2023 (10) TMI 371 - AT - Income Tax

Disallowance u/s 35AD being capital expenditure incurred for the purpose of specified business as per law - HELD THAT - There being no material change in the facts and the applicable law as compared to the preceding years 2023 (7) TMI 1302 - ITAT KOLKATA placing reliance on the decision in the case of Haryana Warehousing Corporation 2019 (7) TMI 1997 - ITAT CHANDIGARH we follow the decision of the Coordinate Bench in assessee s own case and thereby allow the claim of the assessee u/s.35AD - Accordingly, ground no. 1 taken by the assessee is allowed. Disallowance on account of loss of sale of assets which were not part of block of assets as the expansion of business by setting up of clinic was abandoned, assessee furnished the details of the loss claimed by the assessee placed in the paper book - HELD THAT - The fact of abandoning the expansion of business by setting up of a clinic is not in dispute. Also, the incurrence of loss has not been controverted by bringing any material to this effect. AO has disallowed the claim of loss by holding it as capital in nature. It is also noted that the assessee has accounted the expenditure incurred by it as capital work in progress on which no depreciation had been claimed as these assets were never put to use. We note that it is the prerogative of assessee to conduct and plan its business considering economic viability and making of profits. It is the sole discretion of the assessee to make its business decisions for the conduct and the manner in which it wants to plan its business. The dynamics of business are variable and depend upon several factors and consideration, based on which assessee takes its business decision. In the present case before us, assessee found its expansion by setting up a clinic as economically not viable and in order to save its future loss has dropped and abandoned the said project. In order to mitigate the future loss, and to recoup maximum for the expenditure already incurred, the assets deployed on the expansion were put to sell, resulting in the loss which has been claimed by the assessee in computing its profit and loss from business. In view of the decision of Binani Cement Ltd. 2015 (3) TMI 849 - CALCUTTA HIGH COURT and the undisputed facts as stated above, we are of the view that claim of assessee is justifiable and is accordingly allowed.

Summary

Issues Involved:
1. Disallowance of Rs. 10,33,21,064/- under section 35AD for capital expenditure incurred for the purpose of specified business.
2. Disallowance of Rs. 48,36,016/- on account of loss on sale of assets not part of block of assets.

Summary of Judgment:

Issue 1: Disallowance under Section 35AD

Assessee, engaged in the hospital and pharmaceuticals business, claimed a deduction of Rs. 10,33,21,064/- under section 35AD for capital expenditure incurred in constructing and operating a hospital with more than 100 beds. The Ld. AO disallowed this claim, holding that the deduction could only be claimed during the year of running the specified business for which the expenses were crystallized. The Ld. CIT(A) upheld this disallowance.

Before the Tribunal, the Ld. Counsel argued that the assessee is entitled to the deduction under section 35AD, citing the provision that allows deduction for capital expenditure incurred wholly and exclusively for the specified business during the year it is incurred. The Counsel also referred to the explanatory circular for the Finance Act, 2009, which supports the claim. Additionally, the Counsel cited decisions from the Coordinate Bench of ITAT, Kolkata, and ITAT, Chandigarh, which supported similar claims for the assessee in previous years.

The Tribunal, following the precedent set by the Coordinate Bench in the assessee's own case and the decision in Haryana Warehousing Corporation Vs. ACIT, allowed the claim of Rs. 10,33,21,064/- under section 35AD. Thus, ground no. 1 taken by the assessee was allowed.

Issue 2: Disallowance of Loss on Sale of Assets

The assessee planned to set up a clinic but abandoned the project as it was not economically viable. The assets related to this project were sold, resulting in a loss of Rs. 48,36,016/-. The Ld. AO disallowed this claim, treating it as a capital loss. The Ld. CIT(A) upheld this disallowance.

Before the Tribunal, the Ld. Counsel argued that the expenditure was accounted as capital work-in-progress and not added to the block of assets for depreciation. Since the clinic project was abandoned, the assets were sold, and the loss should be allowed as business expenditure. The Counsel cited the decision of the Hon'ble Calcutta High Court in Binani Cement Ltd. Vs. CIT, which held that expenditure on an abandoned project is allowable as it was incurred wholly and exclusively for business purposes.

The Tribunal, considering the decision of the Calcutta High Court and the facts of the case, held that the claim of the assessee was justifiable and allowed the loss of Rs. 48,36,016/-. Thus, ground no. 2 taken by the assessee was allowed.

Conclusion:

In the result, the appeal of the assessee was allowed, and both disallowances made by the Ld. AO and sustained by the Ld. CIT(A) were overturned.