ITO, CHENNAI V. Geometric Engineering Constructions Pvt Ltd., CHENNAI

ITA 1947/CHNY/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4796 (ITAT-CHENNAI)
• Duration Of Justice: 9 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-04-2017
• Appeal Filed By: Department
• Bench Allotted: C
• Next Hearing Date: 10-04-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 28-06-2016
• Court: TRIBUNAL
• Department Lawyers: B NISCHAL JT
• Assessee Lawyers: R SIVARAMAN
• Keywords: Revenue expenditure; Capital expenditure
• Section: 143(3); 147

Judgement Text

, / , IN THE INCOME TAX APPELLATE TRIBUNAL BENCH C/SMC, CHENNAI , ! BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER ./ITA NO.1947/MDS/2016 ' # $%# / ASSESSMENT YEAR: 2005-06 INCOME TAX OFFICER, CORPORATE WARD-2(2), CHENNAI 600 034. VS. GEOMETRIC ENGINEERING CONSTRUCTIONS PVT. LTD. (PREVIOUSLY KNOWN AS M/S. SHRIRAM PPR TECHNOLOGIES PVT. LTD.), SIGAPPI ACHI BUILDING, 4 TH FLOOR 18/3, RUKMANI LAKSHMIPATHI SALAI (MARSHALLS ROAD), EGMORE, CHENNAI 600 008. [PAN: AAHCS 3238E] ( /APPELLANT ) ( / RESPONDENT ) &' ( ) / APPELLANT BY : SHRI B.NISCHAL, JT. CIT *+&' ( ) / RESPONDENT BY : SHRI R.SIVARAMAN, ADVOCATE , $ ( - / DATE OF HEARING : 10.04.2017 .% ( - / DATE OF PRONOUNCEMENT : 24.04.2017 /O R D E R PER SANJAY ARORA, AM : THIS IS AN APPEAL BY THE REVENUE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-15, CHENNAI ( CIT(A) FOR SHORT) DATED 03.03.2016, PARTLY ALLOWING THE ASSESSEES APPEAL C ONTESTING ITS ASSESSMENT U/S. 143(3) R/W. S. 147 OF THE INCOME TAX ACT, 1961 (TH E ACT HEREINAFTER) DATED 14.11.2008 FOR ASSESSMENT YEAR (AY) 2005-06. 2 ITA NO.1947/MDS/2016 (AY 2005 -06) ITO V. G EOMETRIC ENGINEERING CONSTRUCTIONS PVT. LTD. 2. THE ASSESSEE, IN THE BUSINESS OF TRENCHLESS PIPE REHABILITATION AND SEWER RENOVATION WORK, ENTERED INTO A COLLABORATION WITH PRESSUAG PIPE REHABILITATION EMIRATES FOR BRINGING A NEW TECHNOLOGY RELATED TO S EWERAGE SYSTEM. THERE WAS NO ACTIVITY DURING THE RELEVANT PREVIOUS YEAR, I.E. , FINANCIAL YEAR (F.Y.) 2004-05, WHILE THE ASSESSEE HAD A CONTRACT RECEIPT OF . 75,000/- FROM CHENNAI METROPOLITAN WATER SUPPLY AND SEWERAGE BOARD FOR TH E IMMEDIATELY PRECEDING PREVIOUS YEAR, I.E., F.Y. 2003-04. IT CLAIMED A TOT AL EXPENDITURE OF . 93.33 LACS, INCLUDING A SUM OF . 