Tribunal rules in favor of assessee, directing deletion of disallowed revenue expenses

The Tribunal allowed the appeal filed by the assessee, directing the AO to delete the addition made towards the disallowance of revenue expenses claimed. The Tribunal held that the expenses, though treated as pre-operative in the books, were revenue in nature and incurred for business expansion, relying on judicial precedents emphasizing the nature of expenses for tax treatment. The decision overturned the CIT(A) and AO's findings, concluding in favor of the assessee.

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Issues Involved:
1. Disallowance of claim for deduction in respect of revenue expenditure incurred during the year amounting to Rs. 79,23,44,610.

Issue-wise Detailed Analysis:

1. Disallowance of Claim for Deduction in Respect of Revenue Expenditure:

Facts of the Case:
The assessee company, engaged in trading and merchandising, filed its return for AY 2009-10 declaring a total loss of Rs. 1,77,53,82,414. During the scrutiny, the AO noticed that the assessee claimed revenue expenditure of Rs. 79,23,44,610 in the statement of total income, which was capitalized in the books under 'work-in-progress'. The AO questioned why these pre-operative expenses, capitalized in the books, should not be disallowed as revenue expenditure.

Assessee's Argument:
The assessee argued that the expenses were revenue in nature, incurred for business purposes, and debited under 'project development expenditure'. These expenses included rent, salary, traveling expenses, professional fees, electricity, power, fuel, etc., and were necessary for expanding the business by setting up more outlets. The assessee claimed these expenses as revenue expenditure u/s 37(1) of the Income-tax Act in the computation of income.

AO's Findings:
The AO disallowed the claim, stating that:
- The expenses were incurred for acquiring new outlets, resulting in substantial tangible assets, hence should be treated as capital expenditure.
- The expenses were shown as pre-operative in the balance sheet and cannot be allowed as revenue expenditure.
- An expenditure cannot be both capital in books and revenue for tax purposes.
- The assessee's accounting policy was inconsistent, treating the same expenses differently for the Companies Act and Income Tax purposes.
- The expenses did not generate any income/loss to be eligible as revenue expenditure.

CIT(A)'s Decision:
The CIT(A) upheld the AO's decision, stating that:
- The assessee failed to prove that the expenses were paid during the relevant year.
- The expenses were incurred prior to the date of the agreement and were not related to the assessee's business activity during the relevant year.
- The expenses were pre-operative and should be capitalized, not claimed as revenue expenditure.

Tribunal's Analysis:
The Tribunal considered the following:
- The expenses were revenue in nature, incurred for expanding the existing business.
- The business activity had already commenced, and any revenue expenditure for expansion should be allowed as revenue expenses.
- The treatment of expenses in the books of account should not determine their nature for tax purposes.

Reliance on Judicial Precedents:
The Tribunal relied on:
- The decision of ITAT in the case of M/s Reliance Footprint Ltd, where similar expenses were allowed as revenue expenditure.
- The decision of the Hon’ble Bombay High Court in CIT vs Kothari Auto Parts Manufacturing Ltd, and the Hon’ble Gujarat High Court in CIT vs Alembic Glass Industries Ltd, which supported the view that the nature of expenses, not their treatment in books, determines their tax treatment.

Conclusion:
The Tribunal concluded that the AO erred in disallowing the revenue expenses claimed by the assessee. The expenses, though treated as pre-operative in the books, were revenue in nature and incurred for business expansion. Therefore, the Tribunal directed the AO to delete the addition made towards the disallowance of expenses.

Final Judgment:
The appeal filed by the assessee was allowed, and the order was pronounced in the open court on 27th July 2018.

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