I) Commissioner Of Income-Tax v. Woodcraft Productsltd., Reported In (1996) 217 Itr 862 (Calcutta) And

M/s.Tamilnadu Magnesite Ltd.,5/53, Omalur Main Road,Jagir Ammapalayam, Salem.... Appellant/Respondent in both T.Cs. The Assistant Commissioner of Income Tax,Company Circle, Salem. ... Respondent/Appellantin both T.Cs. Prayer: Tax Case (Appeals) filed under Section 260A of Income TaxAct, 1961, against the common order of the Income Tax AppellateTribunal, "D" Bench, Chennai, in ITA Nos.1436/MDS/03 and825/MDS/04 for the assessment years 1998-99 and 1999-2000respectively, dated 07.07.2006 against the order of theCommissioner of Income Tax (Appeals), Salem made in ITA.No.163/200-01, dated and ITA.127/2002-03 dated 25/04/2003,09/12/2003, preferred against order of Joint Commissioner,Income Tax Special Range, Salem dated 15/09/200 (NewPAN.No.AACT9933A) and the order of the Deputy Commissioner ofIncome Tax, Company circle-I, Salem Dated 12.02.2002. (Delivered by T.S.SIVAGNANAM, J.) These appeals, by the assessee, the Tamilnadu MagnesiteLimited, are directed against the common order passed by theIncome Tax Appellate Tribunal, "D" Bench, Chennai (ITAT) in ITANos.1436/Mds/03 and 825/Mds/04 for the assessment years 1998-99and 1999-2000 respectively, dated 07.07.2006. 2. The appeals were filed by the Revenue before the ITATchallenging the orders passed by the Commissioner of Income Tax(Appeals) (CIT(A)) dated 25.04.2003 and 09.12.2003, by which theCommissioner allowed the appeals filed by the assessee and https://hcservices.ecourts.gov.in/hcservices/ deleted the addition of Rs.11,58,25,167/-, which was claimed bythe assessee to be revenue expenditure. The said order of theCommissioner was reversed by the ITAT restoring the order of theAssessing Officer. 3. The facts, which are necessary for the disposal ofthese appeals, are as follows. For the assessment year 1998-99,the assessee had filed return of income showing a total loss ofRs.11,95,25,000/- as project expenses on the strength of thecharge created to the said effect in the profit and lossaccount. A note was appended stating that due to variousreasons, the Government of Tamil Nadu had ordered the closure ofthe implementation of the Chemical Beneficiation Project videG.O.No.140, Industries Department, dated 11.05.1998 and as aconsequence, upon considering commercial prudence, major portionof intangible assets were shown as revenue expenditure. 4. The assessee placed reliance on the followingdecisions:- (i) Commissioner of Income-Tax vs. Woodcraft ProductsLtd., reported in (1996) 217 ITR 862 (Calcutta) and (ii) Commissioner of Income-Tax vs. Alembic GlassIndustries Limited reported in (1976) 103 ITR 715 (Gujarat). 5. The Assessing Officer while completing the assessmentheld that the expenditure is capital in nature and therefore,declined to accept the assessee's claim of expenses in theprofit and loss account, as they had utilised money from thecapital account and aid from the Government of Tamil Nadu termedas "capital work-in-progress". 6. Further, the Assessing Officer stated that the assesseewas making expenses for the new venture from the capital accountand in the balance-sheet only, it would have been better if thecapital work-in-progress is reduced by Rs.11.58 crores, withoutreducing the operating revenue of the company. Thus, theAssessing Officer held that the expenses were incurred beforethe company could establish the new Chemical BeneficiationPlant. Machineries have been imported and lying in Madras Port.Therefore, declined to accept the claim of the assessee ofRs.11.58 crores as project expenses as revenue expenses. 6. Further, the Assessing Officer stated that the assesseewas making expenses for the new venture from the capital accountand in the balance-sheet only, it would have been better if thecapital work-in-progress is reduced by Rs.11.58 crores, withoutreducing the operating revenue of the company. Thus, theAssessing Officer held that the expenses were incurred beforethe company could establish the new Chemical BeneficiationPlant. Machineries have been imported and lying in Madras Port.Therefore, declined to accept the claim of the assessee ofRs.11.58 crores as project expenses as revenue expenses. 