2015 (10) TMI 1276 - AT - Income Tax

Disallowance of project development expenses claimed by the assessee as revenue expenditure u/s 37(1) - assessing officer has taken the view that the expenditure claimed by the assessee is not allowable, since the assessee itself has treated the same as capital expenditure - Held that - In the instant case, there is no dispute that the nature of business activities of all the stores, i.e., already opened and that are going to be opened, is identical in nature. It is also not in dispute that the assessee is already operating certain stores and it was in the process of opening more number of stores. Hence, we are of the view that it is a case of expansion of business activities. Hence, the view entertained by Ld CIT(A) that the opening of new stores give rise to new sources of income is, in our view, not justified. These expenditures incurred by the assessee are for the purposes of expansion of its business and those expenditure are in the nature of revenue (being mostly paid to employees). These are allowable in the year itself as per ratio of aforementioned decision of the Hon‟ble Bombay High Court in the case of CIT V/s Kothari Auto Parts Manufactures Pvt Ltd (1975 (12) TMI 28 - BOMBAY High Court) and Hon‟ble High Court of Gujarat in the case of CIT V/s Alembic Glass Industries Ltd (1975 (11) TMI 42 - GUJARAT High Court). These expenditures did not create any asset and also did not provide enduring benefit to the business of the assessee so as to say that the expenditure was capital in nature Therefore, we hold that expenditure are allowable in the year under consideration irrespective of the fact that assessee has given dual status to such expenditure in its books of account vis- -vis computation of income filed along with return - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the disallowance of project development expenses claimed by the assessee as revenue expenditure under Section 37(1) of the Income Tax Act was justified.

Detailed Analysis:

1. Background and Facts:
The assessee, engaged in trading and merchandising, had claimed project development expenses as revenue expenditure for the assessment years 2008-09 and 2009-10. These expenses were shown as "Capital work in progress" in the Balance Sheet. The assessee argued that these expenses were incurred for the expansion of its business operations and should be deductible under Section 37(1) of the Income Tax Act.

2. Assessee's Argument:
The assessee contended that all its stores were part of an indivisible business with centralized administration and common management. The expenses, which included salaries, electricity, and audit fees, were incurred for the expansion and maintenance of existing stores. The assessee cited several legal precedents, including the Supreme Court's decision in Kedarnath Jute Manufacturing Company Limited, to argue that book entries should not determine the deductibility of expenses under the Income Tax Act.

3. Assessing Officer's (AO) View:
The AO disallowed the expenses, arguing that they were not incurred for routine operations and were considered capital in nature in the books of account. The AO also disallowed expenses in excess of those already disallowed by the assessee under Sections 40A(7), 40A(9), and 43B of the Act for the assessment year 2008-09.

4. CIT(A)'s Decision:
The CIT(A) upheld the AO's decision, distinguishing between "expansion" and "extension" of business. The CIT(A) held that the assessee's case involved the extension of business by setting up new sources of income, and thus, the project development expenses were not deductible.

5. Tribunal's Analysis:
The Tribunal noted that the AO's view was contrary to the Supreme Court's rulings in Kedarnath Jute Manufacturing Company Limited and Taparia Tools Ltd., which held that book entries are not determinative. The Tribunal found that the expenses were indeed incurred for routine operations and were revenue in nature. The Tribunal also referred to similar cases, such as M/s Reliance Footprint Ltd, where such expenses were allowed as revenue expenditure.

6. Tribunal's Conclusion:
The Tribunal concluded that the expenses were incurred for the expansion of an already established business and should be allowed as revenue expenditure. The Tribunal set aside the CIT(A)'s orders and directed the AO to allow the expenses for both assessment years.

Judgment:
The appeals filed by the assessee were allowed, and the AO was directed to allow the project development expenses as revenue expenditure for the assessment years 2008-09 and 2009-10.