TaxTMI 
TaxTMI 
2026 (9) TMI 255
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....acturing and trading of textile products, including made-ups, fabrics, home fashion products and other related products. During the relevant period, the assessee undertook a project at Bharuch, Gujarat, with the object of setting up a manufacturing facility for towels. The project was subject to obtaining the requisite approvals from the concerned Government authorities, including approval relating to procurement of water. In the course of development of the project, the assessee incurred various expenses such as architectural fees, expenses relating to drawings and commencement permissions, preparation of the base, excavation, civil work and fencing, consultancy charges for electrical systems design, plant designing charges, professional fees and miscellaneous expenses. These expenses were accumulated in the books under the head "Capital Work-in-Progress" in the earlier years. 3. The Bharuch project, however, could not be brought to fruition on account of non-grant of the requisite approvals, particularly the approval for the proposed source of water supply. The assessee accordingly abandoned the project and wrote off the capital work-in-progress in its profit and loss account ....
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....ivil work, which, according to him, were intrinsically connected with setting up a manufacturing facility and were therefore within the capital field. The ld. CIT(A) held that the subsequent abandonment of the project did not alter the character of expenditure and that the write-off of capital work-in-progress could not be converted into revenue expenditure or business loss merely because the intended project did not materialise. 6. The ld. CIT(A) also rejected the assessee's reliance upon the absence of any ultimate enduring benefit. According to the ld. CIT(A), the test of enduring benefit could not be applied in isolation or mechanically and, where expenditure was incurred with the objective of acquiring or bringing into existence a capital asset, the fact that such asset did not eventually materialise would not change the character of the expenditure. The ld. CIT(A) further accepted the Assessing Officer's reasoning based upon the matching principle, observing that the expenditure had been incurred over several earlier years and accumulated as capital work-in-progress and that allowing the entire amount as a deduction in the year of write-off would distort the profits of the....
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....e submitted that the Special Leave Petition filed by the Revenue against the decision in Trigent Software Ltd. was dismissed in limine by the Hon'ble Supreme Court. Reliance was also placed on the decision of the Hon'ble Bombay High Court in Rediff.com India Ltd., [2021] 132 taxmann.com 71, for the proposition that expenditure incurred for carrying on business in a more convenient and profitable manner, without bringing any new asset into existence, is allowable as business expenditure. 10. The ld. AR further relied upon the decision of the Coordinate Bench in Tin Tar Retail Corp., dated 16.02.2026 in ITA Nos. 6485 to 6487/Mum/2024, wherein, it was held that expenditure incurred in the course of expansion of an existing business, where the new project does not constitute a new line of business but remains in continuation of the existing business, may be allowable as revenue expenditure even if initially capitalised, particularly where the project is abandoned and no enduring asset ultimately comes into existence. The learned Departmental Representative ("ld. DR"), on the other hand, supported the orders of the lower authorities and submitted that the expenditure was capital in n....
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.... drawings, commencement permissions, preparation of the base, excavation, civil work and fencing, consultancy charges for electrical systems design, designing charges for the plant, professional fees and miscellaneous expenses. These items were incurred in the course of pursuing the proposed expansion of the assessee's existing manufacturing operations. Since the project itself was abandoned before the contemplated manufacturing facility came into existence, and the material on record does not demonstrate the existence of any enduring capital asset available for use in the assessee's business, the ultimate character and effect of the expenditure have to be considered in the context of the existing business as a whole. 14. We are also unable to accept the proposition, in the broad manner in which it has been applied by the lower authorities, that the fact of capitalization in the earlier years concludes the matter against the assessee. The Supreme Court and High Courts have repeatedly emphasised that the distinction between capital and revenue expenditure is to be determined on the basis of the real nature and purpose of the expenditure and not merely by the form in which the ass....
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....pansion or continuation of an existing business. 17. We may also deal with the Revenue's reliance upon the matching principle. The fact that the assessee follows the mercantile system of accounting does not, in our view, by itself determine whether a particular outgoing is capital or revenue in character. The matching principle is a rule of accounting and computation and cannot override the substantive provisions governing deductibility. The Hon'ble Supreme Court in the case of Taparia Tools Ltd. (2015) 372 ITR 605 clarified that the matching concept can be applied only at the option of the assessee - i.e., where the assessee himself seeks to spread the expenditure over future years - and even then, only if the conditions of the matching concept are satisfied and the Revenue, however, cannot force such spreading or invoke the matching principle to restrict a deduction that is otherwise permissible under the statute. Once the expenditure is found to be revenue in nature and is written off upon the abandonment of the project in the relevant previous year, the question of the year in which the deduction is to be allowed has to be considered in accordance with the statutory provisio....