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ACIT-6 (3) , Mumbai Versus M/s. Gravis Foods Pvt Ltd.,

2015 (9) TMI 1008 - ITAT MUMBAI

Disallowance of pre-operating expense for a “Mawa Project” - revenue v/s capital expenditure - expenditure incurred for expansion of the dairy business of the assessee as held by CIT(A) in deleting the disallowance - what is the nature of the "Mawa‟? Is it a milk product or not and if fails in the scope of the assessee's business of not? - Held that:- The undisputed facts include that the "Mawa" is made up of the milk product and therefore, it is a dairy product and they same is covered wi .....

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management, accounts, CEOs for both the dairy /milk products is one and the same. AO has not made out the absence of interlacing of the above. Under the factual matrix of the case, we find the claim of the assessee is allowable. Accordingly, the AO is directed to delete the addition. The order of the CIT (A) is thus, affirmed. - Decided in favour of assessee. - I.T.A. No. 1051/M/2013 - Dated:- 28-8-2015 - SHRI D. KARUNAKARA RAO AND SHRI AMIT SHUKLA, JJ. For The Appellant Shri L.K.S. Dehiya and M .....

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ject - a new project unconnected with existing business as capital in nature and not deductible u/s 37(1) of the Act. 2. On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in considering the expenditure of ₹ 1,27,20,969/- incurred by the assessee on MAWA project as expenditure incurred for expansion of the dairy business of the assessee when it was totally a new business unconnected with the existing business. 2. Briefly stated relevant facts of the case are .....

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cream. During the assessment proceedings, AO noticed that the assessee debited expenditure of ₹ 1,24,81,369/- towards cancellation of project involving manufacturing and sale of Khoa, a milk product. The break-up of the above expenditure for the sum of ₹ 1,27,20,969/- is given in a tabular form and the same is narrated on page 5/6 of the impugned order. The said expenditure is divided into various heads viz., salaries wages and allowances; staff welfare and canteen expenses; sampling .....

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re-operative expenses, the assessee replied vide letter dated 22.12.2011 and gist of the said reply is summarized in para 5.3 of the assessment order. Accordingly, the case of the assessee is that it is in the business of milk products. As per the object clause of the MoA, the manufacturing of Mawa Khoa is part of its approved business objectives. The ice-creams also belong to the same family of milk products. The said expenditure of ₹ 1,27,20,969/- was not incurred on any capital asset en .....

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bove said expenditure is neither for any capital investment nor it is a pre-operative expenditure. Since, the assessee is in the ice-cream business for a long time, so the launching of a new business constitutes expansion of and extension of existing business of the assessee, which is already commenced then. For this proposition, assessee relied on the judgment of the Hon‟ble Supreme Court in the case of Empire Jute Company Ltd vs. CIT [124 ITR 1]. Assessing Officer did not consider the ab .....

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of the existing business. AO interpreted the same as stating a separate project altogether. AO is of the opinion that the said expenditure of ₹ 1,27,20,969/- do not fall in the new field. He also refers the expression pre-operative expenses‟ from the said letter dated 22.12.2011. AO is also aware of the fact that these expenses are incurred towards aborted Mawa product. However, AO is of the opinion that such Mawa product constitutes a new project entering into new horizons of custo .....

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s, assessee explained the background of assessee-company and informed the above referred details of Mawa project and also communicated the said expenditure was considered as a capital work-in-progress in the books of accounts (para 3.2 of the CIT (A)‟s order). Assessee further communicated the general nature of the expenditure by giving the break-up of the details for the said sum of ₹ 1,27,20,969/- and informed that the said expenditure was treated as deductible expenditure in the c .....

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that the ice-creams are made out of milk and the product of Mawa also has milk as a raw material. He also argued that the said expenditure was incurred subsequent to the set-up of the assessee‟s business and therefore, the expenditure should not be categorized as pre-operative expenditure, merely relying on the expressions used by the assessee in the correspondence with the AO. Assessee also explained the applicability of the provisions of section 37(1) of the Act and reasoned the expendi .....

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duct. Assessee relied on the judgment of the Hon‟ble Supreme Court in the case of Prithvi Insurance Co (63 ITR 632), which is relevant for the propositions relating to the above proviso. The said judgment has laid down the principle to decide whether two businesses are separate or a part and parcel of the same business. The guidelines also helps to come to the conclusion that if there was common management, common business organization administration fund place business etc which helps to .....

