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2025 (5) TMI 5 - AT - Income TaxClaim deduction of expenditure incurred in an abandoned project - intimation passed u/s 143(1) and 143(3) - HELD THAT - The fact would remain that the assessee was constrained to abandon an expansion of the project already carried on by it for the reasons beyond its control and hence it was constrained to write off the expenses booked under work in progress in the books of account as those expenses will not result in creation of any new asset which could be put to use. We notice that the assessee has cited various reasons which compelled them to abandon the projects. It cannot be disputed that they were commercial decisions taken by the assessee and it is well settled that the wisdom of commercial decisions cannot be questioned by the tax authorities. Hence in the facts of the present case we hold that the amount so written off will be allowable as deduction. Accordingly direct the AO to delete the disallowance made in the intimation passed u/s 143(1) of the Act and also in the assessment order passed u/s 143(3) of the Act.
The core legal question considered by the Tribunal in these appeals is whether the assessee is entitled to claim a deduction for expenses incurred on "Capital work in progress" that were subsequently written off due to abandonment of pipeline laying projects. Both appeals pertain to the disallowance of such expenditure by the Assessing Officer (AO) under sections 143(1) and 143(3) of the Income Tax Act, 1961.
The principal issue is thus:
Additional subsidiary issues implicitly considered include:
Issue-wise Detailed Analysis Issue: Deductibility of expenditure incurred on abandoned capital work-in-progress projects Relevant Legal Framework and Precedents: The Tribunal extensively relied upon the principles laid down by the Hon'ble Supreme Court in Empire Jute Co. Ltd., which emphasized that there is no single conclusive test to distinguish capital from revenue expenditure. The Court held that the test of enduring benefit should be applied with caution, considering the commercial nature of the advantage obtained. Expenditure that facilitates business operations without creating a new enduring asset may be revenue in nature even if the benefit endures. Additionally, the Tribunal drew upon the Madras High Court decision in Tamilnadu Magnesite Ltd., where expenses incurred on an abandoned expansion project were held deductible as revenue expenditure since no new asset of enduring benefit was created and the project was abandoned due to government orders beyond the assessee's control. Other relevant judicial precedents considered include:
Court's Interpretation and Reasoning: The Tribunal found that the assessee's business involved ongoing expansion of pipeline infrastructure for gas distribution. The expenditure written off related to abandoned pipeline laying projects that were expansions of the existing business. The reasons for abandonment included delays in government approvals, redevelopment issues, withdrawal of interest from partners, and commercial decisions, all beyond the assessee's control. The Tribunal rejected the AO's contention that the expenditure was capital merely because it was initially booked as capital work-in-progress. It held that the source of funds (capital or revenue account) is not the decisive test. Instead, the key considerations are whether a new asset of enduring benefit was created and whether the expenditure brought about a new business or merely expanded the existing one. Applying the tests from Empire Jute and related cases, the Tribunal concluded that since no new asset came into existence and the expenditure was incurred for expansion of the existing business, the written-off amount constituted revenue expenditure. The abandonment was due to external factors and commercial prudence, not due to any fault or change in business direction by the assessee. The Tribunal noted that the reasoning of the AO distinguishing the Madras High Court decision on the ground that the project abandonment was not by government order was incorrect. The principle that expenses on abandoned projects in the nature of expansion of existing business are deductible applies irrespective of the precise reason for abandonment, provided the reasons are beyond the assessee's control. The Tribunal also distinguished cases relied upon by the Revenue where the expenditure related to new projects or new business ventures resulting in creation of enduring assets, which were held capital expenditure. Here, the facts were different as the project was an expansion and no asset was brought into use. Key Evidence and Findings:
Application of Law to Facts: The Tribunal applied the legal tests to the facts and found the expenditure to be revenue in nature. The abandonment of the pipeline projects did not lead to creation of any fixed asset or enduring benefit, and the expenditure was incurred in the course of expanding an existing business. The reasons for abandonment were external and commercial, not voluntary cessation of business or creation of a new business. Treatment of Competing Arguments: The Revenue argued that the expenditure was capital because it was incurred from capital account and related to acquisition of tangible assets. The Tribunal rejected this, emphasizing that the source of funds is not determinative. The Revenue's reliance on cases involving new projects or assets was distinguished on facts. The Tribunal also rejected the AO's attempt to distinguish the Madras High Court decision on the basis of abandonment reasons. Conclusions: The Tribunal concluded that the expenditure written off on abandoned work-in-progress projects was deductible as revenue expenditure under the Income Tax Act. The orders of the lower appellate authorities confirming the disallowance were set aside. The appeals were allowed in favour of the assessee. Significant Holdings "The test to be applied to ascertain as to whether the expenditure is revenue or capital is not based on where the funds were drawn from. The broad parameters and tests, which have been laid down by various decisions are that there should be an enduring benefit, which should accrue to the assessee and there should be a creation of a new asset. In the instant case, both these parameters remain unfulfilled." "The decision of the Government of Tamil Nadu to sell the project is a very important fact, which has to be borne in mind to decide as to whether the expenditure incurred by the assessee was capital or revenue in nature." "The expenditure incurred for the implementation of the project was claimed as revenue expenses/business loss in the computation of total taxable income on the strength of the Government Order directing closure of the project and cancellation of the allotment of the land." "If the expenditure is incurred for starting a new 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 same business, which is already carried on by the assessee, even if it is for the expansion of the business, such an expense is to be treated as business expenditure." "It cannot be disputed that they were commercial decisions taken by the assessee and it is well settled that the wisdom of commercial decisions cannot be questioned by the tax authorities." "We find that the CIT(A) was perfectly right in deleting the addition and holding that the expenditure was revenue not capital expenditure." The Tribunal's final determination was that the disallowance of expenses written off as abandoned capital work-in-progress was not justified and the expenditure is deductible as revenue expenditure under the Act. Both appeals were allowed accordingly.
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