TMI Blog2019 (8) TMI 1198X X X X Extracts X X X X X X X X Extracts X X X X ..... services rendered by them as shown in the designation. We reverse the finding of the lower authorities and allow ground number 1 and 2 of the appeal of the assessee holding that employs remuneration on legal and professional fees has been correctly debited in the profit and loss account and is allowable to the assessee as a deductible expenditure u/s 37 (1) of the income tax act. Interest income assessment - capital receipt OR revenue reciept - HELD THAT:- NTPC SAIL POWER COMPANY PVT. LTD. VERSUS CIT [ 2012 (10) TMI 524 - DELHI HIGH COURT] held that if the receipt is inextricably linked to the setting up of the project then it would be capital receipt not liable to tax but ultimately be used to reduce the cost of the project. In the present case, the assessee has given advances to fellow subsidiaries. Further, assessee also could not establish that how the above advance given to the subsidiary companies from womb the interest income has been earned are inextricably linked to the setting up of the project. Further assessee has also treated it as a regular income and offered to tax in the computation of income by crediting it as other income in the profit and loss account. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in law, Ld. Commissioner of Income Tax (Appeals) has erred in sustaining disallowance in respect of employees remuneration amounting to ₹ 2,64,00,715/-. GROUND NO. 1.2: On basis of facts and in circumstances of case and in law, ld. Commissioner of Income Tax (Appeals) has erred in upholding action of AO regarding treatment of employees remuneration as capital expenditure. GROUND NO. 2.1: On facts and in circumstances of case and in law, Ld. Commissioner of Income Tax (Appeals) has erred in sustaining disallowance in respect of Legal and Professional expenses amounting to ₹ 4,69,00,663/-. GROUND NO. 2.2: On basis of facts and in circumstances of case and in law, ld. Commissioner of Income Tax (Appeals) has erred in upholding action of AO regarding treatment of Legal and Professional expenses as capital expenditure. GROUND NO. 3.1: ld. AO has erred in not treating Interest income amounting to ₹ 7,52,26,392/-, arising out of primary parking of funds arranged for setting up of plant, as capital receipt. Ground No. 3.2 ld AO has erred in not setting off above mentioned capital rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -. It was also seen that in the preceding year the assessee had declared interest on Inter Corporate Deposits at ₹ 38,35,616/- with no expenses for employees remuneration and only ₹ 5,51,500/- as expense for legal and professional fees. Vide questionnaire dated 23/12/2013, the assessee was asked that It is seen from your profit and loss account filed that the only income earned during the year is of ₹ 7,52,26,392/- as interest income. Further from this, you have debited an expense of ₹ 2,64,00,715/- as salary and wages and ₹ 4,69,00,663/- as legal and professional fees. It is to be show caused that why these expenses, if found to be allowed, is not to be capitalized as they pertained to expenditure during construction period. In response to this, the assessee filed details vide letter dated 05/02/2014 on justification of allowability of salary and professional fees. The assessee has stated that in addition to setting up of the power project, the assessee to increase its operational area had also evaluated the viability of various other areas within its business objects and incurred salary cost and other administrative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the normal course of the assessee s business and is quite routine in nature. It is, thus, claimed as revenue expense, b. Indiabulis Real Estate Limited: The assessee explored the opportunity with MSEDCL who wanted to appoint distribution franchisee for Nagpur Urban Distribution Divisions of Gandhibag. Civil Lines and Mahal. IBREL provided consultancy in preparation of bid to act as distribution franchisee of the state electricity board. Such efforts were done in the normal course of the assessee s business and is quite routine in nature. It is, thus, claimed as revenue expense. The ld AO asked on 17/02/2014 and 19/02/2014 assessee to file any agreement that were made for legal and professional expenses with the concerned parties. In response to this, the assessee has stated that as the parties who have given consultancy were known to the assessee, the execution of an agreement was not considered necessary. It is to be brought on record here that on the query of the nature of work performed by these entities the assessee has stated vide point no.3 in its letter 19/02/2014 that - with respect of your query regarding agreement with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led by WBPDCL is a sham document and that the assessee has now tried to willfully submit inaccurate particulars. 3. Even on repeated opportunities being given the assessee did not produce any documentary evidence on the nature of work performed by M/s Indiabulls Real Estate Limited. It has only filed Form No.16A which though stands as a proof for deposit of tax and for the amount paid but by no stretch of imagination it can be considered as a test whether the expense is of capital or revenue nature. 