2007 (10) TMI 286 - HC - Income Tax

Assessee decided to expand its activities and therefore undertook a fuel injection equipment project for which assessee incurred an expenditure towards acquisition of plant and machinery - control over the two units is in the hands of the same management and administration - There can be no dispute that new venture was managed from common funds - it can be said that the fuel injection equipment project is only an extension of the existing business and therefore the expenditure incurred on this project is a revenue expenditure

Summary

Issues Involved:
1. Classification of preoperative expenditure of the fuel injection equipment project as capital or revenue expenditure.
2. Deletion of an addition of Rs. 41,666 under section 37(3) read with rule 6B of the Income-tax Act, 1961.

Detailed Analysis:

1. Classification of Preoperative Expenditure:

Facts and Background:
The assessee, a company manufacturing fans and sewing machines, expanded its activities by undertaking a fuel injection equipment project in Hyderabad. The total expenditure incurred was Rs. 1.56 crores, with Rs. 1.35 crores spent on plant and machinery (not in dispute). The remaining Rs. 20,41,158, consisting of various preoperative expenses, was contested as capital expenditure by the Assessing Officer, a view upheld by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal.

Legal Precedents and Principles:
The court examined several precedents to determine whether the expenditure should be classified as capital or revenue. The key principles derived from these cases include:
- India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC): The Supreme Court emphasized that the nature of expenditure should be determined based on commercial trading principles and business necessity.
- Prem Spinning and Weaving Mills Co. Ltd. v. CIT [1975] 98 ITR 20 (All): The unity of control over different business units is decisive, not the nature of the businesses.
- CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 (Guj): Interconnection, interlacing, and interdependence between business units suggest revenue expenditure.
- CIT v. Expanded Metal Manufacturers [1991] 189 ITR 317 (All): Similar principles were applied to classify expenditure as revenue.
- CIT v. Modi Industries Ltd. (No. 3) [1993] 200 ITR 341 (Delhi): The court reiterated the importance of common management and funds in determining the nature of expenditure.
- Veecumsees v. CIT [1996] 220 ITR 185 (SC): Interconnection and interdependence between businesses were crucial in classifying expenditure as revenue.

Application to the Present Case:
The court found that the control over both the existing business and the new project was under the same management and administration. The funds for both ventures were common, indicating unity of control and interdependence. Therefore, the fuel injection equipment project was an extension of the existing business, making the preoperative expenditure a revenue expenditure.

Distinction from Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC):
The court distinguished this case, which involved setting up a new business and capitalizing interest on borrowed funds for plant installation, from the present case of business expansion.

Conclusion:
The court concluded that the preoperative expenditure of Rs. 20,41,158 was revenue expenditure, answering the question in the negative, in favor of the assessee and against the Revenue.

2. Deletion of Addition Under Section 37(3) Read with Rule 6B:

Facts and Background:
The second question involved the deletion of an addition of Rs. 41,666, which was deemed inconsequential in terms of tax effect.

Court's Decision:
The court declined to answer this question, returning the reference unanswered due to its inconsequential tax effect.

Final Judgment:
The court disposed of the reference by answering the substantive question in favor of the assessee, classifying the preoperative expenditure as revenue expenditure. The second question was returned unanswered due to its minimal tax impact.