2015 (3) TMI 849 - HC - Income Tax

Expenditure incurred for preparation of the feasibility study report and capital-work-in-progress disallowed - disallowing the expenditure by ITAT in the earlier years, but written off during the previous year corresponding to the assessment year 2002-03 since the proposed project was abandoned - Held that - The expenditure made for construction/acquisition of new facility subsequently abandoned at the work-inprogress stage was allowable as incurred wholly or exclusively for the purpose of assessee s business as covered by the decision in Graphite India Ltd. (1996 (6) TMI 73 - CALCUTTA High Court). Our conclusion is fortified by the view expressed by the Supreme Court in CIT Vs. Indian Mica Supply Co. P. Ltd. 1970 (4) TMI 6 - SUPREME Court wherein held that it was only as a result of the compromise that the respondent became entitled to remain in possession of the demised land. Its liability also became ascertained only at that point of time. It cannot be disputed that the respondent in incurring the expenditure had acted in the interest of and for the purpose of its business. The expenditure was not laid out for any purpose other than that of carrying on the business. The deduction was properly admissible under section 10 (2)(xv) of the Act. Section 10 (2) (xv) of the old Act corresponds to section 37 (1) of the present Act. For the aforesaid reasons the question is answered in the affirmative - decided in favour of the assessee.

Summary

Issues:
1. Allowance of expenditure incurred for abandoned construction project under section 37 of the Income Tax Act, 1961.
2. Interpretation of when expenditure can be claimed as deduction in the relevant assessment year.
3. Application of legal precedents regarding revenue vs. capital expenditure.

Issue 1: Allowance of Expenditure for Abandoned Construction Project
The appeal challenged a Tribunal's decision allowing the Revenue's appeal against an order by CIT (A) regarding the deduction of expenditure for an abandoned construction project. CIT (A) had allowed the expenditure under section 37 of the Income Tax Act, 1961, stating that when construction is abandoned at the work-in-progress stage, the expenditure should be allowed. However, the Tribunal reversed this decision, stating that the expenditure incurred in earlier years could not be deducted in the current assessment year.

Issue 2: Interpretation of Deduction Timing
The key question framed in the appeal was whether the Tribunal erred in disallowing the expenditure incurred for a feasibility study report and work-in-progress in earlier years but written off in the current assessment year due to project abandonment. The appellant argued that the expenditure arose in the relevant year of abandonment, citing legal precedents such as CIT Vs. Graphite India Ltd. The decision emphasized that the decision to abandon the project in the relevant year was the cause for claiming the deduction, making it allowable in that year.

Issue 3: Application of Legal Precedents
The appellant relied on legal precedents, including decisions by the Supreme Court, to support their argument for allowing the expenditure in the relevant assessment year. The court referred to cases like CIT Madras Vs. Gajapathy Naidu and CIT Vs. Indian Mica Supply Co. P. Ltd. to establish the timing of deduction based on when the expenditure arose. The court differentiated the present case from Delhi Tourism and T.D.C. Ltd., highlighting the specific circumstances of the expenditure related to the abandoned project.

In conclusion, the court allowed the appeal, agreeing with the appellant's argument that the expenditure for the abandoned construction project should be allowed in the relevant assessment year. The decision was based on the timing of when the expenditure arose, as determined by the abandonment of the project in that year. The court's analysis relied on legal precedents and interpretations of the Income Tax Act to support the allowance of the deduction in the specific circumstances of the case.