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
Chemplast Sanmar Ltd.
vs. ACIT; 412 ITR 323 (Mad)
Date of order: 7th August,
37 – Business expenditure – Capital or revenue – Test to be applied –
Pre-operative expenditure of new line of business abandoned subsequently –
Deductible revenue expenditure
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.
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.