4. It has been held in the case of Arvind Mills Ltd. Vs CIT (SC) 197 ITR 422 that Capital Expenditure would not become revenue expenditure simply by reason that it was incurred in connection with business activities, which ultimately resulted in efficiently carrying on day-to-day business. Moreover, the expression enduring benefit and rights of a permanent nature are only descriptive and not definite and are relative in meaning not synonymous with permanent or everlasting as held in Devidas Vithaldas Co. Vs. CIT (SC) 84 ITR 754. 5. It has been held in the following cases, which further clarifies that these expenses made by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,500 WBPDCL invited bids for selection of Mine Development and operator for developments, Mining Supply of coal from east of Damagoria in Ranjiganj coal block allotted to WBPDCL Elera Power provided consultancy and coordinate in preparation of the said bid though it did not fructify. Such efforts were done in the normal course of the assessee s business and is quite routine in nature. It is, thus, claimed as revenue expense. 2 Indiabulls Real Estate Limited 11,030,0 00 The assessee explored the opportunity with MSEDCL who wanted to appoint distribution franchisee for Nagpur Urban Distribution Divisions of Gandhlbag, Civil Lines and Mahal. IBREL provided consultancy in preparation of bid to act as distribution franchisee of the state electricity board. Such efforts were done in the normal course of the assessee s business and is quite routine in nature. It is, .thus, claimed as revenue expense. 3 S. Khandelwal Co. 1,103 Other Misc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncy in relation to Bhaiyathan Power Project. The assessee has itself confirmed that this payment was with respect to Bhaiyathan Power Project In this regard it is submitted that the name of the company itself is ....Bhaiyathan Power and the nature of work as mentioned in the invoice has to be read as consultancy in relation to Bhaiyathan Power's project which happened to be a project as mentioned in our submission dated 14.02.2014 (i.e. consultancy provided and co-ordination of a bid invited by a Government corporation). No where the invoice confirms that the consultancy has been provided with respect to On perusal of the above details, it is evident that such expenses were not booked in the immediately preceding year. It was informed that the payment of salary which was booked during the year pertains to only last few months of the financial year, and does not cover the full year. The Ld. AO, while passing the impugned order, has taken notice of this claim of the appellant regarding salary of the high level officials of the appellant company, who observed that the appellant was in the business of setting up a Power Plant at Bhaiyathan, Chhattisgarh, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TS INCORPORATION ARE: 1 To promote, undertake, carry on either on its own or through any other entity or to enter into agreements, contracts, partnership, alliance or any other arrangement for technical, financial and operational assistance or sharing of profits / losses with any Person / Body / Bodies Corporate incorporated in India or abroad. in connection with the generation, distribution, trading, supply, accumulation and employment of electricity, galvanism, magnetism or otherwise and business of establishing, commissioning, setting up, operating and maintaining electric power generating stations based on conventional/non-conventional resources, tie-lines, substations and transmission lines on Build, Own and Operate (BOO) and/or Build, Own and Transfer (BOT), and/or Build, Own, Lease and Transfer (BOLT) and/or Build, Own, Operate and Transfer (BOOT) basis and/or otherwise, and to carry on the business of acquiring, operating, managing and maintaining existing power generation stations, tie- lines, sub-stations and transmission lines, either owned by the private sector or public sector or the Government or Governments or other public authorities and for any or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est Bengal Power Development Corporation Limited (WBPDCL) M/s Indiabulls CSEB Bhaiyathan Power Limited is one of the parties willing to participate in the bid invited by WBPDCL In this regard. M/s Indiabulls CSEB Bhaiyathan Power Limited sought assistance from Elena Power and Infrastructure Limited to develop bidding strategy for Indiabulls CSEB Bhaiyathan Power Limited to participate in the bid. There is no mention in the entire report about the terms and scope of the said consultancy study, and the time-frame within which such study was to be completed and the methodology used. The report does not mention about the methodology used or the specific technical persons that may have been engaged by that company in preparing this consultancy report. 6.4 Further, on perusal of the other report which was prepared by M/s India bulls Real Estate Ltd. regarding field study report of Nagpur franchisee areas, claimed to be for MSEDC again, the appellant company name comes only in the initially introduction in one sentence without mentioning the terms and scope of the study, the time-frame for the study, the methodology used for the study etc., as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame of the company itself is Indiabulls Bhaiyathan Power Ltd. and therefore the narration on die invoice should be read as consultancy in relation to Bhaiyathan Power's Project , and none of the invoices show that the consultancy has been provided with respect to the ongoing power project of the company. In view of this, it was submitted that the observation of the AO was incorrect, and which cannot be the basis for making decision on this ground. 