INTERMARKET INDIA PRIVATE LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 4(2)(1), MUMBAI

Briefly stated, the material facts emerging from the record are that the assessee is engaged in the business of manufacturing and trading of textile products, including made-ups, fabrics, home fashion products and other related products. During the relevant period, the assessee undertook a project at Bharuch, Gujarat, with the object of setting up a manufacturing facility for towels. The project was subject to obtaining the requisite approvals from the concerned Government authorities, including approval relating to procurement of water. In the course of development of the project, the assessee incurred various expenses such as architectural fees, expenses relating to drawings and commencement permissions, preparation of the base, excavation, civil work and fencing, consultancy charges for electrical systems design, plant designing charges, professional fees and miscellaneous expenses. These expenses were accumulated in the books under the head “Capital Work-in-Progress” in the earlier years.

The Bharuch project, however, could not be brought to fruition on account of non-grant of the requisite approvals, particularly the approval for the proposed source of water supply. The assessee accordingly abandoned the project and wrote off the capital work-in- progress in its profit and loss account during the previous year relevant to Assessment Year 2013-14. The assessee claimed the resultant write- off as an allowable business expenditure under sections 28/37 of the Act, contending that the expenditure was incurred in connection with the expansion of its existing business and that no new business or independent source of income was brought into existence. The Assessing Officer, however, treated the expenditure as capital in nature and disallowed the claim, principally on the ground that the character of expenditure does not change merely because the project for which it was incurred is subsequently abandoned. The Assessing Officer also proceeded on the footing that capital expenditure is specifically excluded from the ambit of section 37 of the Act.

In appeal before the ld. CIT(A), the assessee reiterated that the Bharuch project was not a new or unrelated line of business, but was undertaken in continuation and expansion of its existing business. It was submitted that the expenditure was inextricably linked with the assessee’s existing business and was intended to increase the profitability thereof; further, owing to the failure to obtain the requisite approvals, no capital asset or enduring benefit ultimately came into existence. The assessee relied upon various judicial precedents, including the decisions in Empire Jute Co. Ltd. v. CIT, Idea Cellular Ltd., Indo Rama Synthetics (I) Ltd., Gujarat Narmada Valley Fertilizers Co. Ltd., Trigent Software Ltd., Tata Robins Fraser Ltd., Binani Cement Ltd. and other decisions concerning abandoned projects. The assessee’s principal submission was that expenditure incurred in the course of expansion of an existing business, where there is unity of control and commonality of funds and no new enduring asset ultimately comes into existence, may retain the character of revenue expenditure notwithstanding its initial capitalization.

The ld. CIT(A), however, did not accept the assessee’s contention. The ld. CIT(A) proceeded on the basis that the assessee itself had treated the expenditure as capital in nature by capitalising it as capital work-in-progress over the earlier years. The ld. CIT(A) further noted that the expenditure was not confined to feasibility studies or exploratory activities, but included architectural fees, drawings, commencement permissions, excavation, fencing, site development and civil work, which, according to him, were intrinsically connected with setting up a manufacturing facility and were therefore within the capital field. The ld. CIT(A) held that the subsequent abandonment of the project did not alter the character of expenditure and that the write-off of capital work-in-progress could not be converted into revenue expenditure or business loss merely because the intended project did not materialise.

The ld. CIT(A) also rejected the assessee’s reliance upon the absence of any ultimate enduring benefit. According to the ld. CIT(A), the test of enduring benefit could not be applied in isolation or mechanically and, where expenditure was incurred with the objective of acquiring or bringing into existence a capital asset, the fact that such asset did not eventually materialise would not change the character of the expenditure. The ld. CIT(A) further accepted the Assessing Officer’s reasoning based upon the matching principle, observing that the expenditure had been incurred over several earlier years and accumulated as capital work-in-progress and that allowing the entire amount as a deduction in the year of write-off would distort the profits of the relevant year. On this reasoning, the ld. CIT(A) agreed with the Assessing Officer that the expenditure was capital expenditure, specifically excluded from the ambit of section 37(1) of the Act, and upheld the disallowance of Rs.3,05,80,830/-. The appeal of the assessee was accordingly dismissed.

