ESSAR STEEL LTD, MUMBAI V. ADDL , CIT CIR 5(1), MUMBAI

ITA 3668/MUM/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8166 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 4 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-09-2014
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: K
• Next Hearing Date: 05-09-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 06-05-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: S D SRIVASTAVA
• Keywords: Capital asset; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL K , BENCH MUMBAI , BEFORE : SHRI R.C.SHARMA , A M & SHRI VIJAY PAL RAO , J M I TA NO. 3668 /MUM/20 11 ( ASSESSMENT YEAR :200 6 - 0 7 ) M/S ESSAR STEEL LIMITED, GROUP TAXATION, ESSAR HOUSE, NO.11, K.K.MARG, MAHALAXMI, MUMBAI - 400 034 VS. A D CIT - 5(1), MUMBAI - 400 020 PAN/GIR NO. : AAAC E 1741 P ( APPELLANT ) .. ( RESPONDENT ) /REVENUE BY : MR. S.D.SRIVASTAVA /ASSESSEE BY : MR. VIJAY MEHTA DATE OF HEARING : 12 TH AUGUST , 201 4 DATE OF PRONOUNCEMENT : 19 TH SEPTEMBER , 201 4 O R D E R PER VIJAY PAL RAO ( J .M) : TH IS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A) , DATED 21 - 2 - 2011, FOR THE ASSESSMENT YEAR 200 6 - 0 7 , IN THE MATTER OF ORDER PASSED UNDER SECTION 143(3) OF THE I.T. ACT . 2 . THE ASSESSEE HAS TAKEN FOLLOWING GROUNDS : 1. DISALLOWANCE OF REVENUE EXPENSES OF RS. 54,80,00,000/ - INCLUDED IN CAPITAL WORK IN PROGRESS ('CWIP') 1.1 THE COMMISSIONER OF INCOME TAX (APPEALS) - 15, MUMBAI, {HEREINAFTER REFERRED TO AS THE 'CIT( A)'} ERRED IN LAW AND FACTS IN DISALLOWING THE CLAIM OF REVENUE EXPENDITURE OF RS.54,80,00,000 INCURRED IN THE COURSE OF THE EXISTING BUSINESS AS INCURRED ON A NEW LINE OF BUSINESS AND THUS CAPITAL EXPENDITURE. 1.2 THE APPELLANT SUBMITS THAT EXPENSES OF RS. 54,80,00,000 INCURRED IN RESPECT OF EXPANSION OF EXISTING STEEL PLANT AND PELLET ITA NO . 3668 / 11 2 PLANT SHOULD HAVE BEEN ALLOWED AS REVENUE EXPENSES IRRESPECTIVE OF THE ACCOUNTING TREATMENT. 2. DISALLOWANCE OF REVENUE EXPENSES OF RS. 23,71,00,000 INCLUDED IN CWIP 2 .1 THE CIT(A)'} ERRED IN LAW AND FACTS IN DISALLOWING THE CLAIM OF REVENUE EXPENDITURE OF RS.23,71 ,00,000 INCURRED IN THE COURSE OF THE EXISTING BUSINESS AS INCURRED ON A NEW LINE OF BUSINESS AND THUS CAPITAL EXPENDITURE. 2.2 THE APPELLANT SUBMITS THAT EXPENSES OF RS. 23,71,00,000 INCURRED DURING TRIAL RUN .PERIOD OF COLD ROLLING MILL SHOULD HAVE BEEN ALLOWED AS REVENUE EXPENSES IRRESPECTIVE OF THE ACCOUNTING TREATMENT. 