7. The assessee filed appeals before the CIT(A). The CIT(A) considered the facts of the case and by orders dated25.04.2003 and 09.12.2003, allowed the appeals filed by theassessee. The CIT(A) pointed out that looking at the facts andcircumstances of the case as per the assessment order, the soleground, on which the Assessing Officer described that theproposition appears to be utilisation of funds from capitalaccount and aid from Government of Tamil Nadu and using the term“capital work-in-progress”, the Assessing Officer came to aconclusion that the assessee had started a new venture and new project and incurred capital expenditure and thought fit todisallow. The CIT(A) held that as amply enumerated in the caselaws and the Government Order, it came to light that theassessee's basic intention was to take over the ChemicalBeneficiation Project from the Tamil Nadu Industrial DevelopmentCorporation (TIDCO) for production of 'high quality sinteredmagnesia', which is one of the products of the assessee company.Therefore, the appellate authority held that, it cannot be saidthat a new venture has come into existence. With theseobservations, the appeals were allowed by the CIT(A) and theAssessing Officer was directed to delete the addition ofRs.11,58,25,167/-. 8. As against the orders passed by the CIT(A), the Revenuepreferred appeals before the Tribunal. The Tribunal, by theimpugned orders, has allowed the appeals of the Revenue andrestored the orders passed by the Assessing Officer. In sodoing, the Tribunal pointed out that the expenditure wasincurred by the assessee to acquire a new asset and it was theexpansion of the profit making apparatus and the fixed asset ofthe assessee got increased. Expenditure was incurred to acquirethe profit earning apparatus and not for operating the profitearning apparatus. Further, it was pointed out that theChemical Beneficiation Plant was ordered to be closed due tonon-availability of Government approval and there is absolutelynothing on record to indicate that the expenditure was incurredin the Revenue field. 9. The above tax case appeals have been admitted on thefollowing substantial questions of law. “(a) Whether the Tribunal is correct inrejecting the claim of deduction / loss relating tothe 'project expenses' in the computation oftaxable total income relating to the assessmentyear(s) under consideration? (b) Whether the Tribunal is correct inconcluding that the expenses were capital in natureeven though such expenses were incurred for'possible expansion' of the existing business? (c) Whether the Tribunal is correct in lawin concluding that the expenses claimed were in thenature of capital field even though the incurringof expenses did not result in creation of any assetof enduring in nature?” 10. Mr.A.S.Sriraman, learned counsel for the appellantsubmitted that the Tribunal has not assigned any reason toreverse the well considered order of the CIT(A), as it failed toappreciate that the expenses incurred in the implementation ofthe abandoned project under consideration have not brought any https://hcservices.ecourts.gov.in/hcservices/ asset into existence, inasmuch as the expenses incurred on thesaid abandoned project would constitute deductible loss. (c) Whether the Tribunal is correct in lawin concluding that the expenses claimed were in thenature of capital field even though the incurringof expenses did not result in creation of any assetof enduring in nature?” 10. Mr.A.S.Sriraman, learned counsel for the appellantsubmitted that the Tribunal has not assigned any reason toreverse the well considered order of the CIT(A), as it failed toappreciate that the expenses incurred in the implementation ofthe abandoned project under consideration have not brought any https://hcservices.ecourts.gov.in/hcservices/ asset into existence, inasmuch as the expenses incurred on thesaid abandoned project would constitute deductible loss. 11. Further, it is submitted that the ITAT failed toappreciate that the venture undertaken was not a new one, but,in fact one in the same line of business already being carriedon by the assessee company. The assessee had claimed that theexpenses incurred for the implementation of the project wasclaimed as revenue expenses / business loss in the computationof total taxable income on the strength of the Government Orderin G.O.No.140, directing closure of the project and cancellationof the allotment of the land. This aspect of the matter was notconsidered by the Tribunal and without reference to the factualposition, the impugned order has been passed. 