2014 (12) TMI 926 - AT - Income Tax

Expenses incurred in connection with extension of existing business at Greater Noida Capital or revenue expenses allowable u/s 37(1)/36(1)(iii) - Held that - As decided in assessee s own case, it has been held that if it is expansion of the same line of business, the expense incurred on obtaining the borrowed funds should be allowed as revenue expenditure - there was no finding regarding the nature of the project being undertaken at Noida - the detail shows only expenditure on acquisition of land and building construction - assessee had itself capitalized the borrowing cost in the preceding as well as current year and only after 12.12.2001 when the project was deferred/suspended, that the assessee has claimed the borrowing cost to be allowable as revenue expenses as per the AS-16 of the Institute of Chartered Accountants of India. The reliance upon A.S. 16 by the assessee is on the premise that the case comes under Suspension of Capitalization - the matter is remitted back for the issue of allowability of interest expenditure to the file of AO - since there is no finding of the authorities below regarding nature of the project being undertaken by the assessee at Greater Noida, therefore, the issue of suspension of capitalisation also needs examination of facts at the end of AO Decided in favour of assessee. Advances given during the course of business in earlier years, written off during the year disallowed Held that - A proposal of Reconfiguration of IT Set up for the assessee company has been put up by Shri Abir Basak to Mr. Dinesh Chandna with a bottom line that the commercial term for the same has been negotiated to ₹ 5 lacs with M/s IBM Global Services - the assessee has claimed bad debts of ₹ 5 lakh paid to M/s Trivoli Management, ₹ 1,25,000 to M/s IBM Global Services and ₹ 2,10,000 to M/s IBM Global Services & Excel Computer totalling to ₹ 8,35,000/- as per scope of work, certain devices, systems were proposed to be installed for the purpose of reconfiguration of IT set up of the assessee - the amounts were advanced for purchase of capital assets and as decided in Tulip Star Hotels Limited. Versus Additional Commissioner Of Income-tax, Special Range - 1, New Delhi 2007 (6) TMI 238 - ITAT DELHI-D - advance given for purchase of capital assets are not allowable as bad debts/business loss thus, the order of the CIT(A) is upheld Decided against assessee.

Summary

Issues Involved:
1. Disallowance of expenses incurred in connection with the extension of existing business at Greater Noida by treating them as capital expenditure.
2. Disallowance of advances written off during the year.

Issue-wise Detailed Analysis:

1. Disallowance of Expenses Incurred in Connection with Extension of Existing Business at Greater Noida:

The assessee contested the disallowance of Rs. 270,79,740/- incurred for the extension of its existing business at Greater Noida, which the Assessing Officer (AO) treated as capital expenditure. The assessee argued that these expenses, including Rs. 254,22,653/- as interest, should be allowed as revenue expenditure under sections 37(1) and 36(1)(iii) of the Income Tax Act, 1961.

The Tribunal referred to a similar case from the previous assessment year (AY 2002-03) where the issue was remitted to the AO for fresh consideration. The Department did not object to remitting the issue back to the AO for reassessment. The Tribunal noted that the CIT(A) had decided the issue by reiterating its conclusions from AY 2002-03 against the assessee.

The Tribunal observed that the nature of the project at Greater Noida, whether it was an expansion of the existing business or a new project, was not determined by the lower authorities. The Tribunal emphasized the need to examine whether the borrowing costs should be capitalized or recognized as expenses based on the Accounting Standard (AS)-16 of the Institute of Chartered Accountants of India.

The Tribunal highlighted that the assessee had capitalized the borrowing costs up to 12.12.2001 and claimed the costs as revenue expenditure after this date, arguing that the project was suspended. The Tribunal found it necessary to remit the issue back to the AO to determine the nature of the project and whether the suspension of capitalization was justified.

2. Disallowance of Advances Written Off During the Year:

The assessee contested the disallowance of Rs. 8,35,000/- being advances given during the course of business in earlier years, which were written off during the financial year under consideration. The AO disallowed the claim, stating that the advances were for acquiring capital assets and could not be allowed as revenue expenditure.

The Tribunal referred to the decision of the ITAT Delhi in the case of TULIP STAR HOTELS LTD. vs. ADDITIONAL COMMISSIONER OF INCOME TAX, which held that advances given for the purchase of capital assets are not allowable as business loss. The Tribunal noted that the CIT(A) had also confirmed the disallowance based on this precedent.

The Tribunal reviewed the details provided by the assessee and found that the advances were indeed for the purchase of capital assets, such as IT setup reconfiguration. Therefore, the Tribunal upheld the disallowance, agreeing with the lower authorities that the advances could not be written off as bad debts or business loss.

Conclusion:

The appeal was partly allowed for statistical purposes concerning the disallowance of expenses incurred in connection with the extension of the existing business at Greater Noida, with the issue remitted back to the AO for fresh consideration. The appeal was dismissed regarding the disallowance of advances written off during the year, as the Tribunal upheld the lower authorities' decision. The order was pronounced in the open court on 22.12.2014.