Capital expenditure on business expansion denied where new unit enlarged the profit-earning structure, not ordinary operations.

Expenditure incurred to set up a new unit as an extension of an existing business is capital in nature where it relates to enlarging the profit-earning structure rather than the ordinary conduct of business. On the facts, the Kandla project was treated as an extension of the assessee's manufacturing business, and the outlay was connected with bringing that expanded unit into existence. The principle applied was the settled distinction between capital outlay for initiation or expansion of the profit-making apparatus and revenue expenditure for carrying on business operations. The amount was therefore not allowable as a revenue deduction.

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Issues: Whether the expenditure of Rs. 29,200 incurred for setting up a new unit at Kandla as an extension of the existing business was allowable as revenue expenditure.

Analysis: The assessee was already carrying on the business of manufacturing metallic yarn and polyester films, and the proposed Kandla project was found to be only an extension of that existing business. The nature of the expenditure had therefore to be tested on the settled distinction between outlay made for bringing into existence or enlarging the profit-earning structure, and outlay incurred for carrying on the business more efficiently. On the facts found, the expenditure was connected with the setting up of the new unit and did not represent mere working expenses of the existing business. The binding principle applied was that expenditure incurred for extension of business is capital in nature when it goes towards the initiation or expansion of the profit-making apparatus rather than its ordinary operation.

Conclusion: The expenditure was held to be capital expenditure and not allowable as a revenue deduction.

Ratio Decidendi: Expenditure incurred for setting up or extending a business is capital in nature when it is directed to the expansion of the profit-earning structure and not to the ordinary conduct of an existing business.

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