AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2018 (9) TMI 75
X X X X Extracts X X X X
X X X X Extracts X X X X
.... under Section 115JA of the Act. The said return was processed under Section 143(1) of the Act. Subsequently, a notice under Section 148 was issued and the assessment under Section 143(3) read with Section 147 of the Act was completed on 31.3.2004 determining the total income of Rs. 1,10,36,000/- under normal computation and Rs. 10,82,98,335/- under Section 115JA of the Act. While completing the assessment, the Assessing Officer made certain adjustments, of which, we are concerned only with regard to expenditure on the textile project amounting to Rs. 2,38,25,283/-. 4. During the previous year relevant to the assessment year 2000-01, the appellant intended to start a textile business and since the project did not materialize, the appellant decided to abandon the project and in view of the same, they incurred an expenditure of Rs. 2,38,25,383/- and treating the expenditure as revenue expenditure, it was returned in the books in the previous assessment year relevant to the assessment year 2000-01. The Assessing Officer, by order dated 31.3.2004, while considering the preoperative expenses of taxable project, held that the act of the assessee in debiting the capital expenditure to it....
X X X X Extracts X X X X
X X X X Extracts X X X X
....w : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure incurred towards a new project which was abandoned subsequently is capital in nature and hence, not an allowable deduction " 9. Mr.Vikram Vijayaraghavan, learned counsel for the appellant submits that the expenses, which were incurred, were neither capital nor personal in nature and therefore, should have been treated as revenue expenditure. He would further submit that the Tribunal ought to have appreciated that though a new unit was to produce a different product from that of the existing units, the decisive factors for allowance are unity of control, management and common fund, etc. He would also submit that the assessment was for the assessee company as a whole and not unit wise and that the expenditure, which would normally be allowed, should be allowed even if the same was incurred for a new project. 10. The learned counsel for the appellant distinguishes the decision in EID Parry (India) Ltd., by contending that the question, which fell for consideration before the Hon'ble Division Bench, was as to whether the expenditure incurred by the asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er passed by the CIT (A), will clearly show that they are revenue expenditure and that the CIT (A) as well as the Tribunal applied the wrong test, came to a wrong conclusion and prayed for answering the substantial question of law in favour of the assessee. 14. Per contra, the learned Senior Standing Counsel for the Revenue points out that the issue relating to unity of control, management and common fund, etc., was never raised before the CIT (A) or before the Tribunal and that a new ground cannot be raised before this Court for the first time in this appeal. Therefore, the assessee should not be permitted to canvass such a ground. Referring to the decision in the case of Jay Engineering Works Ltd., it is further submitted that the Courts pointed out that there may be several permutations and combinations that may arise for determining whether the expenditure is revenue or capital and each case may be dealt with on the principles, which have been laid down and accepted by the Courts. 15. By referring to the decision in the case of M/s.Tamil Nadu Magnesite Ltd., it is submitted by the learned Senior Standing Counsel for the Revenue that what is required to be considered is the na....
X X X X Extracts X X X X
X X X X Extracts X X X X
....new project for manufacture of methanol at Ennore. It incurred an expenditure on that account for over a period of time all of it prior to the assessment year 1981-82 (subject year). The amount spent for the project on various items such as engineering fee, travel expenses, interest, salary for employees working in the project, legal fees, etc., for the period from 1975 to 1978 aggregated to Rs. 37,55,159/-. The assessee sought to claim those items as deductible items as expenditure for the assessment year 1981-82. The undisputed fact in the said case was that the expenditure has been incurred prior to the assessment year in question. The assessee s case that they subsequently abandoned the project does not on that score convert what was an expenditure in the nature of capital expenditure into a revenue expenditure and that setting up of a new project was clearly in the capital field and not in that of the revenue. The abandonment of that project is the abandonment of a project, on which, capital expenditure had been incurred. Further, the expenditure incurred on that capital project was not something, which could be regarded as revenue expenditure laid out exclusively and wholly f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ision Bench of the Delhi High Court in the case of Jay Engineering Works Ltd., which took into consideration all the relevant decisions on the point, some of which are identical to the facts of the present case in the sense that the assessee ran a particular line of business and wanted to start a different line of business, for which, expenditure was incurred and subsequently, the business was abandoned and the question was as to how the expenditure had to be treated. The Delhi High Court referred to the decisions of (i) the Allahabad High Court in the case of Prem Spinning & Weaving Mills Co. Ltd. Vs. CIT [reported in (1975) 98 ITR 20], (ii) the Hon ble Supreme Court in the case of Produce Exchange Corporation Ltd. Vs. CIT [reported in (1970) 77 ITR 739], (iii) the Gujarat High Court in the case of CIT Vs. Alembic Glass Industries Ltd. [reported in (1976) 103 ITR 715], (iv) again the Allahabad High Court in the case of CIT Vs. Expanded Metal Manufacturers [reported in (1991) 189 ITR 317], (v) the Delhi High Court in the case of CIT Vs. Modi Industries Ltd. [reported in (1993) 200 ITR 341] and (vi) again the Hon ble Supreme Court in the case of Veecumsees Vs. CIT [re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Tribunal, as could be seen from the orders passed by the respective Authorities. The Authorities concurrently held that it is the assessee, who had commenced business and the assessee would mean the assessee company as a whole and not a different entity. Therefore, when there is commonality of control, management and fund, those would be the decisive factors to be taken into consideration and not the new line of business namely textile business. 31. Having held so, it may not be necessary for this Court to dwell upon the facts, which have been identical in the decision in the case of Sakthi Sugars Ltd., as, on facts, we are fully convinced that the decisive factors involved are unity of control, management and common fund. 32. In the decision in the case of Tamil Nadu Magnesite Ltd., the issue as to what would be the proper test to be applied to distinguish capital and revenue expenditure was considered and after referring to the decision of the Hon ble Supreme Court in the case of Empire Jute Co. Ltd. Vs. CIT [reported in (1980) 3 Taxmann 69] and other decisions on the point, it was held as follows : "20. To decide the substantial questions of law framed for consideration,....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... test was applied by Lord Haldane in the case of John Smith & Son vs. Moore 12 TC 266, where the learned Law Lord drew the distinction between fixed capital and circulating capital by holding that fixed capital is what the owner turns to profit by keeping it in his own possession; circulating capital is what he makes profit of by parting with it and letting it change." 33. The test laid down in the decision in the case of Tamil Nadu Magnesite Ltd., if applied to the case on hand, it has to be held that the expenditure incurred by the assessee was revenue expenditure. 34. The learned Senior Standing Counsel for the Revenue has referred to the decision in the case of Indo Rama Synthetics (I) Ltd. In fact, reference to the said decision was with regard to paragraph 8 wherein another decision was quoted. Ultimately, in paragraph 9, the Hon ble Full Bench of the Delhi High Court held in favour of the assessee concluding that the expenditure incurred was in the nature of salary, wages, repairs, maintenance, design and engineering fee, traveling and other expenses of administrative nature and they are to be treated as revenue expenditure. Therefore, the decision in the case of Indo Rama....