78,55,782/- AS DEFERRED REVENUE EXPENDITURE, FOR THE RELEVANT YEAR. THE SAME WAS EXPLAINED TO BE BY WAY OF PRE-OPERATIVE EXPENSES ON ITS PROJECT, SINCE ABANDONED AND, THEREFORE, TR EATED AS DEFERRED REVENUE EXPENDITURE. IN FACT, THE EXPENDITURE HAD BEEN INCU RRED EVEN PRIOR TO THE CURRENT YEAR. THE ASSESSING OFFICER (AO), ACCORDINGLY, CONS IDERING THE SAME AS CAPITAL EXPENDITURE, DISALLOWED THE SAME, RELYING ON THE DE CISIONS IN THE CASE OF SWADESHI COTTON MILLS CO. LTD. V. CIT [1967] 63 ITR 65 (SC) AND E.I.D. PARRY (INDIA) LTD. V. CIT [2002] 257 ITR 253 (MAD). IN APPEAL, THE ASSESSEE S UBMITTED THAT THE PROJECT HAD COMMENCED IN MARCH, 2004 AND, ACCORDINGLY, EXPENDITURE UP TO FEBRUARY, 2004, PROFILED YEAR-WISE, AS UNDER, WAS IN THE NATURE OF REVENUE EXPENDITURE: YEAR ENDED 31.3.2003: . 54,94,389 YEAR ENDED 31.3.2004: . 24,94,542 -------- ----- . 79,88,931 (OF THE SAME . 1.33 LACS WAS CLAIMED IN AY 2004-05 AND THE BALAN CE . 78.56 LACS FOR AY 2005-06). PLACING RELIANCE ON THE DECISIONS IN THE CASE OF BINANI CEMENT LTD. V. CIT [2016] 380 ITR 116 (CAL) AND INDO RAMA SYNTHETICS (I) LTD. V. CIT [2011] 333 ITR 18 (DEL), THE LD. CIT(A) HELD THAT THE EXPENSES RELATING TO AN ABANDONED PROJECT, WHICH WERE ONLY IN THE NATURE OF PRE-OPERA TIVE EXPENSES, WERE LIABLE TO BE ALLOWED AS REVENUE EXPENDITURE AND, ACCORDINGLY, ALLOWED THE SAME; THE 3 ITA NO.1947/MDS/2016 (AY 2005 -06) ITO V. G EOMETRIC ENGINEERING CONSTRUCTIONS PVT. LTD. PROJECT ACTIVITIES COMMENCING IN MARCH, 2004. AGGRI EVED, THE REVENUE IS IN APPEAL. 3. I HAVE HEARD THE PARTIES, AND PERUSED THE MATERI AL ON RECORD. THE COLLABORATION AGREEMENT WITH PRESSUAG PIPE REH ABILITATION EMIRATES IS NOT ON RECORD, NOR IS THERE ANY REFERENCE THERETO I N THE ORDERS OF THE AUTHORITIES BELOW. WHAT THEREFORE IS THE NATURE OF THE PROJECT BEING SET UP IS CONSPICUOUS BY ITS ABSENCE. BEFORE ME, THE LEARNED COUNSEL, DIFFER ENT FROM THE ONE WHO REPRESENTED THE ASSESSEE BEFORE THE FIRST APPELLATE AUTHORITY, WOULD ARGUE THAT THE EXPENDITURE WAS NOT TOWARDS SETTING UP A PROJECT BU T FOR INTRODUCING NEW TECHNOLOGY BY THE ASSESSEE INTO ITS EXISTING BUSIN ESS. HIS CLAIM, NOT SUBSTANTIATED AND, IN FACT, CONTRARY TO WHAT STANDS STATED IN THE ASSESSMENT AND THE APPELLATE ORDER, WOULD NEVERTHELESS BE CONSIDER ED ON MERITS. THE LAW IN THE MATTER IS TRITE. EXPENDITURE INCURR ED ON THE SETTING UP A PROJECT, AS INDEED REFERRED TO BOTH IN THE ACCOUNTS AS WELL AS IN THE ORDERS BY THE REVENUE AUTHORITIES, AND ONLY ON THE BASIS OF THE E XPLANATIONS OFFERED BY OR ON BEHALF OF THE ASSESSEE; IT BEING NOT