2014 (9) TMI 361 - HC - Income Tax

Expenses disallowed Project work in progress should be capitalized or not Held that - Method of accounting is one aspect and regardless of the treatment given in the books of accounts, the expenditure, if it is revenue in nature, can be claimed u/s 37 of the Act relying upon Kedarnath Jute Mfg. Co. V/s Commissioner of Income-Tax 1971 (8) TMI 10 - SUPREME Court - The core and important aspect which should have been determined by the AO was; whether or not, the expenditure was revenue or capital in nature - This was not the appropriate manner to deal with the contention and issue whether or not the expenditure was wholly or exclusively for purpose of earning of income AO has not dealt with and examined the aspect but made the addition - even if addition is made in the year, the expenditure will have to be allowed as a deduction in the subsequent years - The income declared in the revised return filed on 30.11.2006 was income and in the revised return loss was declared - The tax effect and the tax involvement would be minimum, and in case we take a holistic view by taking future years in question, there possibly would not be any tax collection shortfall Decided against revenue.

Summary

Issues:
Appeal by revenue on Assessment Year 2006-2007 regarding disallowed expenditure of Rs. 42,60,293 as "project work in progress."

Analysis:
The respondent-assessee initially declared income of Rs. 3,06,525, revised to Rs. 1,45,756, and later to a loss of Rs. 41,14,537. The Assessing Officer disallowed the expenditure of Rs. 42,60,293 as it should be capitalized. The Commissioner of Income Tax (Appeals) reversed this, which was affirmed by the Income Tax Appellate Tribunal (ITAT).

The respondent provided consultancy and venture capital advisory services, treating the expenditure as 'project work in progress.' The Assessing Officer held the change in accounting method as incorrect. The Commissioner of Income Tax (Appeals) supported the respondent, stating the expenditure was revenue in nature and allowable under Section 37 of the Act.

The Tribunal upheld the Commissioner's decision. The High Court emphasized that the key issue was whether the expenditure was revenue or capital in nature. The Assessing Officer failed to determine this, relying solely on accounting entries. The court highlighted the need to examine if the new activity was an extension of the existing business and the nature of expenses.

The court refused to remand the matter as the assessee consistently followed the same method in subsequent years. Even if the expenditure was added back, it would be allowed as a deduction in future years. Considering the minimal tax effect, the appeal was dismissed, noting there would likely be no tax collection shortfall in the future.