1982 (1) TMI 100 - AT - Income Tax

Issues Involved:

1. Classification of Rs. 7,69,110 as revenue or capital expenditure.
2. Timing of expenditure in relation to the commencement of business.
3. Applicability of Section 35D for deferred revenue expenditure.
4. Treatment of expenditure under mercantile accounting system.
5. Applicability of judicial precedents from existing business cases to new business setup.

Detailed Analysis:

1. Classification of Rs. 7,69,110 as Revenue or Capital Expenditure:

The primary issue in this appeal is whether the expenditure of Rs. 7,69,110 incurred by the assessee-company should be classified as revenue expenditure or capital expenditure. The assessee-company, a new undertaking, incurred this expenditure to facilitate the supply of power to its factory. The Income Tax Officer (ITO) initially classified this expenditure as capital expenditure, arguing that it provided an enduring benefit to the company. This classification was upheld by the Appellate Assistant Commissioner (AAC). However, the Commissioner (Appeals) later reclassified the expenditure as revenue expenditure, citing commercial expediency and referencing the Bombay High Court's decision in CIT v. Excel Industries Ltd. The Tribunal, however, disagreed, emphasizing that the expenditure was incurred before the business commenced and thus should be treated as capital expenditure.

2. Timing of Expenditure in Relation to the Commencement of Business:

The Tribunal highlighted the importance of the timing of the expenditure. The expenditure was incurred before the actual production commenced, which, according to the Tribunal, means it was not incurred in the course of running the business but rather in setting up the business. The Tribunal referenced various judicial precedents, including the Gujarat High Court's decision in CIT v. Sarabhai Sons (P.) Ltd., which held that expenditure incurred before the business is set up cannot be allowed as revenue expenditure.

3. Applicability of Section 35D for Deferred Revenue Expenditure:

The assessee-company had claimed a portion of the expenditure under Section 35D as deferred revenue expenditure. The ITO had accepted this claim to the extent of Rs. 4,80,942 and allowed a deduction for one-tenth thereof. However, the Tribunal noted that the remaining expenditure of Rs. 7,69,110 did not fall under the purview of Section 35D and thus could not be treated as deferred revenue expenditure.

4. Treatment of Expenditure under Mercantile Accounting System:

The Tribunal also considered the treatment of the expenditure under the mercantile system of accounting. It emphasized that under this system, expenditure must be claimed in the previous year in which it is incurred or the liability arises, as per the Supreme Court decision in Kedarnath Jute Manufacturing Co. Ltd. v. CIT. The Tribunal pointed out that the assessee had initially claimed the expenditure in the previous year ending 30-6-1974, relevant to the assessment year 1975-76. Therefore, claiming the expenditure again in the assessment year 1976-77 was not permissible.

5. Applicability of Judicial Precedents from Existing Business Cases to New Business Setup:

The Tribunal noted that the judicial precedents cited by the assessee, including the Bombay High Court's decision in CIT v. Excel Industries Ltd. and the Supreme Court's decision in Empire Jute Co. Ltd. v. CIT, pertained to existing businesses. These cases held that expenditure incurred to run an existing business more efficiently could be treated as revenue expenditure. However, the Tribunal emphasized that these precedents were not applicable to the present case, where the expenditure was incurred in setting up a new business. The Tribunal concluded that the expenditure incurred before the commencement of business could not be allowed as revenue expenditure, irrespective of whether it provided an enduring benefit.

Conclusion:

The Tribunal concluded that the expenditure of Rs. 7,69,110 incurred by the assessee-company was capital expenditure as it was incurred before the business commenced. The Tribunal also noted that the expenditure could not be claimed again in the assessment year 1976-77 under the mercantile system of accounting. Furthermore, the Tribunal highlighted that the judicial precedents cited by the assessee were not applicable to the present case of a new business setup. Consequently, the Tribunal restored the ITO's original decision to disallow the expenditure, resulting in the revenue's appeal being successful.

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