6.5.3 On careful consideration of the above facts, it is evident that the claim by the appellant that in addition to setting up the power plant, it had also started new business activities or started exploring for new business opportunities is not supported by the facts of the case. In the own admission of the appellant, the bidding for the coal mine allocation in West Bengal was in the nature of a backward integration in order to sustain regular coal supply to its power plant, which was yet to be set-up. Similarly, the interest in the Maharashtra State electricity distribution company's bid was to ensure forward integration of power to be produced by its power plant for distribution purposes. Undoubtedly, the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rward and backward linkages to the power plant, which too was under construction, it is evident that the expenses in the nature of salary paid to the employees of the appellant company were ultimately for the purpose of setting up of the power plant only and for making it viable and profitable. In view of the above, it is held that salary cost reimbursed by the appellant requires to be capitalised to the cost of the power project. 7. Assessee, aggrieved by order of learned CIT A, has preferred this appeal before us. Contesting this appeal, learned authorised representative summarized his arguments in his written submission as under:- Ground No. 3.1. 3.2: Interest Income earned during the period of construction is a Capital Receipt and required to be set off against pre-operative expenses: 1) The business of the Assessee was in construction stage and had not started commercial production. The loan was received by the Assessee for the purpose of setting up of its power plant. Since the loan could not be utilized for the time being due to legal entanglements, the funds were temporarily advanced to the fellow subsidiaries and interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds invested by the assessee company and the interest earned were inextricably linked with the setting up of the power plant. It may further be added that the Tribunal has not found that the deposits made as margin monies were not limited to the activity of construction connected with the expansion of the business by way of setting up of a totally new power generation plant [Para 10] he Tribunal and the lower authorities committed error in holding that the interest earned on fixed deposit of amounts borrowed, which is the subject-matter of the present appeal, would have to be treated as revenue receipt. [Para 11 ] ii. Indian Oil Panipat Power Consortium Ltd. v. Income-tax Officer [2009] 315 ITR 255 fDelhil: Facts of the judgment: The assessee-company was incorporated in pursuance of a joint venture entered into between an Indian company and a Japanese company to set up a power project. In order to effectuate the purpose for which joint venture was conceived, both the joint venture partners contributed share capital which included a sum by way of additional share capital. The assessee stated that said funds were required for purchase of land and de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, the impugned judgment was to be set aside. [Para 7] iii. Additional Commissioner of Income-tax v. India Drugs Pharmaceuticals Ltd. [1983] 141 ITR 1 34 (Delhi): Facts of the judgment: The assessee-company, being an undertaking promoted to start the manufacture of drugs and Pharmaceuticals, received certain payments during the setting up of its factory. These were (i) on account of sale of tender forms regarding construction and erection of plant and machinery to contractors, (ii] on account of sale of grass and trees, (iii] on account of sale of stone and boulders, and (iv ) by way of recovery from contractors for providing them with electricity and water at the sites. The ITO was of the opinion that these sums represented income taxable in the hands of the assessee under the head Income from other sources . On appeal, the AAC deleted the above additions on the ground that they did not constitute income. On second appeal, the Tribunal upheld the order of the AAC. The Tribunal held that these receipts were clearly referable to the source of business, profession or vocation and since they were not fully set up at the time the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which were inextricably linked with the process of setting up its plant and machinery, such receipts would go to reduce the cost of its assets. These were receipts of a capital nature and could not be taxed as income. Facts of the Assessee: In the case of the Assessee, the funds were irrefutably borrowed for the capital work and hence were inextricably linked to the project. The said funds had to be temporarily parked gainfully due to a hiatus in the construction activity. v. Commissioner of Income-tax v. Karnataka Power Corpn. [2001] 247 1TR 268 (SC): The Hon ble Supreme Court followed the decision in case of CIT v. Bokaro Steel Ltd. [1999] 102 Taxman 99 [SC] and held that the interest receipts and hire charges from contractors are in the nature of capital receipts which would go to reduce capital cost. 2. It is not in dispute that the first two questions must be answered in the affirmative and in favour of the assessee having regard to the judgments of this Court in CIT v. Bokaro Steel Ltd. [1999] 102 Taxman 94 and CIT v. Alcock Ashdown Co. Ltd. [1997] 224 ITR 353/ 90 Taxman 521, respectively. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts of centrally sponsored scheme of infrastructural development as specified in the Government order. Hence, interest on all these fixed deposits are considered to be capitalised and not revenue receipt to treat it as an income. The Tribunal considering these aspects has held that the interest earned on these grants is not an income, which one does not find fault with. [Para 17] There is no substantial question of law arising for our consideration. [Para 18] viii. ASSISTANT COMMISSIONER OF INCOME-TAX V. BR11 BHIISHAN LAL SONS [2001] 119 TAXMAN 173 fDELHIl fMAG.l / /I20001 69 TTI 379 fDelhil / IT APPEAL NOS. 8553 fDELHIl OF 1992 AND 3632 fDELHIl OF 1993 Facts of the judgment: Object business resolution was money lending doesn t matter For the assessment years 1989-90 and 1990-91, the assessee earned interest income by way of investing certain surplus amounts in FDRs, securities, etc., and showed it as income from business in order to avail deduction in respect thereof under section 32AB. The Assessing Officer treated the income so earned as income from other sources and negatived the claim of deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Assessing Officer completed assessment treating interest as revenue income liable to tax. In appellate proceedings, the assessee raised an objection relating to chargeability of interest income which was claimed to be capital receipt. The Commissioner (Appeals] set aside assessee's explanation and confirmed addition made by the Assessing Officer. In course of appellate proceedings before the Tribunal, the revenue raised a preliminary objection that assessee could not raise dispute relating to chargeability of interest income for the first time before the Tribunal. The Hon'ble Tribunal held as under: Coming to the merits of case share capital as well as loans were raised for the specific purpose of setting up of the power generation plants. The business of the assessee has not been commenced and, therefore, the interest received in the period prior to commencement of business was in the nature of capital receipt and hence was required to be set off against the pre-operative expenses. The assessee has already set off the interest income against the preoperative expenses which is titled as 'project development expenditure'. In view o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs to obtain feedback on various operational parameters. (iv) Obtained the peak loading of the substations, conducted survey at the existing location of the substations to find out additional space availability for expansion of substation, (v) Compared data collected from the field to data in the RFP document. (vi) Visited the Division offices and took feedback from each of the engineers, collected information regarding the distribution failure, the monthly salary burden for each of the franchisee area and for testing division and the distribution losses, witnessed theft, maximum utilized capacity of the transformers, audit report of the distribution transformers and the sales and demand. S. No. Name of employee Designation Salary reimbursed in Rs. 1 Ashok kacker President Advisor 6,333,333 2 Gurbans Singh Diretor (human resourse] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Damagoria coal blocks of Raniganj Coalfield had been allotted to West Bengal Power Development Corporation Limited ( WBPDCL ). The Assessee was willing to participate in the bids invited by WBPDCL for selection of mine developer and operator for development, mining and supply of coal from east of Damagoria in Raniganj coal block allotted to WBPDCL. The Assessee sought assistance from EPIL to develop bidding strategy for the Assessee to participate in the bid. EPIL had been entrusted to prepare the Mining plan for the coal blocks. It provided consultancy and coordinated in preparation of the said bid though it did not fructify. It provided data on history of the coalfield, communication and accessibility, climate, physiography and drainage, production schedule, area of the block, exploration status, density of boreholes, coal analysis geology and structure, power supply, etc. The observations of EPIL are listed in the feasibility report. (B) Employee Cost ₹ 2.64.00.715 The employee remuneration expenses pertain to reimbursement in respect of salary for 14 high level officials of its holding company, India bulls Power Project Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concluded that the expenditure pertains to the power project? 8) Assessee to decide whether any expenditure should be incurred in the course of his or its business: It is open to come to a conclusion either that the alleged payment was not real or that it was not incurred by the Assessee in the character of a businessman or that it is not laid out wholly and exclusively for the purpose of the business of the assessee and to disallow it. But it is the function of the Assessee to determine the work for which the remuneration should be paid to an employee of the Assessee. If the Ld. AO and Ld. CIT(A) are satisfied that the expenditure was laid out or expended wholly and exclusively for the purpose of the business of the Assessee, there was no reason why the amount expended should not have been allowed. Hence, it should be allowed as revenue expenditure. i) S.A. Builders Ltd. v. CIT fAl [2007] 288 ITR 1 fSCl We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377 2 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... increase in the profits of the employer is, in our judgment, erroneous. iv) CIT v. Oracle India fP.l