2018 (9) TMI 75 - HC - Income Tax

Expenditure incurred towards a new project which was abandoned subsequently - nature of expenditure - capital of revenue - allowable deduction - Held that - The proper test to be applied is not the nature of new line of business, which was commenced by the assessee, but unity of control, management and common fund. In the instant case, we find that this issue was never disputed by the Assessing Officer or the CIT (A) or the Tribunal, as could be seen from the orders passed by the respective Authorities. The Authorities concurrently held that it is the assessee, who had commenced business and the assessee would mean the assessee company as a whole and not a different entity. Therefore, when there is commonality of control, management and fund, those would be the decisive factors to be taken into consideration and not the new line of business namely textile business. Having held so, it may not be necessary for this Court to dwell upon the facts, which have been identical in the decision in the case of Sakthi Sugars Ltd. 2010 (8) TMI 456 - MADRAS HIGH COURT , as, on facts, we are fully convinced that the decisive factors involved are unity of control, management and common fund. In the instant case, as admitted by the CIT (A), the preoperative expenses are all generally revenue expenditure and by applying a wrong test, which is not the decisive test, the Authorities had concurrently committed an error in treating the expenditure as capital expenditure. For all the above reasons, the order passed by the Tribunal calls for interference and the substantial question of law, which has been framed for consideration, has to be necessarily answered in favour of the assessee

Issues Involved:
1. Whether the expenditure incurred towards a new project which was subsequently abandoned is capital in nature and hence, not an allowable deduction.

Issue-wise Detailed Analysis:

1. Nature of Expenditure (Revenue vs. Capital):

The primary issue in this case was whether the expenditure incurred by the assessee towards a new textile project, which was subsequently abandoned, should be treated as capital expenditure or revenue expenditure. The assessee contended that the expenditure should be treated as revenue expenditure because it related to salaries, rent, insurance, taxes, traveling, repairs, and other miscellaneous expenses. The Assessing Officer, however, classified this expenditure as capital in nature and disallowed it.

The CIT (A) and the Tribunal upheld the Assessing Officer's decision, relying on the precedent set by the Hon'ble Division Bench of the High Court in the case of EID Parry (India) Ltd. vs. CIT. The Tribunal concluded that since the textile project was a new line of business for the assessee, the incurred expenditure was capital in nature.

2. Applicability of EID Parry (India) Ltd. Decision:

The assessee challenged the applicability of the EID Parry (India) Ltd. decision, arguing that the facts of that case were different. In EID Parry (India) Ltd., the expenditure was incurred for a new methanol project over several years before the assessment year in question and was capital in nature from the outset. The High Court agreed with the assessee, noting that the facts in EID Parry (India) Ltd. were different and not applicable to the present case. The Court emphasized that the decision in EID Parry (India) Ltd. revolved around a different factual matrix and should not have been applied by the CIT (A) and the Tribunal.

3. Unity of Control, Management, and Common Fund:

The assessee argued that the decisive factors for allowance are unity of control, management, and common fund, and that these factors were present in their case. The Revenue countered that this issue was not raised before the CIT (A) or the Tribunal and should not be considered for the first time in this appeal. However, the High Court found that the assessee had indeed raised this issue before the CIT (A) and that the CIT (A) failed to address it. The High Court held that unity of control, management, and common fund are decisive factors, and if these are present, the expenditure should be allowed as revenue expenditure, even if incurred for a new project.

4. Relevant Judicial Precedents:

The High Court referred to several judicial precedents, including the decision of the Division Bench of the Delhi High Court in Jay Engineering Works Ltd. vs. CIT, which emphasized that the nature of the new business is not a decisive test. Instead, what matters is the control of both ventures being in the hands of one establishment, common management, and common funds. The High Court also referred to the decision of the Hon'ble Supreme Court in Produce Exchange Corporation Ltd. vs. CIT, which explained the meaning of 'same business' for the purpose of Section 24(2) of the Act.

The High Court further cited the decision in Tamil Nadu Magnesite Ltd. vs. ACIT, which discussed the proper test to distinguish capital and revenue expenditure. It was held that the nature of advantage in a commercial sense is crucial, and if the expenditure facilitates trading operations or management without affecting fixed capital, it is revenue expenditure.

5. Conclusion:

The High Court concluded that the CIT (A) and the Tribunal erred in applying the decision in EID Parry (India) Ltd. and failed to consider the decisive factors of unity of control, management, and common fund. The High Court held that the expenditure incurred by the assessee was revenue expenditure, as it facilitated the assessee's business operations and was not for acquiring a capital asset. The substantial question of law was answered in favor of the assessee, and the appeal was allowed.

In conclusion, the High Court emphasized that the proper test to distinguish between capital and revenue expenditure is the nature of advantage in a commercial sense, and unity of control, management, and common fund are decisive factors. The expenditure incurred by the assessee for the abandoned textile project was held to be revenue expenditure and allowable as a deduction.

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