2007 (4) TMI 53 - HC - Income Tax

High Court affirms disallowance of pre-operative expenses under Income-tax Act, 1961.

COMMISSIONER OF INCOME-TAX Versus RELAXO FOOTWEARS LTD.

The High Court upheld the Tribunal's decision regarding the disallowance of pre-operative expenses and capital issue expenses claimed by the assessee ... Taxable income – Revenue contended that the pre-operative expenses were not considered for calculation of taxable income but as per assessee expenses is part of existing business ,so it is allowed – Held that revenue contention is not correct and it is dismissed Issues:1. Disallowance of pre-operative expenses and capital issue expenses.2. Nature of expenses incurred in a new unit as an extension of old business.Issue 1: Disallowance of Pre-operative Expenses and Capital Issue ExpensesThe case involved an appeal under section 260A of the Income-tax Act, 1961, where the Revenue challenged the order passed by the Income-tax Appellate Tribunal regarding the disallowance of pre-operative expenses and capital issue expenses claimed by the assessee. The Assessing Officer disallowed these claims, stating that pre-operative expenses cannot be written off at once and capital issue expenses are allowable only after a public issue has been raised and subscribed. The Commissioner of Income-tax (Appeals) partly allowed the appeal, leading to further challenges by both the Revenue and the assessee before the Tribunal. The Tribunal allowed the appeal of the assessee and dismissed that of the Revenue.Issue 2: Nature of Expenses Incurred in a New Unit as an Extension of Old BusinessThe core issue revolved around determining whether the expenses incurred in setting up a new unit, which was considered an extension of the old business, should be treated as revenue or capital in nature. The Revenue contended that such expenses should be capitalized, considering the new business as distinct from the existing one. However, the Tribunal, based on the principle established in CIT v. Modi Industries Ltd., held that if there is unity of control and the new unit is interlaced with the existing business, the expenses for setting up the new unit should be allowed as revenue expenditure. The Tribunal found that in the present case, there was complete unity of control and interlacing of the units, leading to the conclusion that the expenses incurred for the new unit, being part of the existing business, should be treated as revenue expenditure.In conclusion, the High Court upheld the Tribunal's decision, stating that the expenses incurred for setting up a new unit, which was an extension of the existing business with unity of control, should be allowed as revenue expenditure. The Court found no substantial question of law in the Tribunal's order, dismissing the Revenue's appeal.