2018 (7) TMI 1813 - AT - Income Tax

Expenditure towards acquiring and oping of retail outlets / stores - Disallowance of claim for deduction in respect of revenue expenditure - contention of the assessee that expenditure incurred under the head pre-operative expenses and treated as capital work-in-progress are in the nature of revenue expenditure being rent salary and other general overhead expenses which are incurred in connection with running of day to day business of expansion of its existing business by acquisition of new outlets - Held that - The expenditure are in the nature of salary electricity audit fee etc. incurred for expansion of existing line of business that is setting up of more number of stores/speciality stores or for maintenance of already established stores - Operations of these stores at various locations is one composite business and once business had been started then the expenditure can not be linked only to the stores which became operational during the year under consideration. Respectfully following the decision of Hon ble Bombay High Court in the case of M/s Reliance Footprint Ltd (2013 (12) TMI 161 - ITAT MUMBAI) we are of the considered view that the AO was erred in disallowing revenue expenses claimed by the assessee in the statement of total income but treated as pre-operative expenses to be capitalized under the head capital work-in-progress in books of account. Therefore we direct the AO to delete addition made towards disallowance of expenses. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of claim for deduction in respect of revenue expenditure incurred during the year amounting to ? 79,23,44,610.

Issue-wise Detailed Analysis:

1. Disallowance of Claim for Deduction in Respect of Revenue Expenditure:

Facts of the Case:
The assessee company, engaged in trading and merchandising, filed its return for AY 2009-10 declaring a total loss of ? 1,77,53,82,414. During the scrutiny, the AO noticed that the assessee claimed revenue expenditure of ? 79,23,44,610 in the statement of total income, which was capitalized in the books under 'work-in-progress'. The AO questioned why these pre-operative expenses, capitalized in the books, should not be disallowed as revenue expenditure.

Assessee's Argument:
The assessee argued that the expenses were revenue in nature, incurred for business purposes, and debited under 'project development expenditure'. These expenses included rent, salary, traveling expenses, professional fees, electricity, power, fuel, etc., and were necessary for expanding the business by setting up more outlets. The assessee claimed these expenses as revenue expenditure u/s 37(1) of the Income-tax Act in the computation of income.

AO's Findings:
The AO disallowed the claim, stating that:
- The expenses were incurred for acquiring new outlets, resulting in substantial tangible assets, hence should be treated as capital expenditure.
- The expenses were shown as pre-operative in the balance sheet and cannot be allowed as revenue expenditure.
- An expenditure cannot be both capital in books and revenue for tax purposes.
- The assessee's accounting policy was inconsistent, treating the same expenses differently for the Companies Act and Income Tax purposes.
- The expenses did not generate any income/loss to be eligible as revenue expenditure.

CIT(A)'s Decision:
The CIT(A) upheld the AO's decision, stating that:
- The assessee failed to prove that the expenses were paid during the relevant year.
- The expenses were incurred prior to the date of the agreement and were not related to the assessee's business activity during the relevant year.
- The expenses were pre-operative and should be capitalized, not claimed as revenue expenditure.

Tribunal's Analysis:
The Tribunal considered the following:
- The expenses were revenue in nature, incurred for expanding the existing business.
- The business activity had already commenced, and any revenue expenditure for expansion should be allowed as revenue expenses.
- The treatment of expenses in the books of account should not determine their nature for tax purposes.

Reliance on Judicial Precedents:
The Tribunal relied on:
- The decision of ITAT in the case of M/s Reliance Footprint Ltd, where similar expenses were allowed as revenue expenditure.
- The decision of the Hon’ble Bombay High Court in CIT vs Kothari Auto Parts Manufacturing Ltd, and the Hon’ble Gujarat High Court in CIT vs Alembic Glass Industries Ltd, which supported the view that the nature of expenses, not their treatment in books, determines their tax treatment.

Conclusion:
The Tribunal concluded that the AO erred in disallowing the revenue expenses claimed by the assessee. The expenses, though treated as pre-operative in the books, were revenue in nature and incurred for business expansion. Therefore, the Tribunal directed the AO to delete the addition made towards the disallowance of expenses.

Final Judgment:
The appeal filed by the assessee was allowed, and the order was pronounced in the open court on 27th July 2018.