2010 (1) TMI 148 - HC - Income Tax

Assessment under section 143(3)- Capital or revenue expenditure- The assessee filed its return of income and the assessment was completed under section 143(3) of the Income Tax Act, 1961. The assessee initially declared the total income of Rs. 40,20,690/-. In the revised return the assessee claimed a loss of Rs. 32,39,614. The principal reason for revising the return was that in the original return it could not claim expenses debited under the head Capital work in progress which had been duly claimed in the revised return. The Assessing officer held that in the original return the assessee had identified Rs. 72.60 lakhs for diversification and expansion of new projects and was of capital nature. The Commissioner (Appeals) held that no capital assets has been created out of these expenditures thus it is not capital nature. The Tribunal bifurcated the sum of Rs. 72,60,300, out of total expenditure on salary and wages, telephone, traveling expenses and other administrative expenses and allocated to the modification of existing products/developments of new products with the asset under the same management, with the same work force and expertise. It also observed that the revenue did not ever doubt that the expenditure was exclusively and wholly for the purpose of business. The Tribunal accepted the approach adopted by Commissioner (Appeals). Held that- findings of the Tribunal that the expenditure incurred was revenue expenditure and/or for business purpose, had not been challenged, nor was there any challenge to the finding that no capital asset come into existence. Further held that Tribunal had remanded the matter on account of bed debts write off Rs. 10,72,917 to the file of the Assessing officer with a direction to adjudicate the same afresh. Thus the issue was yet to be finally determined and whenever it was finally determined the aggrieved party would be entitled to avail of remedies in accordance with law.

Issues Involved:
1. Nature of expenditure: Capital vs. Revenue
2. Bad debts written off

Detailed Analysis:

Issue 1: Nature of expenditure: Capital vs. Revenue

The first issue revolves around whether the expenditure of Rs. 72,60,300 incurred by the assessee for diversification and expansion of new product range should be treated as capital expenditure or revenue expenditure. The assessee initially declared this expenditure as capital in its original return but later revised it to revenue expenditure.

The Commissioner of Income-tax (Appeals) (CIT(A)) allowed the appeal, noting that the expenditure was related to the development of new products within the same organization, using existing infrastructure, and did not create any new capital assets. The CIT(A) referenced the Supreme Court judgment in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC), which distinguishes between capital and revenue expenditure based on whether the advantage obtained is of an enduring nature in the capital field or merely facilitates the business operations in the revenue field.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the expenditure was exclusively for business purposes and did not result in the creation of new capital assets. The Tribunal also noted that the Revenue did not challenge the finding that the expenditure was for business purposes.

The High Court agreed with the Tribunal, stating that the expenditure could not be regarded as capital merely because it was initially declared as such. The revised return filed under section 139(5) of the Income-tax Act, 1961, was valid for rectifying the error. The Court cited the Delhi High Court's judgment in CIT v. Denso India Ltd. [2009] 318 ITR 140, which treated similar expenditures as revenue in nature.

Issue 2: Bad debts written off

The second issue pertains to the deduction of Rs. 10,72,917 on account of bad debts written off. The Assessing Officer (AO) disallowed the deduction, stating that the basis for the provision and the details of the write-off were not provided. The CIT(A) deleted the addition without considering the statutory conditions under section 36(1)(vii) read with sub-section (2) of the Act.

The Tribunal remanded the matter back to the AO for fresh adjudication, emphasizing the need to comply with the relevant statutory conditions. Both the assessee's counsel and the Departmental representative agreed to this course of action.

The High Court noted that since the matter was remanded for fresh determination, it could not be considered as finally determined. The Court referenced its earlier judgment in Punjab Small Industries and Export Corporation Limited v. Deputy CIT [2007] 171 Taxman 312; [2009] 316 ITR 239, which held that issues remanded for fresh determination do not warrant adjudication at that stage.

Conclusion:

The High Court dismissed the appeals, affirming the Tribunal's decisions on both issues. The expenditure of Rs. 72,60,300 was rightly treated as revenue expenditure, and the matter of bad debts written off was correctly remanded for fresh adjudication. No other arguments or questions were raised, and a copy of the order was directed to be placed on the file of the connected appeal.

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