The ACIT, (OSD)Range-8, Ahmedabad V. M/s. Suzlon Infrastructure Limited, Ahmedabad

ITA 215/AHD/2009

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1791 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 2 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 17-03-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 22-01-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHELLEY JINDAL
• Keywords: Revenue expenditure; Capital expenditure

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH C AHMEDABAD BEFORE S/SHRI BHAVNESH SAINI, JM AND D.C.AGRAWAL, A M ASSTT. C.I.T. (OSD), CIRCLE- 8, AHMEDABAD. VS. SUZLON INFRASTRUCTURE LTD., SUZLON HOUSE, 5, SHREEMALI SOCIETY, NAVRANGPURA, AHMEDABAD. PAN :AAACS 6871 Q (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI SHELLEY JINDAL, CIT, DR RESPONDENT BY:- SHRI TUSHAR HEMANI, AR O R D E R PER D.C. AGRAWAL, ACCOUNTANT MEMBER . THIS IS AN APPEAL FILED BY THE REVENUE RAISING FOL LOWING GROUNDS- (1) THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DEL ETING THE DISALLOWANCE MADE BY THE AO ON ACCOUNT OF SITE DEVE LOPMENT EXPENDITURE OF RS.1,17,18,630/- INCURRED FOR MULLUR KARNATAKA SEZ TREATING SUCH EXPENDITURE AS CAPITAL EXPENDITUR E. 2. THE FACTS OF THE CASE ARE THAT ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF CIVIL WORK, ERECTION AND COMMISSIONING OF WIND MILLS AND DEVELOPMENT OF SPECIAL ECONOMIC ZONES (SEZ). THE RE TURN OF INCOME WAS FILED ON 15/10/2007 DECLARING TOTAL LOSS OF RS. 15,10,08,111/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICE D THAT ASSESSEE HAS CLAIMED EXPENDITURE INCURRED FOR A PROPOSED SEZ IN MULLUR, KARNATAKA. ITA NO.215/AHD/2009 ASST. YEAR 2007-08 ITA NO.215/AHD/2009 ASST. YEAR 2007-08 2 THIS SEZ WAS NOT SUBSEQUENTLY SET UP. THE EXPENDITU RE SO INCURRED WAS HELD AS CAPITAL EXPENDITURE BY THE AO FOR THE FOLLO WING REASONS :- (1) THE ASSESSEE HAS NOT RECEIVED ANY INCOME AS DEVELOP ER FOR MULLUR SITE AT KARNATAKA. (2) NO CONTRACT FOR LEASING OF LAND HAS BEEN ENTERED IN TO. SINCE BUSINESS HAS NOT COMMENCED FOLLOWING THE DECI SION OF HON. SUPREME COURT IN TUTICORIN ALKALI CHEMICALS & FERTI LIZERS LTD. 227 ITR 172 & OTHERS AND DECISION OF HON. ALLAHABAD HIGH CO URT IN CIT VS. MOHAN STEEL LTD. 191 CTR 279, THE AO TREATED THE EX PENDITURE AS PRE- COMMENCEMENT/PRE-PRODUCTION EXPENDITURE AND DISALLO WED THE CLAIM. 