S. 37(1) — Capital or revenue expenditure — Expenditure incurred on launching of a new model of car — Held as revenue expenditure.

ITAT ‘C’ Bench, Mumbai

Before S. V. Mehrotra (AM) and

Asha Vijayaraghvan (JM)

ITA No. 2091/Mum./2008

A.Y. : 2004-05. Decided on : 30-6-2009

Counsel for assessee/revenue : Jayesh Dadia/

Yeshwant V. Chavan

S. 37(1) — Capital or revenue expenditure — Expenditure
incurred on launching of a new model of car — Held as revenue expenditure.

Per S. V. Mehrotra :

Facts :

The assessee was carrying on the business of manufacture
and sale of automobiles and machine tools. During the year under appeal, it
had incurred expenditure of Rs.2.93 crore on van project. In its return of
income the same was claimed as revenue expenditure though in its books of
account, the same was capitalised and shown as ‘Capital work in progress’. The
AO rejected the claim of the assessee for reasons amongst others, as under :

•  The expense incurred was for development of a new car and hence cannot be
  termed as revenue expenditure;

•  As per the Annual Report of the assessee — the project was under
  implementation and ready to launch. Therefore, the expense incurred up to the end of the previous year
  had rightly been capitalised by the assessee in its books of accounts.

The CIT(A) on appeal confirmed the action of the AO,
observing that the project was new business and not the expansion of an
existing business.

Before the Tribunal, the Revenue justified the orders of
the lower authorities and further contended that :

• The assessee had enhanced the capacity by installing new assembly line; and

• The expenditure was for manufacturing of altogether a different car.

Held :

According to the Tribunal the moot point for consideration
was whether the expenditure incurred in launching a new model could be treated
as expansion of same business or a new business. It referred to the CIT(A)’s
observation that if the assessee had incurred expenditure for expansion of the
production capacity of its Premier Padmini car or any of the cars which it was
already manufacturing, it would amount to a case of expansion. According to
the CIT(A), the product sought to be manufactured was a totally new product,
even if it was a car. The Tribunal did not agree to it. According to it, the
test to be applied for deciding whether a particular project was an expansion
of the existing line of business or a new business was to determine whether
there was unity of control and management and interlacing of funds or not. It
noted that those two aspects in the case of the assessee had not been disputed
by the Revenue. Therefore, it held that the expenditure incurred on the van
project was revenue in nature being for expansion of the business.
Accordingly, the appeal filed by the assessee on this ground was allowed.