MAHANAGAR GAS LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX, INCOME TAX

It is stated that, sometimes, the work started in laying new pipelines may have to be abandoned in the middle of the work on various reasons. The expenditure incurred in laying new pipelines till the date it is abandoned would have been accounted under the head “work in progress”. Since it will not be converted into Fixed assets and further, the expenditure incurred on that will become irrecoverable, the assessee will write off the expenditure as “work in progress written off” and claim the same as deduction as normal business expenditure. During the year under consideration, the assessee wrote off abandoned work in progress to the tune of Rs.4,65,77,133/-. Accordingly, the assessee had claimed the same as deduction in the profit and loss account. While processing return of income u/s 143(1), a sum of Rs.4,64,79,545/- was disallowed and in the original assessment order passed u/s 143(3) of the Act, a sum of Rs.4,65,77,133/- was disallowed.

The assessee challenged the adjustment made u/s 143(1) of the Act as well as the addition made u/s 143(3) of the Act in the appeals filed before the Ld.CIT(A). The appeal filed against the intimation passed u/s 143(1) of the Act came to be disposed of by the Ld.Addl/JCIT(A) and the appeal filed against the assessment order passed u/s 143(3) of the Act came to be disposed of by the Ld.CIT(A). Both the appellate authorities confirmed the additions. Hence, the assessee has filed these two appeals before the Tribunal.

We heard the parties and perused the record. The only question that needs to be addressed is whether the assessee is entitled to claim deduction of expenditure incurred in an abandoned project. The assessee is already engaged in the business of distribution of gas through pipelines. Hence, the laying of new pipelines is only expansion of existing business. The various reasons that compelled the assessee to abandon the new projects are summarized as under before the Ld CIT(A):- a. Delay in approval from Government authorities and in between the building has gone for redevelopment; b. Due to lack of permission and NOC from MMRDA in view of proposed Metro work; c. Due to redevelopment work and pipeline being at a very odd location in the redevelopment project it cannot be used; d. Initial discussion and interest shown by BEST for furtherance of pipes but now no interest from BEST regarding CNG set up; e. Initial discussion with the management of Company but the customer‟s business has been shut down. The assessee also furnished a tabular form explaining reasons for abandoning of majority of its projects during the year under consideration and the same is extracted in the order passed by the Ld.CIT(A).

An identical question on deduction of expenditure incurred on abandoned project came to be examined by the Hon‟ble Madras High Court in the case of Tamilnadu Magnesite Ltd vs. ACIT (Appeals No.907 and 908 of 2007). The facts prevailing in that case were that the assessee M/s Tamilnadu Magnesite Ltd was manufacturing, inter alia, “high quality sintered magnesia”. The assessee took over a Chemical Beneficiation Project from the Tamil Nadu Industrial Development Corporation (TIDCO) for production of 'high quality sintered magnesia', which is one of the products of the assessee company. It incurred various expenses in implementation of the new project. 8.1. The AO of the above said assessee before the Hon‟ble Madras High Court noticed that the assessee was making expenses for the new venture from the capital account and they were booked as “capital work-in- progress”. The total amount incurred was Rs.11.58 crores. However, due to various reasons, the Government of Tamil Nadu had ordered the closure of the implementation of the Chemical Beneficiation Project vide G.O.No.140, Industries Department, dated 11-05-1998 and as a consequence, upon considering commercial prudence, the above expenses of Rs.11.58 crores were shown as revenue expenditure. The AO, however, disallowed the said claim holding it as capital expenditure, but the Ld. CIT(A) allowed it as revenue expenditure. However, the ITAT reversed the decision of Ld CIT(A) and restored the addition made by the AO. The Hon‟ble Madras High Court held that the claim of the expenses incurred on abandoned project is allowable as „revenue expenditure‟, since it was expansion of existing business. The relevant observations made by the Hon‟ble Madras High Court are extracted below:-

Further, it is submitted that the ITAT failed to appreciate that the venture undertaken was not a new one, but, in fact one in the same line of business already being carried on by the assessee company. The assessee had claimed that the expenses incurred for the implementation of the project was claimed as revenue expenses / business loss in the computation of total taxable income on the strength of the Government Order in G.O.No.140, directing closure of the project and cancellation of the allotment of the land. This aspect of the matter was not considered by the Tribunal and without reference to the factual position, the impugned order has been passed.

Further, it is submitted that the decisions, which were referred to by the assessee were not properly considered by the Tribunal and the factual position in those decisions were not appreciated. Thus, it is submitted that when there is no new business, which has been created and there is no creation of any new asset, nor there being any enduring benefit accrued to the assessee, the expenditure should be treated as revenue and not as capital.

