1982 (10) TMI 51 - AT - Income Tax

Summary

Issues Involved:
1. Whether the new project was an extension of the existing business.
2. Whether the incurred expenditure was of a capital or revenue nature.
3. Allowance of specific expenses such as engineering service fees, travelling expenses, industrial licence fees, and loan application fees.

Detailed Analysis:

1. Whether the new project was an extension of the existing business:
The central issue was whether the new project at Kandla was an extension of the existing business. The assessee contended that the project was merely an extension of its current operations, manufacturing metallic yarn and polyester films. The learned counsel for the assessee drew attention to the memorandum of association and a letter from the Government of India, which confirmed that the project was within the scope of the company's existing business activities. The Tribunal agreed with this view, noting that the business organisations, administration, and funds of both the existing and new units were common. This was consistent with the Gujarat High Court's decision in CIT v. Alembic Glass Industries Ltd., where it was held that the new unit did not constitute a new business but was an extension of the existing business.

2. Whether the incurred expenditure was of a capital or revenue nature:
The primary contention was whether the expenses incurred for the new project should be classified as capital or revenue expenditure. The Judicial Member initially held that the expenditure was of a capital nature, citing the Supreme Court's decision in Assam Bengal Cement Co. Ltd. v. CIT, which stated that outlays for the initiation or extension of a business are deemed capital expenditures. However, the Accountant Member disagreed, arguing that the expenditure should be treated as revenue expenditure under the precedent set by the Gujarat High Court in Alembic Glass, which allowed similar expenses as revenue deductions. The Accountant Member emphasized that the law had evolved since the Supreme Court decision, and the nature of the expenses did not result in acquiring an asset of an enduring nature but were necessary for the ongoing business operations.

3. Allowance of specific expenses:
- Engineering Service Fee (Rs. 24,400): The Accountant Member acknowledged that this fee was incurred for obtaining a feasibility report, which could be considered capital expenditure. However, the assessee argued that this was an alternative plea and that the entire expenditure should be allowed as revenue expenditure.
- Travelling Expenses (Rs. 3,100): The Accountant Member argued that these expenses were connected with the business and should be allowed as revenue expenditure.
- Industrial Licence Fee (Rs. 500): The Accountant Member treated this fee as covered by the decision in Alembic Glass, allowing it as a revenue expenditure.
- Loan Application Fee (Rs. 1,200): The Accountant Member noted that various court decisions had held that borrowing money, whether for revenue or capital assets, did not result in acquiring an enduring asset but was a liability to be discharged. Therefore, this fee was allowed as a revenue expenditure.

Conclusion:
The Third Member, after considering the submissions and the precedents, concluded that the new project was indeed an extension of the existing business and that the expenditure incurred was of a revenue nature. The Third Member agreed with the Accountant Member's view, allowing the entire expenditure of Rs. 29,200 as a revenue deduction. The matter was then referred back to the original Bench for disposal in accordance with the majority view, confirming the allowance of the expenses as revenue expenditure.