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TMI Blog2013 (9) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... peals) has erred in confirming the disallowance of Rs. 43,88,823 made by the Assessing Officer by treating the said expenditure as capital in nature. The facts of the case are that the assessee-company engaged in the business of manufacture and sale of nylon yarn, filed its return of income on November 30, 1998 for the assessment year 1998-99 declaring a total income of Rs. 37,23,570. The assessment was completed under section 143(3) of the Income-tax Act on March 27, 2001. While completing the assessment, the Assessing Officer disallowed Rs. 13,94,779 out of Rs.43,88,823 being the expenditure incurred on expansion of the project, holding that the said expenditure was incurred in the earlier assessment year and did not pertain to the assessment year 1998-99. The Assessing Officer also disallowed depreciation of Rs. 55,74,831 claimed on thermopac machine, holding that the capital work-in-progress incurred by the assessee for expansion-cum-diversification project includes machinery called thermopac machine installed in the site during the assessment year 199798 ; the machinery was sitting idle as the project was abandoned by the assessee. Therefore, the assessee is not entitled for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal. The Commissioner of Income-tax (Appeals) further held that the said expenditure was incurred by the assessee for setting up of new project and since this project was abandoned and the expenditure incurred on the abandoned project partook the nature of capital expenditure, he confirmed the disallowance of Rs. 43,88,823 made by the Assessing Officer. While coming to the said conclusion, the Commissioner of Income-tax (Appeals) placed reliance on the decision of the hon'ble jurisdictional High Court in the case of E. I. D. Parry (India) Ltd. v. CIT [2002] 257 ITR 253 (Mad). The Commissioner of Income-tax (Appeals) also confirmed the disallowance of depreciation on thermopac machine as the said machinery was not put into use by the assessee and further held that the assessee could not controvert the view of the Assessing Officer that an asset not ready for use can claim the beneficial interpretation of passive use for claiming depreciation. Against this order of the Commissioner of Incometax (Appeals), the assessee is in appeal before us. Counsel for the assessee submits that the Assessing Officer went beyond the directions of the Tribunal while disallowing the entir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordance with law as the subject-matter in the appeal filed by the Department before his Tribunal was for the expenditure of Rs. 13,94,779 only. Therefore, we hold that the Commissioner of Income-tax (Appeals) is not justified in holding that the Assessing Officer is correct in examining the allowability of expenditure of Rs. 43,88,823. Therefore, the Assessing Officer should restrict the disallowance of expenditure only to the extent of Rs. 13,94,779. Coming to the allowability of the expenditure, we find that the said expenditure was incurred during the previous year 1996-97 relevant to the assessment year 1997-98 for expansion of new project and this project was later abandoned in the year 1999. In an identical situation, the hon'ble jurisdictional High Court in the case of E. I. D. Parry (India) Ltd. v. CIT [2002] 257 ITR 253 (Mad) has held as under : "It is clear from the assessee's own case that the expenditure was incurred for the purpose of setting up a new project. The expenditure had been incurred in the years prior to the assessment year in question. The assessee's case that it subsequently abandoned that project does not on that score convert what was an expenditure in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l field and not revenue expenditure. The ratio of that case is clearly attracted to the facts of the case here. While in the case of Swadeshi Cotton Mills Co. Ltd. [1967] 63 ITR 65 (SC), payment had been made with the object of avoiding unnecessary investment in capital assets, here the expenditure had been incurred for the purposes of setting up the project, but that expenditure was unfruitful, as the project was not established but was abandoned. The abandonment was obviously to avoid any further expenditure being incurred, and to avoid any other adverse effects by reason of incurring of additional expenditure which the assessee itself thought would no longer be beneficial to pursue. Such expenditure incurred by it for a new project which was in the nature of capital expenditure remains such, and by claiming it in a subsequent year as revenue expenditure, the assessee cannot convert what was capital expenditure into revenue expenditure." In view of the above decision of the hon'ble jurisdictional High Court, we hold that the expenditure incurred by the assessee on the new project as capital in nature. The Assessing Officer is directed to restrict to the disallowance to Rs. 13,9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assive use. The Assessing Officer observed that the doctrine of passive user applies in a case where the machinery was already in use for some time and subsequently there is a stoppage in the business activity due to low demand for its goods, etc., in the market and for any other reason if this machine has to be stopped during this period of interregnum, then the doctrine of passive user applies so that the assessee can claim depreciation over such stand-still machinery. He observed that in the case of the assessee, the project had not even started off. Therefore, the Assessing Officer held that no depreciation is allowable on an asset which has not even been ready for use. The Commissioner of Income-tax (Appeals) confirmed the disallowance agreeing with the view of the Assessing Officer. The machinery which was purchased by the assessee in the course of expansion of new project was installed in the year 1996-97 relevant to the assessment year 1997-98. There is nothing on record to suggest that the assessee had put the machinery to use during the assessment year 1998-99. It appears that the assessee had claimed 100 percent depreciation as the project was completely abandoned late ..... X X X X Extracts X X X X X X X X Extracts X X X X
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