Keerthi Industries Limited , Hyderabad V. Income Tax Officer, Ward-2(1), Hyderabad

ITA 687/Hyd/2019

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 6609 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 7 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-12-2021
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB-B
• Assessment Year: 2016-2017
• Appeal Filed On: 05-05-2019
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Revenue expenditure
• Section: 37; 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “B”: HYDERABAD (THROUGH VIRTUAL CONFERENCE) B EFORE SH RI VI J AY PA L RAO, JU DIC IAL MEMBE R AND SHR I L AXMI PR AS A D SAHU , AC COUNT ANT MEMBE R ITA No. 687/Hyd/2019 Assessment Year: 2016-17 Keerthi Industries Ltd., Hyderabad. PAN – AAFCS 3938P Vs. Income-tax Officer, Ward – 2(1), Hyderabad. (Appellant) (Respondent) Assessee by: Shri. V. Siva Kumar Revenue by: Shri Rohit Mujumdar Date of hearing: 10/11 /2021 Date of pronouncement: 10/12/2021 O R D E R PER L.P. SAHU, A.M.: This appeal filed by the assessee is directed against CIT(A), Hyderabad’s order dated 04/04/2019 for AY 2016- 17 involving proceedings u/s 143(3) of the Income Tax Act, 1961 ; in short “the Act on the following grounds of appeal: “1. The Order of the Commissioner of Income Tax (Appeals)-2, Hyderabad dated 04-04-2019 is erroneous, contrary to law and facts of the case. 2. a) The Commissioner of Income Tax (Appeals) is not justified in upholding the disallowance of expenditure ITA No. 687/Hyd/2019 K e e r t h i I n d u s t r i e s L t d . , Hy d e r a b a d . :- 2 -: of Rs.42,06,000/- incurred on abandoned sugar project stating that such expenditure is nothing but a capital expenditure and not a revenue expenditure by nature. b) The Commissioner of Income Tax (Appeals) ought to have seen that expenditure incurred is of revenue nature and allowable as deduction since Appellant's units are managed by common management through its Board of Directors and thus there is unit of control and management over its businesses and funds for various businesses are interlaced. Hence confirming disallowance of such expenditure is not justified. 3. For all of the above and such other grounds as may be urged at the time of hearing it is most respectfully prayed that this Hon'ble Tribunal may be pleased to allow the appeal and suitable directions be issued to the Assessing Officer to delete the disallowance ofRs.42,06,000/-.” 2. Briefly, the facts of the case are that the appellant is a company engaged in the business of manufacture of cement, printed circuit boards and in generation of wind power. It had filed its Return of Income for A.Y. 2016-17 on 30.09.2016 admitting total income of Rs. NIL after setting off brought forward losses of Rs. 28,26,20,667/-. The case was selected for Scrutiny under CASS and assessment was completed u/s 143(3) of the Act on 31.10.2018 by disallowing sugar division expenditure of Rs. 42,06,000/-, by observing as under in the assessment order by the AO: 2.1 During assessment proceedings, the AO observed from the profit & loss account submitted by the assessee under the head "Revenue from operations" that the ITA No. 687/Hyd/2019 K e e r t h i I n d u s t r i e s L t d . , Hy d e r a b a d . :- 3 -: assessee company had not admitted any income from "Sugar Division but an amount of Rs.42.06 lakhs was claimed as expenditure in respect of "Sugar Division". Vide this office notice u/s.142(l), dt.23.7.2018, assessee was asked to explain why the company has not admitted any income from "Sugar Division". In response, assessee vide its letter dated 13.8.2018 had submitted its explanation for not offering any income from “Sugar Division" as under: "In the year 2007, company wanted to diversify into other business and decided to set up a sugar factory. Accordingly company filed Industrial Entrepreneur Memorandum (IEM) and obtained acknowledgement. from the Ministry of Commerce and Industry Government of India which is a Pre-requisite for setting up an Industry. As per Clause 6A (Extracted hereunder) of Sugarcane(Control) (Amendment) Order, an enterprise which filed an IEM should set up the sugar factory within a period of two years from the date of !EM or any extended time as may be granted. Considering the difficulties faced by the company in obtaining various approvals from Government of Karnataka, Chief Director(Sugar) Ministry of Consumer Affairs, Food and PD, Government of India has extended time for commencement of commercial production up to 26.07.2014. By the time the company obtained all the required approvals from Government