12. Further, it is submitted that the decisions, whichwere referred to by the assessee were not properly considered bythe Tribunal and the factual position in those decisions werenot appreciated. Thus, it is submitted that when there is nonew business, which has been created and there is no creation ofany new asset, nor there being any enduring benefit accrued tothe assessee, the expenditure should be treated as revenue andnot as capital. 13. Further, it is pointed out that, though it may betrue that the expenditure was incurred from the capital account,that would not be the proper test to determine the nature ofexpenditure for the reasons not attributable to the assessee,when the existing unit ought to be closed. 14. In support of his contention, the learned counselplaced reliance on the following decisions:- (i) Indo Rama Synthetics Ltd. vs. Commissioner of IncomeTax reported in (2011) 333 ITR 18 (Delhi) (ii) Binani Cement Ltd. vs. Commissioner of Income Taxreported in (2016) 380 ITR 116 (Calcutta) (iii) Commissioner of Income Tax vs. Tata Robins FraserLtd. reported in (2012) 253 CTR 227 (Jharkhand) (iv) Asia Power Projects P Ltd. vs. DCIT reported in 370ITR 257 (Karnataka), and (v) M/s.Thiruvengadam Investments Pvt. Ltd. vs. TheAssistant Commissioner of Income Tax in T.C.(A) No.583 of 2007dated 05.01.2016, which was followed by a Division Bench of thisCourt in Commissioner of Income Tax vs. M/s.Prasad Productionsin T.C. (A) No.905 of 2008 dated 04.04.2018. 15. Mr.S.Rajesh, learned Standing Counsel for the Revenuesought to sustain the order passed by the ITAT by referring tothe factual position as stated in the assessment order dated15.09.2000. It is submitted that the expenditure is capital in https://hcservices.ecourts.gov.in/hcservices/ nature, as the money was drawn from the capital account and itis an aid extended by the Government of Tamil Nadu termed as“capital work-in-progress” and merely because the project wasabandoned on account of cancellation of the approvals granted bythe Government of Tamil Nadu, that will not change the characterof the expenditure to that of the revenue, as the expenditurewas incurred for acquisition of tangible assets. 16. Further, the learned Standing Counsel referred to theorder passed by the CIT(A) more particularly paragraph 5 of theorder, which referred to the Government Order and the decisiontaken by the Government to abandon the project and submittedthat merely because the project was abandoned, that will not bea reason to treat the expenditure as revenue. 17. In support of his contentions, the learned StandingCounsel placed reliance on the following decisions:- 16. Further, the learned Standing Counsel referred to theorder passed by the CIT(A) more particularly paragraph 5 of theorder, which referred to the Government Order and the decisiontaken by the Government to abandon the project and submittedthat merely because the project was abandoned, that will not bea reason to treat the expenditure as revenue. 17. In support of his contentions, the learned StandingCounsel placed reliance on the following decisions:- (i) Empire Jute Co. Ltd vs. Commissioner of Income Taxreported in [1980] 3 Taxman 69 (SC) (ii) E.I.D.Parry (India) Ltd. vs. Commissioner of IncomeTax reported in [2002] 257 ITR 253 (Madras) (iii) Mascon Technical Services Ltd. vs. Commissioner ofIncome Tax reported in [2013] 37 Taxaman.com 253 (Madras)(iv) Malabar & Pioneer Hosiery (P) Ltd. vs. Commissionerof Income Tax reported in [2009] 178 Taxman 120 (Kerala), and (v) Commissioner of Income Tax vs. Idea Cellulura Ltd.reported in [2016] 76 Taxmann.com 77 (Bombay), against which therevenue has preferred appeal before the Hon'ble Supreme Courtand the Special Leave Petition has been admitted as reported in[2017] 81 Taxmann.com 112 (SC) (Commissioner of Income Tax vs.Idea Cellular Ltd.). 18. We have heard the learned counsels for the partiesand carefully perused the materials placed on record. 19. The common issue involved in both the appeals iswhether the Tribunal was justified in reversing the decision ofthe CIT(A) deleting the addition made by the Assessing Officeron the ground that the expenditure incurred by the assessee wasrevenue in nature and not capital. 