Further, it is pointed out that, though it may be true that the expenditure was incurred from the capital account, that would not be the proper test to determine the nature of expenditure for the reasons not attributable to the assessee, when the existing unit ought to be closed.

In support of his contention, the learned counsel placed reliance on the following decisions:- (i) Indo Rama Synthetics Ltd. vs. Commissioner of Income Tax reported in (2011) 333 ITR 18 (Delhi)

Mr.S.Rajesh, learned Standing Counsel for the Revenue sought to sustain the order passed by the ITAT by referring to the factual position as stated in the assessment order dated 15.09.2000. It is submitted that the expenditure is capital in nature, as the money was drawn from the capital account and it is an aid extended by the Government of Tamil Nadu termed as capital work-in-progressand merely because the project was abandoned on account of cancellation of the approvals granted by the Government of Tamil Nadu, that will not change the character of the expenditure to that of the revenue, as the expenditure was incurred for acquisition of tangible assets.

Further, the learned Standing Counsel referred to the order passed by the CIT(A) more particularly paragraph 5 of the order, which referred to the Government Order and the decision taken by the Government to abandon the project and submitted that merely because the project was abandoned, that will not be a reason to treat the expenditure as revenue.

In support of his contentions, the learned Standing Counsel placed reliance on the following decisions:- (i) Empire Jute Co. Ltd vs. Commissioner of Income Tax reported in [1980] 3 Taxman 69 (SC) (ii) E.I.D.Parry (India) Ltd. vs. Commissioner of Income Tax reported in [2002] 257 ITR 253 (Madras)

We have heard the learned counsels for the parties and carefully perused the materials placed on record.

The common issue involved in both the appeals is whether the Tribunal was justified in reversing the decision of the CIT(A) deleting the addition made by the Assessing Officer on the ground that the expenditure incurred by the assessee was revenue in nature and not capital.

To decide the substantial questions of law framed for consideration, we would have to apply the proper test, which would distinguish capital and revenue expenditure. This question came up for consideration before the Hon'ble Supreme Court in Empire Jute Co. (referred supra). It was pointed out that from time to time cases have evolved various tests for distinguishing between capital and revenue expenditure, but, no test is paramount or conclusive. Further, there is no all-embracing formula, which can provide a ready solution to the problem; no touchstone has been devised. It was pointed out that every case has to be decided on its own facts keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. After referring to the decision of Lord Radcliffe in CIT vs. Nchanga Consolidated Coppper Mines Ltd. reported in [1965] 58 ITR 241, it was held that it would be misleading to suppose that, in all cases, securing a benefit for the business would be prima facie capital expenditure "so long as the benefit is not so transitory as to have no endurance at all".

Further, it was held that there may be cases where expenditure even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It was pointed out that it is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test.

Further, it was pointed out that if the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. Thus, it was held that the test of enduring benefit is not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.

Further, it was held that another test, which is often applied is the one based on distinction between fixed and circulating capital. This test was applied by Lord Haldane in the case of John Smith & Son vs. Moore 12 TC 266, where the learned Law Lord drew the distinction between fixed capital and circulating capital by holding that fixed capital is what the owner turns to profit by keeping it in his own possession; circulating capital is what he makes profit of by parting with it and letting it change.

Bearing the above legal principles in mind, we proceed to examine the facts of the instant case. It is not in dispute that the Chemical Beneficiation Plant was already established by TIDCO and on account of their not being able to achieve the desired result, the assessee was invited to take over the project, as the assessee possessed expertise in the field. This is how the assessee stepped into the project and by turn of events, the Government granted approval during the year 1998.

As could be seen from the order passed by the CIT(A), the assessee had entered into an arrangement with TIDCO as well as with IDBI and fixed the project cost with a debt equity ratio, which was approved by the Government of Tamil Nadu and thereafter, steps were taken to acquire land, import machinery etc. In the meantime, 12 years had passed by and the project had not taken off. The IDBI had withdrawn from the project, as it was found to be unviable and another co- promoter viz., M/s.Khaltan Supermag Limited was brought in and a joint sector company was formed with the assessee subject to certain conditions. However, the said co-promoter, M/s.Khaltan Supermag Limited expressed inability to be a part of the project and after 12 years, the Government took a decision to sell the project and consequently, cancelled the allotment of 47 acres of land in favour of the assessee. The above facts clearly demonstrate that the assessee though had entered into arrangement with the banks and co-promoters and took action for acquisition of land, import of machineries, etc., no new venture was established by the assessee. The venture, which was to be taken over by the assessee and operated did not fructify, not on account of the conduct of the assessee, but on account of the decision of the Government of Tamil Nadu. In our considered view, the decision of the Government of Tamil Nadu to sell the project is a very important fact, which has to be borne in mind to decide as to whether the expenditure incurred by the assessee was capital or revenue in nature.

