DCIT 3(2), MUMBAI V. MUKUND LTD, MUMBAI

ITA 2708/MUM/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1265 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-06-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 25-05-2010
• Assessment Year: 2002-2003
• Appeal Filed On: 28-04-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business expenditure; Revenue expenditure; Capital expenditure
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, B, MUMBAI BEFORE SHRI P.M.JAGTAP, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA NO. 2708/MUM/2009 (ASSESSMENT YEAR: 2002-03) DCIT CIRCLE 3(2), ROOM NO.608,6 TH FL, AAYAKAR BHAVAN M K ROAD, MUMBAI-400020 .APPELLANT V/S MUKUND LTD, BAJAJ BHAVAN, 3 RD FL, NARIMAN POINT MUMBAI-400021 PAN:AAACM5008R .. RESPONDENT APPELLANT BY : SHRI VIMAL PUNAMIY A RESPONDENT BY : S/SHRI S S RANA, L K AGRAWAL AN D PITAMBAR DAS O R D E R PER VIJAY PAL RAO,JM THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 24.02.2009 OF CIT(A)-III FOR THE ASSESSMENT YEAR 2002- 03. 2. ONLY ISSUE RAISED IN THIS APPEAL IS WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) IS JUST IFIED IN ALLOWING THE EXPENDITURE OF RS.35,42,821/- INCURRE D FOR ITA NO. 2708/MUM/2009 (ASSESSMENT YEAR: 2002-03) 2 MADHYA PRADESH STEEL PLANT PROJECT MADHYA PRADESH STEEL PLANT PROJECT WAS SHELVED BEFORE COMMISSIONING OF THE PLANT. 3. IN THE RETURN OF INCOME, THE ASSESSEE CLAIMED EXPENDITURE OF RS.38,94,913/- IN RESPECT OF PROJECT EXPENDITURE WRITTEN OFF DURING THE YEAR WHICH HAS BEEN DEBITED TO THE NATURAL HEAD OF EXPENSES. THIS EXPENDITURE WAS I NCURRED IN THE EARLIER YEARS FOR DEVELOPMENT OF THE PROJECT WH ICH WAS LATER ON ABANDONED. THE AO WAS OF THE VIEW THAT SU CH EXPENDITURES INCURRED IN THE PAST THEREFORE, IT IS CAPITAL IN NATURE AND DID NOT FIT WITHIN THE AMBIT OF SECTION 37 OF THE INCOME TAX ACT, 1961 FOR ITS ALLOWABILITY. ACCORDI NGLY, THE SAME WAS DISALLOWED. 4. ON APPEAL, THE CIT(A) HAS FOUND THAT OUT RS.38,9 4,913/- A SUM OF RS.35,42,821/- PERTAINS TO THE MADHYA PRADESH STEEL PLANT PROJECT AND RS.3,52,092/- RELATED TO CAPTIVE BERTH IN PANVEL CREEK NEAR ULVE GROUP. THE CIT(A ) WAS OF THE VIEW THAT AS FAR AS THE MADHYA PRADESH STEEL PLANT PROJECT IS CONCERNED, IT IS DEFINITELY IN THE LINE OF THE ASSESSEES BUSINESS IN WHICH THE ASSESSEE IS ENGA GED IN MANUFACTURING OF STEEL AND OTHER RELATIVE PRODUCT. ACCORDINGLY, THE CIT(A) HAS ALLOWED THE EXPENDITUR E OF RS.35,42,821/- IN RELATION TO MADHYA PRADESH STE EL PLANT PROJECT AND DISALLOWED THE SUM OF RS.3,52,092/- REL ATED TO ITA NO. 2708/MUM/2009 (ASSESSMENT YEAR: 2002-03) 3 THE PROJECT IN PANVEL CREEKS ON THE GROUND THAT THESE ARE THE DIFFERENT PROJECTS AND COMPARING WITH THE LINE OF THE BUSINESS OF THE ASSESSEE. 