2015 (10) TMI 2177 - AT - Income Tax

Expenditure incurred on oil solvent extraction plant - whether as the production had not commenced and therefore, it is in the nature of capital expenditure - revenue v/s capital expenditure - Held that - As evident from the balance sheet of the assessee that the assessee had produced semi finished crude solanesol oil of 11,660 Kgs of low purity. Therefore, on completion of the balance process these semi finished goods will be converted into finished goods and available as stock in trade to the assessee for sale. Hence any expenditure incurred for producing the semi finished goods will be in the nature of revenue expenditure and has to be debited to the Profit And Loss account. Consequently the semi finished goods will also be reflect in the credit side of the Profit And Loss account as Semi-Finished goods and as well as in the balance sheet under the head Current Assets. In such circumstances if this expenditure is not allowed as deduction, then to that extent profit of the assessee will be superficially inflated. Therefore, the Revenue has erred in treating the semi finished stock of the assessee as capital expenditure. Moreover from the order of the Ld. Assessing Officer it appears that he was under impression that the expenditure is incurred towards Solvent Extraction Plant when the fact remains that these expenditure was incurred for the production of semi finished goods viz., crude solanesol oil. Hence we hereby direct the Ld. Assessing Officer to allow the claim of the expenditure of ₹ 18,84,633/- incurred by the assessee for producing the semi finished goods viz., crude solanesol oil. - Decided in favour of assessee.

Issues:
1. Confirmation of re-assessment under Sec.143(3) r.w.s 147 of the Act.
2. Disallowance of expenditure on oil solvent extraction plant as capital expenditure.

Analysis:
1. The appeal was filed by the Assessee against the order of the Commissioner of Income Tax(A)-V, Chennai confirming the re-assessment under Sec.143(3) r.w.s 147 of the Act. The Assessee raised grounds challenging the confirmation of the re-assessment, asserting that the Learned CIT (A) had erred in upholding the re-assessment. The issue revolved around the correctness of the re-assessment framed by the authorities.

2. The primary issue in this case was the disallowance of a sum of &8377; 18,84,633/- as expenditure incurred by the assessee on its oil solvent extraction plant. The Assessing Officer disallowed the expenditure, considering it as capital expenditure since the production had not commenced. The CIT (A) affirmed this disallowance, noting that the plant was not fully set up during the relevant year, supporting the Assessing Officer's view that the expenditure was capital in nature. The Assessee contended that the expenditure should be treated as revenue expenditure since commercial production had commenced. The dispute centered on the classification of the expenditure as capital or revenue in nature.

3. The Assessee, a company engaged in trading and exports, filed its return for the assessment year 2005-06, admitting an income of &8377; 3,59,99,511/-. The case was reopened, and during assessment, it was observed that the Assessee had incurred expenditure on its oil solvent extraction plant. The production of crude solanesol oil was at a semi-finished stage, with no sales made. The Assessing Officer considered the expenditure as capital due to the plant not being fully operational. The CIT (A) upheld this decision, emphasizing that depreciation was not claimed on the plant, indicating it was not fully set up. The Assessee argued that the expenditure should be allowed as a deduction since commercial production had commenced.

4. During the proceedings, the Assessee submitted the company's annual report, asserting that commercial production of crude oil had begun. The Revenue supported the previous orders disallowing the expenditure. After hearing both parties and examining the records, it was noted that the Assessee had produced semi-finished crude solanesol oil, which would be converted into finished goods for sale. The expenditure incurred for producing these goods was deemed revenue expenditure and should be debited to the Profit And Loss account.

5. The Tribunal found that the expenditure incurred by the Assessee for producing semi-finished goods should be treated as revenue expenditure. The Assessing Officer's confusion between the nature of the expenditure and the product being produced was clarified. It was directed that the claim of the &8377; 18,84,633/- expenditure for producing semi-finished goods should be allowed. The appeal of the Assessee was allowed, overturning the previous decisions.

This detailed analysis of the judgment outlines the issues involved, the arguments presented by the parties, and the Tribunal's decision on each issue, providing a comprehensive understanding of the legal aspects and reasoning behind the judgment.

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