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T vs. Tata chemicals Ltd (256 ITR 399) for the said identical proposition. Thus, the case of the assessee is that the Mawa project being milk dairy product constitutes the same existing business and they qualify the characters of interlacing, interdependence and interconnection of the Mawa project with that of the existing ice-cream dairy business. He relied on various other decisions from various High Courts in support of his submissions. CIT (A) considered the same and accepted the contention .....

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xisting and new business activities. Further, he analyzed the nature of expenditure and find none of them are helpful in creating the new asset as technically the said expenses are incurred for office maintenance and marketing activities and other overheads. CIT (A) also discussed the details about the aborted product. He also commented on the note left by the auditors in the financial statements and held that the said expenses were related to a new project and product and not for separate busin .....

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ure is allowable. Further, CIT (A) relied on the judgment of the Hon‟ble Bombay High Court in the case of Sterlite Industries (India) Ltd vs. Addl. CIT (102 TTJ 53) (Mumbai), wherein it was held that the interest expenditure incurred on the borrowed loans for acquiring a new plant and machinery, which is for expansion of the existing business constitutes an allowable revenue expenditure. There is also a reference to the decision of ITAT, Chandigarh Bench in the case of Glaxo Smithklline Co .....

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ppellant incurs expenditure on diversification and expansion of new product range including acquisition of machinery to aid such expansion, the said expenses expenditure is to be allowed as a beta expenditure. Similar view has been taken in the case of Sterlite Industries (India) Ltd vs. Addl. CIT (102 TTJ 53) (Mumbai), wherein the Hon‟ble Court has held that wherein the appellant sets up new plant which is inter-dependent on the existing ones and are supervised by the common management of .....

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umer preferences and loyalty towards brand of products and therefore, it is allowable as revenue expenditure. The expenditure incurred by assessee for expansion and betterment of its existing business would need to be treated as a revenue expense. Reliance is also placed in the case of CIT vs. Usha Iron & Ferro Metal Corp. Ltd (2007) 163 Taxman 256 (Delhi). Aggrieved with the above, relief granted by the CIT (A), Revenue is in appeal before the Tribunal by raising the above mentioned grounds .....

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belong to the cold chains. Ld DR relied on the judgment of the Hon‟ble Supreme Court in the case of Jonas Woodhead and Sons (India) Ltd vs. CIT [224 ITR 342] for the proposition that it has laid down the principles as to identify the capital or revenue nature of certain expenditure. Further, he agreed to the fact that the said judgment relates to the payment of supply of technical know-how and set-up of plant and machinery. He also relied on the judgment of Hon‟ble Delhi High Court i .....

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f as aborted expenditure since, the project did not materialize. Otherwise, Ld DR heavily relied on the order of the AO. 5. Per contra, Shri A.V. Sonde, ld Counsel for the assessee relied heavily on the order of the CIT (A) and the detailed written submissions containing the series of case laws furnished before the CIT (A) vide written submission letter dated 23.10.2012. These are extracted and form part of the impugned order at para 3.2. In summary, the case of the Ld Counsel for the assessee i .....

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for which the assessee is incorporated. The ice-creams of Baskin Robbins fall in the same genus of dairy products. He has also reiterated the fact that the Revenue did not establish the absence of interlacing, interdependence and interconnection of the business activities after considering the set principles of common management administration business organization fund. He also cited various decisions which were already discussed in the above paras of this order. Referring to the judgment of t .....

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n management administration business organization fund, the new business should be treated as part of the existing business. Accordingly, the expenses incurred in connection with the said new project of the assessee constitute allowable expenditure u/s 37(1) of the Act. 7. We have heard both the parties and perused the orders of the Revenue Authorities as well as the precedents cited by the Ld Representatives of both the parties. After hearing both the parties and perusal of the orders of the Re .....

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t for the alleged preoperative nature of the claim. Therefore, we have no doubt to treat the impugned expenditure as allowable revenue but for the allegation of the AO. No expenditure incurred on acquisition of the capital assets such as plant & machinery, land and building, technical know-how etc., is included in the expenditure claimed by the assessee. 9. New product vs New business: Memorandum of Association of the assessee provides for the following main object of the business of the ass .....

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raw material for the manufacture of the ice-creams. The expression milk product‟ is a generic expression and in our opinion, the said expression covers all kinds of milk products. Ice creams are made up of the milk or the cream. Both the milk and the cream are the dairy products. 9.2. In the context of ice-creams, a milk-product the Cream is a dairy product composed of the higher-butterfat layer skimmed from the top of milk before homogenization. Cream being of the less dense, the same is .....

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