinery and re-erecting the same. The Hon’ble Supreme Court held that such expenditure was capital in nature as it was incurred not merely for carrying on the business but for setting up the concern with a greater advantage than its previous set up. The Hon’ble Court observed that the expenditure resulted in a permanent improvement in the profit-making apparatus and therefore had to be treated as capital expenditure. The learned CIT(A) held that the same principle squarely applied to the facts of the present case where the assessee shifted machinery and factory equipment to another location.
7.6 The learned CIT(A) also relied upon the decision of the Hon’ble Karnataka High Court in the case of CIT v. Wipro Ltd. (2014) 41 taxmann.com 190 (Karnataka). In that case, the High Court held that expenditure incurred for shifting old machinery to make way for installation of new machinery could give the assessee an enduring benefit of better and more efficient production over a period of time and therefore such expenditure could not be treated as revenue expenditure allowable under section 37(1) of the Act. Applying the same reasoning, the learned CIT(A) held that the shifting of machinery and equipment in the present case also resulted in enduring benefit and therefore had to be treated as capital expenditure.
7.7 The learned CIT(A) further referred to the principle laid down in British Insulated and Helsby Cables Ltd. v. Atherton [1925] 10 Tax Cases 155 (HL) wherein it was held that expenditure incurred once and for all with a view to bringing into existence an asset or ad-vantage for the enduring benefit of trade should ordinarily be treated as capital expenditure. The learned CIT(A) observed that shifting the factory to another site provided the assessee with a more advantageous location for carrying on its business and therefore the benefit derived from such expenditure was of an enduring nature.
7.8 The learned CIT(A) also referred to judicial precedents where similar expenses incurred for shifting or relocating factory operations were treated as capital expenditure. In particular, reliance was placed on the decisions in Bimetal Bearings Ltd. (210 ITR 945) and India Pistons Repco Ltd.( 143 ITR 424), wherein the Hon’ble Courts had held that expenditure incurred for shifting a factory due to labour unrest or similar circumstances resulted in an enduring advantage and therefore constituted capital expenditure.
7.9 After analysing the above judicial precedents and the facts of the present case, the learned CIT(A) concluded that the expenditure incurred by the assessee for shifting its factory machinery and equipment from the old premises to the new premises resulted in an enduring benefit and improvement in the business structure of the assessee. Accordingly, the learned CIT(A) held that the expenditure was capital in nature and could not be allowed as a deduction under section 37(1) of the Act. The action of the AO in capitalizing the expenditure of Rs. 1,13,40,045 was therefore confirmed.
8. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.
9. The learned AR before us filed a paper book running from pages 1 to 184 and con-tended that the authorities erred in treating shifting expenses as capital in nature. The assessee merely relocated its existing factory from a rented premises to its own premises within the same industrial area, without acquiring any new asset or expanding operations. The expenditure was incurred on dismantling, transportation, reinstallation, crane charges and incidental costs, which are necessary for continuity of business. It was argued that ownership of premises is irrelevant; the key test is whether a new asset or advantage in the capital field arises. Relying on judicial precedents, it was submitted that the test of enduring benefit is not conclusive and that expenditure facilitating efficient conduct of existing business remains revenue in nature. Since the profit-making apparatus remained unchanged, the expenditure qualifies for deduction under section 37(1) of the Act.
10. On the other hand, the learned DR before us supported the orders of the Assessing Officer and CIT(A), submitting that the expenditure is capital in nature. It was argued that shifting the factory from a rented premises to an owned premises provides a long-term structural advantage and enduring benefit to the assessee. The activity involved dis-mantling and reinstallation of machinery, which is not routine but affects the business setup. Relying on judicial precedents, it was contended that such relocation results in improved efficiency and better operational conditions over time. Therefore, the expenditure cannot be treated as revenue merely because no new asset is directly created. The Id. DR submitted that the enduring benefit test is satisfied and the expenditure was rightly capitalized, warranting no interference.
