Capital expenditure vs. Revenue Expenditure – An important verdict by Supreme Court
The Supreme court has laid down a few important principles with regard to the treatment of expenditure as revenue vs. capital expenditure from income tax law perspective.
Supreme Court has held as under:
- The mode or manner or form of payment whether Lump Sum or recurring or the quantum is irrelevant
- The decision of capital Vs revenue is to be decided keeping practical, business and commercial rationale
- The payment would be capital if it is for acquisition of asset or right but revenue if it is use of an asset.
- Subsequent or periodic payment if relatable to original acquisition of asset or right will not change its nature and continue to be capital.
- If subsequent payment is for a different right or unconnected to original acquisition then it could be revenue.
- In this case both payment were for right to establish and operate telecom services and thus subsequent variable license fees too were connected to original acquisition of right and hence not revenue but capital and may be eligible for deduction u/s 35DDA
The court has concluded that the License Fee paid by Telecom Operators is Capital in nature.
The copy of the order is as under: