TaxTMI 
TaxTMI 
2019 (8) TMI 1198
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....al expenditure is confirmed. Assessee has raised following grounds of appeal:- "GROUND NO. 1.1: On basis of facts and in circumstances of case and in law, Ld. Commissioner of Income Tax (Appeals) has erred in sustaining disallowance in respect of employees remuneration amounting to Rs. 2,64,00,715/-. GROUND NO. 1.2: On basis of facts and in circumstances of case and in law, ld. Commissioner of Income Tax (Appeals) has erred in upholding action of AO regarding treatment of employees remuneration as capital expenditure. GROUND NO. 2.1: On facts and in circumstances of case and in law, Ld. Commissioner of Income Tax (Appeals) has erred in sustaining disallowance in respect of Legal and Professional expenses amounting to Rs. 4,69,00,663/-. GROUND NO. 2.2: On basis of facts and in circumstances of case and in law, ld. Commissioner of Income Tax (Appeals) has erred in upholding action of AO regarding treatment of Legal and Professional expenses as capital expenditure. GROUND NO. 3.1: ld. AO has erred in not treating Interest income amounting to Rs. 7,52,26,392/-, arising out of primary parking of funds arranged for setting up of plant, as capi....
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....ssional fees for Rs. 4,69,00,663/-. It was also seen that in the preceding year the assessee had declared interest on Inter Corporate Deposits at Rs. 38,35,616/- with no expenses for employees remuneration and only Rs. 5,51,500/- as expense for legal and professional fees. Vide questionnaire dated 23/12/2013, the assessee was asked that "It is seen from your profit and loss account filed that the only income earned during the year is of Rs. 7,52,26,392/- as interest income. Further from this, you have debited an expense of Rs. 2,64,00,715/- as salary and wages and Rs. 4,69,00,663/- as legal and professional fees. It is to be show caused that why these expenses, if found to be allowed, is not to be capitalized as they pertained to expenditure during construction period." In response to this, the assessee filed details vide letter dated 05/02/2014 on justification of allowability of salary and professional fees. The assessee has stated that in addition to setting up of the power project, the assessee to increase its operational area had also evaluated the viability of various other areas within its business objects and incurred salary cost and other administrative o....
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....aimed as revenue expense, b. Indiabulis Real Estate Limited: The assessee explored the opportunity with MSEDCL who wanted to appoint distribution franchisee for Nagpur Urban Distribution Divisions of Gandhibag. Civil Lines and Mahal. IBREL provided consultancy in preparation of bid to act as distribution franchisee of the state electricity board. Such efforts were done in the normal course of the assessee's business and is quite routine in nature. It is, thus, claimed as revenue expense. " The ld AO asked on 17/02/2014 and 19/02/2014 assessee to file any agreement that were made for legal and professional expenses with the concerned parties. In response to this, the assessee has stated that as the parties who have given consultancy were known to the assessee, the execution of an agreement was not considered necessary. It is to be brought on record here that on the query of the nature of work performed by these entities the assessee has stated vide point no.3 in its letter 19/02/2014 that - with respect of your query regarding agreement with the parties, it is submitted that the conduct of the parties is evident from the invoices attached herewith. From th....
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....being given the assessee did not produce any documentary evidence on the nature of work performed by M/s Indiabulls Real Estate Limited. It has only filed Form No.16A which though stands as a proof for deposit of tax and for the amount paid but by no stretch of imagination it can be considered as a test whether the expense is of capital or revenue nature. 4. It has been held in the case of Arvind Mills Ltd. Vs CIT (SC) 197 ITR 422 that Capital Expenditure would not become revenue expenditure simply by reason that it was incurred in connection with business activities, which ultimately resulted in efficiently carrying on day-to-day business. Moreover, the expression 'enduring benefit' and 'rights of a permanent nature' are only descriptive and not definite and are relative in meaning not synonymous with 'permanent' or 'everlasting' as held in Devidas Vithaldas & Co. Vs. CIT (SC) 84 ITR 754. 5. It has been held in the following cases, which further clarifies that these expenses made by the assessee are of capital in nature: a. Commencement of business is relevant for allowance of expenditure u/s 37 and not setting up of the business- Expenditure incurred pr....
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....med as revenue expense. 2 Indiabulls Real Estate Limited 11,030,0 00 The assessee explored the opportunity with MSEDCL who wanted to appoint distribution franchisee for Nagpur Urban Distribution Divisions of Gandhlbag, Civil Lines and Mahal. IBREL provided consultancy in preparation of bid to act as distribution franchisee of the state electricity board. Such efforts were done in the normal course of the assessee's business and is quite routine in nature. It is, .thus, claimed as revenue expense. 3 S. Khandelwal & Co. 1,103 Other Misc. 4 Envirotech Consultants Pvt. Ltd. 22,060 Other Misc. Total 46,900,663 5.3.2 In this regard, the Ld. AR filed detailed submissions is as under: "In the present case, the AO had treated Rs. 4.69 erores, being the legal and professional charges debited in the audited Profit and Loss Account of the assessee as capital expenditure. In the humble submission of the assessee, these expenses have no correlation with the ongoing project and the same have been incurred for the purpose of assessee's business, not related to the project. Thus, these expenses had been deb....
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....he financial year, and does not cover the full year. The Ld. AO, while passing the impugned order, has taken notice of this claim of the appellant regarding salary of the high level officials of the appellant company, who observed that the appellant was in the business of setting up a Power Plant at Bhaiyathan, Chhattisgarh, which is yet to be set-up. It was observed by him that prior to the current year all expenses in the nature of employee remuneration were duly capitalised as preconstruction period expenses. Keeping in view the above, the Ld. AO capitalized the salary expenses against the cost of the Power Plant, which is being set-up by the appellant company. 5.2.2 Before me, the Ld. Appellant counsel conceded that undoubtedly the appellant company is still in the process of settingup a Thermal Power of Project (Bhaiyathan Project) in the state of Chhattisgarh. It was informed that the aforesaid employees are already on the pay-roll of the holding company M/s India Bulls Power Ltd., whose salaries were reimbursed in the current year by the appellant company, as they had provided the services for exploring new opportunities for the company. It was submitted that the ap....
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....d to carry on the business of acquiring, operating, managing and maintaining existing power generation stations, tie- lines, sub-stations and transmission lines, either owned by the private sector or public sector or the Government or Governments or other public authorities and for any or all of the aforesaid purposes, to do all the necessary or ancillary activities as may be considered necessary or beneficial or desirable and in any manner deal with or dispose of undertaking, property, assets, rights and all other effects which in the opinion of the Company is conducive to the attainment of any or all of its business objectives or to acquire and dispose of shares, securities and interest in such Businesses. (5) To carry on the business of design, engineering, construction and development of power projects Including hydroelectric projects, renewable energy, nuclear, gas and coal and fuel oil based projects. 6.2 The Ld. Counsel were asked to explain whether the said group companies namely M/s Elena Power & Infrastructure Ltd. and M/s India Bull Real Estate Ltd. had any expertise, skill set or any prior experience of executing such consultancy studies. The appellant....
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....ed to be for MSEDC again, the appellant company name comes only in the initially introduction in one sentence without mentioning the terms and scope of the study, the time-frame for the study, the methodology used for the study etc., as under:- "M/s Indiabulls CSEB Bhaiyathan Limited (ICBL) is willing to participate in the bid invited by MSEDCL. In this regard, ICBL ought assistance from Indiabulls Real Estate Limited (IBREAL) to develop bidding strategy for Indiabulls to participate in bid." 6.5 The appellant was also asked to explain the exact nature of the services rendered by M/s Elena Power & Infrastructure ltd. and M/s India bulls Real Estate Ltd., in the light of the feet that the invoices raised by both the parties give the narration 'consultancy in relation to Bhaiyathan Power Project'. The Ld. Appellant counsel before me, submitted that the appellant intended to develop an advance strategy for backward and forward integration with the power plant, which was being set-up in Chhattisgarh. In view of this, it wanted to enter into bidding for coal mines in West Bengal in order to ensure supply to the Bhaiyathan Power Plant, when it is constructed. Fu....
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....et-up. Similarly, the interest in the Maharashtra State electricity distribution company's bid was to ensure forward integration of power to be produced by its power plant for distribution purposes. Undoubtedly, the invoices issued by M/s Elena Power & Infrastructure Ltd. and M/s India bulls Real Estate Ltd. clearly show that such consultancy services were in respect of M/s Bhaiyathan Power Project only, which is proved by the appellant's own admission in this regard. The appellant's plea that the narration on such invoices does not denote the nature of the services and that in its view since the company's name is "... Bhaiyathan Power", the narration in the invoices have to be read as "consultancy narration to Bhaiyathan Power's Project". However, on the facts of the case it is evident that the appellant's interpretation is not supported by facts and circumstances of the case. Evidently, the appellant intended to make backward and forward integration with respect to its power plant, which is yet to be set-up. The appellant has capitalised all expenses pertaining to the power project. Since the project for backward and forward integration were at bid stage o....
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....ting up of its power plant. Since the loan could not be utilized for the time being due to legal entanglements, the funds were temporarily advanced to the fellow subsidiaries and interest was earned thereon. The interest earned was to be used for construction of the power plant. 2) Since the power plant business had not been set up, the receipts and payments would be clearly on capital account and hence not liable to tax. In a case where these receipts and payments pertain to the fixed structure of the company's business that was being set up, it would be inconsistent to hold that the expenditure incurred by the Assessee prior to the setting up would be of a capital nature but the receipts would be of a revenue nature. 3) It has been held in the following case laws that surplus money lying idle which has earned interest income during the period of construction is to be treated as a capital receipt and is to be set off against pre-operative expenses. 4) Further, the Assessee had taken the borrowed funds for the purpose of construction and since the construction activity was temporarily slowed due to various legal issues during the impugned A.Y, the Ass....
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....sum by way of additional share capital. The assessee stated that said funds were required for purchase of land and development of infrastructure, but due to legal entanglements with respect to title of land, they were temporarily put in fixed deposit with bank and interest was earned thereon. It claimed that said interest was capital receipt and, therefore, should be set off against pre-operative expenses. The Assessing Officer, however, treated the interest as 'income from other sources'. On appeal, the Commissioner fAppeals] categorically found that the funds were placed in fixed deposit so that liquidity was ensured and money would remain available when required for purchase of land and infrastructure development and, hence, the interest earned was 'inextricably linked' with the setting up of the power plant. He, therefore, applied the judgment of the Supreme Court in CIT v.Bokaro Steel Ltd. [1999] 236 ITR 315 / 102 Taxman 94 and allowed the claim of the assessee by directing the Assessing Officer to delete the addition and to consider the same for capitalization towards pre-operative expenses. On the revenue's appeal, the Tribunal, following decision in Tuti....
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....iness, profession or vocation and since they were not fully set up at the time the impugned payments were received, the receipts were of a capital nature and were not liable to tax. "So far as the receipts from the sale proceeds of trees, grass, boulders and stone were concerned, they represented the sale proceed of capital assets and were, therefore, capital in nature. So bar as the receipts on account of tender forms and by wav of water and electricity charges to the contractors were concerned, they would not be treated as arising out of a source of income separate from the business which was being set up. Since the business had not been fully set up. the receipts and payments would be clearly on capital account and hence not liable to tax. In a case where these receipts and payments pertain to the fixed structure of the company's business that was being set up. it would be inconsistent to hold that the expenditure incurred bv the assessee prior to the setting up would be of a capital nature but the receipts would be of a revenue nature. Hence, the impugned receipts were of a capital nature and were not liable to tax." iv. Commissioner of Income-tax....
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.... vi. Principal Commissioner of Income Tax. Bengalure v. Bank Note Paper Mill India (P.) Ltd. [2018] 95 taxmann.com 158 (Karnataka): Facts of the judgment: Assessee-company was engaged in construction activities. Share capital was received to meet capital expenditure for setting up the factory. Funds were not required immediately and hence the Assessee made deposits with bank on which he earned interest. It was held that Interest income earned by Assessee company on bank deposits made out of share capital, prior to confmencement of business operations of the company during the construction period was not liable to be taxed as 1FOS as the said interest income was earned prior to commencement of operations of the company during the construction period and the same was eligible for deduction against public issue expenses incurred by company as it was on capital account. vii. Karnataka State Agricultural Produce Processing & Export Corporation Ltd. [2015] 377 ITR 496 (Karnataka) Facts of the judgment: The assessee was a company, fully owned by the Government of Karnataka, engaged in trading in agricultural produce and was an approved chan....
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....tended that the capital money in the business was stock-in-trade of the business and such stock-in-trade rotated in one form or the other and, therefore, rotation of capital in different forms was in the course of carrying on of the business. It was further contended that keeping money in safe custody in the shape of FDRs and securities was for a business purpose to start a new unit for which licence was later obtained for manufacturing spun yarn from cotton in existing factory premises and that was why, at the end of the year, the deposits remained only to the tune of one-fourth of the original deposits. The Commissioner (Appeals), after examining the matter in detail, allowed the assessee's claim. The Hon'ble Tribunal held as under: "In the instant case, the assessee's intention was a bona fide intention and the surplus money, which was earned from the business, was Ivina idle. Then the assessee made a fixed deposit with the bank and when the assessee succeeded in obtaining the licence from the Government of India for the new unit for the manufacturing of spun yarn from cotton in the existing factory premises, it encashed the FDRs and utilised the same for the pu....
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....ration. [Para 24]" Alternate submissions: II. Ground No. 1.1.2.1: Without prejudice to the above. Employee cost and Legal and professional charges should be allowed: 1) Expense incurred wholly and exclusively for the purpose of business: In addition to setting up of the power project, the Assessee had also evaluated the viability of various other areas to increase its operational area. The Assessee had incurred salary cost of Rs. 2,64,00,715 and legal and professional charges of Rs. 46,900,663 in respect of the same. Such efforts were done in the normal course of business. 2] Employee cost and Legal and professional charges are revenue in nature: [A] Legal and Professional Charges: The Assessee had received services in the nature of consultancy for the preparation of bid documents for which payment was made. Legal and professional charges were paid to the following: • Indiabulls Real Estate Limited ("1BREAL"): Ultimate Holding Company- Amount charged Rs. 1.10.30.000 a. Maharashtra State Electricity Distribution Company Limited ("MSEDCL") is one of the largest public sector companies engaged in the business of electr....
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....ccounts) 551,136 11 Vijay kumar gupta Deputy general manager (business development) 536,502 12 Ajay thakur General manager (business development) 450,000 13 Kiran Chavan manager 363,750 14 Vir singh chauhan Vice president [administration) 270,000 INR 26,400,715 (vii) The observations of IBREAL are in the feasibility report, • Elena Power and Infrastructure Limited ("EPlL"~):- Fellow subsidiary Company- Amount charged Rs. 3.58.47.500 East of Damagoria coal blocks of Raniganj Coalfield had been allotted to West Bengal Power Development Corporation Limited ("WBPDCL"). The Assessee was willing to participate in the bids invited by WBPDCL for selection of mine developer and operator for development, mining and supply of coal from east of Damagoria in Raniganj coal block allotted to WBPDCL. The Assessee sought assistance from EPIL to develop bidding strategy for the Assessee to participate in the bid. EPIL had been entrusted to prepare the Mining plan for the coal blocks. It provided consultancy and coordinated in preparation of the said bid though it did not fructi....
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....e not of nature of capital expenditure, nor was it in the nature of personal expenses of the Assessee. 6) Auditor's Approval: The auditor's approval is the conclusive evidence that such expenses are not related to the project of the company. 7) Improper reasons recorded by the Ld. AO and the Ld. CITfAl: For rejecting the claim for allowance of the amount paid, no proper reasons were recorded by the Ld. AO and the Ld. C1T(A). On what basis have they concluded that the expenditure pertains to the power project? 8) Assessee to decide whether any expenditure should be incurred in the course of his or its business: It is open to come to a conclusion either that the alleged payment was not real or that it was not incurred by the Assessee in the character of a businessman or that it is not laid out wholly and exclusively for the purpose of the business of the assessee and to disallow it. But it is the function of the Assessee to determine the work for which the remuneration should be paid to an employee of the Assessee. If the Ld. AO and Ld. CIT(A) are satisfied that the expenditure was laid out or expended wholly and exclusively for the purpose of the busin....
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....cessarily for the purposes of the business. But an employer in Fixing the remuneration of his employees is entitled to consider the extent of his business, the nature of the duties to be performed, and the special aptitude of the employee, future prospects o f extension of the business and a host of other related circumstances. The rule that increased remuneration can only be justified if there be corresponding increase in the profits of the employer is, in our judgment, erroneous." iv) CIT v. Oracle India fP.l Ltd. f2011) 243 CTR 103 (Delhi!: It was held that revenue cannot sit in arm's chair of Assessee and decide as to how affairs of business were to be run and wasteful or excessive expenditure was to be curtailed v) CIT v. Dalmia Cement IP.l Ltd f20021 121 TAXMAN 706 (DELHI!: Once it is established that there is a nexus between expenditure and purpose of business, revenue cannot justifiably claim to put itself in armchair of a businessman or in position of Board of Directors and assume said role to decide how much is reasonable expenditure having regard to circumstances of case vi) DCIT v. Manish Buildwell fP.l Ltd. [2012] 23 taxmann.com ....
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.... account. The new venture was managed from common funds, control over the two businesses was in hands of same management and administration. Participation hy assessee in the tender demonstrates that its business is set up during relevant year. 3) What was needed for setting up of the said business was to secure a business place or an office, to provide it with furniture, etc., to have a telephone, to maintain the office and make ready everything to start business. As a matter of fact the Assessee had already commenced its business when it had engaged consultants to help it in the preparation of certain bids. 4) Difference between 'ready to commence' and 'commenced' is only technical or academic, as once business is established, all expenses in relation thereto are deductible irrespective of actual commencement of business. 5) The assessment order reveals that Ld. AO had disallowed the expenses claimed by the Assessee for the reason that it has not shown resultant income in the accounting year. It appears that Ld. AO has swayed away with an impression that whenever any expenses are incurred by the Assessee then resultant income should have ....
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....learned counsel for the parties. 8. We find that this Court in the case of Dy. CIT v. Core Health Care Ltd. [2008] 298 ITR 194/167 Taxman 206 has affirmed the view taken by the Gujarat High Court. 9. In this view of the matter, we are of the considered opinion that the Income Tax Appellate Tribunal was justified in allowing the expenditure of Rs. 3,37,84,348/- towards the interest paid on the loans taken and expenditure on other items connected herewith for establishment of the unit, while affirming the order of the Commissioner of Income Tax [Appeals). 10. Learned counsel for the Revenue-appellant submitted that the respondent cannot claim depreciation on the amount of interest which has been allowed as revenue expenditure and therefore, the depreciation referable to such interest expenditure be reversed. Learned counsel for the respondent however submitted that there is nothing on record that depreciation on this amount has been taken by the respondent. 11. Be that as it may, if as a fact the respondent has taken any depreciation on the amount of interest and other items which has been allowed as revenue expenditure that much depreciation shoul....
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.... Previous means the financial year immediately preceding the assessment year. The proviso appended to this section further contemplates that in case of a business newly set up in the said financial year, the previous year shall be the period beginning with the date of set up of the business. The expression 'set up' has not been defined anywhere in the Act but it is understood in the common parlance and has been explained in a large number of decisions. According to the meaning expounded in the authoritative pronouncements, if an assessee is in a position to deliver the goods, it means that the business is set up. Actual delivery is immaterial. For example, if a person wants to carry on the business of transportation, the moment he purchased the vehicle for transporting the goods and arranged the space then it would indicate that business has been set up, it is immaterial whether he was able to actually transported the goods or not. [Para 7] Adverting to the facts of present case, the business of the assessee is development of real estates. It has participated in a tender floated bv the Official Liquidator of the High Court. The participation in the tender was starting of on....
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....er of Income-tax 5fl) v. Essar Oil Ltd. [2011] f Mumbai) The assessee was in the business of operation of rings for extraction of oil; undertaking offshore contracts for laying of pipelines; setting up of refinery etc. and marketing of petroleum products. As part and parcel of these activities, it was bidding for various contracts, and incurred expenditure on travelling, bidding for tenders, exploration activities at blocks, etc. It claimed that since these expenses were revenue in nature and directly related with ongoing business, entire expenditure incurred during financial year should be allowed, whereas the Assessing Officer disallowed the same. On appeal, the Commissioner (Appeals) deleted the addition made by the Assessing Officer following the order of the Tribunal in assessee's own case, wherein identical issue had been decided in favour of the assessee by the Tribunal. The Hon'ble Tribunal held as under: "Following the decision the Tribunal in ITA Nos. 3643 to 3645/M/2002 The impugned expenditure incurred by the assessee during the previous year for setting up refinery is to be allowed. Therefore, the order of the Commissioner (Appeals) is to....
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.... be said to be incurred or allowable. Rather, the reality of any situation is that once the business is set up the assessee has to necessarily incur expenses after which only income could be generated. Since the Legislature in their wisdom did not intend to use the term begins to manufacture, in section 3(l)(d) or section 35D. the object of the enactment clearly goes to indicate that what is important is the setting up of the business, which is the starting point for determination o f revenue expenses and income. It is but natural that unless and until the business is set up it cannot be said to be ready to commence business. Therefore, the actual commencement of business follows the setting up of business which is starting point. Thus, the expenditure incurred from the date of setting up of the business till the actual commencement of production is allowable as revenue expenditure." viii) COROMANDEL EXPORTS (P) LTD. v. INCOME-TAX OFFICER H9841 20 TTI 503 (Hyderabad) The assessee-company was set up with the object of exporting tobacco. It took on rent a building, incurred some expenses like filing fees, audit fee, postage and telegram and legal e....
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....have identified each expenditure and the expenditure related to the project has already been capitalized as expenditure during the construction. An expenditure, which is not related at all to those projects, has been debited to the profit and loss account. 9. The learned departmental representative vehemently supported the order of the learned lower authorities and submitted that the expenditure of salary and legal and professional expenses incurred by the assessee are also related to the project and therefore it has been correctly held to be the expenditure incurred during the construction period by assessee. He further submitted that the claim of the assessee that interest income should be considered as reducing the cost of the project and should be removed from the taxable income for the year is devoid of any merit as assessee himself has credited the above sum to the profit and loss account as income not related to the project. Therefore, now the assessee cannot say that the same needs to be excluded. 10. Learned authorised representative countering the argument of the learned senior departmental representative vehemently stated that at each stage the attempt must be made....
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....nting year the assessee has debited Rs. 6447965/- and during the year further debited a sum of Rs. 22477857/- making the total expenditure during the construction. Pending capitalization on account of legal and professional charges of INR 5 8925822/-. Over and above this the assessee has debited INR 2 6400715/- as salary and wages expenditure to the profit and loss account and legal and professional fees of INR 4 6900663/- under the head administrative expenses. In note number vi in schedule and the assessee has submitted that any expenditure directly/indirectly related and attributable to the construction of power projects and incidental to setting up power project facilities, incurred prior to the date of commencement of commercial operation of the power project, or accumulated under expenditure during construction. Pending capitalization, to be capitalized on completion of construction of the respective power projects and to commencement of commercial operations. In notes to accounts in a note number ii) the assessee has stated that assessee is in the process of setting up a thermal power project at Bhayathain in the state of Chhattisgarh. The project is planned to have two supe....
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....rred salary costs and other administrative overhead for the same. Therefore, the assessee has incurred the said cost in the profit and loss account as the employees were involved in exploring new opportunities for the assessee company and other expenditure were involved at managing the company at corporate level. It was further stated that some of the employees had been making efforts in helping the company to explore potential and prospective borrowers for the funds available and thus helping earning the income also. Therefore, on the above bases the assessee debited the cost to the profit and loss, as it was neither directly nor indirectly related to the power project. Similarly with respect to the legal and professional charges it was submitted that INR 3 5847500/- has been incurred for bids for selection of mine developer and operator for development mining and supply of coal in coal block allotted to the assessee this sum is provided as consultancy and coordination charges in preparation of the above paid. Ultimately, it is altogether a different aspect that it did not fructified. Therefore the efforts were done in the normal course of the assessee's business and are quite rou....
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....Bulls real estate Ltd that is placed at page number 164 to 245 of the paper book. Further feasibility study report prepared by Eleanor power and infrastructure Ltd is also placed at page number 246 - 359 of the paper book. On perusal of the feasibility study report and field study report, it is apparent that both these expenditure are not related to the power project. In view of this, it is apparent that the narrations mentioned in the invoices are general in nature and does give an indication that they relate to the power project but when the respective reports are seen it is apparent that they do not relate directly or indirectly to the power project. Thus, narration in invoice cannot be the sole guide to determine the capitalization of expenditure involved, if the other relevant documents show otherwise. The only argument of the learned assessing officer is that this expenditure should have been capitalized to the expenditure during construction account and cannot be allowed as a deduction to the assessee. However, it is not the case of the assessing officer that this expenditure is not incurred by the assessee or is not related to the business of the assessee. Had the power pro....
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.... well as the salary expenditure, which has been debited to the profit and loss account, is not related to the project (fixed assets) therefore it is not required to be capitalized. The above expenditure is required to be tested under the normal income tax provisions u/s 37 (1) of the act. Even otherwise in para number 6.5.3 of the order of the learned CIT - A has held that the assessee has capitalized all expenses pertaining to the power project and the above expenditure incurred by the assessee with respect to the salary and legal and professional fees is backward or forward integration but at bit stage. Merely because assessee has capitalized all the expenditure, relating to the power project there is no reason to capitalize all the expenditure, which are not even related to the power project, should also be capitalized. Further it is not the case of the revenue that assessee has not incurred these expenditure. Further, no evidence has been brought on record by the revenue to show that this expenditure is related to the power project only. The revenue also could not controvert that field study report and feasibility report expenditure incurred by the assessee under the head legal....
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.... as other income in the profit and loss account. In view of this ground number 3 of the appeal of the assessee is dismissed. 13. Ground number 4 of the appeal is general in nature, no separate arguments were advanced by the parties and therefore it is dismissed. 14. Accordingly, ITA number 3498/del/2015 filed by the assessee for assessment year 2011 - 12 is partly allowed. 15. Now we come to ITA number 1461/del/2016 filed by the learned deputy Commissioner of income tax, circle - 23 (2), New Delhi for assessment year 2012 - 13 against the order of the Commissioner of income tax (appeals) - 4, New Delhi wherein the action of the learned assessing officer to treat the expenses of abundant project debited in the profit and loss account of the assessee as a capital expenditure was rejected. The learned assessing officer has raised the following grounds of appeal:- a. the learned CIT (A) erred on facts and in law in relying the expenses in assessment year 2012 - 13 when the project of distribution and generation of power was abandoned in assessment year 2013 - 14. b. The learned CIT (A) has erred in relying the circular of CBDT dated 6/10/2015, which is relate....
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....e learned CIT - A has preferred this appeal before us. The learned departmental representative vehemently supported the order of the learned assessing officer and submitted that when the assessee is in the process of setting up of the power project the expenses incurred by the assessee should have been capitalized as they are related to the power project. 20. The learned authorised representative vehemently supported the order of the learned CIT - A and submitted that when the project itself has been abandoned by the assessee there is no reason to capitalize Those Expenditure to the cost of the power project. He submitted that all these expenses have been incurred by the assessee during the course of the business and are as such allowable u/s 37 (1) of the income tax act. He therefore submitted that there is no reason to as it is apparent that assessee is not able to commence the power project due to certain statutory glitches. 21. We have carefully considered the rival contention as well perused the orders of the lower authorities. The learned CIT - A has dealt with the whole issue as under:- "4. In this case there is only one disallowance of Rs. 1,08,99,459/- which....
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....i High Court referred to the decisions of: (i) the Allahabad High Court in the case of Prem Spg. & Wvg. Mills Co. Ltd. v. CIT [1975] 98 ITR 20 (All.), (ii) the Hon'ble Supreme Court in the case of Produce Exchange Corpn. Ltd. (supra), (iii) the Gujarat High Court in the case of CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 (Guj.), (iv) again the Allahabad High Court in the case of CIT v. Expanded Metal Mfgrs. [1991] 55 Taxman 429/189 ITR 317 (All.), (v) the Delhi High Court in the case of CIT v. Modi Industries Ltd. (No. 3) [1993] 68 Taxman 114/200 ITR 341 (Delhi) and (vi) again the Hon'ble Supreme Court in the case of Veecumsees v. CIT [1996] 86 Taxman 243/220 ITR 185 (SC). 27. After referring to the above referred to decisions, the High Court of Delhi, in the case of Jay Engg. Works Ltd. (supra), held as follows : "On an appreciation of the law laid down by the various decisions referred to above, it is clear that the nature of the new business is not a decisive test for determining whether or not there is an expansion of an existing business. The nature of the business could be as distinct ....