This clause requires the tax auditor to classify the amount of expenditure incurred by the assessee as capital or revenue expenditure in respect of the various transactions incurred. This clause states that an auditor needs to identify the capital expenditure based on the applicable accounting principles and laws.
Expenses incurred by an assessee may or may not be allowable as per income tax law. It is important that the amount of expenditure in respect of each items is required to be stated. Accordingly, tax auditor will have to obtain the information and make necessary enquiries in that behalf. It may necessitate review of books of account, basis of classification, groups under which such expenses have been debited, and so on.
Generally capital expenditure is not allowable in calculating income of a business unless it is specifically stated in Act. If the capital expenditure is debited to the profit and loss account, It should be disclosed in a classified manner stating the amount on various heads separately.
Since some specified capital expenditures may be allowable as deduction in the computation of total income like Expenses on scientific research, it is necessary to indicate the nature of expenditure, the amount of expenditure incurred, so that proper deduction can be allowed in the computation of total income.
There are various capital expenditures such as purchase cost of assets, installation charges incurred, tax paid on imported assets, intangible assets purchased, Expenses on issue of shares etc. and other expenses which can be determined as per the circumstances