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2014 (2) TMI 234 - AT - Income TaxNature of expenses Capital OR Revenue - Expenses incurred on preliminary survey Survey for aqua and agro project Held that - The Assessee has proposed to set up Aqua Agro Project which was admittedly an expansion of the existing project - The proposed new project is stated to have inextricable linkage with the existing business of the assessee - It is also a fact that no new asset has come to be created by the incurring of expenses - the Revenue could not bring any material on record to controvert the submission of the assessee - Relying upon CIT Vs. Priya Village Roadshows Limited 2009 (8) TMI 765 - Delhi High Court - the expenditure cannot be considered to be of capital nature and therefore, the claim of the Assessee needs to be upheld Decided in favour of Assessee. Depreciation u/s 32 of the Act Greenhouse classified as building instead of plant Held that - The functional test have to be applied to determine as to whether the building is a plant or is a building simpliciter Relying upon CIT vs. Victory Aqua Farms Ltd. 2004 (10) TMI 84 - KERALA High Court The green house is an essential part for a company engaged in the business of Tissue Culture - It cannot be considered as a simple building but has to be considered as a plant - the Assessee was right in considering the green house as part of plant and machinery and claiming depreciation of 25% - Decided partly in favour of Assessee.
Issues Involved:
1. Disallowance of amortization of expenses. 2. Disallowance of expenses as capital expenditure. 3. Disallowance of legal and professional fees. 4. Classification of greenhouses for depreciation purposes. Issue-wise Detailed Analysis: 1. Disallowance of Amortization of Expenses: The Assessee did not press this ground due to the smallness of the amount involved. Consequently, this ground was dismissed as not pressed. 2. Disallowance of Expenses as Capital Expenditure: The Assessee incurred Rs. 10,71,565/- on a preliminary survey for the Aqua and Agro Project, which was eventually abandoned. The Assessing Officer (AO) disallowed this expenditure, treating it as capital in nature, and this decision was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) referenced cases such as CIT vs. Maneklal Industries and Triveni Engineering Works v CIT to support the view that expenses on new projects not directly connected to the existing business are capital expenditures. However, the Assessee argued that the Aqua Agro Project was part of the existing business and cited various judgments to support the claim that the expenses should be treated as revenue expenditures. The Tribunal agreed with the Assessee, noting that the proposed project was an expansion of the existing business and no new asset had come into existence. Thus, the Tribunal allowed the Assessee's claim, treating the expenses as revenue in nature. 3. Disallowance of Legal and Professional Fees: This issue was interconnected with the expenses incurred on the preliminary survey for the Aqua and Agro Project. The AO disallowed Rs. 35,000/- spent on legal and professional fees, treating it as a capital expenditure. The CIT(A) upheld this disallowance, and the Tribunal, following its reasoning on the second issue, allowed the Assessee's claim, treating these expenses as revenue in nature. 4. Classification of Greenhouses for Depreciation Purposes: The Assessee claimed depreciation at 25% on greenhouses, treating them as "plant." The AO classified greenhouses as "building," allowing only 10% depreciation. The CIT(A) upheld the AO's decision, stating that greenhouses are in the nature of buildings. The Assessee argued that greenhouses are integral to the hardening process in Tissue Culture activities and should be treated as part of the manufacturing process. The Tribunal applied the "functional test" and referenced various judgments, including CIT vs. Victory Aqua Farms Ltd. and CIT vs. Karnataka Power Corporation, to conclude that greenhouses, in this context, function as plant and machinery. Therefore, the Tribunal allowed the Assessee's claim for higher depreciation at 25%. Conclusion: The Tribunal partly allowed the Assessee's appeals, granting relief on the disallowance of expenses as capital expenditure and the classification of greenhouses for depreciation purposes. The disallowance of amortization of expenses was dismissed as not pressed.
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