1986 (4) TMI 130 - AT - Income Tax

Tribunal denies deduction for project expenses, equipment advance, and more

AP Mining Corpn. Ltd. Versus Income-Tax Officer.

AP Mining Corpn. Ltd. Versus Income-Tax Officer. - ITD 018, 190, TTJ 025, 548, Issues:1. Whether the expenditure incurred for a proposed project is revenue or capital in nature.2. Whether the expenditure for designs and drawings is allowable as revenue expenditure or for depreciation.3. Whether the advance made for equipment to be supplied can be considered as a revenue or capital loss.4. Whether the claim under section 80J of the Income-tax Act is valid.5. Whether the disallowance of guest house expenditure and depreciation of furnishings is justified.Analysis:1. The case involved a dispute regarding the deduction of an expenditure of Rs. 9,42,631 incurred by the assessee for a proposed crushing complex project. The expenditure included amounts for design, supply, erection, and commissioning. The Income Tax Officer (ITO) disallowed the claim, considering it as capital expenditure. The Commissioner (Appeals) upheld this decision. The assessee argued that the expenditure was to avoid a potential business loss and should be treated as revenue expenditure. However, the tribunal held that the expenditure was capital in nature and not deductible as revenue expenditure.2. The tribunal examined the expenditure of Rs. 2,82,000 for designs and drawings. The assessee claimed it should be allowed as revenue expenditure or for depreciation. Citing relevant case law, the tribunal held that the expenditure for designs and drawings was capital in nature, as it resulted in acquiring a capital asset of technical know-how. Therefore, the claim for deduction was disallowed.3. Regarding the advance made for equipment to be supplied, the tribunal considered it a capital loss since the proposed project was dropped, and the machinery order was canceled. Citing precedents, the tribunal held that such losses incurred for canceling contracts for capital assets are capital losses and cannot be treated as revenue losses.4. The tribunal rejected the claim for relief under section 80J of the Income-tax Act, citing an amendment to the section and the decision in Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308.5. The tribunal also dismissed the appeal concerning the disallowance of guest house expenditure and depreciation of furnishings used in the guest house, citing section 37(4)(ii) of the Act, which prohibits depreciation on assets used in a guest house.In conclusion, the tribunal upheld the disallowance of the expenditure related to the proposed project, designs and drawings, advance for equipment, relief under section 80J, and guest house expenditure and depreciation, dismissing the appeal in its entirety.