The meaning of capital expenditure under section 37(1) of the Income Tax Act is not defined in the act itself. But we can take guidance from decisions by various high courts. Here are excerpts of courts orders in which the Hon’ble High Court tried to explain the meaning of capital expenditure.
Meaning of capital expenditure defined by court
The phrase ‘capital expenditure‘ used in section 37(1) of the Income Tax Act came up before various high courts as detailed under :
1. Hon’ble Pondicherry High Court explained the meaning of ‘capital expenditure‘ while delivering judgment in Mohanlal Hargovind Of Jubbulpore vs. CIT [1949] 17 ITR 473 (PC) as under :
Meaning : There is no definition of the expression ‘capital expenditure’ in the act, and it must be construed in a business sense save insofar as there may be rules of construction applicable to it.
2. Hon’ble Rajasthan High Court explained the meaning of ‘capital expenditure’ while delivering judgment in CIT vs. Wolkem (p.) Ltd. Co. [2002] 258 ITR 350 (Raj.) as under :
Meaning : The expression ‘capital expenditure’ is not defined in the income-tax act and the words ‘in the nature of capital expenditure’ occurring in section 37(1) make the meaning of the expression more elastic in its application to the facts of each case. The consistent view of the court is that the expression is to be construed in a business sense save insofar as there may be rules of construction applicable to it.
The word ‘capital’ connotes permanency and capital expenditure is, therefore, closely akin to the concept of securing something, tangible or intangible property, corporeal or incorporeal right so that they could be of a lasting or enduring benefit to the enterprises in issue. Revenue nature expenditure, on the other hand, is operational in its perspective and solely intended for the furtherance of the enterprise.
3. Hon’ble Rajasthan High Court explained the meaning of ‘capital expenditure‘ while delivering judgment in CIT vs. Lake Palace Hotels & Motels (P.) Ltd. [2002] 258 ITR 562 (Raj.) as under :
Meaning : The word ‘capital’ connotes permanency and ‘capital expenditure’ is, therefore, closely akin to the concept of securing something, tangible or intangible property, or corporeal or incorporeal right, so that they could be of a lasting or enduring benefit to the enterprise in issue. Revenue expenditure, on the other hand, is operational in its perspective and solely intended for the furtherance of the enterprise.
Section 37(1) of the Income Tax Act
37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.
Explanation 1.—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.
Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.
86[Explanation 3.—For the removal of doubts, it is hereby clarified that the expression “expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law” under Explanation 1, shall include and shall be deemed to have always included the expenditure incurred by an assessee,—
(i) for any purpose which is an offence under, or which is prohibited by, any law for the time being in force, in India or outside India; or
(ii) to provide any benefit or perquisite, in whatever form, to a person, whether or not carrying on a business or exercising a profession, and acceptance of such benefit or perquisite by such person is in violation of any law or rule or regulation or guideline, as the case may be, for the time being in force, governing the conduct of such person; or
(iii) to compound an offence under any law for the time being in force, in India or outside India.]
(2) [***]
(2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.
(3) [***]
(3A) [***]
(3B) [***]
(3C) [***]
(3D) [***]
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In this article, you can get guidance from high courts on the meaning of capital expenditure under section 37(1) of the Income Tax Act.
Updated up to Finance Act 2021