2010 (5) TMI 831 - HC - Income Tax

Nature of expenditure - interest/expenditure allowed as revenue expenditure incurred for new unit which was a separate unit from existing unit and this new unit had not started production - HELD THAT - Both, the Tribunal as well as CIT (A), have recorded concurrent findings of fact and come to the conclusion that the so called new unit was merely an expansion of the existing business of the assessee and was not setting up of a new business and as such the expenses incurred in this regard were allowable as revenue expenses. Considering the fact that the AO had not considered the claims of each of the items of expenditure incurred by the assessee from the angle as to whether the same were in the nature of revenue or capital expenditure, the matter has been restored to the AO to look into the nature of the expenses and consider as to whether the same are allowable u/s 36(1)(iii) or Section 37. In the circumstances, no infirmity can be found in the approach adopted by CIT (A) as confirmed by the Tribunal so as to warrant interference. The appeals are, accordingly, dismissed.

Summary

Issues:
- Interpretation of revenue expenditure for a new unit
- Allowability of expenses as revenue or capital expenditure
- Expansion of existing business vs. setting up a new business

Interpretation of Revenue Expenditure for a New Unit:
The appeals arose from a consolidated order of the Tribunal concerning common questions under Section 260A of the Income-tax Act, 1961. The appellant-revenue questioned the allowance of interest/expenditure of Rs. 140.70 lacs as revenue expenditure for a new unit that had not commenced production. The assessee, engaged in manufacturing chemical processing equipment, incurred expenses for a new unit separate from the existing one. The Assessing Officer treated these expenses as capital expenditure due to the new unit not starting production.

Allowability of Expenses as Revenue or Capital Expenditure:
The assessee appealed to the Commissioner (Appeals), who ruled in favor of the assessee, considering the new unit an expansion of the existing business rather than a new business. The Commissioner directed the Assessing Officer to assess the nature of expenses under Sections 36(1)(iii) and 37 of the Act. The Tribunal upheld this decision, emphasizing that the new unit represented an expansion of the existing business, making the revenue expenditure allowable. Both the Tribunal and Commissioner (Appeals) concurred that the expenses were revenue in nature, warranting no interference.

Expansion of Existing Business vs. Setting up a New Business:
Both the Tribunal and Commissioner (Appeals) concluded that the new unit was an extension of the existing business, not the establishment of a new one. They found no error in considering the new unit as part of the existing business, allowing the expenses as revenue expenditure. The Assessing Officer was directed to evaluate the expenses to determine their nature under the relevant sections of the Act. Consequently, the appeals were dismissed, with no substantial question of law arising from the Tribunal's order.