2017 (11) TMI 898 - AT - Income Tax

Allowable business expenses - expenditure incurred for New Lock project - Held that - Technical know-how fees expenses pending for capitalization and differed revenue expenditure was not properly looked into by the Assessing Officer as well as by the CIT(A). Thus, the expenditure incurred for New Lock project has to be verified by the Assessing Officer as the Ld. AR submitted that New Lock project was a new product line belonging to the same business of the Auto-components and taken under the same company with unity of control and common funds and all the Expenditures, and if the said appreciated individually are all revenue in nature. The same has to be verified by the Assessing Officer. The matter needs to be remanded back before the Assessing Officer for this issue. Needless to say, the assessee be given opportunity of hearing.

Summary

Issues Involved:
1. Disallowance of expenditure as business loss
2. Treatment of capital expenditure as part of block of assets for depreciation

Issue 1: Disallowance of Expenditure as Business Loss:
The appellant contested the disallowance of expenditure amounting to Rs.47,74,477 under the head 'Lock Project written off' by the Assessing Officer (A.O). The A.O. contended that the expenditure was capital in nature and thus not eligible as a business loss. The CIT(A) upheld the A.O.'s decision, stating that the expenditure was incurred for setting up a new project and was on capital account. The CIT(A) emphasized that only expenditure of a recurring nature could be allowed as eligible business expenditure. The appellant argued that the writing off was due to technological changes by customers, rendering the project unsuitable. The A.O. was requested for direct confirmation from the customer. The appellant claimed the expenditure as revenue under section 37(1), citing it as a new product line in the same business. The Tribunal observed that the technical know-how fees and deferred revenue expenditure were not adequately examined by the A.O. and CIT(A). It remanded the issue back to the A.O. for verification, granting the appellant an opportunity for a hearing. The appeal on this ground was partly allowed for statistical purposes.

Issue 2: Treatment of Capital Expenditure as Part of Block of Assets for Depreciation:
The appellant challenged the decision of the A.O. and CIT(A) regarding the treatment of capital expenditure of Rs.47,74,477 as part of the block of assets for depreciation. The CIT(A) dismissed this ground, stating that the expenditure was capital in nature and could not form part of the block of assets as the assets were not utilized for business purposes. The CIT(A) upheld the A.O.'s decision to treat the loss as capital loss and disallowed it. The appellant argued that the expenditure should be allowed as business loss, but the Tribunal upheld the decision of the A.O. and CIT(A) on this issue as well. The Tribunal noted that the appellant did not press Ground No. 2 related to this issue. Additionally, an additional ground related to the disallowance by the A.O. was raised by the appellant, which was not considered by the CIT(A). The Tribunal remanded this issue back to the A.O. for verification, ensuring the appellant's right to a hearing.

In conclusion, the Tribunal partially allowed the appeals of the assessee for statistical purposes, remanding certain issues back to the Assessing Officer for further examination and granting the appellant an opportunity for a hearing.