Tribunal upholds deletion of added income during trial run period as revenue expenditure

The Tribunal dismissed the revenue's appeal, upholding the Ld. CIT(A)'s decision to delete the addition of income during the trial run period and allowing the corresponding expenses as revenue expenditure. The Tribunal emphasized that income earned during the trial run period should be reduced from capital expenditure, following the matching concept of accountancy. The decision was supported by the principle that receipts from commercial production before the commencement of business are of a capital nature and cannot be taxed, resulting in the AO's addition being deemed unsustainable.

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Issues:
1. Addition of income during trial run period
2. Capitalization of expenses without supporting evidence

Analysis:
1. The appeal was filed by the revenue against an order by Ld. CIT(A) deleting an addition of Rs. 3,16,68,000 made by the AO on account of disallowance of netting off of income during trial run with trial run expenses for the assessment year 2011-12. The Assessee Company was engaged in the implementation of a hydroelectric project and started commercial generation of electricity. The AO noted income from the sale of power during the trial run period and adjusted it against the expenditure incurred during construction/trial period pending capitalization. The assessee contended that the income earned during the trial run period was reduced from capital expenditure, following the matching concept of accountancy. The AO, however, held that the corresponding expenditure was not substantiated, relying on a decision by ITAT Bangalore. The Ld. CIT(A) upheld the assessee's contention, stating that the income earned during the trial run period was reduced from capital expenditure, and the actual expenses incurred were allowed as revenue expenditure, resulting in a revenue loss.

2. The AO's decision was based on the failure of the assessee to provide proper details of the corresponding expenditure claimed against the income earned during the trial run period. However, the Ld. CIT(A) disagreed, emphasizing that the income earned during the trial run period was reduced from capital expenditure, and the expenses were treated as revenue expenditure. The Tribunal concurred with the Ld. CIT(A), highlighting the principle that if expenses before the commencement of business are added to the cost of assets, the corresponding income from commercial production should also be treated as capital in nature. The Tribunal referred to a Supreme Court decision to support the view that such receipts are of a capital nature and cannot be taxed. Therefore, the addition made by the AO was deemed unsustainable, and the Ld. CIT(A)'s order deleting the addition was affirmed.

In conclusion, the Tribunal dismissed the revenue's appeal, upholding the Ld. CIT(A)'s decision to delete the addition of income during the trial run period and allowing the corresponding expenses as revenue expenditure.

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