Ltd. f2011) 243 CTR 103 (Delhi!: It was held that revenue cannot sit in arm's chair of Assessee and decide as to how affairs of business were to be run and wasteful or excessive expenditure was to be curtailed v) CIT v. Dalmia Cement IP.l Ltd f20021 121 TAXMAN 706 (DELHI!: Once it is established that there is a nexus between expenditure and purpose of business, revenue cannot justifiably claim to put itself in armchair of a businessman or in position of Board of Directors and assume said role to decide how much is reasonable expenditure having regard to circumstances of case vi) DCIT v. Manish Buildwell fP.l Ltd. [2012] 23 taxmann.com 362 IDelhi - Trib.I the AO cannot step into the shoes of businessman and review the business expediency of the assessee's decision vii) DCIT v. Sophisticated Marbles and Granite Industries [2010] 3 ITRfTl 220 (Delhi): The business interest is well understood by the assessee and the Assessing Officer cannot step into the shoes of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as needed for setting up of the said business was to secure a business place or an office, to provide it with furniture, etc., to have a telephone, to maintain the office and make ready everything to start business. As a matter of fact the Assessee had already commenced its business when it had engaged consultants to help it in the preparation of certain bids. 4) Difference between 'ready to commence' and 'commenced' is only technical or academic, as once business is established, all expenses in relation thereto are deductible irrespective of actual commencement of business. 5) The assessment order reveals that Ld. AO had disallowed the expenses claimed by the Assessee for the reason that it has not shown resultant income in the accounting year. It appears that Ld. AO has swayed away with an impression that whenever any expenses are incurred by the Assessee then resultant income should have arisen. However it is well settled that for the purpose of allowance of any expenses under section 37(1) of the Act as expenses it is not necessary that assessee should have earned income out of such activity. Whatever has required to be seen is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the Gujarat High Court. 9. In this view of the matter, we are of the considered opinion that the Income Tax Appellate Tribunal was justified in allowing the expenditure of ₹ 3,37,84,348/- towards the interest paid on the loans taken and expenditure on other items connected herewith for establishment of the unit, while affirming the order of the Commissioner of Income Tax [Appeals). 10. Learned counsel for the Revenue-appellant submitted that the respondent cannot claim depreciation on the amount of interest which has been allowed as revenue expenditure and therefore, the depreciation referable to such interest expenditure be reversed. Learned counsel for the respondent however submitted that there is nothing on record that depreciation on this amount has been taken by the respondent. 11. Be that as it may, if as a fact the respondent has taken any depreciation on the amount of interest and other items which has been allowed as revenue expenditure that much depreciation should be reversed by the assessing authority, 12. Subject to the aforesaid observations, the appeals fail and the same are dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion further contemplates that in case of a business newly set up in the said financial year, the previous year shall be the period beginning with the date of set up of the business. The expression 'set up' has not been defined anywhere in the Act but it is understood in the common parlance and has been explained in a large number of decisions. According to the meaning expounded in the authoritative pronouncements, if an assessee is in a position to deliver the goods, it means that the business is set up. Actual delivery is immaterial. For example, if a person wants to carry on the business of transportation, the moment he purchased the vehicle for transporting the goods and arranged the space then it would indicate that business has been set up, it is immaterial whether he was able to actually transported the goods or not. [Para 7] Adverting to the facts of present case, the business of the assessee is development of real estates. It has participated in a tender floated bv the Official Liquidator of the High Court. The participation in the tender was starting of one activity which enabled the assessee to acquire the land for development. The actual development of the land ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee was in the business of operation of rings for extraction of oil; undertaking offshore contracts for laying of pipelines; setting up of refinery etc. and marketing of petroleum products. As part and parcel of these activities, it was bidding for various contracts, and incurred expenditure on travelling, bidding for tenders, exploration activities at blocks, etc. It claimed that since these expenses were revenue in nature and directly related with ongoing business, entire expenditure incurred during financial year should be allowed, whereas the Assessing Officer disallowed the same. On appeal, the Commissioner (Appeals) deleted the addition made by the Assessing Officer following the order of the Tribunal in assessee's own case, wherein identical issue had been decided in favour of the assessee by the Tribunal. The Hon ble Tribunal held as under: Following the decision the Tribunal in ITA Nos. 3643 to 3645/M/2002 The impugned