3 . RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. FACTS IN BRIEF ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF HOT BRIQUETTE IRON (HBI), HOT ROLLED COILS (HRC) SHEETS, PLATES ETC. IN THE COMPUTATION OF INCOME, THE ASSESSEE HAS CLAIMED A SUM OF RS. 54,80,00,000/ - ON ACCOUNT OF EXPENDITURE DURING CONST RUCTION PERIOD AND RS.23,71,00,000 / - - UNDER THE HEAD TRIAL RUN EXPENSES. ASSESSEE WAS ASKED TO EXPLAIN WHY THE EXPENSES MENTIONED ABOVE SHOULD NOT BE TREATED AS CAP I TAL EXPENDITURE. THE AO DISALLOWED THE SAME BY OBSERVING THAT T HE ASSESSEE HAS TO SET UP A NEW UNIT FROM SCRATCH TO MANUFACTURE COLD ROLLE D ST EEL. IT HAS TO ACQUIRE PROFIT MAKING ASSETS LIKE BUILDING, PLANT AND MACHINERY ETC. AND INCUR CAPITAL EXPENDITURE FOR SETTING UP ITS NEW UNIT. THE EXPENSES INCURRED FOR THE NEW PROJECT WAS HELD TO BE CAPI TAL IN NATURE. SIMILARLY EXPENSES OF RS.23.71 CRORES INCURRED DURING TRIAL RUN PERIOD OF COLD ROLLING MILL WAS DISALLOWED AS REVENUE EXPENSES. ITA NO . 3668 / 11 3 4 . BY THE IMPUGNED ORDER, THE CIT(A) CONFIRMED THE ADDITION, AGAINST WHICH ASSESSEE IS IN FURTHER APPEAL BEFORE US. 5 . IT WAS ARGUED BY THE LEARNED AR THAT SIMILAR ISSUE WAS DEALT BY THE TRIBUNAL IN ASSESSMENT YEAR 2007 - 08, ORDER DATED 27 - 9 - 2013 AND THE MATTER WAS RESTORED TO THE FILE OF THE AO FOR EXAMINING THE NATURE OF EXPENDITURE AFTER HAVING THE FOLLOWING OBSE RVATIONS : - 10. WE HAVE HEARD THE RIVAL CONTENTION AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. ON A PERUSAL OF THE ORDER OF THE LEARNED COMMISSIONER (APPEALS), IT IS SEEN THAT THE LEARNED COMMISSIONER (APPEALS) HAS NOT EXAMINED AS TO WHAT WAS T HE NATURE OF EXPENSES AND WHETHER IT WAS SPENT FOR INCREASE IN THE CAPACITY FOR EXISTING PLANT OR FOR THE EXPANSION OF BUSINESS OR FOR ENTIRELY NEW LINE OF BUSINESS. HE HAS SIMPLY HELD THAT IN VIEW OF THE PROVISO TO SECTION 36(1)(III), THE EXPENSES HAS TO BE CAPITALIZED. AS POINTED OUT BY THE LEARNED COUNSEL THAT THERE IS NO INTEREST CLAIMED BY THE ASSESSEE, THEN, THERE IS NO QUESTION OF CAPITALIZING THE INTEREST AS STIPULATED IN THE PROVISO TO SECTION 36(1)(III). EVEN THE ASSESSING OFFICER HAS NOT MENTIONE D AS TO WHAT IS THE NEW PROJECT ESTABLISHED BY THE ASSESSEE. IF THERE IS AN EXPANSION OF EXISTING BUSINESS OR INCREASE IN THE CAPACITY OF THE EXISTING PLANT, THEN THE EXPENDITURE INCURRED THEREON, HAS TO BE TREATED AS REVENUE EXPENDITURE AS HELD BY THE TRI BUNAL IN ASSESSEES OWN CASE IN THE LAST SEVERAL YEARS. THUS, NEITHER THE ASSESSING OFFICER NOR THE LEARNED COMMISSIONER (APPEALS) HAVE NOT EXAMINED THESE FACTS. THEREFORE, IN THE INTEREST OF JUSTICE, WE ARE OF THE CONSIDERED OPINION THAT THE MATTER NEEDS TO BE SET ASIDE TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THIS ASPECT IN THIS LINE. CONSEQUENTLY, WE SET ASIDE THE IMPUGNED ORDER PASSED BY THE LEARNED COMMISSIONER (APPEALS) AND RESTORE THE ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER FOR EXAMINI NG WHETHER IT IS FOR INCREASE OF EXISTING BUSINESS OR NOT. THUS, THE GROUND NO.1, RAISED BY THE ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 6 . ON THE OTHER HAND, LEARNED DR RELIED ON THE ORDERS OF THE AUTHORITIES BELOW. 