TMI Blog2009 (9) TMI 635X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 - Once it is accepted as a fact that the assignment given to the said consultants was for the purpose of improving operational efficiencies and was not to incur any enduring benefit in capital field but to carry on the existing business more efficiently and profitably, the irresistible conclusion which follows is that such expenditure was allowable as business expenditure - All the appeals are dicided in the favour of the assessee - 843 of 2009 - - - Dated:- 25-9-2009 - SIKRI A. K., VALMIKI J. MEHTA JJ JUDGMENT A. K. Sikri J.- This appeal was heard on the following questions of law : "(1) Whether on the facts and in the circumstances of the case, the Tribunal erred in law in holding that the expenditure incurred by the appellant on expansion of its existing business by setting up a weaving and spinning unit for manufacture of fabric and textiles in the State of Karnataka was capital in nature ? (2) Whether on the facts and in the circumstances of the case, the Tribunal erred in law in holding that consul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounting to Rs. 64,47,855 were written off and claimed deduction in computation of income for the assessment year 2000-01 under section 37(1) of the Act. 4. Vide order dated December 31, 2002, passed by the Assessing Officer (AO) under section 143(3) of the Act, the Assessing Officer disallowed the aforesaid related project expenses incurred by the appellant-company for setting up the said unit holding the same to be capital in nature. Aggrieved by the said order dated December 31, 2002, passed by the Assessing Officer under section 143(3) of the Act, the appellant preferred an appeal to the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals), vide order dated November 28, 2003, upheld the disallowance made by the Assessing Officer on the ground that since the unit was proposed to be set up in Karnataka, which was geographically very far from the existing unit of the appellant, it did not prove the inextricable linkage of the proposed unit with the existing business of the appellant. It was further held by the Commissioner of Income-tax (Appeals) that since the proposed unit could not, in fact, be set up, the question whether the same constituted mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he following judgments : (i) CIT v. Prithvi Insurance Co. Ltd. [1967] 63 ITR 632 (SC) ; (ii) Produce Exchange Corporation Ltd. v. CIT [1970] 77 ITR 739 (SC) ; (iii) Standard Refinery and Distillery Ltd. v. CIT [1971] 79 ITR 589 (SC) ; and (iv) B. R. Ltd. v. CIT [1978] 113 ITR 647 (SC). 8. He further argued that applying the principles laid down in the aforesaid judgments, it had been held by various High Courts that where existing business is to expand or set up a new unit in the same business fold, revenue expenditure incurred on setting up such new unit/expansion of the existing unit is admissible business deduction. 9. Learned counsel for the respondent, on the other hand, relied upon the reasoning given by the Tribunal holding the expenditure incurred by the appellant as capital expenditure. 10. In a recent judgment given by this court in CIT v. Priya Village Road shows Ltd. (I. T. A. No. 145 (Delhi) 2007) [2011] 332 ITR 594 an identical issue came up for consideration. In that case also the assessee was in the business of running cinemas. There was a proposal for taking over another cinema, namely, Savitri Cinema, from its owners for conversion into multi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e test of `enduring benefit is largely accepted and applied by the courts. Further, if the expenditure is incurred with a view to bringing an asset or advantage into existence, it is to be treated as capital expenditure and while doing so, it is not necessary that such expenditure should have that result. The relevant portion of the discussion contained in that judgment is reproduced below (pages 643 and 644) : `The test to discriminate between a capital and a revenue expenditure is not straight. An item of expenditure though incurred wholly and exclusively for the purpose of the business may nevertheless be inadmissible as an allowance if it is of a capital nature. The border line between a capital expenditure and a revenue expenditure is a blurred one. Different minds may come to different conclusions and may yet have valid reasons justifying each of the two view points. In the leading case of Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, it was held that when an expenditure is made not only once and for all but also with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is a very good reason (in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the consultants for preparing project reports on manufacturing insecticide formulation-an item to be used for improving the quality of cane produced in the area by individual agriculturists and societies and also for another project, namely, for survey report on extra melkral alcohol as the assessee wanted these reports for better use of its byproducts, namely, molasses. After explaining the principle to be applied for determining the nature of expenditure in the aforequoted portion, the court was of the view that the expenditure was attributable to capital having been incurred with a view to bringing an asset or advantage into existence and having enduring benefit. It was categorically observed that merely because the project did not materialise the nature of the expenditure would not change to revenue. Obviously, heavy reliance is placed on this judgment by the learned counsel for the Revenue on the basis of which it was argued by Mr. Subhash Bansal that merely because the projects were shelved ultimately, is of no consequence. Mr. Aggarwal, learned counsel appearing for the respondent, on the other hand submitted that the entire argument is misconceived inasmuch as the proje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing whether the two businesses run by an assessee are the same business, what is important is that unity of control and interlacing of the two businesses and not the nature of the business. A harmonious reading of the aforesaid two judgments of this court, namely, Triveni Engineering Works Ltd. [1998] 232 ITR 639 on the one hand and Modi Industries Ltd. (No. 3) [1993] 200 ITR 341, on the other, would clearly demonstrate that one has to keep in mind the essential purpose for which such an expenditure is incurred. If the expenditure is incurred for starting a new business which was not carried out by the assessee earlier, then such expenditure is held to be of capital nature. In that event it would be irrelevant as to whether project really materialised or not. 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, namely, to start a new unit which is the same as earlier business and there is unity of control and a common fund, then such an expense is to be treated as business expenditure. In such a case whether new business/asset comes into existence or not would become ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material was treated as revenue expenditure as the new venture was interconnected and formed part of the existing business." 11. In the present case also, as already pointed out above, the expenditure incurred was in the nature of salary, wages, repairs, maintenance, design and engineering fee, travelling and other expenses of administrative nature. Indubitably, in the normal course, these expenses would be treated as revenue expenditure. The unit, which the appellant proposed to set up had inextricable linkage with the existing business of the appellant. The proposed business was not an individual business but vertical expansion of the present business. Thus, the test of existing business with common administration and common fund is clearly met. Since the project was abandoned, no new asset also came to be created. 12. We may point out at this stage that this court in CIT v. Monnet Industries Ltd. [2009] 176 Taxman 81 ; [2011] 332 ITR 627 treated the interest borrowed on capital as business expenditure when the amount was borrowed for setting up a new plant. That was a case where the assessee was already in the business of ferro alloys plant and it had set up sugar plant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant. 18. Vide order dated December 31, 2002 passed by the Assessing Officer under section 143(3) of the Act, the Assessing Officer, being of the view that the appellant had failed to establish that the payment made to M/s. McKinsey and Co. was revenue in nature and that since the appellant itself had treated the said expenditure as deferred revenue expenditure, disallowed the said expenditure of Rs. 74,04,128 holding the same to be capital expenditure. 19. Appeals preferred by the appellant before the Commissioner of Income-tax (Appeals) as well as the Tribunal were dismissed and this is how the appellant has filed the present appeal under section 260A of the Act raising the aforesaid question of law. 20. The argument of the appellant before the Tribunal, and before us, was that the purpose of the said operational efficiency and profitability study was to improve and enhance the nature and profits of the appellant-company. It was also submitted that the said expenditure was not incurred with a view to acquiring any capital asset or enduring advantage in the capital field. The Tribunal, however, rejected this submission of the appellant on the ground that there ..... X X X X Extracts X X X X X X X X Extracts X X X X
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