20. To decide the substantial questions of law framed forconsideration, we would have to apply the proper test, whichwould distinguish capital and revenue expenditure. Thisquestion came up for consideration before the Hon'ble SupremeCourt in Empire Jute Co. (referred supra). It was pointed outthat from time to time cases have evolved various tests fordistinguishing between capital and revenue expenditure, but, notest is paramount or conclusive. Further, there is no all-embracing formula, which can provide a ready solution to the https://hcservices.ecourts.gov.in/hcservices/ problem; no touchstone has been devised. It was pointed outthat every case has to be decided on its own facts keeping inmind the broad picture of the whole operation in respect ofwhich the expenditure has been incurred. After referring to thedecision of Lord Radcliffe in CIT vs. Nchanga ConsolidatedCoppper Mines Ltd. reported in [1965] 58 ITR 241, it was heldthat it would be misleading to suppose that, in all cases,securing a benefit for the business would be prima facie capitalexpenditure "so long as the benefit is not so transitory as tohave no endurance at all". 21. Further, it was held that there may be cases whereexpenditure even if incurred for obtaining advantage of enduringbenefit, may, nonetheless, be on revenue account and the test ofenduring benefit may break down. It was pointed out that it isnot every advantage of enduring nature acquired by an assesseethat brings the case within the principle laid down in thistest. What is material to consider is the nature of advantagein a commercial sense and it is only where the advantage is inthe capital field that the expenditure would be disallowable onan application of this test. 21. Further, it was held that there may be cases whereexpenditure even if incurred for obtaining advantage of enduringbenefit, may, nonetheless, be on revenue account and the test ofenduring benefit may break down. It was pointed out that it isnot every advantage of enduring nature acquired by an assesseethat brings the case within the principle laid down in thistest. What is material to consider is the nature of advantagein a commercial sense and it is only where the advantage is inthe capital field that the expenditure would be disallowable onan application of this test. 22. Further, it was pointed out that if the advantageconsists merely in facilitating the assessee's tradingoperations or enabling the management and conduct of theassessee's business to be carried on more efficiently or moreprofitably while leaving the fixed capital untouched, theexpenditure would be on revenue account, even though theadvantage may endure for an indefinite future. Thus, it washeld that the test of enduring benefit is not a certain orconclusive test and it cannot be applied blindly andmechanically without regard to the particular facts andcircumstances of a given case. 23. Further, it was held that another test, which isoften applied is the one based on distinction between fixed andcirculating capital. This test was applied by Lord Haldane inthe case of John Smith & Son vs. Moore 12 TC 266, where thelearned Law Lord drew the distinction between fixed capital andcirculating capital by holding that fixed capital is what theowner turns to profit by keeping it in his own possession;circulating capital is what he makes profit of by parting withit and letting it change. 24. Bearing the above legal principles in mind, weproceed to examine the facts of the instant case. It is not indispute that the Chemical Beneficiation Plant was alreadyestablished by TIDCO and on account of their not being able toachieve the desired result, the assessee was invited to takeover the project, as the assessee possessed expertise in thefield. This is how the assessee stepped into the project and byturn of events, the Government granted approval during the year 1998. 25. As could be seen from the order passed by the CIT(A),the assessee had entered into an arrangement with TIDCO as wellas with IDBI and fixed the project cost with a debt equityratio, which was approved by the Government of Tamil Nadu andthereafter, steps were taken to acquire land, import machineryetc. In the meantime, 12 years had passed by and the projecthad not taken off. The IDBI had withdrawn from the project, asit was found to be unviable and another co-promoter viz.,M/s.Khaltan Supermag Limited was brought in and a joint sectorcompany was formed with the assessee subject to certainconditions. However, the said co-promoter, M/s.Khaltan SupermagLimited expressed inability to be a part of the project andafter 12 years, the Government took a decision to sell theproject and consequently, cancelled the allotment of 47 acres ofland in favour of the assessee. The above facts clearlydemonstrate that the assessee though had entered intoarrangement with the banks and co-promoters and took action foracquisition of land, import of machineries, etc., no new venturewas established by the assessee. The venture, which was to betaken over by the assessee and operated did not fructify, not onaccount of the conduct of the assessee, but on account of thedecision of the Government of Tamil Nadu. In our consideredview, the decision of the Government of Tamil Nadu to sell theproject is a very important fact, which has to be borne in mindto decide as to whether the expenditure incurred by the assesseewas capital or revenue in nature. 