7 . WE HAVE CONSIDERE D THE RIVAL CONTENTIONS, CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOUND FROM THE RECORD THAT THE ASSESSEE IS ENGAGED IN MANUFACTURING OF HOT ROLLED COILS, SHEETS, PLATES ITA NO . 3668 / 11 4 ETC. DURING THE COURSE OF SCRUTINY ASSESSMENT AO FOUND THAT ASSE SSEE HAD INCURRED CAPITAL EXPENDITURE FOR ESTABLISHING COLD ROLLING PLANT. ACCORDINGLY, THE AO DISALLOWED CAPITAL EXPENDITURE INCURRED ON COLD ROLLING PLANT AFTER HAVING THE FOLLOWING OBSERVATION : - THE ASSESSEE IS INVOLVED IN THE MANUFACTURE OF HOT ROLLE D STEEL. THE ASSESSEE HAS STARTED A NEW LINE OF BUSINESS BY VENTURING INTO MANUFACTURE OF COLD ROLLED STEEL. THIS IS A TOTALLY NEW PROCESS AND TECHNOLOGY ENTIRELY DIFFERENT FROM THE ONE FOLLOWED BY THE ASSESSEE IN ITS EARLIER BUSINESS. UNDER NO CIRCUMSTANC ES CAN IT BE CONSIDERED AS AN EXTENSION OF ITS EXISTING BUSINESS. THE ASSESSEE HAS TO SET UP A NEW UNIT FROM SCRATCH TO MANUFACTURE COLD ROLLED STEEL. IT HAS TO ACQUIRE PROFIT MAKING ASSETS LIKE BUILDING, PLANT AND MACHINERY ETC. AND INCUR CAPITAL EXPENDIT URE FOR SETTING UP ITS NEW UNIT. THE EXPENSES INCURRED FOR THE NEW PROJECT ARE CAPITAL IN NATURE. THIS VIEW IS SUPPORTED BY THE HON. BOMBAY HIGH COURT IN THE CASE OF CIT VS. J.K. CHEMICALS LTD. (207 ITR 985). HENCE THE DEDUCTION CLAIMED BY THE ASSESSEE IS DISALLOWED AND ADDED TO ITS TAXABLE INCOME. BY THE IMPUGNED ORDER, CIT(A) CONFIRMED THE ACTION OF THE AO AFTER RECORDING THE FOLLOWING FINDINGS : - 4.5 THE ISSUE OF ADMINISTRATIVE EXPENDITURE IS TAKEN UP FIRST. ACCORDING TO THE APPELLANT DURING THE YEAR UNDER CONSIDERATION, EXPANSION OF THE EXISTING STEEL PLANT AND PELLET PLANT WAS GOING ON. IN RESPECT OF SUCH EXPANSION WORK, CERTAIN ADMINISTRATIVE EXPENSES HAVE BEEN APPORTIONED TO CAPITAL WORK IN PROGRESS AS PER ACCOUNTING POLICIES. THE APPELLANT HAS SOU GHT TO ADVANCE THE ARGUMENT THAT PRINCIPLE AND FACTORS WHICH APPLIES FOR ACCOUNTING POLICIES/PRINCIPLES ARE AT COMPLETE VARIANCE FROM THE IT ACT. THIS IS NOT CORRECT. ACCOUNTING STANDARDS ARE PASSED OR ADOPTED AFTER DUE DELIBERATION AND ARE MEANT TO PRESEN T A TRUE AND FAIR PICTURE TO ALL STAKE HOLDERS IN RESPECT OF PUBLIC COMPANY LIKE THIS. THE VERY FACT THAT THIS EXPENDITURE HAS BEEN CLASSIFIED BY THEM AS CWIP IMPLIES THAT THEY WERE BY ITS VERY NATURE MEANT TO BE SO. THE 'MATCHING PRINCIPLE' IN ACCOUNTING IS ONE OF THE MOST IMPORTANT ONE AND UNLESS REVENUE CAN BE BOOKED THE CORRESPONDING EXPENSE CANNOT BE CLAIMED AS DEDUCTION OTHERWISE IT WILL GIVE A DISTORTED PICTURE OF THE FINANCIALS OF THE COMPANY. THE EXPENDITURE IN THE PRESENT CASE IS MADE FOR SUBSTA NTIAL EXTENSION OF BUSINESS AND HAS ALL THE HALL MARKS OF THE CAPITAL ITA NO . 3668 / 11 5 EXPENDITURE. THE APPELLANT BY INCURRING THIS EXPENDITURE IS SEEKING TO EXPAND ITS EXISTING STEEL PLANT BY INCREASING THE PRODUCTION CAPACITY FROM 2.4 MTPA TO 4 MTPA . THUS ENHANCING ITS INCOME EARNING POTENTIAL. THUS TAKING BOTH THE FACTOR VIZ ACCOUNTING STANDARDS AND SUBSTANTIAL EXPANSION, THE ACTION OF THE AO IN TREATING IT AS CAPITAL IS UPHELD. 8 . DURING THE COURSE OF HEARING THE ASSESSEE WAS ASKED TO FILE DETAILS OF THE EXPENDITURE SO INCURRED. WE FIND THAT IN THE BOOKS OF ACCOUNTS THE ASSESSEE HAS CAPITALIZED THE ENTIRE EXPENDITURE FOR ACQUISITION OF HY - GRADE PELLETS LIMITED AND STEEL CORPORATION OF GUJARAT LIMITED, HOWEVER, IN COMPUTATION THE ASSESSEE HAS CLAIMED THE EXPENDITURE OF RS. 54.86 CRORES ON ACCOUNT OF SALARY, WAGES, POWER CHARGES, REPAIR MAINTENANCE, PROFESSIONAL FEES ETC. . INCURRED D URING THE CONSTRUCTION PERIOD AND RS. 23.71 CRORES UNDER THE HEAD TRIAL RUN EXPENSES AS REVENUE EXPENDITURE. THERE IS NO DISPUTE THAT THE EX PENDITURE INCURRED BY THE ASSESSEE ON ACCOUNT OF SALARY, WAGES, POWER CHARGES, REPAIR MAINTENANCE, PROFESSIONAL FEES ETC. ARE PRIOR TO THE DATE OF SETTING UP OF PLANT AND MACHINERY SO ACQUIRED BY THE ASSESSEE. THE CONTENTION OF THE ASSESSEE FOR CLAIMING TH E SAID EXPENDITURE AS REVENUE IS THAT SINCE THE EXPENDITURE HAS BEEN INCURRED FOR EXPANSION OF THE EXISTING BUSINESS AND CAPACITY OF MANUFACTURING, THEREFORE, IT IS AN ALLOWABLE REVENUE EXPENDITURE. IT IS PERTINENT TO NOTE THAT THE QUESTION AS TO WHETHER A PARTICULAR EXPENDITURE IS CAPITAL OR REVENUE HAS TO BE DECIDED BY CONSIDERING THE PURPOSE FOR WHICH THE EXPENDITURE IS LAID OUT. IN THE CASE IN HAND THOUGH THE EXPENDITURE HAS BEEN INCURRED ON ACCOUNT OF SALARY, WAGES, POWER CHARGES, REPAIR ITA NO . 3668 / 11 6 MAINTENANCE, P ROFESSIONAL FEES ETC. BUT THE SAME IS WITH RESPECT TO A NEW PLANT AND MACHINERY ACQUIRED BY THE ASSESSEE AND BEFORE THE SAME IS PUT TO USE. THEREFORE, THE EXPENDITURE IN QUESTION WAS INCURRED FOR BRINGING A NEW ASSET INTO EXISTENCE . THE HON BLE SUPREME COU RT IN THE CASE OF DALMIA JAIN AND CO. LTD. VS. CIT, REPORTED IN 81 ITR 754 HAS LAID DOWN THE PRINCIPLE ON THIS POINT AT PAGE 757 AS UNDER : - THE QUESTION FOR DECISION IS WHETHER THE LITIGATION EXPENSES INCURRED BY THE ASSESSEE WERE FOR THE PURPOSE OF CREA TING, CURING OR COMPLETING THE ASSESSEE'S TITLE TO CAPITAL OR WHETHER IT WAS FOR THE PURPOSE OF PROTECTING ITS BUSINESS. IF IT IS THE FORMER THEN THE EXPENSES INCURRED MUST BE CONSIDERED AS CAPITAL EXPENDITURE. BUT, ON THE OTHER HAND, IF IT IS HELD THAT TH E