2018 (6) TMI 1236 - HC - Income Tax

Claim of deduction / loss relating to the project expenses in the computation of taxable total income - expenditure incurred by the assessee was revenue in nature and not capital - Whether the Tribunal is correct in concluding that the expenses were capital in nature even though such expenses were incurred for possible expansion of the existing business? - Whether the Tribunal is correct in concluding that the expenses were capital in nature even though such expenses were incurred for possible expansion of the existing business? - Held that - The assessee though had entered into arrangement with the banks and co-promoters and took action for acquisition of land, import of machineries, etc., no new venture was established by the assessee. The venture, which was to be taken over by the assessee and operated did not fructify, not on account of the conduct of the assessee, but on account of the decision of the Government of Tamil Nadu. In our considered view, the decision of the Government of Tamil Nadu to sell the project is a very important fact, which has to be borne in mind to decide as to whether the expenditure incurred by the assessee was capital or revenue in nature. The Assessing Officer fell in error in going by the fact that the expenditure was incurred from the capital account forgetting that the test to be applied to ascertain as to whether the expenditure is revenue or capital is not based on where the funds were drawn from. The broad parameters and tests, which have been laid down by various decisions are that there should be an enduring benefit, which should accrue to the assessee and there should be a creation of a new asset. In the instant case, both these parameters remain unfulfilled. - Decided in favour of assessee

Issues Involved:
1. Whether the Tribunal is correct in rejecting the claim of deduction/loss relating to the 'project expenses' in the computation of taxable total income for the assessment years under consideration.
2. Whether the Tribunal is correct in concluding that the expenses were capital in nature even though such expenses were incurred for 'possible expansion' of the existing business.
3. Whether the Tribunal is correct in law in concluding that the expenses claimed were in the nature of capital field even though the incurring of expenses did not result in the creation of any asset of enduring nature.

Issue-wise Detailed Analysis:

1. Rejection of Deduction/Loss Claim:
The Tribunal rejected the claim of the assessee, Tamilnadu Magnesite Limited, for deduction of ?11,58,25,167/- as project expenses, treating them as capital expenditure. The High Court examined whether this rejection was justified. The assessee argued that the expenses were incurred for an abandoned project and should be treated as deductible loss. The High Court referred to various precedents, including the Supreme Court's decision in Empire Jute Co. Ltd., which emphasized that the nature of advantage in a commercial sense and whether it is in the capital field determines the nature of expenditure. The High Court concluded that the expenses were revenue in nature as they did not result in the creation of a new asset or enduring benefit.

2. Nature of Expenses - Capital vs. Revenue:
The Tribunal concluded that the expenses were capital in nature because they were incurred for acquiring a new asset and expanding the profit-making apparatus. The High Court, however, noted that the Chemical Beneficiation Plant project was abandoned due to the Government's decision, and no new venture was established by the assessee. The High Court applied the test from Empire Jute Co. Ltd., which states that if the expenditure facilitates the assessee's trading operations without creating a new asset or enduring benefit, it should be considered revenue expenditure. The High Court found that the project expenses did not create any new asset or enduring benefit and were thus revenue in nature.

3. Creation of Asset of Enduring Nature:
The Tribunal held that the expenses were capital because they were for acquiring a new asset. The High Court disagreed, stating that the project was abandoned due to the Government's decision, and no new asset was created. The High Court referred to decisions such as Indo Rama Synthetics Ltd. and Binani Cement Ltd., which held that if the expenditure is for the same line of business and does not result in a new asset, it should be treated as revenue expenditure. The High Court concluded that the expenses were revenue in nature as they did not create any new asset of enduring nature.

Conclusion:
The High Court allowed the appeals, set aside the Tribunal's order, and held that the expenses were revenue in nature. The substantial questions of law were answered in favor of the assessee and against the revenue. The High Court emphasized that the nature of expenditure should be determined based on whether it creates a new asset or enduring benefit and not merely on the source of funds used for the expenditure.

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