11. We have heard the rival contentions of both the parties and perused the materials available on record. The short issue before us is whether the expenditure of 71,13,40,045 incurred on shifting of factory from rented premises to its own premises is to be treated as capital or revenue in nature in the given facts and circumstances. The AO and Ld. CIT(A) have treated the said expenditure as capital in nature primarily on the ground that shifting of premises resulted in an enduring benefit to the assessee. For this proposition, the learned CIT(A) and departmental representative have primarily relied on the decision of the Hon’ble Supreme Court in Sita/pur Sugar Works Ltd. reported in 49 ITR 160. In that case, the assessee had shifted its factory from one location to another because the earlier location was commercially disadvantageous due to non-availability of quality raw materials and recurring floods. The Honhle Supreme Court held that the expenditure incurred on dismantling, transporting and re-erecting the factory was capital in nature. The Hon’ble Court observed that such expenditure was not incurred in the ordinary course of carrying on the business but was incurred for setting up the business in a more advantageous manner. It was further held that the expenditure resulted in a permanent improvement in the profit-making apparatus and therefore constituted capital expenditure. Importantly, the Hon’ble Court clarified that even if no new tangible asset is created, an advantage of enduring nature in the capital field would still render the expenditure capital in nature. Thus, the ratio of this decision is that where the expenditure leads to a structural improvement in the business or enhances the profit-making apparatus itself, it assumes the character of capital expenditure.
11.1 On the other hand, the assessee has relied upon the decision of the Hon’ble Supreme Court in Empire Jute Co. Ltd. reported 124 ITR 1, which lays down a more nuanced approach. In that case, the assessee had incurred expenditure for pur-chase of loom hours which enabled it to operate its machinery for longer duration. The Revenue sought to treat the same as capital expenditure on the ground of enduring benefit. However, the Hon’ble Supreme Court held that the test of enduring benefit is not conclusive and cannot be applied mechanically. The Hon’ble Court emphasized that what is relevant is the nature of the advantage in a commercial sense. It was held that if the expenditure merely facilitates the carrying on of business more efficiently without altering the fixed capital structure, the same would-be revenue in nature. The Hon’ble Court noted that no new asset was created and the profit-making apparatus remained unchanged, the expenditure was only part of the operating cost incurred in the process of earning profits. Therefore, the payment was held to be revenue expenditure
11.2 Further, reliance has been placed by the assessee on the decision of the Hon’ble Madras High Court in CIT vs. Loyal Super Fabrics reported in 304 ITR 78. In that case, the assessee had shifted its factory due to external compulsion arising from public objection and environmental issues. The Revenue had relied on Sitalpur Sugar Works Ltd (supra) to contend that the expenditure was capital in nature. However, the Hon’ble High Court distinguished the facts and held that the expenditure was revenue in nature. The Hon’ble Court observed that the shifting was not undertaken for improving profitability or gaining an advantage but was necessitated for the very survival of the business. It was further observed that the assessee had in fact lost certain advantages due to shifting, and any benefit arising was only incidental. The Hon’ble Court emphasized that the test of enduring benefit is flexible and cannot be applied in isolation without considering the surrounding circumstances. Where shifting is compelled by business necessity, the expenditure cannot be regarded as capital merely be-cause some benefit may endure. From the above decisions, it is clear that while Sita/pur Sugar Works Ltd (supra) supports the proposition that expenditure resulting in improvement of the profit-making apparatus is capital in nature, the decisions in Empire Jute Co. Ltd (surpa) and Loyal Super Fabrics (supra) clarify that the test of enduring benefit is not decisive and that the real test is whether the expenditure is incurred in the capital field or in the course of carrying on business operations. If the expenditure does not bring into existence any new asset or does not alter the capital structure, but merely facilitates the conduct of business, it is to be treated as revenue in nature.
