ALPHA TOYO LIMITED,FARIDABAD vs. ADDL. CIT, FARIDABAD

PER SUCHITRA KAMBLE, JM

“1. On the facts and circumstances of the case and in law, the Ld.CIT(A), erred in passing the order u/s 250 by misconceiving the facts, making unfounded assumptions and based on that arriving at the conclusion that the expenditure of Rs.47,74,477/- incurred by the appellant is not a business loss to be allowed in computing the income of the appellant. 1.2. Without prejudice to the above, on the facts and circumstances of the case and in law, the Ld.CIT(A), erred in passing the order u/s 250 by misconceiving the facts, making unfounded assumptions on the basis of nomenclature given to the entries in the books of accounts instead of ascertaining the real nature of the transaction which is contrary to law and based on that arriving at the conclusion that the Capital expenditure of rs.47,74,477/- incurred by the appellant is not to be treated as a part of Block of assets and depreciation allowance should not be afforded to the appellant.

The above grounds of appeal are mutually exclusive and without prejudice to each other.

“1. On the facts and circumstances of the case and in law, the Ld.CIT(A), erred in passing the order u/s 250 by misconceiving the facts, making unfounded assumptions and based on that arriving at the conclusion that the expenditure of Rs.99,25,150/- incurred by the appellant is not a business loss to be allowed in computing the income of the appellant.

1.2 Without prejudice to the above, on the facts and circumstances of the case and in law, the Ld.CIT(A) erred in passing the order u/s 250 by misconceiving the facts, making unfounded assumptions on the basis of nomenclature given to the entries in the books of accounts instead of ascertaining the real nature of the transaction which is contrary to law and based on that arriving at the conclusion that the Capital expenditure Rs.99,25,150/- incurred by the appellant is not to be treated as a part of Block of assets and depreciation allowance should not be afforded to the appellant. The above grounds of appeal are mutually exclusive and without prejudice to each other.

3. The assessee company is a Public Limited Company manufacturing auto components like Handle Bar Switches for Escort/Yamaha since 1978. In 1989, the company acquired the right to use Design, drawings and other Technical Know-how for manufacturing of Locks and Car Combination switches from Asahi Alpha Limited. Asahi Alpha Limited had in turn obtained the right to use in 1988 from Asahi Denso Limited. In the respective years the cost of Technical know-how, Interest on IFCI Loan and small machine tools were not claimed as revenue as the commercial production had not started. The entire development cost was shown under the head “Deferred Revenue Expenditure” in the Balance Sheet “Asset Side”. As per the assessee, all these expenses are allowable in the normal course of revenue expenditure.

4. For the sake of convenience we hereby taking up the facts of A.Y. 2002- 03. During the previous year relevant to A.Y. 2002-03, M/s Yamaha Motors for whom this development was being done switched over from earlier technology of 2 stroke engine to 4 stroke engine and from 6 volt battery to 12 Volt battery. Thus the usage and demand of the product being developed by the assessee came to an end and the entire Lock project was aborted. The return of income declaring loss of Rs.40,28,879/-was filed by the assessee on 30/10/2002 for A.Y. 2002-03, which was processed u/s 143(1) of the Act on 26/2/2004. Thereafter, the A.O observed that in the P & L account, the assessee had claimed expenditure of Rs. 47,74,477/- under the head ‘Lock Project written off’. Since the expenditure being capital in nature, the A.O recorded the reasons that the income to that extent had escaped assessment and issued notice u/s 148 of the Act on 19/3/2007. In response to the said notice, the assessee filed return declaring same loss of Rs.40,28,879/-. In response to notice u/s 143(2), the Ld. Counsel of the assessee vide letter dated 14/8/2007 requested for supply of the reasons recorded for reopening of assessment. The copy of reasons recorded was supplied on the same day. In response to further notices u/s 143(2) and 142(1) dated 11/9/2007, the assessee objected to reopening of assessment. The A.O therefore, disposed off the objections by passing a speaking order on 11/10/2007. The A.O provided the opportunity to the assessee as to why the claim of Rs.47,74,477/- may not be disallowed. The assessee contended that the expenditure should be allowed as incurred during the year. The A.O, however, held that the assessee failed to clarify the specific section under which such loss was claimed and also failed to establish the necessary conditions for allowing such claim as eligible business expenditure. Accordingly, the claim of ‘Lock project written off’ amounting to Rs.47,77,477/- was disallowed by the Assessing Officer.

5. Aggrieved by the order of the A.O, the assessee filed appeal before the CIT(A) and the CIT(A) held as under:-

“6.1. As regards ground No. 2 of appeal, it is evident from the records ’ that the appellant had incurred expenditure under the head “Lock Project” which included capital work in progress, technical knowhow and deferred revenue expenditure etc. aggregating to Rs.47,74,477/- till 31.03.2002. The same has been written off in the P&L account and claimed as revenue expenditure. Admittedly, the entire expenditure was on account of setting up a new project for manufacturing locks etc. for Yamaha Motors Ltd. Hence, the expenditure incurred on setting up of a new project was on capital account. The same has been shown as work in progress and even the expenditure which was incidental to setting up of project and revenue in nature had to be included as deferred revenue expenditure as the assets so involved in the new project were not put to use for the purpose of business. Only the expenditure of recurring nature can be allowed as eligible business expenditure. Since, the expenditure was incurred on creation of income generating apparatus for the purpose of getting enduring benefits, such expenditure was certainly capital in nature. As contended in ground No. 2, the aforesaid expenditure cannot be" legally permitted to form part of block of assets as the assets represented by the said expenditure have not been put to use for the purpose of business, so as to entitle the appellant to claim depreciation. It is only after fulfillment of this condition that an asset shall form part of relevant block of asset only after it has been put to use for business purpose. Therefore, on factual and legal aspects, I do not find any force in the averments of the learned counsel that such expenditure representing Work in Progress” is eligible tobe incorporated in the block of assets. Once, the expenditure has been held to be capital in nature, the AO is under no legal obligation to verify reasons and nature of same with Yamaha Motors Ltd. Hence, the ground No. 2 of appeal is dismissed.

6.2. In the ground No. 3 of appeal, the learned counsel has contended that alternatively, the said expenditure may be allowed as business loss. Since, the entire expenditure was on capital work, the same is not permitted to be allowed as business loss under any provisions of the Act. It is correct that the project has not commenced and the entire amount spent on that project has been a loss to the appellant but the said loss is on capital account. The loss is capital in nature. It would be only after the assets representing such expenditure are sold or otherwise discarded or disposed off that the capital loss would be determined and not till the expenditure remains as capital work in progress. Therefore, I find no merits in the contentions raised with reference to this ground of appeal. Hence, ground No. 3 of appeal also stands dismissed. The Action of the AO in treating the said loss as capital loss and in consequential disallowance thereof is upheld.”