2021 (10) TMI 174 - HC - Income Tax

High Court affirms ITAT ruling on deducting work-in-progress as revenue expense.

The High Court upheld the decision of the Income Tax Appellate Tribunal (ITAT) in allowing the deduction claimed by the respondent for writing off capital ... Allowability of revenue expenditure on abandoned projects - capital work-in-progress - capital expenditure versus revenue expenditure - business expenditure where no enduring asset is created - abandoned project expenditure treated as revenue lossAllowability of revenue expenditure on abandoned projects - capital work-in-progress - capital expenditure versus revenue expenditure - business expenditure where no enduring asset is created - Whether amounts written off from capital work-in-progress in respect of abandoned website development projects are allowable as revenue/business expenditure or are capital in nature and not deductible as revenue loss. - HELD THAT: - The Court accepted the factual finding that the sums written off related to ongoing projects which were abandoned after reassessment of commercial viability due to recession, and that the expenditures consisted of routine items such as salaries and professional fees which did not result in the creation of any enduring asset. The Assessing Officer and the CIT(A) treated the amounts as capital on the basis that they were recorded under 'capital work-in-progress' and that they related to projects that could have been capital assets; the Tribunal, however, found on facts that the expenditure was incurred in connection with the existing business and was revenue in nature. This Court held that where expenditure is incurred to carry on the existing business in a more convenient or profitable manner and does not bring into existence a new enduring asset, such expenditure is properly characterised as business (revenue) expenditure. The Court endorsed the ITAT's application of that test, relied on precedents applying the same principle, observed that the facts of the present case are identical to earlier decisions of this Court, and concluded that the question did not raise any substantial question of law warranting interference with the Tribunal's finding of fact.The Tribunal's conclusion that the amounts written off from capital work-in-progress in respect of the abandoned projects are allowable as revenue/business expenditure is upheld; the departmental appeal is dismissed.Final Conclusion: The appeal is dismissed. The expenses written off from capital work-in-progress for abandoned projects, being routine revenue items that did not create any enduring asset, are allowable as business expenditure and the Tribunal's order in favour of the assessee is sustained. Issues:1. Deduction claimed on account of capital work-in-progress written off.2. Disallowance of claim of writing off 'capital work-in-progress' by Assessing Officer.3. Appeal before Commissioner of Income Tax (Appeals) regarding expenditure on abandoned project.4. Decision of the Income Tax Appellate Tribunal (ITAT) setting aside the order of CIT(A).5. Interpretation of expenses as revenue or capital expenditure.6. Application of legal precedents in determining the allowability of expenses as revenue expenditure.7. Correctness of ITAT's view on allowability of business expenditure.8. Dismissal of the appeal by the High Court.Analysis:1. The respondent claimed a deduction of a substantial amount on account of capital work-in-progress written off due to a fall in revenue caused by a recession. The respondent decided to conserve cash flow and pursue only critical projects, abandoning those not expected to yield returns. The expenses incurred on the abandoned projects were identified as revenue expenses, not creating any new asset but being of a routine nature like salary and professional fees.2. The Assessing Officer disagreed with the respondent's claim, asserting that the expenditure was for creating new projects which were capital assets yielding enduring benefits. The Officer disallowed the claim of writing off 'capital work-in-progress,' stating that capital loss from abandoned projects cannot be set off against revenue loss.3. The Commissioner of Income Tax (Appeals) upheld the Assessing Officer's decision, ruling that expenditure on abandoned projects cannot be treated as revenue expenditure.4. The Income Tax Appellate Tribunal (ITAT) reversed the CIT(A)'s order, emphasizing that the expenses incurred were routine in nature and revenue expenses. Citing legal precedents, including a judgment from the Jharkhand High Court and a decision of the Bombay High Court, the ITAT allowed the expenses as revenue expenditure.5. The ITAT's decision was based on the premise that if an expenditure is incurred for conducting business more conveniently and profitably without creating new assets, it qualifies as allowable business expenditure. The High Court concurred with this view, finding no error in the ITAT's analysis of the facts and application of legal principles.6. The High Court referenced a judgment involving cellular towers construction to support the ITAT's decision, highlighting the similarity in facts. The Court dismissed the appeal, deeming it devoid of merit and not raising any substantial legal questions.