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TMI Blog2016 (3) TMI 368X X X X Extracts X X X X X X X X Extracts X X X X ..... able to claim the benefit u/s.28 of the Act. The expenditure incurred by the assessee is not for the purpose of carrying on its business, but on the other hand it is incurred for the purpose of setting up of new business which is in capital filed. Had the expenditure incurred for carrying on business which is an outgoing and assessee could claim as deduction from the profit of the business. The law has evolved considerably as a result of acceptance of the crucial principle that the distinction between capital and revenue expenditure should be determined from the practical and business view point and in accordance with sound accountancy principles, eschewing the legalistic approach. The expenditure incurred to set up a project at Singur in West Bengal is not an expenditure wholly and exclusively incurred for the purpose of carrying on business of the assessee or incidental o the carrying on the business of the assessee and it is an expenditure incurred in the capital field and it also cannot be allowed u/s.37 of the Act. Thus the loss in respect of discarded project had written off by the assessee during the previous year is not allowable expenditure as business deduction and it can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the quantum of sales made. He pleaded that the royalty paid annually, based on the percentage of sales made, is an annual charge and allowable as revenue expenditure. He also relied on the decision of co-ordinate bench of this Tribunal in the case of M/s.IHD Industries Pvt. Ltd in ITA No.2405/Mds./2014 vide order dated 02.06.2015 and also the judgment of M/s.India Nippon Electricals Ltd. in ITA No.1706/Mds./2014 vide order dated 18.12.2015 wherein it was held that:- we have carefully gone through the judgment of the jurisdictional High Court in the case of Southern Switch Gear Ltd (supra). In that case the foreign company was required to maintain the assessee s factory in India. Being so, it was held that the assessee got the enduring benefit and it is a capital expenditure. However, in the present case, though the agreement was for 10 years, the royalty is based on the quantum of sales made by the assessee only. Being so, the above judgment cannot be straightly applied to the facts of the present case. Considering the facts of the case, in our opinion, the judgment of the jurisdictional High Court in the case of CIT vs Hitech Arai Ltd, 368 ITR 577, is applicable. In that cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. reported in 148 ITR 272 (Mad.) and argued that the facts of the assessee s case are identical to those involved in that case of M/s.Southern Switch Gear Ltd. The facts involved in the present case are exactly identical to the above decision of jurisdictional High Court, as confirmed by the Apex Court, and hence squarely applicable to present assessee. The only difference is the time gap. The said decision of the Supreme Court was prior to 01.04.1998, where the allowance of depreciation on the intangible assets was not in existence. Hence, the Supreme Court held that 75% of the royalty payments are to be considered as revenue expenses and the balance constitutes the capital expenses. This was particularly so, because the assessee was not entitled for any depreciation on the royalty (intangible asset) in those years, as a result of which the assessee will not get an opportunity to recover the cost of the intangible asset, which, lile any other asset, will get depreciated over a period oi use owing to the changes in technology etc. Consequent to 01.04.1998, the royalty payments, being one of the intangible assets, is entitled for depreciation at 25%. Thus, the assessee gets a bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal. 10. Ld.A.R submitted that the proposed project at Singur was in line with the existing business. When the construction work commenced, there were certain unrest and protests by the local people and hence, the project was abandoned. He further pleaded that since the proposed project was in line with the existing business of the assessee, the entire capital work-in-progress, on abandoning the project, becomes an allowable revenue expenditure and accordingly, debited the same in its P L account as capital work-inprogress written off. He also relied the case laws reported in 332 ITR 592(Del.), 263 ITR 357(Gau.) and 175 ITR 72 (Raj.). Further he also relied on the decision of co-ordinate bench of this Tribunal in the case of (i) ACIT Vs. M/s.Lakshmi Machine Works Ltd., in ITA No.1349/Mds./2013 vide order dated 9th July, 2015, (ii) DCIT Vs.Polygel Industries Pvt. Ltd. in ITA No.3655/Mum/2011 vide order dated 25.02.2015 (iii) of Hon ble Delhi High Court in the case of Indo Rama Synthetics (I) Ltd. Vs. CIT reported in 228 CTR 276. The ld.A.R putforth the argument for the proposition that if the project carried out by the assessee not ultimately materialized , the expenditure in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngur in West Bengal. Due to unrest and protest by the local people, assessee had abandoned the said project , and claimed it as a revenue expenditure as a business expenditure. A perusal of Sec.30 to Sec.38 of the Act shows that neither sections will apply to this case and the assessee will not be able to claim the benefit u/s.28 of the Act. The expenditure incurred by the assessee is not for the purpose of carrying on its business, but on the other hand it is incurred for the purpose of setting up of new business which is in capital filed. Had the expenditure incurred for carrying on business which is an outgoing and assessee could claim as deduction from the profit of the business. The law has evolved considerably as a result of acceptance of the crucial principle that the distinction between capital and revenue expenditure should be determined from the practical and business view point and in accordance with sound accountancy principles, eschewing the legalistic approach. The expenditure incurred to set up a project at Singur in West Bengal is not an expenditure wholly and exclusively incurred for the purpose of carrying on business of the assessee or incidental o the carrying o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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