Feasibility studies are important for companies venturing into new technological developments or contemplating major projects. They assist in determining the feasibility of the projects and whether they will be profitable in the long term. However, when it comes to taxation, one of the key questions that often arises is whether the expenditure incurred during a feasibility study should be classified as revenue or capital expenditure. In this article, we’ll discuss the key differences between revenue and capital expenditures and their tax implications.

Feasibility Studies: Capital V/s Revenue Expenditure

Feasibility studies assess the viability of new projects, and their classification as capital or revenue expenditure depends on the purpose and outcome:

Part of Business Expansion (Revenue Expenditure)

The costs are generally classified as revenue expenditure if a feasibility study is conducted to expand an existing business or improve operations. This is because the study assesses the viability of ongoing operations without creating a new asset. In CIT v. Priya Village Roadshows Ltd. (2011), the Delhi High Court ruled that expenses for expanding an existing business should be treated as revenue expenditure under Section 37 of the Income-tax Act, 1961.

New Asset Creation (Capital Expenditure):

If a feasibility study leads to the creation of a new asset or technological advancement, the costs may be classified as capital expenditure. For example, suppose it results in a new product or platform. In that case, the expenditure is capitalised as part of the asset's cost and depreciated over time, allowing the business to claim depreciation allowances for tax benefits.

New Business or Diversification (Capital Expenditure):

A feasibility study related to establishing a new business or a major diversification has to be classified as capital expenditure. For instance, if a company conducts a study to determine the viability of entering an entirely new market or creating a new division, the associated costs might be capitalised because they are tied to a significant change in the business.

Conclusion

In conclusion, the classification of expenditure on feasibility studies hinges on the purpose and outcome of the study. If the study is aimed at expanding an existing business or improving operations without creating new assets, the costs are typically classified as revenue expenditure, as seen in the CIT v. Priya Village Roadshows Ltd. (2011) case. However, if the study leads to the creation of a new asset or technological advancement, or if it is related to a new business venture or major diversification, the expenditure is classified as capital expenditure. Proper classification not only ensures tax compliance but also optimizes the financial benefits through depreciation allowances when capital expenditure is involved.