26. The Assessing Officer fell in error in going by thefact that the expenditure was incurred from the capital accountforgetting that the test to be applied to ascertain as towhether the expenditure is revenue or capital is not based onwhere the funds were drawn from. The broad parameters andtests, which have been laid down by various decisions are thatthere should be an enduring benefit, which should accrue to theassessee and there should be a creation of a new asset. In theinstant case, both these parameters remain unfulfilled. 27. The High Court of Delhi in Indo Rama Synthetics Ltd.(supra) held that if the expenditure is incurred for starting anew business, which was not carried out by the assessee earlier,then such expenditure was held to be capital in nature.However, if the expenditure incurred is in respect of the samebusiness, which is already carried on by the assessee, even ifit is for the expansion of the business, viz., to start a newunit, which is same as earlier business and there is unity ofcontrol and a common fund, then such an expense is to be treatedas business expenditure and in such a case whether it is a newbusiness / asset would become a relevant factor. 28. It is further held that if there is no creation of new asset, then the expenditure incurred would be revenue innature. However, if the new asset comes into existence, whichis of enduring benefit, then such expenditure would be capitalin nature. 29. The Hon'ble Delhi High Court took note of thedecision of the Gauhati High Court in DCIT vs. Assam AsbestosLtd. reported in (2003) 185 CTR (Gau.) : (2003) 263 ITR 357(Gau.). The High Court of Calcutta in the case of Binani CementLtd. (supra), considered a case where the Tribunal disallowedthe expenditure allegedly incurred by the assessee for preparingfeasibility study report and capital work-in-progress in theearlier years but written off during the previous year, sincethe proposed project was abandoned. The Court affirmed the viewtaken by the CIT(A), where it was held that the company claimedas allowable the expenditure on this abandoned project. Whileit was found to be unviable, the expenditure on it was for thepurpose of business and it was not claimed or allowed earlier asbusiness expenditure because it was of capital nature entitledto depreciation after completion and on commencement of its usefor business and that stage having not reached and no assethaving come into existence, the capital work-in-progress had tobe written off as such. 30. In the case of Asia Power Projects P Ltd. (supra),the High Court of Karnataka held that, if the assessee incurs aliability and when the contract under which that liability wasincurred was terminated and when no amounts under the or inpursuance of a claim is receivable, he is entitled to claim thesaid amount incurred as expenditure in implementing the contractas a set off under Section 37(1) read with 28 of the Income TaxAct, 1961. 31. Insofar as the abandoned feature films areconsidered, a Division Bench of this Court in the case ofTiruvengadam Investments Pvt. Ltd. vs. Assistant Commissionerof Income tax reported in (2016) 95 CCH 0024 ChenHc, referringto a circular issued by the CBDT in Circular No.16/2015 dated06.10.2015, held that film production expenses of abandonedfilms should be treated as revenue expenditure. This decisionwas followed in the case of Asia Power Projects P Ltd. (supra). 32. The learned counsel for the Revenue strenuouslycontended that a new project had emerged and it is immaterialwhether machinery was reduced to scrap and ordered to be soldand what is required to be seen is that the expenditure wasincurred from the capital account. 