2018 (12) TMI 704 - HC - Income Tax

Pre-operative expenditure - revenue or capital expenditure - assessee itself has treated the same as capital work-in-progress in the balance sheet - Held that - The Tribunal examined the nature of the expenditure and came to the conclusion that the expenditure was not incurred for a new business but was for the expansion of the existing business. The Tribunal relied upon its own decision in the case of Ms. Reliance Footprint Ltd. We noticed that the Revenue had challenged the judgment of the Tribunal in the case of Reliance Foot Print Limited came to be dismissed by this Court by judgment 2017 (7) TMI 611 - BOMBAY HIGH COURT . The Tribunal correctly held both the issues in favour of assessee. Mere accounting entires in the books of accounts would not decide the taxability of the amount in question. The Tribunal also noted that the expenditure was incurred for expansion of existing business. Thus, this is a mere question of fact. No question of law, therefore, arises. Income Tax Appeals are dismissed.

Summary

Issues:
1. Interpretation of pre-operative expenditure as revenue expenditure.
2. Treatment of expenditure in books of accounts.
3. Nature of the expenditure - new business or expansion of existing business.

Issue 1 - Interpretation of Pre-operative Expenditure:
The case involves an appeal by the Revenue challenging the judgment of the Income Tax Appellate Tribunal regarding the treatment of pre-operative expenditure as revenue expenditure. The Revenue argued that the expenditure should have been capitalized, as the assessee had initially treated it as 'capital work-in-progress' in the balance sheet. However, the Tribunal, citing legal precedents, held that accounting entries do not determine the taxability of an item. The Tribunal concluded that the expenditure, incurred for the expansion of the existing business, was revenue in nature, not for a new business. This factual determination led to the dismissal of the appeal, as no question of law was found to arise.

Issue 2 - Treatment of Expenditure in Books of Accounts:
The Revenue contended that the assessee's treatment of the expenditure in the books of accounts as 'capital work-in-progress' should govern its tax treatment. However, the Tribunal, relying on Supreme Court decisions, emphasized that accounting entries do not dictate the taxability of an item. The Tribunal's analysis focused on the nature of the expenditure, which was deemed to be for the expansion of the existing business, not for a new business. This approach led to the dismissal of the Revenue's appeal, as the Tribunal found no legal question to consider.

Issue 3 - Nature of the Expenditure - New Business or Expansion:
The Tribunal's decision was based on the determination that the expenditure in question was not related to a new business but rather aimed at expanding the existing business. By considering the purpose of the expenditure, the Tribunal concluded that it was revenue in nature. This finding was supported by a previous case involving the same assessee, where the Tribunal's judgment was upheld by the High Court. The Tribunal's analysis focused on the factual aspect of the expenditure being for business expansion, leading to the dismissal of the Revenue's appeal based on the absence of any legal question.