expenditure incurred by the assessee during the previous year for setting up refinery is to be allowed. Therefore, the order of the Commissioner (Appeals) is to be confirmed. [Para 4] vi) NEIL AUT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred or allowable. Rather, the reality of any situation is that once the business is set up the assessee has to necessarily incur expenses after which only income could be generated. Since the Legislature in their wisdom did not intend to use the term begins to manufacture, in section 3(l)(d) or section 35D. the object of the enactment clearly goes to indicate that what is important is the setting up of the business, which is the starting point for determination o f revenue expenses and income. It is but natural that unless and until the business is set up it cannot be said to be ready to commence business. Therefore, the actual commencement of business follows the setting up of business which is starting point. Thus, the expenditure incurred from the date of setting up of the business till the actual commencement of production is allowable as revenue expenditure. viii) COROMANDEL EXPORTS (P) LTD. v. INCOME-TAX OFFICER H9841 20 TTI 503 (Hyderabad) The assessee-company was set up with the object of exporting tobacco. It took on rent a building, incurred some expenses like filing fees, audit fee, postage and telegr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e annual accounts stating that the auditors as well as the board of directors have identified each expenditure and the expenditure related to the project has already been capitalized as expenditure during the construction. An expenditure, which is not related at all to those projects, has been debited to the profit and loss account. 9. The learned departmental representative vehemently supported the order of the learned lower authorities and submitted that the expenditure of salary and legal and professional expenses incurred by the assessee are also related to the project and therefore it has been correctly held to be the expenditure incurred during the construction period by assessee. He further submitted that the claim of the assessee that interest income should be considered as reducing the cost of the project and should be removed from the taxable income for the year is devoid of any merit as assessee himself has credited the above sum to the profit and loss account as income not related to the project. Therefore, now the assessee cannot say that the same needs to be excluded. 10. Learned authorised representative countering the argument of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit was INR 3 8212475/ . Similarly with respect to the legal and professional charges until the commencement of the accounting year the assessee has debited ₹ 6447965/ and during the year further debited a sum of ₹ 22477857/ making the total expenditure during the construction. Pending capitalization on account of legal and professional charges of INR 5 8925822/ . Over and above this the assessee has debited INR 2 6400715/ as salary and wages expenditure to the profit and loss account and legal and professional fees of INR 4 6900663/ under the head administrative expenses. In note number vi in schedule and the assessee has submitted that any expenditure directly/indirectly related and attributable to the construction of power projects and incidental to setting up power project facilities, incurred prior to the date of commencement of commercial operation of the power project, or accumulated under expenditure during construction. Pending capitalization, to be capitalized on completion of construction of the respective power projects and to commencement of commercial operations. In notes to accounts in a note number ii) the assessee has stated that assessee is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase the operational area of the assessee company has also evaluated the viability of various other areas within its business objects and incurred salary costs and other administrative overhead for the same. Therefore, the assessee has incurred the said cost in the profit and loss account as the employees were involved in exploring new opportunities for the assessee company and other expenditure were involved at managing the company at corporate level. It was further stated that some of the employees had been making efforts in helping the company to explore potential and prospective borrowers for the funds available and thus helping earning the income also. Therefore, on the above bases the assessee debited the cost to the profit and loss, as it was neither directly nor indirectly related to the power project. Similarly with respect to the legal and professional charges it was submitted that INR 3 5847500/ has been incurred for bids for selection of mine developer and operator for development mining and supply of coal in coal block allotted to the assessee this sum is provided as consultancy and coordination charges in preparation of the above paid. Ultimately, it is altogether a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. To support the payment of legal and professional fees the assessee submitted the field study report dated March 2011 prepared by India Bulls real estate Ltd that is placed at page number 164 to 245 of the paper book. Further feasibility study report prepared by Eleanor power and infrastructure Ltd is also placed at page number 246 359 of the paper book. On perusal of the feasibility study report and field study report, it is apparent that both