3. THE LD. CIT(A) ALLOWED THE CLAIM BY FINDING THAT ASSESSEE HAS ALREADY STARTED ACTIVITIES LIKE IDENTIFICATION OF L AND FOR SEZ. FURTHER ASSESSEE WAS ALREADY IN THE BUSINESS OF ESTABLISHIN G SEZ AND THUS IT WAS A CONTINUOUS COURSE OF ACTIVITIES. IT IS NOT NECESSAR Y THAT ACCORDING TO THE LD. CIT(A) ALL THE ACTIVITIES OF THE BUSINESS SHOULD BE STARTED SIMULTANEOUSLY. ONCE ASSESSEE WAS ALREADY IN THE LINE OF BUSINESS E XPENDITURE INCURRED ON THE PROPOSED ACQUISITION OF SEZ AT MULLUR-KARNATAKA IS REVENUE EXPENDITURE. THE LD. CIT(A) RELIED ON THE FOLLOWING AUTHORITIES :- (1) CIT VS. ALEMBIC GLASS INDUSTRIES LTD. 103 ITR 714 ( GUJ); (2) SAYAJI IRON & ENGG. WORKS (P) LTD. VS. CIT 96 ITR 2 40 (GUJ); (3) CIT VS. HINDUSTAN GENERAL ELECTRICAL CORPN. LTD. 81 ITR 243 (CAL); (4) CIT VS. ALEMBIC GLASS INDUSTRIES LTD. 71 ITR 752 (G UJ); AND (5) GUJARAT SMALL SCALE INDUSTRIES CORPN. LTD. VS. CIT 142 ITR 35 (GUJ). 4. WE HAVE HEARD THE PARTIES AND CAREFULLY PERUSED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW THERE IS NO CASE FOR INTERFERENCE IN THE ORDER OF LD. CIT(A). IT HAS BEEN SUBMITTED BY THE L D. AR THAT ASSESSEE COMPANY HAD PLAN TO DEVELOP FOUR SEZS AS UNDER :- ITA NO.215/AHD/2009 ASST. YEAR 2007-08 3 1. PADUBIDRI KARNATAKA 2. MULLUR KARNATAKA 3. COIMBATORE- TAMILNADU AND 4. BARODA-GUJARAT. IT HAD INCURRED EXPENDITURE FOR PURCHASE OF LAND AT THREE PLACES TO THE FOLLOWING EXTENT:- LOCATION LAND PURCHASED (RS.) PADUBIDRI-KARNATAKA RS.42,67,23,209/- COIMBATORE-TAMILNADU RS.1,16,51,39,157/- BARODA-GUJARAT RS.22,59,51,362/- THE ASSESSEE HAD ALSO INCURRED EXPENDITURE FOR DEVE LOPING MULLUR SEZ IN KARNATAKA TO THE FOLLOWING EXTENT :- OPERATING COST OF INFRASTRUCTURE DEVELOPMENT BUSINE SS PARTICULARS AMOUNT (RS.) OPERATING AND OTHER EXPENSES PROJECT SITE EXPENSES 845,370 SECURITY EXPENSES 8,713 DIRECT EXPENSES (SHOWN IN ANNEXURE-28 SUBMITTED TO YOUR OFFICE ON 20.06.2008 8,54,083 RENT 270,000 COMMUNICATION EXPENSES 268,610 TRAVELLING, CONVEYANCE AND VEHICLE EXPENSES 1,385,0 10 REPAIRS TO BUILDING 10,596 OTHER SELLING AND ADMINISTRATIVE EXPENSES 3,370,807 CONSULTANCY CHARGES TOTAL (A) 3,194,864 9,353,864 EMPLOYEES REMUNERATION AND BENEFITS SALARIES, WAGES, ALLOWANCES AND INCENTIVES 2,090,62 1 CONTRIBUTION TO PROVIDENT AND OTHER FUNDS 4,812 STAFF WELFARE EXPENSES 269,227 TOTAL (B) 2,364,660 GRAND TOTAL (A) + (B) 11,718,6 30 THE OBJECT OF THE COMPANY WAS TO ESTABLISH SEZS AND SALE THE PLOTS TO PROSPECTIVE INDUSTRIALISTS WHO LIKED TO ESTABLISH T HEIR INDUSTRIES IN SUCH SEZ. FOR CERTAIN UNAVOIDABLE REASONS THE SEZ AT MUL LUR-KARNATAKA COULD NOT BE MADE OPERATIVE THIS YEAR AS LAND FOR THAT SE Z COULD NOT BE ITA NO.215/AHD/2009 ASST. YEAR 2007-08 4 SATISFACTORY LOCATED . HOWEVER, THE ASSESSEE HAS AL READY COMMENCED THE BUSINESS. IT HAS CARRIED OUT ALL THE NECESSARY ACTI VITIES FOR THE BUSINESS. BUSINESS IS ALWAYS A CONTINUOUS COURSE OF ACTIVITIE S. IT CONTAINS MULTIPLE TRANSACTIONS. SOME TRANSACTION SUCCEEDS AND RESULTS INTO PROFIT TO THE ASSESSEE AND SOME TRANSACTION MAY