Revenue Expenditure or Capital Expenditure ?
This query is : Resolved
24 March 2010
Amount paid to vacate plot by the builder and developer is treated as Revenue Expenditure or Capital Expenditure ?
24 March 2010
It is a revenue Expenditure as it is done in the course of their normal buisness activity...Further the legality of the transaction is to be examined.
25 March 2010
agreed
14 April 2010
Thank you for reply. any reference case in this regard ?
22 July 2025
The treatment of amount paid to vacate a plot—whether as revenue expenditure or capital expenditure—depends on the nature and purpose of the payment in the context of the business.
✅ General Rule (Builder/Developer Context)
For a builder or developer, if the payment is made to vacate a plot as part of acquiring land for development, it's generally treated as capital expenditure, because:
It is directly related to acquiring or improving a capital asset (the land).
It adds to the cost of acquisition of the land and forms part of the cost of project.
Even though developers deal in land as stock-in-trade, such payments (to tenants, encroachers, etc.) are not recurring, and are incurred to bring the land into usable condition, hence capital in nature.
🔍 Judicial Precedents / Case Law
CIT v. Bombay Dyeing and Manufacturing Co. Ltd.
[1996] 219 ITR 521 (SC)
Supreme Court held that compensation paid to tenants to vacate premises was capital expenditure as it resulted in enduring benefit and facilitated development.
CIT v. Shree Capital Services Ltd.
[2009] 319 ITR 100 (Del)
Payments made to tenants to vacate for redevelopment treated as capital expenditure.
CIT v. V.S. Dempo & Co. Ltd.
[2016] 387 ITR 354 (Bom)
Payment made to remove encumbrance (like tenants) to facilitate sale or development is part of capital cost.
📌 Exception (Revenue Expenditure Possibility)
If the payment is made frequently, in the ordinary course of business, and not linked to acquisition or improvement of a capital asset, it might be treated as revenue expenditure.
However, for builders, it's usually part of acquiring a project site, hence capital expenditure.
📝 Conclusion
The amount paid by a builder or developer to vacate a plot is treated as Capital Expenditure, as it forms part of the cost of acquiring or improving a capital asset (land for development).
✅ General Rule (Builder/Developer Context)
For a builder or developer, if the payment is made to vacate a plot as part of acquiring land for development, it's generally treated as capital expenditure, because:
It is directly related to acquiring or improving a capital asset (the land).
It adds to the cost of acquisition of the land and forms part of the cost of project.
Even though developers deal in land as stock-in-trade, such payments (to tenants, encroachers, etc.) are not recurring, and are incurred to bring the land into usable condition, hence capital in nature.
🔍 Judicial Precedents / Case Law
CIT v. Bombay Dyeing and Manufacturing Co. Ltd.
[1996] 219 ITR 521 (SC)
Supreme Court held that compensation paid to tenants to vacate premises was capital expenditure as it resulted in enduring benefit and facilitated development.
CIT v. Shree Capital Services Ltd.
[2009] 319 ITR 100 (Del)
Payments made to tenants to vacate for redevelopment treated as capital expenditure.
CIT v. V.S. Dempo & Co. Ltd.
[2016] 387 ITR 354 (Bom)
Payment made to remove encumbrance (like tenants) to facilitate sale or development is part of capital cost.
📌 Exception (Revenue Expenditure Possibility)
If the payment is made frequently, in the ordinary course of business, and not linked to acquisition or improvement of a capital asset, it might be treated as revenue expenditure.
However, for builders, it's usually part of acquiring a project site, hence capital expenditure.
📝 Conclusion
The amount paid by a builder or developer to vacate a plot is treated as Capital Expenditure, as it forms part of the cost of acquiring or improving a capital asset (land for development).
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