these expenditure are not related to the power project. In view of this, it is apparent that the narrations mentioned in the invoices are general in nature and does give an indication that they relate to the power project but when the respective reports are seen it is apparent that they do not relate directly or indirectly to the power project. Thus, narration in invoice cannot be the sole guide to determine the capitalization of expenditure involved, if the other relevant documents show otherwise. The only argument of the learned assessing officer is that this expenditure should have been capitalized to the expenditure during construction account and cannot be allowed as a deduction to the assessee. However, it is not the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th respect to fixed assets accounting. It has been classified by the auditors and the company itself that the amount of legal and professional expenditure as well as the salary expenditure, which has been debited to the profit and loss account, is not related to the project (fixed assets) therefore it is not required to be capitalized. The above expenditure is required to be tested under the normal income tax provisions u/s 37 (1) of the act. Even otherwise in para number 6.5.3 of the order of the learned CIT A has held that the assessee has capitalized all expenses pertaining to the power project and the above expenditure incurred by the assessee with respect to the salary and legal and professional fees is backward or forward integration but at bit stage. Merely because assessee has capitalized all the expenditure, relating to the power project there is no reason to capitalize all the expenditure, which are not even related to the power project, should also be capitalized. Further it is not the case of the revenue that assessee has not incurred these expenditure. Further, no evidence has been brought on record by the revenue to show that this expenditure is related to the power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtricably linked to the setting up of the project. Further assesse has also treated it as a regular income and offered to tax in the computation of income by crediting it as other income in the profit and loss account. In view of this ground number 3 of the appeal of the assessee is dismissed. 13. Ground number 4 of the appeal is general in nature, no separate arguments were advanced by the parties and therefore it is dismissed. 14. Accordingly, ITA number 3498/del/2015 filed by the assessee for assessment year 2011 12 is partly allowed. 15. Now we come to ITA number 1461/del/2016 filed by the learned deputy Commissioner of income tax, circle 23 (2), New Delhi for assessment year 2012 13 against the order of the Commissioner of income tax (appeals) 4, New Delhi wherein the action of the learned assessing officer to treat the expenses of abundant project debited in the profit and loss account of the assessee as a capital expenditure was rejected. The learned assessing officer has raised the following grounds of appeal:- a. the learned CIT (A) erred on facts and in law in relying the expenses in assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses on power project which had to be abandoned and the expenses should be debited to the profit and loss account. Therefore, he directed the learned assessing officer to allow the expenses claimed by the appellant. 19. Learned AO aggrieved with the order of the learned CIT A has preferred this appeal before us. The learned departmental representative vehemently supported the order of the learned assessing officer and submitted that when the assessee is in the process of setting up of the power project the expenses incurred by the assessee should have been capitalized as they are related to the power project. 20. The learned authorised representative vehemently supported the order of the learned CIT A and submitted that when the project itself has been abandoned by the assessee there is no reason to capitalize Those Expenditure to the cost of the power project. He submitted that all these expenses have been incurred by the assessee during the course of the business and are as such allowable u/s 37 (1) of the income tax act. He therefore submitted that there is no reason to as it is apparent that assessee is not able to commence the power proj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the point, some of which are identical to the facts of the present case in the sense that the assessee ran a particular line of business and wanted to start a different line of business, for which, expenditure was incurred and subsequently, the business was abandoned and the question was as to how the expenditure had to be treated. The Delhi High Court referred to the decisions of: (i) the Allahabad High Court in the case of Prem Spg. Wvg. Mills Co. Ltd. v. CIT [1975] 98 ITR 20 (All.), (ii) the Hon'ble Supreme Court in the case of Produce Exchange Corpn. Ltd. (supra), (iii) the Gujarat High Court in the case of CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 (Guj.), (iv) again the Allahabad High Court in the case of CIT v. Expanded Metal Mfgrs. [1991] 55 Taxman 429/189 ITR 317 (All.), (v) the Delhi High Court in the case of CIT v. Modi Industries Ltd. (No. 3) [1993] 68 Taxman 114/200 ITR 341 (Delhi) and (vi) again the Hon'ble Supreme Court in the case of Veecumsees v. CIT [1996] 86 Taxman 243/220 ITR 185 (SC). 27. After referring to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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