FAIL FOR VARIOUS COMMERCIAL REASONS BUT FOR THAT MATTER IF A PARTICULAR TRANSACTION FAI LS THEN EXPENDITURE INCURRED IN CARRYING OUT SUCH TRANSACTION CANNOT BE TREATED AS CAPITAL. IT IS NOT A CASE THAT ASSESSEE IS YET TO COMMENCE THE BUS INESS AND MAKING INVESTMENT IN PROPORTION THEREOF. THE CASE OF THE A SSESSEE IS COVERED BY THE FOLLOWING AUTHORITIES :- (1) PREM CONDUCTORS PVT. LTD. VS. CIT (1977) 108 I TR 654 (GUJ) IN THIS CASE, THE ASSESSEE COMPANY WAS INCORPORATE D IN NOVEMBER, 1963. THE OBJECT OF THE COMPANY WAS TO MANUFACTURE ALIMINIUM AND COPPER CONDUCTORS. FOR THE ASSESSMENT YEAR 1965-66, THE COMPANY SHOWED A LOSS OF ABOUT RS.47,000/- WHICH LOSS WAS M ADE UP OF EXPENSES LIKE SALARIES, POSTAGE, RATES AND TAXES, PRINTING, ETC. FOR THE ASSESSMENT YEAR 1966-67, THE ASSESSEE CLAIMED A LOSS OF RS.58, 000/-. THE COMPANY ACTUALLY STARTED PRODUCTION IN JUNE, 1965, WAS DISA LLOWED BY THE DEPARTMENT AS WELL AS BY THE TRIBUNAL. ON REFERENCE , DIVAN, CHIEF JUSTICE (AS HE THEN WAS), SPEAKING FOR THE DIVISION BENCH OF THE GUJARAT HIGH COURT, OBSERVED THAT ONE BUSINESS ACTIVITY MIG HT PRECEDE ANOTHER AND THAT WHAT WAS REQUIRED TO BE SEEN WAS AS TO WHE THER ONE OF THE ESSENTIAL ACTIVITIES FOR THE CARRYING ON OF THE BUS INESS OF THE ASSESSEE COMPANY AS A WHOLE WAS OR WAS NOT COMMENCED. IT WAS HELD THAT THE COMPANY HAD COMMENCED ITS BUSINESS BY SECURING ORDE RS FIRST AND GOING INTO PRODUCTION LATER ON AND AS THE BUSINESS ACTIVI TY OF SECURING THE BUSINESS HAD PRACTICALLY STARTED SINCE THE VERY DAT E OF THE INCORPORATION OF THE COMPANY, THE BUSINESS ACTIVITY ALSO STARTED FROM THE DATE OF ITS INCORPORATION AND NOT FROM THE DATE WHEN THE PRODUC TION OF ALUMINUM CONDUCTORS COMMENCED. THE SAID AMOUNTS WERE TREATED AS BUSINESS LOSSES. ITA NO.215/AHD/2009 ASST. YEAR 2007-08 5 (2) SAYAJI IRON & ENGG. WORKS (P) LTD. VS. CIT (197 4) 96 ITR 240 (GUJ) CAPITAL OR REVENUE EXPENDITURE FOREIGN TOUR EXPEN SES DIRECTORS AND PRODUCTION MANAGER GOING ABROAD FOR ACQUAINTING THE MSELVES WITH NEW DESIGNS OF PRODUCTS REVENUE EXPENDITURE. HELD - THE EXPENSES WERE INCURRED BY THE ASSESSEE COMPANY FOR PURPOSES OF GETTING AN IDEA AS TO WHAT SHOULD BE THE DESIGN OF NEW ITEM OF HOIST TO BE MANUFACTURED AND THE NATURE OF PROCESS INVOLVED IN THE MANUFACTURE THEREOF AND NOT WITH A VIEW TO ACQUIRE RIGHTS OR BE NEFITS OF A PERMANENT CHARACTER. THE TRIBUNAL WAS NOT JUSTIFIED IN DISALL OWING THE PROPORTIONATE CLAIM OF THE ASSESSEE COMPANY FOR THE EXPENSES INCU RRED IN CONNECTION WITH THE TRIP ABROAD BY ITS TWO DIRECTORS AND THE P RODUCTION MANAGER IN CONNECTION WITH ACQUAINTING THEM SELVES WITH THE TE CHNICAL KNOW-HOW FOR MANUFACTURING ELECTRIC HOISTS ON THE GROUND THAT IS WAS