During the course of hearing before us, the learned Authorised Representative (“ld. AR”) submitted that the abandoned project was merely an expansion of the assessee’s existing line of business and not an altogether new project or a new source of income. He submitted that the authorities relied upon by the Assessing Officer and the ld. CIT(A) were distinguishable because those decisions dealt with projects constituting a new and distinct line of business or the acquisition of a profit-making apparatus, whereas, in the present case, the project was intended to continue the assessee’s existing business. The ld. AR specifically referred to the principles emerging from the decisions in Triveni Engineering Works Ltd. v. CIT, E.I.D. Parry (India) Ltd. v. CIT, Hasimara Industries Ltd. v. CIT and Atcom Technologies Ltd. v. DCIT and submitted that the true test is whether the expenditure was incurred for facilitating the existing business or for bringing into existence an asset or advantage in the capital field.

The ld. AR further placed reliance upon the decision of the Hon’ble Bombay High Court in Trigent Software Ltd.,[2023] 147 taxmann.com 52, as referred to in the record, wherein the distinction between expenditure incurred for starting a new business and expenditure incurred in connection with the same business, including expansion thereof, was considered. According to the ld. AR, where expenditure is incurred in respect of the same business already carried on by the assessee, even though the expenditure relates to a new unit or an expansion, and there is unity of control and a common fund, such expenditure is to be regarded as business expenditure. He also submitted that, where no new asset of enduring benefit comes into existence, the expenditure cannot be treated as capital merely because it was initially capitalised.

The ld. AR also relied upon the decision of the Hon’ble Bombay High Court in Tata Chemicals Ltd., [2024] 167 taxmann.com 661, which, as recorded in the assessee’s submissions, followed the principle stated in Trigent Software Ltd. He submitted that the Special Leave Petition filed by the Revenue against the decision in Trigent Software Ltd. was dismissed in limine by the Hon’ble Supreme Court. Reliance was also placed on the decision of the Hon’ble Bombay High Court in Rediff.com India Ltd., [2021] 132 taxmann.com 71, for the proposition that expenditure incurred for carrying on business in a more convenient and profitable manner, without bringing any new asset into existence, is allowable as business expenditure.

The ld. AR further relied upon the decision of the Coordinate Bench in Tin Tar Retail Corp., dated 16.02.2026 in ITA Nos. 6485 to 6487/Mum/2024, wherein, it was held that expenditure incurred in the course of expansion of an existing business, where the new project does not constitute a new line of business but remains in continuation of the existing business, may be allowable as revenue expenditure even if initially capitalised, particularly where the project is abandoned and no enduring asset ultimately comes into existence. The learned Departmental Representative (“ld. DR”), on the other hand, supported the orders of the lower authorities and submitted that the expenditure was capital in nature and that the subsequent abandonment of the project could not alter its character.

We have carefully considered the rival submissions, perused the material placed on record and examined the reasoning adopted by the Assessing Officer as well as the ld. CIT(A). The controversy has to be examined by determining the true and commercial character of the expenditure in the light of the purpose for which it was incurred and the business context in which the project was undertaken. It is well settled, as emerging from the authorities relied upon by the parties, that expenditure incurred for setting up an altogether new and distinct business or for bringing into existence a profit-making apparatus would ordinarily fall within the capital field. Conversely, where the expenditure is incurred in connection with the existing business, including an expansion thereof, and is intended to facilitate or make more profitable the business already carried on, the expenditure may be revenue in character, particularly where no new asset of enduring benefit ultimately comes into existence. The mere accounting treatment adopted by the assessee cannot, by itself, be regarded as conclusive of the legal character of expenditure.

In the present case, the factual position recorded in the order under appeal shows that the assessee was already engaged in the business of manufacture and trading of textile products and that the Bharuch project was undertaken for manufacturing towels, which formed part of the existing line of business. The project was not a venture into an altogether different or unrelated business. The project could not be commenced because the requisite approval for procurement of water was not granted by the concerned authority, and the project was consequently abandoned. Significantly, the record does not establish that the expenditure resulted in the coming into existence of a completed manufacturing facility or any independent capital asset yielding an enduring advantage to the assessee. The fact that the expenditure had been accumulated as capital work-in-progress in the earlier years is relevant as an accounting fact, but it cannot be treated as determinative of the character of the expenditure for the purposes of the Act.

The nature of the expenditure also assumes importance. The expenditure comprised architectural fees, expenses relating to drawings, commencement permissions, preparation of the base, excavation, civil work and fencing, consultancy charges for electrical systems design, designing charges for the plant, professional fees and miscellaneous expenses. These items were incurred in the course of pursuing the proposed expansion of the assessee’s existing manufacturing operations. Since the project itself was abandoned before the contemplated manufacturing facility came into existence, and the material on record does not demonstrate the existence of any enduring capital asset available for use in the assessee’s business, the ultimate character and effect of the expenditure have to be considered in the context of the existing business as a whole.

