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TMI Blog2009 (9) TMI 635X X X X Extracts X X X X X X X X Extracts X X X X ..... yester for a number of years. According to the petitioner, for several years prior to the previous year relevant to the assessment year 2000-01 (the assessment year under consideration), the appellant had been generating substantial surplus cash from its existing business of manufacture of yarn and polyester. With a view to utilizing the said cash surplus available and with a view to expanding its hitherto existing operations, the appellant-company commenced the setting up of a spinning and weaving unit for the manufacture of fabric and textile during the financial year 1995-96 in the State of Karnataka. The manufacture of the underlying product was authorized by the memorandum of association and the articles of association of the appellant-company. The said unit was in line with the appellant's strategy to expand its business operations in the same line of business through vertical integration, by utilizing as raw materials for the proposed new unit, the products such as yarn and polyester, manufactured by the existing units. For setting up the new unit, the appellant identified manpower from the existing pool of resources of the appellant-company. Furthermore, the said unit was p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fact that the product proposed to be manufactured in the proposed unit was authorized by the memorandum and articles of association did not prove the inextricable linkage of the proposed unit with the existing business of the appellant. On the contrary, the Tribunal observed that since the unit was proposed to be set up in the State of Karnataka, which was much far away from the existing unit of the appellant, the new unit could not be regarded as part of the existing business. The Tribunal, accordingly, upheld the order of the Commissioner of Income-tax (Appeals) and sustained the disallowance. 6. The submission of Mr. Ajay Vohra, learned counsel appearing for the appellant, was that the expenditure incurred would be treated as revenue expenditure, inasmuch as : (a) the said expansion was authorized by the memorandum of association and the articles of association of the appellant-company ; (b) the setting up of the new unit was part of the process of vertical integration by utilizing the products manufactured by the existing units as raw materials for the new unit ; (c) the resources proposed to be utilized for the said unit were identified from w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount paid to the architect and other expenditure was claimed as revenue expenditure. Similarly, there was another proposal before the assessee to take over Priya Cinema for the purpose of conversion into a four-screen cinema complex. Detailed technical feasibility was carried out and building plans were prepared by M/s. Consultancy Engineering Group and Morphagenisi Architecture Studio, who were paid certain remuneration. On subsequent market research, the assessee preferred to retain single screen cinema and the proposal of the conversion of the said cinema into a multiplex complex was shelved. The amount paid to the said consultants was claimed by the assessee as revenue expenditure. The Assessing Officer had disallowed the said expenditure treating the same as capital expenditure. The Tribunal, however, held that both expenditure were in the nature of revenue expenditure. This opinion of the Tribunal was upheld and the said appeal, i.e., I. T. A. No. 145 of 2007, was dismissed vide judgment dated August 24, 2009 (CIT v. Priya Village Roadshows Ltd. [2011] 332 ITR 594). In the process, this court took into consideration a few judgments of this court and gave harmonious construc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be attributed to capital, if it be made with a view to bringing an asset or advantage into existence and it is not necessary that it should have that result-Collins (Inspector of Taxes) v. Joseph Adamson and Co. [1939] 7 ITR 92, 99 (KB). In Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC), their Lord-ships have held (headnote) : "There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and, it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that in that case the manufacturing of insecticide formulation was not carried out by the assessee and the assessee had incurred the expenditure for starting a new line of business, whereas in the instant case it was only an expansion of business. He submitted that this fine distinction is taken note of by the Tribunal in the instant case which materially affected the final outcome. He submitted that the Tribunal referred to various judgments on these aspects. In addition, he also placed reliance upon Jay Engineering Works Ltd. v. CIT [2009] 311 ITR 405 (Delhi). One of the judgments on which the Tribunal based its decision is of this court, i.e., CIT v. Modi Industries Ltd. (No. 3) [1993] 200 ITR 341. In that case the assessee-company which was manufacturing various commodities like sugar, vanaspati, soap, paints and varnish, torch and lantern, started manufacturing a new commodity, viz., spe- cial alloy wire and billets. Debentures were issued for raising funds for this new steel unit and the assessee incurred expenditure for issuing of debentures. The question was whether the expenditure incurred by the assessee in the year in which the unit had not started working ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the facts of this case becomes obvious. The expenditure was incurred in respect of the same business which is already carried on by the assessee. Two projects which were undertaken were for the expansion of the same business, namely, one for taking over Savitri Cinema for conversion into multiplex and operation and management thereof and other for conversion of Priya Cinema into fourscreen multiplex. Payments were made to the consultants for preparing feasibility reports in respect of both projects. However, ultimately the projects were not found to be financially and technically viable and were shelved. Thus, we find that no new asset came into existence, which was the basis adopted by the Assessing Officer for treating the expenditure as capital expenditure but wrongly. In the present case both ingredients are satisfied, namely :- (i) the feasibility study conducted by the assessee was for the same and existing business with a common administration and common fund, and (ii) the study was abandoned, without creating any new asset. 13. We note two judgments of other High Courts taking this view in identical circumstances. One case is decided by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the two plants were common. On this basis, it was opined that there was intermingling and interlacing of funds. The fact that the two divisions are located at different sites did not affect the outcome since marketing of the final products of both divisions was carried out under the supervision and control of the same set of executives at the head office. 13. This judgment is an answer to the wrong approach adopted by the authorities below by not treating the expenditure as revenue expenditure only because the unit was to be set up in Karnataka, which was geographically at a distance from the existing unit. 14. We are supported in our view by yet another judgment of the Supreme Court in the case of Veecumsees v. CIT [1996] 220 ITR 185. That was also a case where the assessee was carrying on jewellery business commencing exhibition of cinematographic films. Capital was borrowed for constructing cinema theatre and interest on borrowed capital was treated as business income deductible under section 36(1)(iii) of the Income-tax Act, 1961. 15. We, thus, answer question No. 1 in favour of the assessee and against the Revenue. 16. In so far as the second qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal could have determined whether the said study, in fact, resulted in enhancing the productivity and profitability of the company. Since the assignment was, in fact, never completed and put into practice, the Tribunal came to the conclusion that the appellant had not been able to prove that the payment of consultancy fee was for enhancing productivity and profitability of the appellant-company. The Tribunal, accordingly, concluded that the aforesaid expenditure in respect of consultancy fee paid to M/s. McKinsey and Co. could not be treated as revenue expenditure. 21. This approach of the Tribunal is not correct in law. Interestingly, the Tribunal has accepted the fact that even when there was no formal written agreement with M/s. McKinsey and Co., the report was submitted by the said company for the task assigned. This report was produced before the Assessing Officer/Commissioner of Income-tax (Appeals). The Tribunal noted that as per the assessee, the perusal of the report clearly indicated that the engagement was for the purpose of improving the operational efficiencies of the assessee and enhance the profitability of the existing business. In these circumstance ..... X X X X Extracts X X X X X X X X Extracts X X X X
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