of Karnataka in 2014, demand of Sugar declined and banks expressed their inability to finance sugar projects as they are overexposed to sugar industry. ITA No. 687/Hyd/2019 K e e r t h i I n d u s t r i e s L t d . , Hy d e r a b a d . :- 4 -: Therefore, the company has abandoned the sugar project being not able to achieve financial closure in time. Company has purchased 97 acres of land at a cost of Rs. 4.75 crores for setting up of Sugar project. In order to safe guard such land, company has incurred expenditure of Rs.42.06 lakhs iz., watch and ward, Jungle cleaning etc. and claimed as a deduction in computation of income .. This expenditure is allowable as deduction since the project was abandoned and incurred during the course of business .. " 2.2. The AO observed that the assessee had planned to set up a sugar factory. The company has obtained in principle the approval from Government of Karnataka for establishing the factory. The company has purchased 97 acres of land at a cost of Rs.4, 75 crores for setting up of sugar project. In order to safeguard such land, the company has incurred expenditure of Rs.42.06 lakhs uiz., watch and ward, Jungle cleaning etc. 2.3 Further, the AO observed that the assessee explained that the reason for abandoning the project was that by the time it obtained all the approvals from Gout, of Karnataka, demand for sugar declined and banks expressed their inability to finance sugar projects as they were over exposed to sugar industry. 2.4 Referring to the provisions of section 37 of the Act, the AO observed that any expenditure not being in the ITA No. 687/Hyd/2019 K e e r t h i I n d u s t r i e s L t d . , Hy d e r a b a d . :- 5 -: nature of capital expenditure or personal expenses of assessee laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head" Profits and gains of the business or profession". The expenditure claimed by the assessee is incurred for the purpose of safeguarding the land purchased for the purpose of setting up of Sugar factory which was abandoned. Had the assessee continued setting up of sugar factory, this expenditure would have to be capitalized and claimed as cost of the project. The act of abandoning of project will not change charter of expenditure from capital to revenue. Further to allow this expenditure as revenue, business of the assessee is not buying and selling of land. Even this expenditure cannot be allowed against other sources of income viz cement division or Wind Power division as same was not expended for the purpose of these businesses. In view of the above observations and relying on various case law, the AO held that the amount of Rs. 42,06,000/- was a capital expenditure and cannot be allowed as revenue expenditure. Accordingly, he made the addition of Rs. 42,06,000/-. 3. Aggrieved by the order of AO, the assessee preferred an appeal before the CIT(A) and the CIT(A) after considering the submissions of the assessee, which were extracted by the CIT(A) in his order at pages 5 to 7, upheld ITA No. 687/Hyd/2019 K e e r t h i I n d u s t r i e s L t d . , Hy d e r a b a d . :- 6 -: the action of the AO by observing that the substantial expenditure incurred by the assessee is directly related to the improvement of the land as admitted by the assessee itself and, therefore, the same is nothing but a capital expenditure and not a revenue expenditure. For the sake of clarity, the findings of the CIT(A) are extracted below: :The AO disallowed a sum of Rs. 42,06,000/- on account of expenses pertaining to sugar division which was a project which was abandoned by the appellant. The expenditure pertained to the land of 97 acres which was acquired by the appellant and the said land was to be leveled and therefore the appellant had incurred expenditure for improvement of the same. The major expenditure was of Rs. 38,70,000/- which was pertaining jungle clearance and the balance pertained to the security etc., which was deployed for the same. The appellant has admitted that this new venture which was entered by intent in 2007 was abandoned as the sugar industry was not attracting much interest from lenders and therefore was becoming unviable to start and therefore the same was claimed as revenue expenditure. The AO held the same as a capital expenditure by relying on the Delhi High Court decision in case of Triveni Engineering Works Vs. CIT which is squarely applicable to the case and also subsequent decisions which held the same view. Thus, the AO concluded that the same could not be allowed as revenue expenditure. It is very important to note that the substantial