5. BEFORE US, THE LEARNED DR HAS SUBMITTED THAT THE EXPENDITURE WAS INCURRED IN THE EARLIER YEARS AND N OT DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION. THEREFORE THE SAME IS NOT ALLOWABLE IN THE ASSESSMENT YEAR UNDER CONSIDERATION. HE HAS FURTHE R CONTENDED THAT UNDISPUTEDLY THE EXPENSES INCURRED F OR ESTABLISHMENT OF A NEW PROJECT WHICH WAS ABANDONED . THEREFORE, THE SAID EXPENDITURE IS OF CAPITAL IN N ATURE. HE HAS RELIED UPON THE ORDER OF THE AO AND SUBMITTED T HAT THE CONCEPT OF MATCHING OF EXPENDITURE AND INCOME REQUI RES THE LIABILITY OF THE EXPENDITURE IN THE YEAR IN WHICH I T WAS INCURRED. THE ASSESSEE HAS ITSELF HAS CAPITALIZED THE EXPENS ES INCURRED IN THE BOOKS OF ACCOUNT, THEREFORE, IT CANNOT BE AL LOWED AS REVENUE EXPENDITURE. 6. ON THE OTHER HAND, THE LEARNED AR OF THE ASSESSE E HAS SUBMITTED THAT DURING THE PREVIOUS RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE WROTE OFF A N AMOUNT OF RS.38.94.913/- OUT OF WHICH RS.35,42,821/- BEI NG THE EXPENDITURE INCURRED FOR THE MADHYA PRADESH STEEL PLANT PROJECT WHICH WAS ABANDONED. THE ASSESSEE HAS CLAR IFIED IN THE NOTE NO.16 OF THE NOTES TO COMPUTATION OF TOTA L INCOME ITA NO. 2708/MUM/2009 (ASSESSMENT YEAR: 2002-03) 4 ENCLOSED ALONG WITH THE RETURN OF INCOME, THAT AS P ER THE ACCOUNTING POLICY A6(III), THE PROJECT AND THE BUSI NESS DEVELOPMENT EXPENDITURE ARE WRITTEN OFF TO THE NA TURAL HEADS OF THE EXPENSES IN THE YEAR IN WHICH THE PROJECT IS ABANDONED. THE EXPENDITURE INCURRED DURING DEVELOPMENT AND PRE LIMINARY STAGES OF THE COMPANYS NEW PROJECT ARE CARRIED FO RWARD AND NOT AS DEDUCTION IN ANY OF THE EARLIER YEARS. SINC E THE SAID AMOUNT WAS NOT ALLOWED IN THE EARLIER YEAR THE SAME WAS CLAIMED AS DEDUCTION IN THE YEAR UNDER CONSIDERATIO N. HE HAS FURTHER POINTED OUT THAT THE SAID EXPENDITURE WAS I NCURRED ONLY FOR THE PAYMENT OF SALARY AND WAGES JUDICIAL EXPE NSES AND NOT TOWARDS ANY INVESTMENT OR PURCHASES OF THE ASSE TS OR MACHINERY. THEREFORE, THE EXPENDITURE IS IN THE NA TURE OF REVENUE EXPENDITURE AND ALLOWABLE AS BUSINESS EXPEN DITURE. HE HAS HEAVILY RELIED UPON THE DECISION OF DELHI HI GH COURT IN THE CASE OF INDO RAMA SYNTHETICS (I) LTD V/S CIT RE PORTED IN 228 CTR (DEL) 278 AND SUBMITTED THAT THE FACTS IN T HE SAID CASE ARE IDENTICAL WITH THE FACTS OF THE ASSESSEE S CASE THEREFORE THE CASE OF THE ASSESSEE IS SQUARELY COVE RED BY THE DECISION OF THE DELHI HIGH COURT IN THE CASE OF IN DO RAMA SYNTHETICS (I) LTD (SUPRA). HE HAS ALSO RELIED ON THE FOLLOWING CASE LAWS: I) GAMMON INDIA PVT LTD V/S CIT -202 ITR 1 (BOM II) CIT V/S J K CHEMICALS LTD-207 ITR 985 (BOM) III) FANCY CORPORATION LTD V/S CIT- 162 ITR 827 (BO M) ITA NO. 2708/MUM/2009 (ASSESSMENT YEAR: 2002-03) 5 IV) SADICHHA CHITRA V/S CIT-189 ITR 774 (BOM) 7. IN REBUTTAL, THE LEARNED DR HAS SUBMITTED THAT T HE DECISIONS RELIED UPON BY THE LEARNED AR ARE NOT APP LICABLE IN THE CASE OF ABANDONED PROJECT BUT WERE RELETED TO THE CASES WHERE THE PROJECT WERE CONTINUED. 8. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND REL EVANT RECORD. AT THE OUTSET, WE NOTE THAT THE EXPENDITUR E WHICH WAS WRITTEN OFF BY THE ASSESSEE WAS INCURRED FOR THE DE VELOPMENT OF MADHYA PRADESH STEEL PLANT PROJECT BUT THE S AID EXPENDITURE WAS INCURRED IN THE NATURE OF PAYMENT O F WAGES, SALARY, TRAVELING AND OTHER ADMINISTRATIVE EXPENSE S. THUS, IT IS CLEAR THAT THE SAID EXPENDITURE WAS NOT INCURRED FOR CREATING ANY ASSET OR INVESTMENT IN THE ASSET. IT IS ALSO UNDISPUTED FACT THAT THE ASSESSEE WAS DEVELOPING THE MADHYA PRADESH STEEL PLANT PROJECT IN THE EXISTING LINE OF BUSI NESS OF THE ASSESSEE. THEREFORE, THE EXPENDITURE WAS FOR THE E XTENSION OF THE BUSINESS OF THE ASSESSEE AND NOT FOR ANY NEW BU SINESS. WHEN IT IS FOR EXTENSION OF EXISTING BUSINESS AND THE CONTROL OF BOTH EXISTING AND THE EXTENSION OF NEW AND THE PROPOSED VENTURE ARE IN THE HANDS OF THE SAME MANAGEMENT/ADMINISTRATION/ ESTABLISHMENT THEN SIMPL Y BECAUSE THE NEW PROJECT WAS TO BE DEVELOPED AT A F AR AWAY PLACE WILL NOT MAKE ANY DIFFERENCE IN THE ALLOW ABI LITY OF NATURE ITA NO. 2708/MUM/2009 (ASSESSMENT YEAR: 2002-03) 6 OF EXPENDITURE . WE NOTE THAT THE FACTS OF THE CAS E OF INDO RAMA SYNTHETICS (I) LTD (SUPRA) ARE IDENTICAL TO TH E FACTS OF THE PRESENT CASE. THE HON. DELHI HIGH COURT HAS RECORDE D IN PARAGRAPH 9 AS UNDER : 9. IN THE PRESENT CASE ALSO, AS ALREADY POINTED OUT ABOVE, THE EXPENDITURE INCURRED WAS IN THE NATU RE OF SALARY, WAGES, REPAIRS, MAINTENANCE, DESIGN AND ENGINEERING FEE, TRAVELING AND OTHER EXPENSES OF ADMINISTRATIVE NATURE. INDUBITABLY, IN NORMAL COUR SE THESE EXPENSES WOULD BE TREATED AS REVENUE EXPENDITURE. THE UNIT, WHICH THE APPELLANT PROPOSE D TO SET UP HAD INEXTRICABLE LINKAGE WITH THE EXISTIN G BUSINESS OF THE APPELLANT. THE PROPOSED BUSINESS WA S NOT AN INDIVIDUAL BUSINESS BUT VERTICAL EXPANSION OF THE PRESENT BUSINESS THUS, TEST OF EXISTING BUSINE SS WITH COMMON ADMINISTRATION AND COMMON FUND IS CLEARLY MET. SINCE THE PROJECT WAS ABANDONED, NO NE W ASSET ALSO CAME TO BE CREATED THUS, WHEN THE FACTS OF THE SAID CASE AND THE CASE IN HAND ARE SIMILAR THEN THE ISSUE IS COVERED BY THE DECISION O F THE HON.DELHI HIGH COURT IN THE CASE OF INDO RAMA SYNT HETICS (I) LTD (SUPRA) VIDE PARAGRAPH 10 AND 11 HAS HELD AS UN DER : 10. A HARMONIOUS READING OF THE AFORESAID TWO JUDGMENTS OF THIS COURT, NAMELY, TRIVENI ENGINEER ING WORKS LTD (SUPRA) ON THE ONE HAND AND MODI INDUSTRIES (SUPRA) ON