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2015 (1) TMI 1024 - HC - Income TaxExpenditure incurred for the expansion of existing business - Revenue v/s capital expenditure - Held that - The amount which has never materialized i.e. the expenses incurred towards such project is rightly treated as revenue expense and not as capital expenditure. - Decided in favour of the assessee. Exclusion of 90% of net interest for calculating the deduction under section 80HHC - Held that - The question involved in the present appeal is governed by the decision of the Supreme Court in Distributors (Baroda) P. Ltd. v. Union of India and others 1985 (7) TMI 1 - SUPREME Court and the deduction given under Section 80(c) is required to be upheld. Therefore the tribunal has rightly directed exclusion of 90% of net interest for calculating the deduction under section 80HHC of the Income Tax Act 1961. Income Tax Appellate Tribunal was right in law in allowing the expenditure of 32.05 lacs incurred on feasibility study of PET product. We also hold that the Income Tax Appellate Tribunal was right in law in directing the exclusion of 90% of net interest for calculating the deduction under section 80HHC of the Income Tax Act 1961. - Decided in favour of the assessee.
Issues Involved:
1. Whether the expenditure of Rs. 19,29,010/- on the Seamless Steel Tube project should be treated as capital or revenue expenditure. 2. Whether the expenditure of Rs. 32.05 lakhs on the feasibility study of the PET product should be treated as capital or revenue expenditure. 3. Whether the exclusion of 90% of net interest for calculating the deduction under section 80HHC of the Income Tax Act, 1961, is correct. Detailed Analysis: Issue 1: Treatment of Expenditure on Seamless Steel Tube Project The primary question was whether the expenditure of Rs. 19,29,010/- incurred on the Seamless Steel Tube project should be classified as capital expenditure or revenue expenditure. The tribunal ruled in favor of the assessee, treating it as revenue expenditure. The tribunal noted that the project was an expansion of the existing business rather than a new line of business. The memorandum of association showed that manufacturing tubes, pipes, and sheets was within the company's objectives. The tribunal observed that there was a unity of control, common business organization, and administration, indicating that the project was an extension of the current business. The High Court upheld this view, stating that the expenses incurred towards a project that never materialized should be treated as revenue expenditure, thus answering the question in favor of the assessee. Issue 2: Treatment of Expenditure on Feasibility Study of PET Product The second issue involved the treatment of Rs. 32.05 lakhs spent on the feasibility study for the PET product. The tribunal had reversed the Assessing Officer's and CIT(A)'s decision, treating it as revenue expenditure. The tribunal referenced its earlier decision in the assessee's own case, where similar expenses were treated as revenue expenditure. The tribunal noted that the feasibility study was aimed at identifying new projects for the existing business rather than setting up a new business. The High Court agreed with the tribunal's decision, holding that the expenditure on the feasibility study should be treated as revenue expenditure. Issue 3: Exclusion of 90% of Net Interest for Deduction under Section 80HHC The third issue was whether 90% of the net interest should be excluded for calculating the deduction under section 80HHC. The tribunal upheld the CIT(A)'s decision, which excluded 90% of the gross interest receipts from business income. The High Court referred to the Supreme Court's decision in ACG Associated Capsules Pvt. Ltd. v. Commissioner of Income Tax, which clarified that only 90% of the net amount of receipts like interest, which are included in the profits of the business, should be deducted. The High Court concluded that the tribunal correctly directed the exclusion of 90% of net interest for the deduction calculation. Contradictory Decision in TAX APPEAL No.522 of 2009 In a related appeal, TAX APPEAL No.522 of 2009, the tribunal had taken a contrary view, treating the expenditure on the feasibility report as capital expenditure. The High Court reversed this decision, aligning it with the ruling in TAX APPEAL No.2033 of 2009, and held that the expenditure should be treated as revenue expense. Conclusion: The High Court dismissed both Tax Appeal Nos.447 of 2000 and 2033 of 2009, ruling in favor of the assessee on all issues. It held that the expenditure on the Seamless Steel Tube project and the feasibility study of the PET product should be treated as revenue expenditure and confirmed the exclusion of 90% of net interest for calculating the deduction under section 80HHC. The court also reversed the tribunal's contrary decision in TAX APPEAL No.522 of 2009, ensuring consistency in the treatment of feasibility study expenses.
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