Facts of the Case

The assessee, Airport Authority of India (AAI), in its income-tax return for Assessment Year 2002-03, claimed salary paid to certain engineering and project staff as revenue expenditure.

The staff members had earlier been engaged in project-related activities. However, during the relevant assessment year, there were no major projects being undertaken by the assessee. Consequently, the engineering and project staff were deployed in routine day-to-day repairs and maintenance work at various airports.

The Revenue treated the expenditure as capital in nature on the ground that the employees belonged to the project division. The matter ultimately reached the Income Tax Appellate Tribunal (ITAT), which allowed the assessee’s claim and held the salary expenditure to be revenue expenditure. Aggrieved by the Tribunal’s decision, the Revenue filed an appeal before the Delhi High Court under Section 260A of the Income-tax Act, 1961.

Issues Involved

  1. Whether salary paid to engineering and project division staff deployed in day-to-day repairs and maintenance activities at airports should be treated as revenue expenditure or capital expenditure?
  2. Whether merely because the employees belonged to the project division, their salary expenditure automatically acquired the character of capital expenditure?
  3. Whether any substantial question of law arose from the order of the ITAT warranting interference by the High Court under Section 260A?

Petitioner’s Arguments (Revenue)

  • The Revenue contended that the staff in question belonged to the project division.
  • Since project division employees are generally associated with capital projects, the salary expenditure incurred on such employees should be treated as capital expenditure.
  • The Revenue challenged the order of the ITAT that had allowed the expenditure as revenue in nature.

Respondent’s Arguments (Assessee – Airport Authority of India)

  • The assessee submitted that there were no major projects during the relevant period.
  • The engineering and project staff were actually engaged in routine repairs and maintenance activities at airports.
  • Had these employees not been utilized in maintenance work, the assessee would have been required to outsource such work.
  • Merely because the employees belonged to the project division could not change the true nature of the work actually performed by them.
  • The assessee had changed its accounting policy in accordance with recognized institutional guidelines, and such policy had been duly endorsed by the auditors.
  • Since the staff was engaged in day-to-day operational activities, the related salary expenditure was rightly allowable as revenue expenditure.

Court Findings

The Delhi High Court noted that the following facts were undisputed:

  1. No new major project had been undertaken during the relevant period.
  2. The engineering and other staff concerned were actually engaged in day-to-day repairs and maintenance work at airports.
  3. The change in accounting policy had been duly recognized and endorsed by the auditors.

The Court observed that the ITAT had correctly appreciated the factual position and had recorded a finding that the staff whose salaries were claimed as expenditure were utilized in routine repairs and maintenance work.

The High Court emphasized that the real test is the nature of work performed by the employees and not merely the department to which they belong. Since the employees were engaged in day-to-day maintenance activities, the expenditure incurred on their salaries was revenue expenditure.

The Court further held that merely because the employees belonged to the project division did not automatically render their salary expenditure capital in nature.

Court Order

The Delhi High Court dismissed the appeal filed by the Revenue.

The Court held that:

  • Salary paid to engineering and project staff deployed in routine repairs and maintenance work at airports constitutes revenue expenditure.
  • The findings recorded by the ITAT were purely factual and based on undisputed material on record.
  • No substantial question of law arose for consideration under Section 260A of the Income-tax Act, 1961.
  • The appeal was frivolous and misconceived.

The Court consequently dismissed the appeal and imposed costs of ₹25,000 payable to the Delhi High Court Mediation and Conciliation Centre.

Important Clarification

This judgment clarifies that:

  • Classification of expenditure depends upon the actual nature of the activity undertaken and not merely on the designation or departmental affiliation of employees.
  • Salaries paid to employees engaged in routine repairs, maintenance, and operational functions are generally allowable as revenue expenditure.
  • Revenue authorities cannot treat expenditure as capital merely because the employees are attached to a project division when, in reality, they are performing maintenance functions.
  • Findings of fact recorded by the ITAT cannot be disturbed in an appeal under Section 260A unless a substantial question of law arises.

Relevant Section Involved

  • Section 260A of the Income-tax Act, 1961 – Appeal to High Court from orders of the Income Tax Appellate Tribunal (ITAT).

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2009:DHC:7214-DB/AKS13072009ITA7022009_145757.pdf

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