PURSUED OR ABA NDONED, WOULD NOT CHANGE ITS CHARACTER AS A CAPITAL EXPENDITURE, OR CONVERT IT I NTO REVENUE EXPENDITURE. THE DECISIONS BY THE HON'BLE APEX COURT AND THE HON'BLE JURISDICTION HIGH COURT, WHICH ARE EVEN OTHERWISE BINDING ON THIS TRIBUNAL, ARE BASED ON FIRST LEGAL PRINCIPLES, AND SQUARELY ON THE POINT, AND TO WHICH WE MAY ALSO ADD OTHER DECISIONS, AS IN THE CASE OF CHALLAPALLI SUGARS LTD. V. CIT [1975] 98 ITR 167 (SC). THERE IS, IN FACT, NO CONCEPT OF DEFERRED REV ENUE EXPENDITURE (DRE) UNDER THE ACT, SO THAT EXPENDITURE IS EITHER A CAPITAL EX PENDITURE OR REVENUE IN NATURE. DRE IS AN ACCOUNTING CONCEPT, WHEREBY REVENUE EXPEN DITURE, WHICH CANNOT BE ABSORBED (BY THE PROFITS) OF A SINGLE YEAR, AND BEN EFIT OF WHEREOF WHICH IS ALWAYS UNCERTAIN AND CANNOT BE PREDICATED, LIKELY T O ARISE IN FUTURE AS WELL, IS SPREAD OVER A PERIOD OF TIME. FURTHER, AN EXPENDITU RE MAY NOT PAY DIVIDENDS IMMEDIATELY, I.E., DURING THE RELEVANT YEAR, WHICH MAY STAND TO OR OTHERWISE 4 ITA NO.1947/MDS/2016 (AY 2005 -06) ITO V. G EOMETRIC ENGINEERING CONSTRUCTIONS PVT. LTD. ARISE IN FUTURE, IS ANOTHER MATTER; THE EXPENDITURE BEING DEDUCTIBLE ON THE BASIS OF IT HAVING BEEN INCURRED (FOR THE PURPOSE OF BUSI NESS) AND LIABILITY IN ITS RESPECT CONTRACTED OR ACCRUED. THE ONLY EXCEPTION, FOLLOWING THE MATCHING PRINCIPLE, IS WHERE THE BENEFIT OF THE EXPENDITURE INURES WITH REFERENCE TO TIME OVER A DEFINED PERIOD OF TIME, I.E., IN A DEFINITE, MEASURABLE MANNER, SO THAT, THE EXPENDITURE IS SPREAD OVER THE SAID PERIOD AND IN T HE DEFINED RATIO (REF. MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. V. CIT [1997] 225 ITR 802 (SC)). IF THE IMPUGNED PAYMENT, AS STATED, IS TOWARD ACQU IRING A NEW TECHNOLOGY FOR AN EXISTING BUSINESS, THE EXPENDITURE WOULD BE IN THE FORM OF PAYMENT TO THE FOREIGN SUPPLIER, WHILE THE SAME IS OBSERVED TO BE TOWARD DUE DILIGENCE REPORT, SALARY AND WAGES, PRINTING AND STATIONERY, TRAVELLI NG, RENT, ADVERTISEMENT, ETC., OVER THE PRE-OPERATIVE PERIOD (OF THE PROJECT FOR W HICH THE SAME IS INCURRED). IT IS FURTHER ONLY THE DIRECT COSTS INCURRED FOR SETTI NG UP A PROJECT THAT WOULD STAND TO BE CAPITALIZED AS A PART OF THE PROJECT COST, AN D NOT ALL THE INDIRECT EXPENDITURE THAT MAY HAVE ONLY A CAUSAL RELATIONSHIP THEREWITH, SO AS NOT TO ADD VALUE THERETO, WHICH WOULD THUS STAND TO BE EXPENSED IN T HE YEAR OF ACCOUNT. IN OTHER WORDS, THE EXPENSES ARE EITHER IN THE NATURE OF CAP ITAL