We are also unable to accept the proposition, in the broad manner in which it has been applied by the lower authorities, that the fact of capitalization in the earlier years concludes the matter against the assessee. The Supreme Court and High Courts have repeatedly emphasised that the distinction between capital and revenue expenditure is to be determined on the basis of the real nature and purpose of the expenditure and not merely by the form in which the assessee records it in its books. Equally, the principle that the character of expenditure is determined when incurred cannot be divorced from the nature of the business and the object sought to be achieved. Where an expenditure is incurred in the course of an existing business for an expansion which does not constitute a new line of business and where the proposed capital asset never comes into existence, the subsequent abandonment is a relevant circumstance in determining whether the expenditure has, in fact, resulted in any enduring capital advantage.

The reliance placed by the ld. CIT(A) on the decisions dealing with expenditure incurred for a new and distinct business or for acquisition of a profit-making apparatus does not, in our considered view, advance the case of the Revenue on the facts before us. The distinction drawn by the assessee between such cases and the present case is material. The cases of Triveni Engineering Works Ltd., E.I.D. Parry (India) Ltd. and Hasimara Industries Ltd., as referred to in the record, concern circumstances where the expenditure was connected with a new product, a new business or a profit-making asset distinct from the assessee’s existing business. In contrast, the assessee before us was already carrying on the business in the same broad field and the Bharuch project represented an extension of that business. Likewise, the decision in Atcom Technologies Ltd., concerning interest expenditure accumulated in capital work-in-progress for acquisition of properties/flats, is distinguishable on facts where the expenditure was connected with acquisition of identifiable capital assets.

The decisions relied upon by the ld. AR, particularly the principles stated in Trigent Software Ltd., Tata Chemicals Ltd. and Rediff.com India Ltd., are more directly relevant to the factual issue before us. The principle emerging from those decisions, as presented before us, is that where expenditure is incurred in relation to an existing business and no new asset of enduring benefit ultimately comes into existence, the expenditure may be allowable as revenue expenditure notwithstanding the fact that it was initially capitalised or incurred in connection with a project which was subsequently abandoned. The Coordinate Bench decision relied upon by the assessee also proceeds on the same distinction between a new line of business and expansion or continuation of an existing business.

We may also deal with the Revenue’s reliance upon the matching principle. The fact that the assessee follows the mercantile system of accounting does not, in our view, by itself determine whether a particular outgoing is capital or revenue in character. The matching principle is a rule of accounting and computation and cannot override the substantive provisions governing deductibility. The Hon’ble Supreme Court in the case of Taparia Tools Ltd. (2015) 372 ITR 605 clarified that the matching concept can be applied only at the option of the assessee – i.e., where the assessee himself seeks to spread the expenditure over future years – and even then, only if the conditions of the matching concept are satisfied and the Revenue, however, cannot force such spreading or invoke the matching principle to restrict a deduction that is otherwise permissible under the statute. Once the expenditure is found to be revenue in nature and is written off upon the abandonment of the project in the relevant previous year, the question of the year in which the deduction is to be allowed has to be considered in accordance with the statutory provisions and the factual circumstances. In the present case, the expenditure was written off in the year in which the project was abandoned, and the lower authorities have not brought on record any material to establish that the assessee obtained any enduring capital benefit from the expenditure.

On an overall consideration of the facts and the legal position, we find that the Bharuch project was undertaken as an expansion of the assessee’s existing line of business, that there was no demonstrated change in the nature of the assessee’s business, that the project was abandoned because the requisite approval relating to water supply was not obtained, and that no completed capital asset or enduring benefit ultimately came into existence. The expenditure was therefore incurred in the course of and for the purposes of the assessee’s existing business. The mere fact that it was initially shown as capital work-in- progress cannot, in the facts of the present case, convert the expenditure into capital expenditure when the intended project itself did not materialise and no capital asset came into existence.

We accordingly hold that the expenditure incurred by the assessee on the abandoned Bharuch project is allowable as business expenditure in the year under consideration. The disallowance sustained by the ld. CIT(A) is therefore not sustainable. We, accordingly, set aside the impugned order of the ld. CIT(A) on this issue and direct the Assessing Officer to allow the claim of the assessee. The corresponding ground of appeal is allowed.

In the result, the appeal of the assessee is allowed.