IN THE NATURE OF CAPITAL EXPENSES COMMISSIONER OF INCOME-TAX VS. CI BI OF INDIA LTD. (1968) 69 ITR 692; (1968) 2 SCR 696 (SC) APPLIED. (3) CIT (CENTRAL), CALCUTTA VS. HINDUSTHAN GENERAL ELECTRICAL CORPORATION LTD. (1971) 81 ITR 243 (CAL) BROADLY SPEAKING, THEREFORE, IT MAY BE OBSERVED TH AT ONE OF THE PRIMARY RULES FOR DETERMINING WHETHER A PARTICULAR EXPENDIT URE IS A REVENUE OR A CAPITAL EXPENDITURE IS THAT THE COURT FROM THE TERM S OF THE AGREEMENT BETWEEN THE PARTIES AND FROM THE SURROUNDING CIRCUM STANCES HAS TO ASCERTAIN THE PURPOSE FOR WHICH IT IS BEING INCURRE D. IT THE EXPENDITURE IS SO RELATED TO THE CARRYING ON OR THE CONDUCT OF THE BUSINESS THAT IT MAY BE REGARDED AS AN INTEGRAL PART OF THE PROFIT EARNING PROCESS IT SHOULD BE HELD TO BE A REVENUE EXPENDITURE. SHOULD, HOWEVER, THE PURPOSE BE THE ACQUISITION OF AN ASSET OR A RIGHT OF A PERMANENT C HARACTER THE POSSESSION WHEREOF IS THE CONDITION PRECEDENT OR THE PRE-REQUI SITE TO THE COMMENCEMENT OR CONTINUANCE OF THE BUSINESS, THE EX PENDITURE WOULD BE A CAPITAL EXPENDITRE. (4) CIT, GUJARAT II VS. ALEMBIC GLASS INDUSTRIES LT D. (1969) 71 ITR 752 (GUJ). THE COMPANY SENT ITS TECHNICIANS ABROAD TO OBTAIN PRACTICAL KNOWLEDGE FROM FIRM OF USA WHICH HAS A GREAT NAME IN THIS LIN E IN THE INTERNATIONAL MARKET. IT IS THUS CLEAR THAT THE EXPENDITURE WAS I NCURRED BY THE COMPANY ITA NO.215/AHD/2009 ASST. YEAR 2007-08 6 WITH A VIEW TO EARN PROFITS FROM THE SAME METHODS A ND PROCESSES AS BEFORE. THIS IS NOT A CASE WHERE THE EXPENDITURE WA S INCURRED WITH A VIEW TO ENLARGE THE GOODWILL OF THE COMPANY OR TO PERMAN ENTLY IMPROVE THE ASSETS OF THE CONCERN, THE INCIDENTAL RESULT OF IMP ROVEMENT IN THE GOODWILL OF THE COMPANY FLOWING FROM THE MANUFACTURE OF A BE TTER-TYPE OF HEAT- RESISTING GLASSWARE CANNOT BE SAID TO BE THE VIEW W ITH WHICH THE EXPENDITURE WAS INCURRED BY THE ASSESSEE-COMPANY. T HE TRAINING EXPENDITURE WAS, THEREFORE WAS REVENUE EXPENDITURE. CONCLUSION THE COMPANY SENT ITS TECHNICIANS ABROAD TO OBTAIN P RACTICAL KNOWLEDGE FROM FIRM OF USA WHICH HAS A GREAT NAME IN THIS LIN E IN THE INTERNATIONAL MARKET. THE EXPENDITURE INCURRED IN THIS REGARD WAS REVENUE EXPENDITURE BECAUSE SAME WAS INCURRED TO EARN PROFIT AND NOT TH E GOOD WILL. (5) GUJARAT SMALL SCALE INDUSTRIES CORPN. LTD. VS. CIT, GUJARAT (1983) 142 ITR 35 (GUJ). THE EXPENDITURE WAS NOT INCURRED IN CONNECTION WIT H THE TESTING OF THE PLANT AND MACHINERY WHICH WAS INSTALLED IN ORDER TO PRODUCE THE SCOOTERS. THE EXPENDITURE WAS INCURRED IN CONNECTIO N WITH THE TESTING OF THE PRODUCT, NAMELY, THE SCOOTERS MANUFACTURED AT T HE PLANT. THE CONCLUSION IS, THEREFORE, INESCAPABLE THAT THE EXPE NDITURE INCURRED IS OF THE NATURE