31. Insofar as the abandoned feature films areconsidered, a Division Bench of this Court in the case ofTiruvengadam Investments Pvt. Ltd. vs. Assistant Commissionerof Income tax reported in (2016) 95 CCH 0024 ChenHc, referringto a circular issued by the CBDT in Circular No.16/2015 dated06.10.2015, held that film production expenses of abandonedfilms should be treated as revenue expenditure. This decisionwas followed in the case of Asia Power Projects P Ltd. (supra). 32. The learned counsel for the Revenue strenuouslycontended that a new project had emerged and it is immaterialwhether machinery was reduced to scrap and ordered to be soldand what is required to be seen is that the expenditure wasincurred from the capital account. 33. In our considered view, reliance placed on thedecision of this Court in the case of E.I.D.Parry (India) Ltd.,(supra) and the Kerala High Court in the case of Malabar &Pioneer Hosiery (P) Ltd. (supra) is of little avail, as in bothcases, it was for a new project, in contra distinction with the https://hcservices.ecourts.gov.in/hcservices/ factual position in the case on hand. Therefore, thosedecisions are factually distinguishable. Heavy reliance wasplaced on the decision of this Court in the case of MasconTechnical Services Ltd. (supra). 34. At the first blush it appears that the decision would helpthe case of the revenue, but on a closer reading it provesotherwise. The question was whether the assessee was justifiedin seeking for bifurcation of the expenses incurred into capitaland revenue. The Division Bench referred to the decision in thecase of Brooke Bond India Ltd. vs. CIT reported in [1997] 225ITR 798/91 Taxman 26 (SC). In the case of Brooke Bond IndiaLtd. (supra), it was held that expenditure, in connection withthe additional issue of shares, paid to the Registrar ofCompanies by way of filing fee and hence, has no application.The Division Bench held that the decision in the case of BrookeBond India Ltd. (supra) would have no application to the factsof the case, as the expenditure incurred by the assessee wereshown in the books of accounts as towards issue expensesincurred during the year and they found there was no justifiableground to dissect one part of the expenditure as revenueexpenditure and another part as capital expenditure. As pointedout by the Hon'ble Supreme Court in Empire Jute Co. Ltd.(supra), we cannot take a decision sans facts and the factualposition as set out in the preceding paragraph would clearlyshow that the abandoned project was not a new one and it was adecision taken by the Government after about 12 years after thepetitioner was invited to take over the project, which wasalready in existence, as they were an expert in the same line ofbusiness. Therefore, on facts, we find that the CIT(A) wasperfectly right in deleting the addition and holding that theexpenditure was revenue not capital expenditure. We may pointout that the decision in the case of Ideal Cellulura Ltd.(supra) was also a case where the expenditure was incurred tobring into existence a new asset, which is not so in the case onhand. Therefore, the said decision is also distinguishable onfacts. 35. In the result, both the tax case appeals are allowed,the order passed by the Tribunal is set aside and thesubstantial questions of law framed for consideration areanswered in favour of the assessee and against the revenue. Sd/-Assistant Registrar(CO) //True copy// abr Sub Assistant Registrar https://hcservices.ecourts.gov.in/hcservices/ To 1.The Assistant Commissioner of Income Tax, Company Circle, Salem. Company Circle, Salem. 2.The Income Tax Appellate Tribunal, "D" Bench, Chennai. 35. In the result, both the tax case appeals are allowed,the order passed by the Tribunal is set aside and thesubstantial questions of law framed for consideration areanswered in favour of the assessee and against the revenue. Sd/-Assistant Registrar(CO) //True copy// abr Sub Assistant Registrar https://hcservices.ecourts.gov.in/hcservices/ To 1.The Assistant Commissioner of Income Tax, Company Circle, Salem. Company Circle, Salem. 2.The Income Tax Appellate Tribunal, "D" Bench, Chennai. 3.The Commissioner of Income-Tax (Appeals), Office of the Commissioner of Income-Tax (Appeals), No.3, Gandhi Road, Salem-636 007. Office of the Commissioner of Income-Tax (Appeals), No.3, Gandhi Road, Salem-636 007. 4.The Joint Commissioner of Income Tax, Special Range, Salem -7. Special Range, Salem -7. 5.The Deputy Commissioner of Income Tax, Company Circle -I, Salem. Company Circle -I, Salem. +1cc to Mr.S.Sridhar, Advocate SR.No.34864+1cc to Mr.Rajesh, Advocate SR.No.34930 T.C.(Appeal) Nos.907 and 908 of 2007 GN(29/06/2018)