2021 (10) TMI 174 - HC - Income Tax

Nature of expenditure - Deduction on account of capital work-in-progress written off in computation of its income - expenditure was incurred for creation of new projects and these projects were capital assets of its business which were to yield enduring benefit - AO held that by parking such expenditure under the head capital work-in-progress , respondent itself has admitted that those expenses were capital in nature and reduction in capital asset on account of abandoned project for incurring a capital loss cannot be set off or reduced from the income as revenue loss, thus denied claim of writing off capital work-in- progress - ITAT held that the expenses incurred were in connection with the existing business and admittedly were of routine nature like salary, professional fees, etc., and these expenses are otherwise clearly of revenue in nature, thus allowable as revenue expenses - HELD THAT - A judgment of this Court in CIT-3 Vs. Idea Cellular Ltd. 2016 (10) TMI 181 - BOMBAY HIGH COURT where the Court held that where new cellular towers were constructed by cellular operator in addition to existing tower and no new business was set up, if project was abandoned, expenditure so far incurred would be allowed as business expenditure. When we brought this judgment to the notice of Mr. Suresh Kumar and observed that the facts in this case are also identical to the facts of the appeal at hand, Mr. Suresh Kumar as an officer of the Court, agreed. He also states that an SLP against this judgment is pending but there is no stay. ITAT s view that if an expenditure is incurred for doing the business in a more convenient and profitable manner and has not resulted in bringing any new asset into existence, then, such expenditure is allowable business expenditure, is correct. - Decided against revenue.

Summary

Issues:
1. Deduction claimed on account of capital work-in-progress written off.
2. Disallowance of claim of writing off 'capital work-in-progress' by Assessing Officer.
3. Appeal before Commissioner of Income Tax (Appeals) regarding expenditure on abandoned project.
4. Decision of the Income Tax Appellate Tribunal (ITAT) setting aside the order of CIT(A).
5. Interpretation of expenses as revenue or capital expenditure.
6. Application of legal precedents in determining the allowability of expenses as revenue expenditure.
7. Correctness of ITAT's view on allowability of business expenditure.
8. Dismissal of the appeal by the High Court.

Analysis:
1. The respondent claimed a deduction of a substantial amount on account of capital work-in-progress written off due to a fall in revenue caused by a recession. The respondent decided to conserve cash flow and pursue only critical projects, abandoning those not expected to yield returns. The expenses incurred on the abandoned projects were identified as revenue expenses, not creating any new asset but being of a routine nature like salary and professional fees.

2. The Assessing Officer disagreed with the respondent's claim, asserting that the expenditure was for creating new projects which were capital assets yielding enduring benefits. The Officer disallowed the claim of writing off 'capital work-in-progress,' stating that capital loss from abandoned projects cannot be set off against revenue loss.

3. The Commissioner of Income Tax (Appeals) upheld the Assessing Officer's decision, ruling that expenditure on abandoned projects cannot be treated as revenue expenditure.

4. The Income Tax Appellate Tribunal (ITAT) reversed the CIT(A)'s order, emphasizing that the expenses incurred were routine in nature and revenue expenses. Citing legal precedents, including a judgment from the Jharkhand High Court and a decision of the Bombay High Court, the ITAT allowed the expenses as revenue expenditure.

5. The ITAT's decision was based on the premise that if an expenditure is incurred for conducting business more conveniently and profitably without creating new assets, it qualifies as allowable business expenditure. The High Court concurred with this view, finding no error in the ITAT's analysis of the facts and application of legal principles.

6. The High Court referenced a judgment involving cellular towers construction to support the ITAT's decision, highlighting the similarity in facts. The Court dismissed the appeal, deeming it devoid of merit and not raising any substantial legal questions.