2016 (1) TMI 216 - AT - Income Tax

Payment of advance made for acquisition of existing windmill power project - expenditure in the nature of capital expenditure or to be regarded as revenue expenditure - Held that - The assessee had generated revenue from the said windmills pending completion of the payment terms and also incurred expenses which resulted in a net income of ₹ 2.54 lakhs. Further, it is also evident that the assessee had sought to foray into a new business line by proposing to acquire the impugned windmill project. We find on these facts that the payment of impugned advance of ₹ 90 lakhs is in the nature of capital advance or capital investment and not a revenue expenditure as claimed. The test is to consider for what purpose the amount is laid for. If the amount is laid for purchase of goods in which the assessee dealt with and which were ultimately to be sold as profit then the expenditure would ordinarily be revenue expenditure. On the other hand, in the present case, the capital was provided by the assessee to the seller for acquisition of capital asset. The MOU clearly shows that the assessee was venturing on a new business and the amount was put as the capital expenditure to acquire capital asset. It is therefore clear that the loss arose from the investment and not given in the course of business being carried on by the assessee. Thus, it is capital loss and not a loss incidental to the business. Deprivation from benefit as a result of such capital expenditure is of no consequence and cannot impact the character of expenditure. The decisions cited by the assessee are distinguishable on facts. In all the decision relied upon, the advance were given in the course of carrying on of the regular business like purchase of raw material or other business expenses, etc. where the loss incurred due to termination of contract. The expenses were incurred in the revenue field. In the present case, the amount was paid with a view to bringing into existence an asset and therefore clearly is in a capital field. Our aforesaid view is supported by the decision of the Hon ble Delhi High Court in the case of Narang Industries Ltd. vs. CIT (1967 (8) TMI 1 - DELHI High Court ) - Decided against the assessee.

Summary

Issues:
1. Whether the payment of advance made for acquisition of an existing windmill power project is considered capital expenditure or revenue expenditure?

Analysis:
The appeal was against the order of CIT(A)-II, Pune dated 02.11.2012 relating to assessment year 2009-10 under section 143(3) of the Income-tax Act, 1961. The assessee ventured into a new business activity of generation and distribution of energy by taking over an existing windmill business. The Assessing Officer disallowed the windmill expenses of &8377; 97,91,624/-, considering it as capital expenditure. The CIT(A) partially allowed the expenses and treated &8377; 90 lakhs as capital expenditure. The assessee contended that the loss due to forfeiture of advance money was revenue expenditure. The payment was made under a MOU which was later canceled due to failure to fulfill payment terms. The assessee argued that as the asset was never acquired, the expenses were a write-off of an imaginary asset, not capital expenditure. The authorities held the payment as capital advance for acquiring a capital asset, not revenue expenditure. The Tribunal agreed, stating the loss arose from investment, not regular business, making it capital loss. The decisions cited by the assessee were distinguished as those involved regular business expenses, unlike the present case. The Tribunal relied on the decision of the Hon'ble Delhi High Court to support its view. Consequently, the appeal was dismissed, upholding the order of the CIT(A).

This case primarily revolved around determining whether the payment made for the windmill project was capital or revenue expenditure. The Tribunal analyzed the nature of the payment, considering the cancellation of the MOU and the purpose of the advance. The Tribunal concluded that the payment was a capital advance for acquiring a capital asset, not a revenue expenditure. The assessee's argument that the loss was a write-off of an imaginary asset was rejected, emphasizing that the payment was for creating an asset. The Tribunal's decision was supported by legal precedents and upheld the CIT(A)'s order, dismissing the appeal.