TMI Blog2014 (12) TMI 885X X X X Extracts X X X X X X X X Extracts X X X X ..... for acquiring the additional plant and machinery will be in the nature of capital expenditure - If the outlay is made for the extension of business, it will be treated in the capital filed and not revenue. Expenses made under the head trial run expenses during construction period – Capital expenses or not - Whether on the date of trial run, the plant and machinery acquired by the assessee was set up or not – Held that:- If the expenditure even on trial run is considered as prior to the setting up of plant and machinery then it cannot be allowed as revenue expenditure but has to be capitalized and being part of cost of the newly acquired capital asset - The plant and machinery is set up when it is established and in ready to start function - the plant must be put into such shape and stage that it can start functioning for the purpose of business of the assessee - the trial run is one stage prior to discharge the functions for which it has been acquired - until and unless a successful trial run is completed, the newly acquired machinery cannot be said to have put in such a shape that it can start functioning as business asset and, therefore, it cannot be said that the plant and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 71 ,00,000 incurred in the course of the existing business as incurred on a new line of business and thus capital expenditure. 2.2 The Appellant submits that expenses of ₹ 23,71,00,000 incurred during trial run .period of Cold Rolling Mill should have been allowed as revenue expenses irrespective of the accounting treatment. 3. Rival contentions have been heard and record perused. Facts in brief are that the assessee is engaged in the business of manufacturing and sale of Hot Briquette Iron (HBI), Hot rolled coils (HRC) sheets, plates etc. In the computation of income, the assessee has claimed a sum of ₹ 54,80,00,000/- on account of expenditure during construction period and ₹ 23,71,00,000/-- under the head trial run expenses. Assessee was asked to explain why the expenses mentioned above should not be treated as capital expenditure. The AO disallowed the same by observing that the assessee has to set up a new unit from scratch to manufacture Cold Rolled steel. It has to acquire profit making assets like building, plant and machinery etc. and incur capital expenditure for setting up its new unit. The expenses incurred for the new project was held to be capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow and found from the record that the assessee is engaged in manufacturing of hot rolled coils, sheets, plates etc. During the course of scrutiny assessment AO found that assessee had incurred capital expenditure for establishing cold rolling plant. Accordingly, the AO disallowed capital expenditure incurred on cold rolling plant after having the following observation :- The assessee is involved in the manufacture of Hot Rolled Steel. The assessee has started a new line of business by venturing into manufacture of Cold Rolled Steel. This is a totally new process and technology entirely different from the one followed by the assessee in its earlier business. Under no circumstances can it be considered as an extension of its existing business. The assessee has to set up a new unit from scratch to manufacture Cold Rolled Steel. It has to acquire profit making assets like building, plant and machinery etc. and incur capital expenditure for setting up its new unit. The expenses incurred for the new project are capital in nature. This view is supported by the Hon. Bombay High Court in the case of CIT vs. J.K. Chemicals Ltd. (207 ITR 985). Hence the deduction claimed by the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ges, repair maintenance, professional fees etc. are prior to the date of setting up of plant and machinery so acquired by the assessee. The contention of the assessee for claiming the said expenditure as revenue is that since the expenditure has been incurred for expansion of the existing business and capacity of manufacturing, therefore, it is an allowable revenue expenditure. It is pertinent to note that the question as to whether a particular expenditure is capital or revenue has to be decided by considering the purpose for which the expenditure is laid out. In the case in hand though the expenditure has been incurred on account of salary, wages, power charges, repair maintenance, professional fees etc. but the same is with respect to a new plant and machinery acquired by the assessee and before the same is put to use. Therefore, the expenditure in question was incurred for bringing a new asset into existence. The Hon ble Supreme Court in the case of Dalmia Jain and Co. Ltd. Vs. CIT, reported in 81 ITR 754 has laid down the principle on this point at page 757 as under :- The question for decision is whether the litigation expenses incurred by the assessee were for the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its existing business. This fact may be relevant in the circumstances of a given case, but is not so in the present case, because it is an accepted position that if the assessee were to set up its unit at Rajasthan, it would have to acquire land, plant and machinery and incur capital expenditure in that connection for setting up its unit at Rajasthan. The project report which the assessee obtained from Messrs. Dorr Oliver (India) Ltd. was for the purpose of setting up such a unit at Rajasthan. In other words, the expenditure incurred for the project was incurred by the assessee-company in order to decide whether to acquire some profit-making assets for the purposes of is business which would be of an enduring nature. The expenses incurred for the project report have, therefore, to be viewed as being capital in nature. Simply because the assessee had a running business of manufacturing fertilisers, it cannot be said that the expense for obtaining such a project report was a part of the expenses incurred by the assessee for running its business. It was clearly an expenditure incurred for ascertaining whether to acquire new assets of some durability for the purpose of earning profits. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plant and machinery is treated as set up and ready to start the function. Therefore, until and unless a successful trial run is completed, the newly acquired machinery cannot be said to have put in such a shape that it can start functioning as business asset and, therefore, it cannot be said that the plant and machinery has been set up. Prior to the installation of the machinery and bring to the shape to be ready to discharge the function the activities carried out are merely operations for setting up of the plant. The plant and machinery could be treated as set up only as a culmination of all these operations, which are necessary for establishing the plant and machinery and bring in the shape as it is ready to discharge function. We are conscious that in assessment year i.e. A.Y.2005-06, the Tribunal remanded this issue to the record of AO for examining whether it is for increase of existing business or not. Since the issue was not decided on merits and no view was taken by the Tribunal on this point, therefore, the earlier decision of the Tribunal remanding the issue to the record of the AO will have no bearing on the merits of the issue for the assessment year under consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
