All India Bar Examination (AIBE) 3-III Previous Year Question Papers with Answers

Practice Mode:
90.

Company A is expanding its business and leases a piece of land for three years, and agrees to return the land without any modifications to the lessor. Since the land is ideal for agriculture, it constructs a large storage shed on the land. Which of the following statements most accurately applies the principle below?


Principle :

All capital expenditures are not allowed as deductions under "Profits and Gains of Business or Profession'. The test of whether an expenditure is capital or revenue is whether it gives a benefit of an enduring nature. If it does, it is a capital expenditure.

A: The expenditure on building the storage shed is a capital expenditure, since the storages shed provides Company A with an enduring benefit.
B: The expenditure on leasing the land is a capital expenditure, since the land provides Company A with an enduring benefit.
C: The expenditure on leasing the land as well as building the storage shed is a capital expenditure, as it provides Company A with an enduring benefit.
D: The expenditure on building the storage shed is not a capital expenditure, as it only provides a business advantage and not an enduring benefit.
E: The expenditure on building the storage shed is a capital expenditure, since it provides Company A with an enduring benefit, but the expenditure, on leasing the land is not a capital expenditure, as it only provides a business advantage

The answer is: A

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Explanation

The correct option is A: The expenditure on building the storage shed is a capital expenditure, since the storage shed provides Company A with an enduring benefit.

Explanation:

According to the principle, all capital expenditures are not allowed as deductions under "Profits and Gains of Business or Profession". The test of whether an expenditure is capital or revenue is whether it gives a benefit of an enduring nature. If it does, it is a capital expenditure.

In this case, the expenditure on building the storage shed is a capital expenditure, as it gives Company A an enduring benefit. The storage shed is a fixed asset that enhances the value of the land and can be used for storing agricultural produce for a long time. It does not matter that Company A has leased the land for only three years and has agreed to return it without any modifications. The nature of the expenditure is determined by the benefit it confers on the business, not by the legal status of the land.

The other options are incorrect because they either ignore or contradict the principle. The expenditure on leasing the land is not a capital expenditure, as it only provides a business advantage and not an enduring benefit. The lease rent is a recurring expense that does not create any asset or add to the value of the land. The expenditure on leasing the land as well as building the storage shed is not a capital expenditure, as only the latter gives an enduring benefit. The expenditure on building the storage shed is not a revenue expenditure, as it does not only provide a business advantage but also an enduring benefit.