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2015 (10) TMI 1276 - ITAT MUMBAI

2015 (10) TMI 1276 - ITAT MUMBAI - TMI - Disallowance of project development expenses claimed by the assessee as revenue expenditure u/s 37(1) - assessing officer has taken the view that the expenditure claimed by the assessee is not allowable, since the assessee itself has treated the same as capital expenditure - Held that:- In the instant case, there is no dispute that the nature of business activities of all the stores, i.e., already opened and that are going to be opened, is identical in na .....

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the nature of revenue (being mostly paid to employees). These are allowable in the year itself as per ratio of aforementioned decision of the Hon‟ble Bombay High Court in the case of CIT V/s Kothari Auto Parts Manufactures Pvt Ltd (1975 (12) TMI 28 - BOMBAY High Court) and Hon‟ble High Court of Gujarat in the case of CIT V/s Alembic Glass Industries Ltd (1975 (11) TMI 42 - GUJARAT High Court). These expenditures did not create any asset and also did not provide enduring benefit to th .....

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Farrokh Irani For The Respondent : S/Shri Kailash Gaikwad and Jayant Kumar ORDER Per Bench: Both the appeals filed by the assessee are directed against the orders passed by Ld CIT(A)-7, Mumbai and they relate to the assessment years 2008-09 and 2009-10. Since identical issue is urged in these appeals, they were heard together and are being disposed of by this common order, for the sake of convenience. 2. The solitary issue urged in these appeals is whether the Ld CIT(A) was justified in confirmi .....

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Project Development Expenditure as deduction in the computation of total income in both the years under consideration, even though the assessee had shown it in the Balance Sheet as Capital work in progress . When questioned, the assessee submitted that it is in the process of expansion of its business operations by opening various new shops and the revenue expenses, which could not be identified with a particular shop was shown under the head Project Development Expenses and taken to Balance she .....

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s same, and are so arranged that economies of scale can be obtained; this has resulted into the inter-connection and inter-dependence of the stores on each other. This clearly shows that there exists inter-connection, inter-lacing, inter-dependence, common management, common business organization, common fund, common administration and common central place of business in the assessee‟s case. During the year the company has acquired and capitalized the amount spent towards the acquisition o .....

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identifiable with the operation and maintenance of the existing stores the same have been expensed out during the year. Whether the expenses are not directly identifiable with the operation and maintenance of the existing stores, the same has been transferred to Project development expenditure pending capitalization. This has been done mainly to defer the charge of such expenses to profit and loss account. It would be worth mentioning here that what is being reflected by the company in the books .....

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ee is allowable as deduction under the Act. In this regard, the assessee placed reliance on the following case law:- (a) Jay Engineering Works Ltd Vs. CIT (2008)(166 Taxmann 115)(Delhi) (b) CIT Vs. Priya Village roadshows Ltd (2009)(185 Taxmann 44)(Del) (c) CIT Vs. Assam Asbestos Ltd (2003)(263 ITR 357)(Assam) (d) Maharaja Shri Umaid Mills Ltd Vs. CIT (175 ITR 732)(Raj) It was further submitted that the earning of income is not essential for allowing deduction under the Act and for this proposit .....

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ee further contended before the AO that the expenditure booked under the head Project development expenditure is fully allowable u/s 37(1) of the Act as all the conditions prescribed therein are satisfied. However, the AO took the view that the assessee has not incurred such expenses for routine operations and further noticed the assessee itself has considered the same as capital in nature in the books of account. Accordingly, he disallowed the claim of project development expenditure made by th .....

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ld that there is difference between expansion‟ of business and extension‟ of business. The Ld CIT(A) took the view that the assessee‟s case is a case of extension of business activity, i.e., setting up a new source of income. Accordingly, the Ld CIT(A) held that the assessee is not entitled to claim deduction of project development expenditure, since it is a case of extension of business, i.e., setting up of new source of income. Accordingly, he confirmed the addition made by t .....

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regard to the opening of new stores have been taken to Balance Sheet as Capital work in progress in the books of account. However, the same has been claimed as revenue expenditure under the Income tax Act, since all the conditions relating to deduction u/s 37(1) of the Act have been satisfied. He submitted that the assessee has segregated capital expenses, if any, out of Project development expenses, if they are capital in nature and claimed only those expenses, which are revenue in nature. He s .....

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der the Act. In this regard, he placed reliance on the decision rendered by Hon‟ble Supreme Court in the case of Taparia Tools Ltd Vs. JCIT (2015)(55 taxmann.com 361). In the above said case, the assessee issued debentures and offered the investors an option to get one time upfront discounted interest. The interest so paid was treated as deferred revenue expenditure in the books of account, but it was claimed fully for income tax purposes. The claim of the assessee was held to be allowable .....

