Mobilization expenses to move assets to client’s premises allowable as revenue expenditure

Brief of the case:

The ITAT bench of Mumbai in the above cited case held that when the assessee company in its continuing and existing business of chartered hiring of rigs imported new rigs to be moved to and installed at the site of the clients desirous of taking the same on hire for oil drilling, all the mobilization expenses which is in connection with these new rigs till these new rigs mobilization is completed and these rigs are installed at clients site and start commencing drilling of oil for the client is a revenue expenditure and not a capital expenditure.

Facts of the case:

• The assessee company is engaged in the business of giving Rigs (a type of machinery) on chartered hiring to Government and Private parties l who places order on the assessee company. The assessee company has claimed the expenses with respect to the mobilization of rigs to the extent of Rs. 3,43,28,180/- which was not debited to the profit and loss account but was treated as capital expenditure in the books of accounts prepared under the Companies Act ,but treated the same as revenue expenditure and claimed deduction from business profits to match the mobilization income of Rs. 20.46 crores.
• The A.O. observed that the assessee company has not debited the amount of Rs. 3,43,28,180/- to the profit and loss account although the expenditure was incurred , but the same was capitalized in the books of accounts as per the Companies Act and hence the amount which has not been debited to Profit and Loss Account cannot be allowed as deduction while computing income chargeable to tax under the Act.AO thus added back the expenditure to income after allowing depreciation on capitalized mobilization expenses.
• The CIT(A) on appeal also upheld the order of AO by holding that nothing has been submitted to actually establish the mobilization of rigs and commencement of work from it, the claim of the assessee company that expenditure incurred is to be treated as revenue expenses was not acceptable to the CIT(A). Aggrieved assessee is in appeal before tribunal.
  

Contention of the Assessee:

• It was submitted that that mobilization income of Rs. 20.46 crores was offered for taxation and mobilization expenses of Rs.3.43 crores incurred by the assessee company is to be allowed as revenue expenditure even if it is capitalized in the books of account. The company is importing rigs which are transferred to the client’s site and thereafter are installed at clients site for which expenses have been incurred.
• The company’s business of importing rigs and giving the same on hire is a continuous business and transportation and other charges incurred for bringing the rigs to site is not a capital expenditure.
  

Held by ITAT Mumbai:

• Tribunal observed that it is un-disputed fact that the said business of the assessee company of giving rigs on charter hiring basis to Government and Private parties for oil drilling purposes was a continuing and existing business of the assessee company which was set-up since preceding assessment year’s.

• In order to expand its business the assessee company imported additional 4 rigs and received mobilization charges from its clients during the assessment year with respect to these additional new rigs and the said mobilization charges received by the assessee company were offered for taxation by the assessee company in the return of income filed with the Revenue.
• It can be said that when the assessee company acquired these new rigs, these rigs became available for hire from the time these rigs were acquired by the assessee company as the assessee company is in a position to charter hire these newly acquired rigs and these rigs are available and ready to be put to use from the time these rigs are acquired by the assessee company in its continuing and existing business of chartered hiring of rigs.

• Thus, these rigs which are imported are ready and available to be put to use being available for charter hiring after acquisition by the assessee company so far as assessee company is concerned as the same are available for being given on charter hiring from the time the rigs are acquired by the assessee company and are merely to be moved to and installed at the site of the clients desirous of taking the same on hire for oil drilling, so that all the mobilization expenses which is in connection with these new rigs till these new rigs mobilization is completed and these rigs are installed at clients site and start commencing drilling of oil for the client is a revenue expenditure and not a capital expenditure.

• In result assessee’s appeal was allowed.