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

15

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

Date of order: 7^th 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.

iii)   Before the Commissioner (Appeals) a specific
ground had been raised stating that the A.O. ought to have appreciated that the
decisive factors for allowance were unity of control, management,
interconnection, interlacing, inter-dependence, common fund, etc., and if the
above factors were fulfilled, then the expenditure should be allowed even if
the project was a new one. The Commissioner (Appeals) did not give any finding
on such a ground raised by the assessee. Therefore, it was incorrect on the
part of the department to contend that such a question was never raised before
the appellate authorities.”