EXPENSES WERE INCURRED TO PROTECT THE BUSINESS OF THE ASSESSEE, THEN IT MUST BE CONSIDERED AS A BUSINESS LOSS. THE PRINCIPLE WHICH HAS TO BE DEDUCED FROM DECIDED CASES IS THAT, WHERE THE EXPENDITURE LAID OUT FOR THE ACQUISITION OR IMPROVEMENT OF A FIXED CAPITAL ASSET IS ATTRIBUTABLE TO CAPITAL, IT IS A CAPITAL EXPENDITURE BUT IF IT IS INCURRED TO PROTECT THE TRADE OR BUSINESS OF THE ASSESSEE THEN IT IS A REVENUE EXPENDITURE. IN DECIDING WHETHER A PARTICULAR EXPENDITURE IS CAPITAL OR REVENUE IN NATURE, WHA T THE COURTS HAVE TO SEE IS WHETHER THE EXPENDITURE IN QUESTION WAS INCURRED TO CREATE ANY NEW ASSET OR WAS INCURRED FOR MAINTAINING THE BUSINESS OF THE COMPANY. IF IT IS THE FORMER IT IS THE CAPITAL EXPENDITURE ; IF IT IS THE LATTER, IT IS THE REVENUE EXP ENDITURE . THUS, THE PRINCIPLE WHICH HAS BEEN DEDUCED BY THE HON BLE SUPREME COURT AS TO WHETHER THE EXPENDITURE IS LAID OUT FOR ACQUISITION OR IMPROVEMENT OF A FIXED CAPITAL ASSET, IS ATTRIBUTABLE TO CAPITAL, IS A CAPITAL EXPENDITURE. IN DECIDING THE QUE STION AS TO WHETHER A PARTICULAR EXPENDITURE IS CAPITAL OR REVENUE IN NATURE WHAT HAS TO BE CONSIDERED IS WHETHER THE EXPENDITURE IN QUESTION WAS INCURRED TO CREATE ANY NEW ASSET OR WAS INCURRED FOR MAINTAINING THE BUSINESS OF THE ASSESSEE. IN CASE IN HAND , THE EXPENDITURE HAS BEEN INCURRED PRIOR TO SETTING ITA NO . 3668 / 11 7 UP/COMMENCEMENT OF THE FUNCTION OF NEW PLANT AND MACHINERY, THEREFORE, THE SAME WAS LAID OUT IN RELATION TO ACQUISITION AND BRINGING INTO EXISTENCE A NEW ASSET. 9 . THE AO HAS DISALLOWED THE CLAIM OF THE ASSESSEE BY RELYING UPON THE DECISION OF HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. J.K.CHEMICALS LTD., REPORTED IN 207 ITR 985 , WHEREIN THE HON BLE HIGH COURT WHILE DECIDING THE QUESTION OF DEDUCTIBILITY OF EXPENDITURE OF RS. 3.70 LAKHS INCU RRED BY THE ASSESSEE FOR PREPARATION OF A PROJECT REPORT AND MARKET SURVEY HAS HELD AT PAGE 993 AS UNDER : - LOOKING TO THE CIRCUMSTANCES OF THE PRESENT CASE, IN OUR VIEW, IT IS NOT REALLY MATERIAL TO DECIDE WHETHER THE PROJECT AT RAJASTHAN SHOULD BE VIEWE D AS ESTABLISHING A NEW BUSINESS BY THE ASSESSEE OR AS AN EXTENSION OF ITS EXISTING BUSINESS. THIS FACT MAY BE RELEVANT IN THE CIRCUMSTANCES OF A GIVEN CASE, BUT IS NOT SO IN THE PRESENT CASE, BECAUSE IT IS AN ACCEPTED POSITION THAT IF THE ASSESSEE WERE TO SET UP ITS UNIT AT RAJASTHAN, IT WOULD HAVE TO ACQUIRE LAND, PLANT AND MACHINERY AND INCUR CAPITAL EXPENDITURE IN THAT CONNECTION FOR SETTING UP ITS UNIT AT RAJASTHAN. THE PROJECT REPORT WHICH THE ASSESSEE OBTAINED FROM MESSRS. DORR OLIVER (INDIA) LTD. WA S FOR THE PURPOSE OF SETTING UP SUCH A UNIT AT RAJASTHAN. IN OTHER WORDS, THE EXPENDITURE INCURRED FOR THE PROJECT WAS INCURRED