2019 (8) TMI 1198 - AT - Income Tax

Expenditure u/s 37 (1) - power project expenditure - HELD THAT - Merely because assessee has capitalized all the expenditure, relating to the power project there is no reason to capitalize all the expenditure, which are not even related to the power project, should also be capitalized. Further it is not the case of the revenue that assessee has not incurred these expenditure. Further, no evidence has been brought on record by the revenue to show that this expenditure is related to the power project only. The revenue also could not controvert that field study report and feasibility report expenditure incurred by the assessee under the head legal and professional expenditure is any way connected to the power project. With respect to the salary of employees the assessee has given the designation of those employees who salary has been reimbursed to the holding company, the nature of the services rendered by them as shown in the designation. We reverse the finding of the lower authorities and allow ground number 1 and 2 of the appeal of the assessee holding that employs remuneration on legal and professional fees has been correctly debited in the profit and loss account and is allowable to the assessee as a deductible expenditure u/s 37 (1) of the income tax act. Interest income assessment - capital receipt OR revenue reciept - HELD THAT - NTPC SAIL POWER COMPANY PVT. LTD. VERSUS CIT 2012 (10) TMI 524 - DELHI HIGH COURT held that if the receipt is inextricably linked to the setting up of the project then it would be capital receipt not liable to tax but ultimately be used to reduce the cost of the project. In the present case, the assessee has given advances to fellow subsidiaries. Further, assessee also could not establish that how the above advance given to the subsidiary companies from womb the interest income has been earned are inextricably linked to the setting up of the project. Further assessee has also treated it as a regular income and offered to tax in the computation of income by crediting it as other income in the profit and loss account. In view of this ground number 3 of the appeal of the assessee is dismissed. Nature of expenses - expenses of abundant project - revenue or capital expenditure - HELD THAT - As relying on CHEMPLAST SANMAR LIMITED 2018 (9) TMI 75 - MADRAS HIGH COURT and JAY ENGINEERING WORKS LTD. 2007 (10) TMI 286 - DELHI HIGH COURT wherein held that where assessee company set up a new project which was subsequently abandoned, since new project was managed from common funds, control over all business units was in hands of assessee and there was unity of control, it could not be said that pre-operative expenditure incurred by assessee was on a new line of business, thus, same was to be allowed as revenue expenditure. In the present case also, there is no allegation that the expenditure incurred by the assessee is capital in nature. It is not also the case of the revenue that the assessee has not incurred the expenditure at all. It is not also the case of the revenue that these expenditure are not pertaining to this year. Therefore, respectfully following the decision of the honourable Madras High Court and Delhi High Court, we do not find any infirmity in the order of the learned CIT A in allowing the expenditure incurred by the assessee for the abandoned project as allowable during the year.

Summary

Issues Involved:
1. Treatment of Employee Remuneration and Legal and Professional Charges as Capital Expenditure.
2. Treatment of Interest Income as Capital Receipt.
3. Allowability of Expenses for an Abandoned Project.

Issue-Wise Analysis:

1. Treatment of Employee Remuneration and Legal and Professional Charges as Capital Expenditure:
The assessee challenged the disallowance of employee remuneration amounting to ?2,64,00,715 and legal and professional charges of ?4,69,00,663, which were treated as capital expenditure by the AO and upheld by the CIT(A). The assessee argued that these expenses were incurred for exploring new business opportunities and were not related to the ongoing power project. The AO contended that these expenses were used to suppress taxable interest income and should be capitalized as they pertained to the construction period. The CIT(A) supported the AO's view, stating that the expenses were part of the bigger plan for the power plant and should be capitalized.

However, the Tribunal found that the assessee had correctly debited these expenses to the profit and loss account as they were not directly or indirectly related to the power project. The Tribunal noted that the project was progressing slowly due to pending statutory clearances and that the prudent accounting practice would be to debit such expenses to the profit and loss account. The Tribunal allowed the expenses as deductible under Section 37(1) of the Income Tax Act.

2. Treatment of Interest Income as Capital Receipt:
The assessee claimed that interest income of ?7,52,26,392 earned on inter-corporate deposits should be treated as a capital receipt and set off against pre-operative expenses. The AO treated this interest as taxable income. The Tribunal referred to the Delhi High Court's decision in NTPC Sail Power Company Pvt. Ltd. vs. CIT, which held that interest on temporary deposits linked to the setting up of a plant is not income from other sources. However, the Tribunal noted that the assessee could not establish that the interest income was inextricably linked to the setting up of the project. Since the assessee had treated it as regular income and offered it for tax in the return, the Tribunal upheld the AO's decision to treat it as taxable income.

3. Allowability of Expenses for an Abandoned Project:
For the assessment year 2012-13, the AO disallowed expenses of ?1,08,99,459 incurred by the assessee, arguing that no business activities were carried out and the expenses should be capitalized. The CIT(A) allowed the expenses, drawing a parallel with the CBDT circular on abandoned feature films, and directed the AO to allow the expenses as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, referring to the Madras High Court's ruling in Chemplast Sanmar Ltd. v. ACIT, which allowed expenses for an abandoned project as revenue expenditure. The Tribunal found that the expenses were incurred during the course of business and were allowable under Section 37(1) of the Income Tax Act.

Conclusion:
The Tribunal allowed the appeal for the assessment year 2011-12 in part, permitting the deduction of employee remuneration and legal and professional charges but upheld the AO's decision to treat the interest income as taxable. For the assessment year 2012-13, the Tribunal dismissed the AO's appeal, allowing the expenses for the abandoned project as revenue expenditure.