2013 (4) TMI 992 - AT - Income Tax

Summary

Issues involved: Disallowance of expenditure treated as capital in nature and disallowance of advances claimed as business loss.

Issue 1: Disallowance of expenditure treated as capital in nature

The assessee debited Rs.83,20,841 under 'details of exceptional items' for the development of educational software, claiming it as revenue expenditure. The AO disallowed the amount as capital expenditure, which was confirmed by the Ld.CIT(A). The ITAT Chennai, referring to similar cases, held that the expenditure for development of a new product in the same line of business is revenue expenditure. Citing relevant case laws, the ITAT concluded that the expenditure incurred on infructuous capital projects was revenue in nature. Therefore, the impugned addition of Rs.83,20,841 was deleted, and Ground No 1 was allowed.

Issue 2: Disallowance of advances claimed as business loss

The assessee had paid advances of Rs.66,86,104 during the course of business, which became irrecoverable and were written off. The AO disallowed the claim, stating it did not fulfill the criteria under section 36(2) of the Act. The Ld.CIT(A) partially confirmed the disallowance. The ITAT observed that while some advances were on capital account, others were made in the course of business and qualified as revenue expenditure. The ITAT disagreed with the Ld.CIT(A)'s classification of certain advances as capital losses, allowing the deduction under section 37(1) for advances made in the course of business. Consequently, the disallowance/additions of certain advances were deleted, and relief already granted was sustained. Thus, Ground No 2 was partly allowed.

In conclusion, the appeal filed by the assessee was partly allowed by the ITAT Chennai on April 10, 2013.