expenditure is directly related to the improvement of the land, as admitted by the appellant itself, that the land had a jungle in it and the same had to be cleared. Therefore, the same is nothing but a capital expenditure and not a revenue expenditure by "nature ITA No. 687/Hyd/2019 K e e r t h i I n d u s t r i e s L t d . , Hy d e r a b a d . :- 7 -: itself. Therefore, the appellant's contention of isolating this expenditure and claiming it as revenue is a wrong proposition itself as per law. In view of the same, as the project has been abandoned, therefore the action of the AO is upheld on the basis of settled case laws in this regard and also on the basis of the finding given on the nature of expenditure in the above paragraph, in view of the same, the ground no. 2 raised by the appellant is dismissed. The ground nos. 1 and 3 being general in nature needs no adjudication.” 4. Aggrieved by the order of CIT(A), the assessee is in appeal before the ITAT. 5. Before us, the ld. AR of the assessee submitted that the assessee company has purchased 97 acres of land at a cost of Rs. 4.75 crores for setting up of sugar project and in order to safeguard such land, company had incurred expenditure of Rs. 42.06 lakhs, namely, watch and ward, jungle cleaning etc. and claimed as a deduction in computation of income. He, therefore, submitted that the expenditure is allowable as deduction since the project was abandoned and incurred during the course of business. In support of assessee’s case, the ld. AR relied on the decision of the Hon’ble High Court of Madras in the case of Chemplast Samar Ltd., 97 Taxmann.com 347 (Mad.). 6. The ld. DR, on the other hand, besides relying on the orders of revenue authorities, submitted that since the project has been abandoned, the expenditure cannot be in ITA No. 687/Hyd/2019 K e e r t h i I n d u s t r i e s L t d . , Hy d e r a b a d . :- 8 -: the nature of revenue expenditure and therefore, submitted that the order of the CIT(A) be upheld. He submitted that the case laws relied upon by the ld. AR is not applicable to the facts of the case of the assessee. 7. We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The AO disallowed a sum of Rs. 42,06,000/- on account of expenses pertaining to sugar division which was a project which was abandoned by the appellant. The expenditure pertained to the land of 97 acres which was acquired by the appellant and the said land was to be leveled and therefore the appellant had incurred expenditure for improvement of the same. The major expenditure was of Rs. 38,70,000/- which was pertaining jungle clearance and the balance pertained to the security etc., which was deployed for the same. The appellant has admitted that this new venture which was entered by intent in 2007 was abandoned as the sugar industry was not attracting much interest from lenders and therefore was becoming unviable to start and therefore the same was claimed as revenue expenditure. We observe that when the project was abandoned, there is no question of incurring the expenditure in revenue nature. The expenditure incurred by the assessee for the improvement of the land, but, not for the purpose of carrying out business of the assessee. The case laws relied upon by the ld. AR of the ITA No. 687/Hyd/2019 K e e r t h i I n d u s t r i e s L t d . , Hy d e r a b a d . :- 9 -: assessee is distinguishable on facts and is not applicable to the case of the assessee because in that case the expenditure was related to the abandonment of the project, whereas in the case on hand, the assessee has incurred expenditure after the abandonment of the project. It is not a case of expansion of existing business but the expenditure is incurred for setting up of a new line of business. Therefore, we do not find any infirmity in the order of the CIT(A) in confirming the addition of Rs. 42,06,000/-, made by the AO, on account of expenditure which was incurred to sugar division, which was abandoned and upholding the order of the CIT(A), we dismiss the grounds raised by the assessee on this issue. 8. In the result, appeal of the assessee is dismissed in above terms. Pronounced in the open court on 10 th December, 2021. Sd/- Sd/- (VIJAYA PAL RAO) (L. P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated: 10 th December, 2021. kv ITA No. 687/Hyd/2019 K e e r t h i I n d u s t r i e s L t d . , Hy d e r a b a d . :- 10 -: Copy to : 1 Keerthi Industries Ltd., Plot No. 40, IDA, Balanagar, Hyderabad – 500 037. 2 ITO, Ward – 2(1), Hyderabad. 3 CIT(A) - 2, Hyderabad. 4 Pr. CIT - 2, Hyderabad 5 ITAT, DR, Hyderabad. 6 Guard File.