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2016 (11) TMI 391 - AT - Income TaxAddition of Project expenses written off - decision to abandon the project - whether the assessee is eligible to claim the said expenditure in respect of a resort being developed which is being abandoned at the stage of work in progress due to the change in the govt. policy regulating the developments of such resort? - Held that - The decision of Hon ble Delhi High Court in case of Jay Engineering Works Ltd. (2007 (10) TMI 286 - DELHI HIGH COURT ) directly supports the case of the assessee wherein it was held that the nature of the new business is not a decisive test for determining whether or not there is an expansion of an existing business. The nature of the business could be distinct. What is of importance is that the control of both the ventures, the existing venture as well as the new venture, must be in the hands of one establishment or management or administration. The place of business of the existing business and the new business may not be in close proximity. However, the funds utilized for the management of both the concerns must be common as reflected in the balance sheet of the company. The control over the two units is in the hands of the same management and administration. Also see Maharaja Shri Umaid Mills (1987 (9) TMI 6 - RAJASTHAN High Court ) which also supports the case of the assessee. In light of above and given the facts that the decision to abandon the project was taken during the year due to the change in govt. Policy, the expenses relating to the resort which have been written off in the books of accounts have been rightly been claimed by the assessee as revenue expenditure. - Decided in favour of assessee Addition u/s 40A(3) - Held that - The genuineness of the transaction as well as the identity of the payee are not disputed. Further, the appellant has explained the business expediency of making the cash payments to both the parties which has not been controverted by the Revenue. Following the decision of Gujarat High Court in case of Anupam Tele Services (2014 (2) TMI 30 - GUJARAT HIGH COURT ) and Harshila Chordia (2006 (11) TMI 117 - RAJASTHAN HIGH COURT ), the addition under section 40A(3) is deleted.- Decided in favour of assessee
Issues Involved:
1. Addition of ?45,12,111/- of project expenses written off. 2. Addition of ?45,738/- under Section 40A(3) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Addition of ?45,12,111/- of Project Expenses Written Off The primary issue revolves around whether the project expenses of ?45,12,111/- incurred by the assessee for developing a resort, which was later abandoned due to changes in government policy, should be treated as revenue expenditure or capital expenditure. Facts and Arguments: - The assessee had taken agricultural land on lease for developing a resort. The project was started after obtaining necessary approvals. - Due to new government rules regarding land use and road width, the project had to be abandoned, and the expenses were written off as revenue expenditure. - The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated these expenses as capital expenditure, not allowing them to be set off against the income from the assessee's job work business. Findings: - The CIT(A) noted that the expenses were capitalized in previous years and thus should remain capital in nature. - The assessee argued that no new asset came into existence and the expenses should be treated as revenue expenditure or business loss. - The Tribunal examined the nature of the expenses and found that most were revenue in nature, except for minor civil construction works which were also temporary and had to be demolished. Legal Precedents: - The Tribunal referred to several judgments, including CIT vs. Priya Village Road Shows Ltd. and Binani Cement Ltd. vs. CIT, which supported the view that expenses incurred for a project that was later abandoned could be treated as revenue expenditure. - The Tribunal also considered the interconnection between the existing business and the new project, noting that both were under the same management and financially interconnected. Conclusion: The Tribunal concluded that the expenses were rightly claimed as revenue expenditure due to the abandonment of the project during the year in question. The decision to write off the expenses was justified, and the addition of ?45,12,111/- was deleted. 2. Addition of ?45,738/- under Section 40A(3) The second issue pertains to the disallowance of cash payments totaling ?45,738/- under Section 40A(3) of the Income Tax Act, which limits cash payments exceeding ?20,000/-. Facts and Arguments: - The AO observed that the assessee made cash payments of ?25,328/- for wrapper cutting charges and ?20,410/- for spare parts, which were disallowed under Section 40A(3). - The assessee argued that the payments were made in cash due to business exigencies and the insistence of the payees. Findings: - The CIT(A) upheld the disallowance, stating that the assessee did not demonstrate how the payments fell under the exceptions provided in Rule 6DD. - The assessee cited the Gujarat High Court decision in Anupam Tele Services vs. ITO, which held that business expediency and the insistence of the payee could justify cash payments. Legal Precedents: - The Tribunal referred to the Supreme Court decision in Attar Singh Gurumukh Singh vs. ITO and the Rajasthan High Court decision in Harshila Chordia vs. ITO, which emphasized considering business expediency and the genuineness of transactions. Conclusion: The Tribunal found that the identity and genuineness of the payees and transactions were not disputed. Given the business expediency and the insistence of the payees, the addition of ?45,738/- under Section 40A(3) was deleted. Final Judgment: The appeal filed by the assessee was allowed, and both additions made by the lower authorities were deleted. The Tribunal pronounced the order in the open court on 28/09/2016.
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