2016 (4) TMI 388 - AT - Income Tax

Preparatory expense - revenue v/s capital expenditure - Held that - The preparatory expenses are necessity in a construction work and cannot be bifurcated from the actual construction work. Thus, the Ld. DR s contention fails and the said receipt has to be treated as revenue receipts only. The reliance of the Assessing Officer on Section 35D of the Act is not relevant in the present case. Section 35D provides for amortization of certain preliminary expenses incurred by an assessee before commencement of his business or after the commencement of his business but in connection with the extension of the undertaking or setting up a new unit. The assessee herein neither commenced its business during the assessment year in question nor did it incur the expenses in question for setting up any new unit or for extension of its undertaking. The expenses incurred for obtaining feasibility report, on the possibility of setting up projects, etc. is revenue in nature. - Decided in favour of assessee

Summary

Issues:
Disallowance of expenditure towards preparatory work
Disallowance of Work in Progress expenses
Disallowance of prior period expenses

Analysis:
The appeal was filed by the Revenue against the order passed by CIT(A) XVI, New Delhi. The Revenue contended that the CIT(A) erred in deleting the disallowance of certain expenses. The assessee company, a Government of India Undertaking, engaged in various projects, incurred expenses towards preparatory work. The Assessing Officer disallowed a significant amount towards preliminary expenses, which the CIT(A) partly allowed. The CIT(A) held that the preparatory expenses were necessary for construction work and could not be separated from the actual construction work. The CIT(A) also referred to the judgment of ITAT in a similar case to support the decision.

Regarding prior period expenses, the Revenue argued that such expenses should be allowed only in the year to which they relate in the mercantile system of accounting. The Assessing Officer disallowed a portion of these expenses, which the CIT(A) overturned. The CIT(A) relied on the judgment of ITAT and a decision of Delhi High Court to support the decision. The CIT(A) noted that if any expenditure is disallowed, the corresponding income cannot be taxed, which was the case with the prior period expenses in question.

The Revenue contended that the preparatory expenses were rightly disallowed, but the assessee argued that these expenses were common for multiple projects and should be treated as revenue expenses. The assessee also explained that the prior period expenses were related to subcontractor payments for additional work done beyond the original work order. The assessee provided evidence to support the crystallization of expenses and accrual of income in the same year. The assessee cited previous years' assessments where similar expenses were allowed by CIT(A).

The Tribunal analyzed the arguments and upheld the CIT(A)'s decision. The Tribunal found that the preparatory expenses were revenue in nature and not covered under Section 35D of the Act. The Tribunal also reiterated the principle that if expenses are disallowed, the corresponding income cannot be taxed. The Tribunal referenced the judgments of ITAT and Delhi High Court to support the decision. Consequently, the appeal of the Revenue was dismissed, and the order was pronounced in April 2016.