June 2019

Section 37 Business expenditure Capital or revenue Test to be applied Pre-operative expenditure of new line of business abandoned subsequently Deductible revenue expenditure

K. B. BHUJLE
Advocate

15

Chemplast Sanmar Ltd. vs. ACIT; 412 ITR 323 (Mad)

Date of order: 7th August, 2018

A.Y.: 2000-01

 

Section 37 Business expenditure Capital or revenue Test to be applied Pre-operative expenditure of new line of business abandoned subsequently Deductible revenue expenditure

 

The assessee was engaged in the business of manufacture of polyvinyl chloride, caustic soda and shipping. For the A.Y. 2000-01, the A.O. disallowed the expenditure incurred by the assessee on account of a textile project which it had later abandoned. The A.O. held that the textile project, which the assessee intended to start, being a totally new project distinguished from the manufacture of polyvinyl chloride and caustic soda and the business of shipping, in which the assessee was currently engaged, the entire expenditure had to be treated as a capital expenditure.

 

The Commissioner (Appeals) and the Tribunal upheld the decision of the A.O.

 

On appeal by the assessee, the Madras High Court reversed the decision of the Tribunal and held as under:

 

i)   The proper test to be applied was not the nature of the new line of business which was commenced by the assessee, but unity of control, management and common fund. This issue was never disputed by the A.O. or the appellate authorities.

 

ii)   The authorities had concurrently held that it was the assessee who had commenced the business and the assessee would mean the assessee-company as a whole and not a different entity. Therefore, when there was commonality of control, management and fund, those would be the decisive factors to take into consideration and not the new line of business, namely, the textile business.

 

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