BY THE ASSESSEE - COMPANY IN ORDER TO DECIDE WHETHER TO ACQUIRE SOME PROFIT - MAKING ASSETS FOR THE PURPOSES OF IS BUSINESS WHICH WO ULD BE OF AN ENDURING NATURE. THE EXPENSES INCURRED FOR THE PROJECT REPORT HAVE, THEREFORE, TO BE VIEWED AS BEING CAPITAL IN NATURE. SIMPLY BECAUSE THE ASSESSEE HAD A RUNNING BUSINESS OF MANUFACTURING FERTILISERS, IT CANNOT BE SAID THAT THE EXPENSE FOR OBT AINING SUCH A PROJECT REPORT WAS A PART OF THE EXPENSES INCURRED BY THE ASSESSEE FOR RUNNING ITS BUSINESS. IT WAS CLEARLY AN EXPENDITURE INCURRED FOR ASCERTAINING WHETHER TO ACQUIRE NEW ASSETS OF SOME DURABILITY FOR THE PURPOSE OF EARNING PROFITS. 10 . TH E HON BLE HIGH COURT HAS HELD THAT EXPENDITURE INCURRED FOR SETTING UP OF ITS UNIT WAS AN EXPENDITURE INCURRED FOR ACQUIRING NEW ASSET FOR THE PURPOSE OF EARNING PROFITS AND ACCORDINGLY THE SAID ITA NO . 3668 / 11 8 EXPENDITURE FOR OBTAINING SUCH PROJECT REPORT CANNOT BE SAID AS PART OF THE EXPENSES INCURRED BY THE ASSESSEE FOR RUNNING ITS BUSINESS. THUS, IT IS A TRITE LAW ON THE POINT THAT IT IS THE REAL NATURE AND QUALITY OF THE PAYMENT AND NOT QUANTUM OR MANNER OF THE PAYMENT WHICH WOULD PROVE DECISIVE . IF THE OBJECT OF MAKI NG PAYMENT IS TO ACQUIRE A CAPITAL ASSET THE PAYMENT WOULD PARTAKE CHARACTER OF THE CAPITAL PAYMENT EVEN THOUGH IT IS NOT MADE IN LUMPSUM BUT BY INSTALLMENT. WHEN AN EXPENDITURE IS MADE WITH A VIEW TO BRING INTO EXISTENCE AN ASSET OR AN ADVANTAGE FOR ENDUR ING BENEFIT OF THE TRADE, SUCH AN EXPENDITURE IS CAPITAL IN NATURE AND NOT REVENUE. THEREFORE, EVEN IN CASE OF EXPANSION OF EXISTING BUSINESS, THE EXPENDITURE INCURRED FOR ACQUIRING THE ADDITIONAL PLANT AND MACHINERY WILL BE IN THE NATURE OF CAPITAL EXPEND ITURE. IF THE OUTLAY IS MADE FOR THE EXTENSION OF BUSINESS, IT WILL BE TREATED IN THE CAPITAL FILED AND NOT REVENUE. 11 . AS REGARDS THE EXPENDITURE INCURRED ON TRIAL RUN, THE QUESTION ARISES AS TO WHETHER ON THE DATE OF TRIAL RUN, THE PLANT AND MACHINERY ACQUIRED BY THE ASSESSEE WAS SET UP OR NOT. IF THE EXPENDITURE EVEN ON TRIAL RUN IS CONSIDERED AS PRIOR TO THE SETTING UP OF PLANT AND MACHINERY THEN IT CANNOT BE ALLOWED AS REVENUE EXPENDITURE BUT HAS TO BE CAPITALIZED AND BEING PART OF COST OF THE NEWLY ACQUIRED CAPITAL ASSET. THE PLANT AND MACHINERY IS SET UP WHEN IT IS ESTABLISHED AND IN READY TO START FUNCTION. IN OTHER WORDS, THE PLANT MUST BE PUT INTO SUCH SHAPE AND STAGE THAT IT CAN START FUNCTIONING FOR THE PURPOSE OF BUSINESS OF THE ITA NO . 