Expenditure incurred on a new project of starting a hotel chain for expansion of an existing business of real estate development and financing was to be considered as expenditure for the purpose of carrying on existing business and thus allowable as revenue expenditure u/s 37(1)

FACTS
Assessee-company was engaged in the business of real estate development and financing. It expanded its business into starting a hotel chain. It incurred certain expenses like professional fees in connection with the said project and claimed the same u/s 37 of the Act. However, the Assessing Officer disallowed the same. The CIT (A) deleted the disallowance on the grounds that the business of the assessee was in existence and the expenses were incurred in connection with the expansion of business.

Aggrieved, the revenue filed appeal to the ITAT.

HELD
The ITAT dismissed the revenue’s appeal on the following grounds:

The ITAT observed that the CIT (A) had made findings that the assessee’s business was an existing business, whose expansion was under consideration and expenses for the same were incurred. There was no change in management, and there was interlacing of funds, and the genuineness of the expenses was not doubted. The expenses incurred were in the same line of the existing business of the assessee.

The ITAT held that the decision of the CIT (A) was based on the ratio laid down by the Delhi High Court in CIT vs. SRF Ltd. [2015] 59 taxmann.com 180/232 Taxman 727/372 ITR 425, the Mumbai ITAT in Reliance Footprint Ltd. vs. Asstt. CIT [2014] 41 taxmann.com 553/63 SOT 124 (URO) as also in decision of the co-ordinate bench in DSM Sinochem Pharmaceuticals India (P) Ltd. vs. Dy. CIT [2017] 82 taxmann.com 316 (CHD – Trib.).

In Sinochem Pharmaceuticals (supra), the ITAT relied on Calcutta High Court decision in Kesoram Industries & Cotton Mills Ltd. [1992] 196 ITR 845 (Cal.), wherein it was held that if the expenses are incurred in connection with the setting up of a new business, such expenses will be on capital account but where the setting up does not amount to starting of a new business but expansion or extension of the business already being carried on by the assessee, expenses in connection with such expansion or extension of the business must be held to be deductible as revenue expenses. In that case, the expenditure was not related to the setting up a new factory; it pertained to exploring the feasibility of expanding or extending the existing business by setting up a new factory in the same line of business. Thus, since there was an expansion or extension of the existing business of the assessee, the same was to be considered as revenue expenditure.

To conclude, since the CIT (A) relied on the cases referred to above including the decision of co-ordinate bench, the ITAT upheld the findings of the CIT (A) and dismissed the appeal of the revenue.