2018 (6) TMI 1236

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....der of the Assessing Officer. 3. The facts, which are necessary for the disposal of these appeals, are as follows. For the assessment year 1998-99, the assessee had filed return of income showing a total loss of Rs. 11,95,25,000/- as project expenses on the strength of the charge created to the said effect in the profit and loss account. A note was appended stating that due to various reasons, the Government of Tamil Nadu had ordered the closure of the implementation of the Chemical Beneficiation Project vide G.O.No.140, Industries Department, dated 11.05.1998 and as a consequence, upon considering commercial prudence, major portion of intangible assets were shown as revenue expenditure. 4. The assessee placed reliance on the following decisions:- (i) Commissioner of Income-Tax vs. Woodcraft Products Ltd., reported in (1996) 217 ITR 862 (Calcutta) and (ii) Commissioner of Income-Tax vs. Alembic Glass Industries Limited reported in (1976) 103 ITR 715 (Gujarat). 5. The Assessing Officer while completing the assessment held that the expenditure is capital in nature and therefore, declined to accept the assessee's claim of expenses in the profit and loss ....

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.... asset and it was the expansion of the profit making apparatus and the fixed asset of the assessee got increased. Expenditure was incurred to acquire the profit earning apparatus and not for operating the profit earning apparatus. Further, it was pointed out that the Chemical Beneficiation Plant was ordered to be closed due to non-availability of Government approval and there is absolutely nothing on record to indicate that the expenditure was incurred in the Revenue field. 9. The above tax case appeals have been admitted on the following substantial questions of law. "(a) Whether the Tribunal is correct in rejecting the claim of deduction / loss relating to the 'project expenses' in the computation of taxable total income relating to the assessment year(s) under consideration? (b) Whether the Tribunal is correct in concluding that the expenses were capital in nature even though such expenses were incurred for 'possible expansion' of the existing business? (c) Whether the Tribunal is correct in law in concluding that the expenses claimed were in the nature of capital field even though the incurring of expenses did not result in creation....

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.... (v) M/s.Thiruvengadam Investments Pvt. Ltd. vs. The Assistant Commissioner of Income Tax in T.C.(A) No.583 of 2007 dated 05.01.2016, which was followed by a Division Bench of this Court in Commissioner of Income Tax vs. M/s.Prasad Productions in T.C. (A) No.905 of 2008 dated 04.04.2018. 15. Mr.S.Rajesh, learned Standing Counsel for the Revenue sought to sustain the order passed by the ITAT by referring to the factual position as stated in the assessment order dated 15.09.2000. It is submitted that the expenditure is capital in nature, as the money was drawn from the capital account and it is an aid extended by the Government of Tamil Nadu termed as capital work-in-progress and merely because the project was abandoned on account of cancellation of the approvals granted by the Government of Tamil Nadu, that will not change the character of the expenditure to that of the revenue, as the expenditure was incurred for acquisition of tangible assets. 16. Further, the learned Standing Counsel referred to the order passed by the CIT(A) more particularly paragraph 5 of the order, which referred to the Government Order and the decision taken by the Government to abandon the projec....

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.... all cases, securing a benefit for the business would be prima facie capital expenditure "so long as the benefit is not so transitory as to have no endurance at all". 21. Further, it was held that there may be cases where expenditure even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It was pointed out that it is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. 22. Further, it was pointed out that if the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. Thus, it was held that the test of endur....

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....ot on account of the conduct of the assessee, but on account of the decision of the Government of Tamil Nadu. In our considered view, the decision of the Government of Tamil Nadu to sell the project is a very important fact, which has to be borne in mind to decide as to whether the expenditure incurred by the assessee was capital or revenue in nature. 26. The Assessing Officer fell in error in going by the fact that the expenditure was incurred from the capital account forgetting that the test to be applied to ascertain as to whether the expenditure is revenue or capital is not based on where the funds were drawn from. The broad parameters and tests, which have been laid down by various decisions are that there should be an enduring benefit, which should accrue to the assessee and there should be a creation of a new asset. In the instant case, both these parameters remain unfulfilled. 27. The High Court of Delhi in Indo Rama Synthetics Ltd. (supra) held that if the expenditure is incurred for starting a new business, which was not carried out by the assessee earlier, then such expenditure was held to be capital in nature. However, if the expenditure incurred is in respect of ....

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.... circular issued by the CBDT in Circular No.16/2015 dated 06.10.2015, held that film production expenses of abandoned films should be treated as revenue expenditure. This decision was followed in the case of Asia Power Projects P Ltd. (supra). 32. The learned counsel for the Revenue strenuously contended that a new project had emerged and it is immaterial whether machinery was reduced to scrap and ordered to be sold and what is required to be seen is that the expenditure was incurred from the capital account. 33. In our considered view, reliance placed on the decision of this Court in the case of E.I.D.Parry (India) Ltd., (supra) and the Kerala High Court in the case of Malabar & Pioneer Hosiery (P) Ltd. (supra) is of little avail, as in both cases, it was for a new project, in contra distinction with the factual position in the case on hand. Therefore, those decisions are factually distinguishable. Heavy reliance was placed on the decision of this Court in the case of Mascon Technical Services Ltd. (supra). 34. At the first blush it appears that the decision would help the case of the revenue, but on a closer reading it proves otherwise. The question was whether the asses....