3668 / 11 9 ASSESSEE. THER EFORE, UNTIL AND UNLESS EVERYTHING NEEDED IS PUT IN PLACE, SO THAT THE NEWLY ACQUIRED PLANT AND MACHINERY IS READY TO START FUNCTIONING FOR WHICH IT IS ACQUIRED THE EXPENDITURE INCURRED PRIOR TO SETTING UP OF THE PLANT AND MACHINERY CANNOT BE ALLOWED BECA USE IT HAS BEEN LAID OUT FOR BRINING A NEW ASSET INTO EXISTENCE. THE PLANT AND MACHINERY WOULD BE SAID TO BE SET UP WHEN IT IS READY TO BE USED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. THEREFORE, THE TRIAL RUN IS ONE STAGE PRIOR TO DISCHARGE THE FUNCT IONS FOR WHICH IT HAS BEEN ACQUIRED. ONLY ON SUCCESSFUL COMPLETION OF TRIAL RUN, THE PLANT AND MACHINERY IS TREATED AS SET UP AND READY TO START THE FUNCTION. THEREFORE, UNTIL AND UNLESS A SUCCESSFUL TRIAL RUN IS COMPLETED, THE NEWLY ACQUIRED MACHINERY CAN NOT BE SAID TO HAVE PUT IN SUCH A SHAPE THAT IT CAN START FUNCTIONING AS BUSINESS ASSET AND, THEREFORE, IT CANNOT BE SAID THAT THE PLANT AND MACHINERY HAS BEEN SET UP. PRIOR TO THE INSTALLATION OF THE MACHINERY AND BRING TO THE SHAPE TO BE READY TO DISCHAR GE THE FUNCTION THE ACTIVITIES CARRIED OUT ARE MERELY OPERATIONS FOR SETTING UP OF THE PLANT. THE PLANT AND MACHINERY COULD BE TREATED AS SET UP ONLY AS A CULMINATION OF ALL THESE OPERATIONS, WHICH ARE NECESSARY FOR ESTABLISHING THE PLANT AND MACHINERY AND BRING IN THE SHAPE AS IT IS READY TO DISCHARGE FUNCTION. WE ARE CONSCIOUS THAT IN ASSESSMENT YEAR I.E. A.Y.200 5 - 0 6, THE TRIBUNAL REMANDED THIS ISSUE TO THE RECORD OF AO FOR EXAMINING WHETHER IT IS FOR INCREASE OF EXISTING BUSINESS OR NOT. SINCE THE ISSUE WAS NOT DECIDED ON MERITS AND NO VIEW WAS TAKEN BY ITA NO . 3668 / 11 10 THE TRIBUNAL ON THIS POINT, THEREFORE, THE EARLIER DECISION OF THE TRIBUNAL REMANDING THE ISSUE TO THE RECORD OF THE AO WILL HAVE NO BEARING ON THE MERITS OF THE ISSUE FOR THE ASSESSMENT YEAR UNDER CONSIDE RATION. ACCORDINGLY, WE ARE OF THE VIEW THAT THE EXPENDITURE WHICH HAVE BEEN INCURRED BY THE ASSESSEE PRIOR TO SETTING UP THE PLANT AND MACHINERY ARE CAPITAL IN NATURE AND CANNOT BE ALLOWED. 12 . THE ASSESSEE HAS ALSO CLAIMED TERM LOAN INTEREST OF RS. 25.09 CRORES AS REVENUE EXPENDITURE. AS PER PROVISO TO SECTION 36(1)( III ), INTEREST ON TERM LOAN IS TO BE ALLOWED ONLY FROM THE DATE WHEN ASSET IS FIRST PUT TO USE. PRIOR TO IT, SUCH EXPENDITURE CANNOT BE ALLOWED AS REVENUE EXPENDITURE. FROM THE ORDER OF THE TR IBUNAL DATED 27 - 9 - 2013 , WE FOUND THAT SIMILAR EXPENDITURE WAS CLAIMED AS REVENUE BUT THE SAME WAS NOT ALLOWED. 1 3 . IN THE RESULT , APPEAL OF THE ASSESSEE IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 19 /0 9 /2014 . 19 /0 9 /2014 SD/ - SD/ - ( ) ( R.C.SHARMA ) ( ) ( VIJAY PAL RAO ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI ; DATED 19 /0 9 /2014 /PKM , PS COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A) , MUMBAI. 4. / CIT 5. / DR, ITAT, MUMBAI 6. GUARD FILE. ITA NO . 3668 / 11 11 / BY ORDER, ( ASSTT. REGISTRA R) / ITAT, MUMBAI //TRUE COPY//