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re as Capital work-in-progress‟ and claimed the same as revenue expenditure while computing total income. The said claim was rejected by tax authorities, but the Tribunal has allowed the claim by following the decision rendered in the following cases:- (a) Kedarnath Jute Mfg. Company ltd (supra) (b) CIT Vs. Kothari Auto parts Manufacturers Pvt Ltd (109 ITR 333) (c) CIT Vs. Alembic Glass Industries Ltd (103 ITR 715) He further submitted that the decision rendered in the case of Reliance Foo .....

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the Ld CIT(A) has taken up the view that the assessee has set up new source of business by establishing new stores. Accordingly, the Ld CIT(A) has taken the view that the project development expenditure is capital in nature. He further submitted that the assessee has furnished details relating to other expenses included in Project development expenses. He further submitted that the assessee has not generated revenue from new stores and hence under revenue cost matching principle , the expenses c .....

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ssee itself has treated the same as capital expenditure. The AO has also taken the view that the expenditure was not incurred such expenses for routine operations. However, the view taken by the assessing officer is against the proposition laid down by the Hon‟ble Supreme Court in the case of Kedarnath Jute manufacturing Company Ltd (supra) and Taparia Tools Ltd (supra), wherein the Hon‟ble Supreme Court held that the treatment given in books of account are not determinative or concl .....

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tuation, when this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, merely because a different treatment was given in the books of account cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that entries in the books of account are not determinative or c .....

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count is not relevant to examine the claim put forth by the assessee. 12. The next reasoning given by the AO is that the assessee has not incurred these expenses for the routine operations. However, the claim of the assessee is that these expenses were incurred in the routine operations. There is no dispute with regard to the fact that the assessee has already established the business and has also declared sales revenue. The assessee has explained that it has followed the practice of charging ex .....

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he assessee. The same is extracted below, for the sake of convenience:- RELIANCE WELLNESS LIMITED ASSESSMENT YEAR 2009-10 ANNEXURE Details of revenue expenditure debited to CWIP Particulars Amount(Rs.) Electric Power, Fuel and Water 4,53,955 Rent 1,04,75,325 -Salaries and wages 8,29,20,705 -Contribution to Provident fund, superannuation 28,42,804 fund, Gratuity, Leave Encashment -Others 45,46,249 Travelling Expenses 75,00,671 Professional Fees 15,26,047 Payment to Auditors 2,569 Consumption 1,23 .....

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he Ld CIT(A) has taken the view that the expenditure incurred for expansion of business is allowable as deduction, but the expenditure incurred on extension of business is akin to setting up of business or new source of income. Accordingly, the Ld CIT(A) has taken the view that project development expenditure is the expenditure incurred before setting up of business and hence not allowable as deduction. 14. We are unable to understand as to how the extension of business is different from expansi .....

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ra):- 4.5 The Ld A.R also referred to the decision of Hon‟ble Gujarat High Court in the case of CIT Vs. Alembic Glass Industries Ltd (103 ITR 715) wherein it has been held that the expenditure relating to the unit of the assessee at Bangalore were allowable despite the fact that unit of the assessee at Bangalore did not start production as the new unit at Bangalore was nothing but expansion of the existing business and there was complete inter-connection, inter-lacing and inter-dependence .....

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Company empowered the company to manufacture the items in which it was permitted to deal in and thus these are two activities were two separate stages of the same business and the Tribunal was justified in allowing the total expenditure as business expenditure. In the instant case, there is no dispute that the nature of business activities of all the stores, i.e., already opened and that are going to be opened, is identical in nature. It is also not in dispute that the assessee is already opera .....

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of M/s Reliance Foot Prints Ltd (supra). For the sake of convenience, we extract below the relevant observations made by the Tribunal in the above said case:- 6. We have heard both parties and their contentions have carefully been considered. There is no dispute to the fact that the assessee has shown a turnover of ₹ 4.75 croes in relation to its stores which were made operational during the year at Bangalore and Hyderabad. Before the AO it was the case of the assessee that it is in the pr .....

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stores. These submissions were made before the AO and have not been cosntroverted by the AO and disallowance is made mainly on the ground that the assessee cannot give duel status to these expenditure i.e. as capital in books of accounts and as revenue for Income tax purpose. However, such view of the AO cannot be upheld in view of the decision of Hon‟ble Supreme Court in the case of Kedarnath Jute Mfg. Company Ltd (supra) wherein it has been held that the issue that whether the assessee i .....

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galore and Hyderabad. It was the contention of the assessee that operations of these stores at various locations is one composite business and once business had been started then the expenditure cannot be linked only to the stores which became operational during the year under consideration. Such submission of the assessee has not been controverted by the AO. All these details were submitted before the AO and it is not the case of the AO that assessee had not incurred such expenditure for its bu .....

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