THE OTHER, WOULD CLEARLY DEMONSTRATE THAT ONE HAS TO KEEP IN MIND THE ESSENTIAL PURPOSES FOR WHICH SUCH AN EXPENDITURE IS INCURRED. IF THE EXPENDITURE IS INCURRED FOR STARTI NG NEW BUSINESS WHICH WAS NOT CARRIED OUT BY THE ASSESSEE EARLIER, THEN SUCH EXPENDITURE IS HELD TO BE OF CAPITAL NATURE. IN THAT EVENT IT WOULD BE IRREL EVANT AS TO WHETHER PROJECT REALLY MATERIALIZED OR NOT. HOWEVER, IF THE EXPENDITURE INCURRED IS IN RESPECT OF EH SAME BUSINESS WHICH IS ALREADY CARRIED ON BY THE ASSESSEE, EVEN IF IT IS FOR THE EXPANSION OF THE BUSINESS, NAMELY, TO START NEW UNIT WHICH IS SAME A S ITA NO. 2708/MUM/2009 (ASSESSMENT YEAR: 2002-03) 7 EARLIER BUSINESS AND THERE IS UNITY OF CONTROL AND COMMON FUND, THEN SUCH AN EXPENSE IS TO BE TREATED AS BUSINESS EXPENDITURE. IN SUCH A CASE WHETHER NE W BUSINESS/ASSET COMES INTO EXISTENCE OR NOT WOULD BECOME A RELEVANT FACTOR. IF THERE IS NO CREATION O F NEW ASSET, THEN THE EXPENDITURE INCURRED WOULD BE O F REVENUE NATURE. HOWEVER, IF THE NEW ASSET COMES INTO EXISTENCE WHICH IS OF ENDURING BENEFIT, THEN S UCH EXPENDITURE WOULD BE OF CAPITAL NATURE; 11. WHEN WE KEEP IN MIND THE AFORESAID FIND DISTINCTION, THE CONCLUSION ON THE FACTS OF THIS CA SE BECOMES OBVIOUS, THE EXPENDITURE WAS INCURRED IN RESPECT OF SAME BUSINESS WHICH IS ALREADY CARRIED O N BY THE ASSESSEE. TWO PROJECTS WHICH WERE UNDERTAKEN WERE FOR THE EXPANSION OF SAME BUSINESS, NAMELY, ONE FOR TAKING OVER SAVITRI CINEMA FOR CONVERSION INTO MULTIPLEX AND OPERATION AND MANAGEMENT THEREFORE AND OTHER FOR CONVERSION OF PRIYA CINEMA INTO FOUR-SCREEN MULTIPLEX. PAYMENTS WERE MADE TO THE CONSULTANTS FOR PREPARING FEASIBILITY REPORT IN RESPECT OF BOTH THE PROJECTS. HOWEVER, ULTIMATELY PROJECTS WERE NOT FOUND TO BE FINANCIALLY AND TECHNICALLY VIABLE AND WERE SHELVED. THUS, WE FIND THAT NO NEW ASSET CAME INTO EXISTENCE, WHICH WAS TH E BASIS ADOPTED BY THE AO FOR TREATING THE EXPENDITURE AS CAPITAL EXPENDITURE BUT WRONGLY. RESPECTFULLY FOLLOWING THE DECISION OF THE HON.DELH I HIGH COURT IN THE CASE OF INDO RAMA SYNTHETICS (I) LTD (SUPRA) , WE DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. THE ORDER OF THE CIT(A) IS UPHELD QUA THIS ISSUE. 9. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSE D. PRONOUNCED IN THE OPEN COURT ON 25.06.2010 SD SD (P.M.JAGTAP) (VIJAY PAL RAO) ACCOUNTANT MEMBER JUDICIAL MEMB ER MUMBAI, DATED 25 TH JUNE 2010 SRL:18610 ITA NO. 2708/MUM/2009 (ASSESSMENT YEAR: 2002-03) 8 COPY TO: 1. DCIT CIRCLE 3(2), ROOM NO.608,6 TH FL, AAYAKAR BHAVAN M K ROAD, MUMBAI-400020 2. MUKUND LTD, BAJAJ BHAVAN, 3 RD FL, NARIMAN POINT MUMBAI-400021 3 CIT -3 MUMBAI CITY-, MUMBAI. 4.CIT (A)-III, MUMBAI. 6. DR B BENCH BY ORDER TRUE COPY ASSTT. REGISTRAR, ITAT, MUMBAI