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2016 (8) TMI 202 - GUJARAT HIGH COURT

2016 (8) TMI 202 - GUJARAT HIGH COURT - TMI - Trial run expenditure incurred in the process of expansion of its existing manufacturing facilities - revenue or capital expenditure - Held that:- The mere fact that there was no common place of business because the Bangalore unit was situate many miles away from Baroda was not a matter of any consequence because the head office of the assessee was at Baroda and it was the head office which controlled the affairs of both the businesses. It was pointe .....

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as revenue expenditure. - Taking into consideration the fact that the expense was incurred by the assessee for trial run with regard to expansion of present unit, to increase its installed capacity of the tile manufacturing plant from 35000 MT to 42000 MT, we find merit in the submissions of Mr.Soparkar. We are of the opinion that the question posed for our consideration is required to be answered in favour of the assessee and against the revenue. Accordingly, it is held that the Tribunal h .....

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lenged the order of the Income Tax Appellate Tribunal, Ahmedabad Bench A , Ahmedabad, (For short, the Tribunal ) in ITA No.1062/Ahd/1998 dated 24.2.2006, whereby the Tribunal has confirmed the order of the CIT (A) with regard to the expenditure incurred by the assessee for the trial run. 2. At the time of admitting this Appeal, following question of law was framed:- (i) Whether in the facts and circumstances of the case the Income Tax Appellate Tribunal was right in law in treating the trial run .....

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he period various raw materials (imported and indigenous) were utilized. The total cost of trial run was to the tune of ₹ 63.07 lacs, which were excluding revenue expenditure already charged to the P&L Account. He, therefore, submi9tted that as the expenses are incurred only for the purpose of existing line of business where the production was in progress, therefore, the same is rightly claimed as revenue and the Tribunal has committed an error in passing the impugned order. He contend .....

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p; Chemicals Ltd. v. Deputy Commissioner of Income-tax (Asstt.) reported in [2015] 60 taxmann.com 79 (Gujarat). 4. On the other hand, learned counsel for the respondent has supported the impugned order passed by the Tribunal and submitted the Tribunal has not committed any error while passing the impugned order. In support of its conclusion, the Tribunal has relied upon the decision in the case of Challapalli Sugars Ltd. v. CIT reported in [1975] 98 ITR 167. He, therefore, prayed that this appea .....

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to production during the year in question. During the course of the assessee's assessment to income-tax, the ITO, inter alia, held that the Bangalore unit was not a branch of the assessee's factory and that it was, therefore, a new business and since that new business had not started production, the payment of interest on the borrowings made for incurring the expenditure for setting up the new unit could not be allowed as revenue expenditure. On the same ground, he also disallowed some m .....

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ed the whole of the business organization of both the units and the production of both the units was considered the production of that company itself. The mere fact that there was no common place of business because the Bangalore unit was situate many miles away from Baroda was not a matter of any consequence because the head office of the assessee was at Baroda and it was the head office which controlled the affairs of both the businesses. It was pointed out that the closure of any of the two u .....

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s matter, the Court has also considered the decision rendered in the case of Challapalli Sugars Ltd. (supra). 5.1 In Gujarat Small Scale Industries Corprn. Ltd. (supra), this Court observed as under:- 6. If the expenditure was incurred before the commencement of the production, the matter might have stood on a different footing. The combined effect of these factors impels one to the conclusion that the expenditure was in the nature of revenue. The assessee-Corporation was carrying on numerous ac .....

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is difficult to conceive how it can be said to be an expenditure of a capital nature, for, it has not brought into existence any capital asset or advantage of an enduring nature. Counsel for the assessee placed reliance on CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 (Guj), in support of his contention that where the assessee-company was already engaged in manufacturing activities and had started a new branch of manufacturing activities, the expenditure incurred could be treated as re .....

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oth the lines of business constituted the "same business" of the assessee-company. In the present case, it is not necessary to go that far. The assessee-company was already engaged in manufacturing activities and it had started only a new line of production, namely, production of scooters, and the e expenditure incurred was not in connection with the plant or machinery established in order to produce the scooters. It was incurred in connection with the testing of the product and not in .....

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ourt took the view that it was an expenditure of a capital nature having regard to the fact that it was a part of the actual cost incurred in order to bring into existence the cement plant which was to produce the cement. It may be mentioned that the expenditure incurred was in connection with the electricity charges paid in the course of the trial run for the plant before the plant commenced commercial production. Since it was a new plant and the cost had entered into the cost of the plant and .....

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