The tests to classify a particular expenditure as Capital or Revenue Expenditure as follows –
A. If the outgoing expenditure is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit- earning process the expenditure may be regarded as revenue expenditure.
B. If an asset or a right of a permanent character comes into existence due to incurring an expenditure, the possession of which is a condition of the carrying on of the business, then the expenditure may be regarded as capital expenditure.
Now the question is whether interior expenses done on the rental shop for the purpose of its smooth running of the business is a capital expenditure or revenue expenditure? Let’s answer this by following the above test –
1. The expenses were advantageous only for facilitating the business activities.
2. The nature of expenses included painting, plaster of Paris and the labour charges
3. No fixed assets or right of permanent character came into existence due to such expenditure
Hence, the expenses for Interior work in Rented Premises would be treated as revenue expenditure.
In case the lease agreement was executed for a long period of time, say 22 months or even more – can it be contended that the expenditures incurred on the renovation of the business premises will generate benefit to the assessee over a long period of time and hence it will be treated as a capital expenditure? There is no ambiguity that the assessee shall gain the benefit out of the interior expenses incurred by it. But the benefit is in the nature of smooth and efficient running of the business. As such the benefit to the assessee, though enduring in nature, but the same is not on capital transaction rather it directly relates to the revenue transaction of the assessee. Thus, the same i.e., interior expenses cannot be categorized as capital in nature.
