2015 (9) TMI 1008 - AT - Income Tax

Disallowance of pre-operating expense for a Mawa Project - revenue v/s capital expenditure - expenditure incurred for expansion of the dairy business of the assessee as held by CIT(A) in deleting the disallowance - what is the nature of the Mawa‟? Is it a milk product or not and if fails in the scope of the assessee s business of not? - Held that - The undisputed facts include that the Mawa is made up of the milk product and therefore, it is a dairy product and they same is covered within the scope of the declared business of the assessee. We have considered the Ld DRs argument is the preoperative expenditure incurred before a new product is launched constitutes a new business and reject the same. The ice-cream and the Mawa fall in the genus of the dairy/milk products and they are covered by the nature of declared business of the assessee. As such, the impugned expenditure claimed by the assessee does not include any expenditure of capital nature. The control and management, accounts, CEOs for both the dairy /milk products is one and the same. AO has not made out the absence of interlacing of the above. Under the factual matrix of the case, we find the claim of the assessee is allowable. Accordingly, the AO is directed to delete the addition. The order of the CIT (A) is thus, affirmed. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the expenditure of Rs. 1,27,20,969/- incurred on the Mawa project is a pre-operative expense and capital in nature, thus not deductible under Section 37(1) of the Income Tax Act.
2. Whether the Mawa project constitutes a new business unconnected with the existing business of the assessee.

Issue-wise Detailed Analysis:

1. Nature of Expenditure:
The primary contention was whether the expenditure of Rs. 1,27,20,969/- should be considered as capital or revenue in nature. The Assessing Officer (AO) treated it as a pre-operative expense for a new project, thus capital in nature. However, the assessee argued that the expenditure was for general overheads, marketing, and office expenses, none of which created any asset or enduring benefit. The Tribunal agreed with the assessee, stating that the expenditure on salaries, wages, marketing, professional fees, and travel does not fall in the capital field and should be treated as revenue expenditure.

2. New Product vs. New Business:
The AO argued that the Mawa project was a new business unrelated to the existing ice-cream business, thus constituting a new business. The assessee countered this by referring to its Memorandum of Association (MoA), which included the production of milk products as part of its business objectives. The Tribunal noted that both ice-cream and Mawa are dairy products, thus falling under the same business umbrella. The Tribunal emphasized that the manufacture of Mawa, a milk product, was within the scope of the assessee's declared business activities and not a separate new business.

3. Interlacing of Accounts, Management, and Control:
The Tribunal examined whether there was interlacing of control, management, and accounts between the existing business and the Mawa project. The AO failed to establish that the Mawa project was entirely separate from the ice-cream business. The Tribunal found that both divisions were under the same management and financially interconnected, thus supporting the assessee's claim of interlacing and interdependence.

4. Aborted Expenditure:
The Tribunal referenced legal precedents stating that revenue expenditure on an aborted project, such as salaries, wages, and other operational expenses, is allowable. Since the Mawa project was eventually aborted and did not result in any capital asset, the Tribunal concluded that the expenditure should be treated as allowable revenue expenditure.

Conclusion:
The Tribunal affirmed the CIT (A)'s decision, holding that the expenditure incurred on the Mawa project was revenue in nature and allowable under Section 37(1) of the Income Tax Act. The Tribunal dismissed the Revenue's appeal, directing the AO to delete the addition. The order was pronounced in the open court on 28th August 2015.