OF REENUE EXPENDITURE. CONCLUSION EXPENDITURE INCURRED IN CONNECTION WITH THE TESTING OF THE PRODUCT AFTER INSTALLATION OF PLANT WAS REVENUE IN NATURE. FROM THE CAREFUL STUDY OF ABOVE AUTHORITIES ESSENTI AL PRINCIPLES FOR IDENTIFYING EXPENDITURE AS REVENUE OR CAPITAL IN SU CH CIRCUMSTANCES IS THAT WHETHER EXPENDITURE IS INCURRED PRIOR TO START OF A NY ACTIVITIES RELATING TO BUSINESS LIKE SETTING UP OF BUSINESS. A BUSINESS IS COMMENCED AS SOON AS NECESSARY TRANSACTIONS FOR MANUFACTURING OR TRADING ARE UNDERTAKEN SUCH AS PROCURING ORDERS OR PURCHASING RAW MATERIAL FOR MANUFACTURING. WHETHER ASSESSEE IS ALREADY CARRYING OUT BUSINESS A CTIVITIES OF SIMILAR NATURE ELSEWHERE AND EXPENDITURE INCURRED ON FAILED PROJECT WAS OF THE ITA NO.215/AHD/2009 ASST. YEAR 2007-08 7 SAME NATURE AS WAS INCURRED IN RESPECT OF OTHER SIM ILAR ACTIVITIES. WHERE SUCH ACTIVITIES WHICH IF INDIVIDUALLY SEEN MAY APPE AR CAPITAL BUT LARGE NUMBER OF SUCH ACTIVITIES ARE UNDERTAKEN THEN THEY BECOME STOCK-IN-TRADE AND EXPENDITURE INCURRED THEREON WOULD BE REVENUE I N NATURE AND NOT INVESTMENT. WHERE ASSESSEE ACQUIRES A SOURCE OF INC OME, EXPENDITURE INCURRED WOULD BE CAPITAL BUT IF HE IS DEALING IN S OURCES AND TRADING THEM LIKE ANY OTHER COMMODITY, THEN THE SOURCE ITSELF BE COMES STOCK-IN-TRADE FOR THE ASSESSEE AND EXPENDITURE INCURRED ON ACQUIR ING SUCH SOURCE WILL BE REVENUE IN NATURE BEING PURCHASE PRICE FOR SUCH SOURCE. SINCE IN THE PRESENT CASE, SEZS ARE STOCK-IN-TRADE FOR THE ASSES SEE, THEREFORE, EXPENDITURE INCURRED THEREON WOULD BE REVENUE IN NA TURE. FINALLY IN THE END IF ASSESSEE IS NOT ABLE TO ACQUIRE ANY SEZ THEN ONLY FOR THAT MATTER EXPENDITURE CANNOT BE CAPITAL. ONE HAS TO SEE THE N ATURE OF EXPENDITURE WHERE IT IS INCURRED AND NOT WHAT WAS THE FINAL RES ULT. FURTHER WE NOTE THAT AO HAS ALLOWED THE EXPENDITURE INCURRED ON PURCHASE OF PLOT OF LAND IN OTHER THREE SEZS AS REVENUE EXPENDITURE THEN THERE IS NO REASON WHY EXPENDITURE INCURRED ON ACQUISITION OF SEZ AT MULLU R-KARNATAKA THOUGH FAILED THIS YEAR, WILL NOT BE REVENUE IN NATURE. AC CORDINGLY, WE HOLD THE EXPENDITURE INCURRED IS REVENUE AND IT IS ALLOWABLE . AS A RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. 5. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. ORDER WAS PRONOUNCED IN OPEN COURT ON 25/3/11. SD/- SD/- (BHAVNESH SAINI) (D.C. AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMB ER AHMEDABAD, DATED : 25/3/11. MAHATA/- ITA NO.215/AHD/2009 ASST. YEAR 2007-08 8 COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD 1.DATE OF DICTATION 17/3/2011 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 23/3/ 2011 MEMBER.OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..