EXPENDITURE OR FALL TO BE CONSIDERED AS REVENUE EXPENDITURE FOR AN EARLIER YE AR/S. EITHER WAY, THE SAME CANNOT BE ALLOWED FOR THE CURRENT YEAR, MUCH LESS A S REVENUE EXPENDITURE. THERE IS NOTHING TO SHOW, NOT EVEN A PLEA WITH REGARD TO THE ACQUISITION OF TECHNOLOGY, WHICH COULD ONLY BE FROM THE OWNER THEREOF; RATHER, THE ADMITTED POSITION IS OF THE PROJECT HAVING BEEN ABANDONED. THE ARGUMENT, NO T ADVANCED AT ANY STAGE, IS FACTUALLY WITHOUT BASIS, AND FALLS ON ITS FACE. FUR THER, THE REFERENCE TO THE COMMENCEMENT OF OPERATIONS IN MARCH, 2004, WHICH MAY WELL BE TRUE, IS THEREFORE ONLY WITH REFERENCE TO THE ASSESSEES REG ULAR BUSINESS, WITH NO RELATIONSHIP WITH THE IMPUGNED EXPENDITURE WHICH ST ANDS ADMITTEDLY INCURRED IN THE PRECEDING YEARS ONLY IN RELATION TO THE PROJECT , SINCE ABANDONED. IN FACT, THIS 5 ITA NO.1947/MDS/2016 (AY 2005 -06) ITO V. G EOMETRIC ENGINEERING CONSTRUCTIONS PVT. LTD. CLAIM DOES NOT AGREE WITH THE FACT OF ABSENCE OF AN Y ACTIVITY DURING THE CURRENT YEAR (REFER PARA 2). THE DECISIONS BY THE HON'BLE HIGH COURTS OF DELHI AND CALCUTTA CITED SUPRA WOULD BE OF LITTLE CONSEQUENCE IN VIEW OF THE BINDI NG DECISIONS BY THE HON'BLE SUPREME COURT AND THE HON'BLE JURISDICTIONAL HIGH C OURT, SQUARELY ON THE POINT, AND WHICH THE LD. CIT(A) OUGHT TO HAVE CONSIDERED A ND, WHERE SO, DISTINGUISHED, STATING THE REASON/S FOR HER NOT FOLLOWING THE SAME . IN FACT, HER NOT DOING SO MAKES THE IMPUGNED ORDER AS LIABLE TO BE SET ASIDE AT THE THRESHOLD. NO ATTEMPT TO DISTINGUISH THE SAID DECISIONS WAS MADE BY THE L D. AR DURING HEARING AS WELL. FURTHER STILL, IT STANDS CLARIFIED HERE-IN-BEFORE T HAT THE EXPENDITURE UNDER REFERENCE DOES NOT RELATE TO THE CURRENT YEAR, I.E. , IS A PRIOR PERIOD EXPENDITURE, SO THAT IT CANNOT IN ANY CASE BE ALLOWED FOR THE CU RRENT YEAR, MAKING THE CITED DECISIONS EVEN OTHERWISE INAPPLICABLE. THIS IN FACT IS ALSO SO FOR THE REASON THAT IN THESE CASES THERE WAS AN EXISTING BUSINESS, WHIL E IN THE INSTANT CASE THE OPERATIONS ADMITTEDLY COMMENCE ONLY IN MARCH, 2004. 4. IN THE RESULT, THE REVENUES APPEAL IS ALLOW ED. ORDER PRONOUNCED ON APRIL 24, 2017 AT CHENNAI . SD/- ( ) (SANJAY ARORA) /ACCOUNTANT MEMBER /CHENNAI, / /DATED, APRIL 24, 2017 EDN 0 ( *'-12 32%- /COPY TO: 1. &' /APPELLANT 2. *+&' /RESPONDENT 3. , 4- ( )/CIT(A) 4. , 4- /CIT 5. 2$56 *'-' /DR 6. 67# 8 /GF 6 ITA NO.1947/MDS/2016 (AY 2005 -06) ITO V. G EOMETRIC ENGINEERING CONSTRUCTIONS PVT. LTD.