2019 (4) TMI 972 - HC - Income Tax

Allowable expenditure u/s 37 - preoperative expensive for Mawa Project - expansion of existing business OR case of setting up of new industry - Whether a new project unconnected with the existing business which was capital in nature and not deductable u/s 37(1)? - HELD THAT - The assessee -company was set up with the objects to produce or caused to be produced by process, grate, pack, store and sell milk products and ice cream. In furtherance of such objects, the assessee had already set up an ice cream producing unit. Using same management, control and accounts, the assessee attempted to set up another unit for production of Mawa, which is also a milk product. Under such circumstances, tribunal correctly came to the conclusion that this is a case of expansion of existing business and not a case of setting up of new industry. The Supreme Court in case of Alembic Chemical Works Co. Ltd. Vs. Commissioner of Income Tax, Gujarat 1989 (3) TMI 5 - SUPREME COURT was considering a case where the assessee was engaged in the business of manufacturing antibiotic including the Penicillin. The assessee acquired knowhow to produce higher yield and sub culture of high -yielding strain of penicillin. Observing that there was no evidence to indicate that this was not in the line of existing manufacture of Penicillin, the Court held that the expenditure was revenue in nature. - Decided against revenue

Summary

Issues Involved:
Challenge to the judgment of the Income Tax Appellate Tribunal regarding the deletion of disallowance of preoperative expenses incurred for a new project as capital expenditure under section 37(1) of the Act.

Analysis:

1. Disallowance of Preoperative Expenses:
The case involved the assessment of whether the preoperative expenses incurred by the assessee for a new project, "Mawa Project," were capital in nature and not deductible under section 37(1) of the Act. The Assessing Officer contended that the expenditure was for setting up a new industry, while the tribunal held that it was for the expansion of the existing business and thus allowable as revenue expenditure. The tribunal considered the interlacing of accounts, management, and control, concluding that the new project was in the same line of business as the existing one. The tribunal's decision was based on the commonality of accounts, management, and control, leading to the allowance of the expenditure as revenue expenditure.

2. Legal Parameters and Precedents:
The counsel for the Revenue argued that the setting up of a new plant for Mawa production constituted a new industry, contrary to the tribunal's view of mere expansion of the existing industry. On the other hand, the counsel for the assessee emphasized the commonality of accounts, management, and control, stating that the new unit's location did not change the nature of the business. The tribunal relied on the Division Bench's judgment in Commissioner of Income Tax Vs. Tata Chemicals Ltd., highlighting the unity of control as a decisive test, supported by various legal precedents. The tribunal's decision considered factors like administration, flow of funds, and management unity to determine the allowability of the expenditure.

3. Judicial Precedents and Supreme Court Rulings:
The Division Bench's judgment cited various Supreme Court rulings to establish the criteria for determining the unity of control in business operations. The court emphasized factors like common management, administration, fund flow, and functional integrity between units to ascertain the interconnection and interdependence of businesses. Additionally, the Supreme Court's decision in Alembic Chemical Works Co. Ltd. Vs. Commissioner of Income Tax highlighted that expenses in line with existing business activities are revenue in nature. These legal precedents and rulings guided the tribunal's decision in the present case.

4. Conclusion:
The High Court dismissed the Income Tax Appeal, upholding the tribunal's decision to allow the preoperative expenses as revenue expenditure. The court concurred with the tribunal's assessment of the unity of control and interconnection between the existing and new business units, emphasizing the continuity of business activities and the expansion of the assessee's existing business. The judgment underscored the importance of legal parameters, precedents, and Supreme Court rulings in determining the allowability of expenses and the nature of business activities under the Income Tax Act.