2023 (1) TMI 973 - AT - Income Tax

Expenses written off - abandoned project - similar project was abandoned during the earlier year - Revenue expenditure u/s 37 - employee costs and finance charges etc. incurred for the continuous running of the business - Disallowance of no business activities were taken during the year as well as previous year - HELD THAT - Opening balance was written off as prior period expenses and not claimed as expenses in the computation of income. However, the part of the same expenses incurred during the year has been treated by the assessee as relating to same business and assessee wants this expenditure to be allowed as revenue expenditure. We find that assessee is taking contradictory stand. As per assessee s own admission, similar expenses incurred in earlier year are written off as abandoned project. Similar expenditure in the current year assessee wants to be treated as revenue expenditure. It is settled law that any party cannot be allowed to approbate and reprobate i.e. accept and reject part of the same nature. In the same year, assessee wants to adopt two system of accounting In the present case, AO has allowed those expenditure which as per AO is necessary for the purpose of managing the status of the company. While the assessee on the other hand claimed that the entire expenditure was meant to preserve the status of the company and was statutory necessity and commercial expediency. In our considered opinion, those part of the expenditure incurred during the year which are identical to the earlier year, which have been written off by the assessee as abandoned cannot be allowed as revenue expenditure during the year. Hence, we deem it appropriate to remit the issue to the file of AO. AO shall examine the nature of expenditure during the year and those of the expenditure which are of similar nature which have been written off as abandoned for earlier period cannot be allowed as revenue expenditure. Needless to add, assessee shall be provided an opportunity of being heard.

Summary

Issues:
1. Disallowance of revenue expenditure under section 37 of the Income Tax Act, 1961.
2. Disallowance of depreciation at the specified rate of 25% under Section 32 of the Act.
3. Treatment of expenses as capital items (IPRs) and allowing depreciation on capital expenses.

Issue 1: Disallowance of revenue expenditure under section 37 of the Income Tax Act, 1961:
The Assessing Officer (AO) disallowed an amount of Rs. 2,61,76,161 as revenue expenditure, stating that no income was earned from the business activities during the year. The AO allowed certain expenses related to the company's status, but disallowed the rest of the expenditure. The ld. CIT (A) upheld the disallowance, considering the abandoned project to have provided intellectual property rights (IPRs) and directed the AO to allow the expenses as capital items. The Tribunal noted that the assessee had capitalized the expenditure earlier but later found the project commercially unviable and abandoned it. The Tribunal held that expenses identical to those written off in earlier years cannot be claimed as revenue expenditure in the current year. The issue was remitted to the AO for further examination.

Issue 2: Disallowance of depreciation at the specified rate of 25% under Section 32 of the Act:
The assessee claimed depreciation at the specified rate of 25% under Section 32 of the Act, which the ld. CIT (A) did not pass a speaking order on. The Tribunal did not provide a detailed analysis of this issue in the judgment.

Issue 3: Treatment of expenses as capital items (IPRs) and allowing depreciation on capital expenses:
The Revenue argued that the disallowed expenses of Rs. 2,61,76,161 were treated as capital items (IPRs) by the ld. CIT (A), who allowed depreciation on these capital expenses. The Tribunal did not delve into this issue separately in the judgment.

In conclusion, the Tribunal partly allowed the assessee's appeal for statistical purposes and dismissed the Revenue's appeal as infructuous. The issue of disallowance of revenue expenditure was remitted to the AO for further examination to determine the nature of the expenses and prevent the assessee from claiming contradictory stands on the same expenditure.