2018 (11) TMI 1484 - AT - Income Tax

Expenditure incurred during construction/trial period - Revenue or capital expenditure - expenses before the commencement of the business are added to the cost of assets and allowed to be capitalised - matching concept - Held that - It is an undisputed fact that assessee has shown income of ₹ 3,16,68,000/- pertaining to income from sale of power during trial run period has been adjusted from the expenditure incurred during construction/trial period from 17.7.2010 to 28.7.2010 amounting to ₹ 4,90,42,000/- pending capitalisation. AO on one hand has added the income and on the other hand treated the corresponding expenditure as capital. We are unable to appreciate the action of the AO in adding the receipts of ₹ 3,16,68,000/- as income, because if the expenses before the commencement of the business are added to the cost of assets and allowed to be capitalised then how the corresponding income from the commercial production is treated as revenue. It is also capital in nature which has to be reduced accordingly. This principle has been reiterated by the Supreme Court in the case of CIT vs. Bokaro Steel Limited 1998 (12) TMI 4 - SUPREME COURT wherein held that if the assessee receives any amount which are inextricably linked with the process of setting up its plant and machinery, then such receipts will go to reduce the cost of its assets and would be receipts of a capital nature and cannot be taxed. We are of the view that, if income of ₹ 3.16 crore earned during the trial period is treated as income then corresponding expenses of ₹ 4.90 crore incurred during the trial period should also be allowed as revenue expenditure by applying the matching concept, which as discussed above will result in net loss of ₹ 1.74 crores. Thus, the addition made by the AO is unsustainable in law and on facts and hence, we do not find any infirmity in the order of the Ld. CIT (A) in deleting the addition and the same is affirmed - Decided against revenue

Summary

Issues:
1. Addition of income during trial run period
2. Capitalization of expenses without supporting evidence

Analysis:
1. The appeal was filed by the revenue against an order by Ld. CIT(A) deleting an addition of ?3,16,68,000 made by the AO on account of disallowance of netting off of income during trial run with trial run expenses for the assessment year 2011-12. The Assessee Company was engaged in the implementation of a hydroelectric project and started commercial generation of electricity. The AO noted income from the sale of power during the trial run period and adjusted it against the expenditure incurred during construction/trial period pending capitalization. The assessee contended that the income earned during the trial run period was reduced from capital expenditure, following the matching concept of accountancy. The AO, however, held that the corresponding expenditure was not substantiated, relying on a decision by ITAT Bangalore. The Ld. CIT(A) upheld the assessee's contention, stating that the income earned during the trial run period was reduced from capital expenditure, and the actual expenses incurred were allowed as revenue expenditure, resulting in a revenue loss.

2. The AO's decision was based on the failure of the assessee to provide proper details of the corresponding expenditure claimed against the income earned during the trial run period. However, the Ld. CIT(A) disagreed, emphasizing that the income earned during the trial run period was reduced from capital expenditure, and the expenses were treated as revenue expenditure. The Tribunal concurred with the Ld. CIT(A), highlighting the principle that if expenses before the commencement of business are added to the cost of assets, the corresponding income from commercial production should also be treated as capital in nature. The Tribunal referred to a Supreme Court decision to support the view that such receipts are of a capital nature and cannot be taxed. Therefore, the addition made by the AO was deemed unsustainable, and the Ld. CIT(A)'s order deleting the addition was affirmed.

In conclusion, the Tribunal dismissed the revenue's appeal, upholding the Ld. CIT(A)'s decision to delete the addition of income during the trial run period and allowing the corresponding expenses as revenue expenditure.