11.3 Applying these principles to the facts of the present case, we find that the assessee has merely shifted its factory from rented premises to its own premises within the same industrial area. The expenditure incurred is towards dismantling, transportation and re-installation of existing machinery and other assets. There is no material to indicate that any new asset has been created or that there is any expansion or modification of the profit-making apparatus. The plant and machinery remain the same and continue to be used in the same line of business. Therefore, in our humble understanding, the facts are clearly distinguishable from Sitalpur Sugar Works Ltd.(supra), where the shifting was undertaken to fundamentally improve the business structure. On the contrary, the present case is more aligned with the principles laid down in Empire Jute Co. Ltd. (supra), as the expenditure merely facilitates the conduct of business without altering the capital base. Even otherwise, the principle laid down in Loyal Super Fabrics (supra) that the test of enduring benefit cannot be applied mechanically also supports the case of the assessee.
11.4 Accordingly, in our considered view, the reliance placed by the Revenue on Sitalpur Sugar Works Ltd(supra) is not applicable to the facts of the present case, whereas the principles laid down in Empire Jute Co. Ltd (supra). and Loyal Super Fabrics(supra) squarely support the claim of the assessee that the expenditure incurred on shifting of the factory is revenue in nature.
11.5 Without prejudice to the above finding on merits, we also deem it appropriate to examine the issue from an alternative and practical perspective having regard to the peculiar facts of the case and the passage of time. The assessment year involved is A.Y. 2017-18 and as on date almost a decade has elapsed. In such a situation, even if the contention of the Revenue is accepted that the impugned expenditure is capital in nature, the inevitable consequence would be that the assessee would be entitled only to depreciation on the said amount over the subsequent years. However, giving effect to such a conclusion at this stage would lead to serious practical and administrative difficulties. If the expenditure of 71,13,40,045/- is capitalised, the assessee would be entitled to depreciation year after year on the written down value. For instance, assuming a depreciation rate of 10%, the allowance would have to be computed successively across multiple years by reducing the written down value each year. This would require re-computation of income for A.Y. 2017-18 and for all subsequent assessment years, verification of depreciation claimed, reconciliation with books of account, and corresponding adjustments to the written down value of the block of assets. Such an exercise would not be confined to a single year but would extend across several years, thereby creating a cascading effect. Further, it is to be appreciated that in substance the dispute is only about the timing of allowance. Whether the entire expenditure is allowed in one year as revenue expenditure or allowed over a period in the form of depreciation, the ultimate tax impact remains broadly revenue neutral over the life of the asset. Thus, insisting on capitalization at this stage would not serve any meaningful purpose except to create avoidable multiplicity of proceedings and computational complexities.
11.6 In addition, it would impose an onerous burden on both the assessee and the De-partment. The assessee would be required to revisit records of multiple years, while the Department would have to undertake verification and pass consequential orders for each year, which, given the time lag, may not even be feasible in a proper manner. Such an exercise would be wholly disproportionate to the nature of dispute and would amount to placing a herculean burden on the system without any corresponding benefit to the Revenue. Considering the totality of the circumstances, the nature of the expenditure, the lapse of considerable time, and the fact that the issue is essentially tax neutral over a period, we are of the considered view that it would be just and proper to allow the entire expenditure in the year under consideration itself rather than embarking upon a pro-longed and impractical exercise of capitalization and depreciation over several years. Accordingly, even on this alternative reasoning, the claim of the assessee deserves to be allowed in full. Hence the ground of appeal raised by the assessee is hereby allowed.
11.7 As we have allowed the primary ground raised by the assessee through Ground Nos. 2 & 3, we do not find necessary to adjudicate the issue raised by the assessee in Ground Nos. 4 & 5 which is raised without prejudice to the Ground Nos. 2 & 3 and pertains to recalculation of tax liability by giving effect of deprecations. Hence, the Ground Nos. 4 & 5 of assessee’s appeal is hereby dismissed as infructuous.
11.8 Likewise, the issue raised through Ground Nos. 6 and 7 pertain to levy of interest under section 234B and 234D of the Act which is consequential in nature and does not require separate adjudication. Hence Ground No. 6 of the assessee’s appeal is hereby dismissed as infructuous.
12. In the result, the appeal of the assessee is hereby partly allowed.
Order pronounced in court on 29th day of April, 2026
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