The Assessing Officer fell in error in going by the fact that the expenditure was incurred from the capital account forgetting that the test to be applied to ascertain as to whether the expenditure is revenue or capital is not based on where the funds were drawn from. The broad parameters and tests, which have been laid down by various decisions are that there should be an enduring benefit, which should accrue to the assessee and there should be a creation of a new asset. In the instant case, both these parameters remain unfulfilled.

The High Court of Delhi in Indo Rama Synthetics Ltd. (supra) held that if the expenditure is incurred for starting a new business, which was not carried out by the assessee earlier, then such expenditure was held to be capital in nature. However, if the expenditure incurred is in respect of the same business, which is already carried on by the assessee, even if it is for the expansion of the business, viz., to start a new unit, which is same as earlier business and there is unity of control and a common fund, then such an expense is to be treated as business expenditure and in such a case whether it is a new business / asset would become a relevant factor.

It is further held that if there is no creation of new asset, then the expenditure incurred would be revenue in nature. However, if the new asset comes into existence, which is of enduring benefit, then such expenditure would be capital in nature.

The Hon'ble Delhi High Court took note of the decision of the Gauhati High Court in DCIT vs. Assam Asbestos Ltd. reported in (2003) 185 CTR (Gau.) : (2003) 263 ITR 357 (Gau.). The High Court of Calcutta in the case of Binani Cement Ltd. (supra), considered a case where the Tribunal disallowed the expenditure allegedly incurred by the assessee for preparing feasibility study report and capital work-in- progress in the earlier years but written off during the previous year, since the proposed project was abandoned. The Court affirmed the view taken by the CIT(A), where it was held that the company claimed as allowable the expenditure on this abandoned project. While it was found to be unviable, the expenditure on it was for the purpose of business and it was not claimed or allowed earlier as business expenditure because it was of capital nature entitled to depreciation after completion and on commencement of its use for business and that stage having not reached and no asset having come into existence, the capital work-in-progress had to be written off as such.

In the case of Asia Power Projects P Ltd. (supra), the High Court of Karnataka held that, if the assessee incurs a liability and when the contract under which that liability was incurred was terminated and when no amounts under the or in pursuance of a claim is receivable, he is entitled to claim the said amount incurred as expenditure in implementing the contract as a set off under Section 37(1) read with 28 of the Income Tax Act, 1961.

Insofar as the abandoned feature films are considered, a Division Bench of this Court in the case of Tiruvengadam Investments Pvt. Ltd. vs. Assistant Commissioner of Income tax reported in (2016) 95 CCH 0024 ChenHc, referring to a circular issued by the CBDT in Circular No.16/2015 dated 06.10.2015, held that film production expenses of abandoned films should be treated as revenue expenditure. This decision was followed in the case of Asia Power Projects P Ltd. (supra).

The learned counsel for the Revenue strenuously contended that a new project had emerged and it is immaterial whether machinery was reduced to scrap and ordered to be sold and what is required to be seen is that the expenditure was incurred from the capital account.

In our considered view, reliance placed on the decision of this Court in the case of E.I.D.Parry (India) Ltd., (supra) and the Kerala High Court in the case of Malabar & Pioneer Hosiery (P) Ltd. (supra) is of little avail, as in both cases, it was for a new project, in contra distinction with the factual position in the case on hand. Therefore, those decisions are factually distinguishable. Heavy reliance was placed on the decision of this Court in the case of Mascon Technical Services Ltd. (supra).

At the first blush it appears that the decision would help the case of the revenue, but on a closer reading it proves otherwise. The question was whether the assessee was justified in seeking for bifurcation of the expenses incurred into capital and revenue. The Division Bench referred to the decision in the case of Brooke Bond India Ltd. vs. CIT reported in [1997] 225 ITR 798/91 Taxman 26 (SC). In the case of Brooke Bond India Ltd. (supra), it was held that expenditure, in connection with the additional issue of shares, paid to the Registrar of Companies by way of filing fee and hence, has no application. The Division Bench held that the decision in the case of Brooke Bond India Ltd. (supra) would have no application to the facts of the case, as the expenditure incurred by the assessee were shown in the books of accounts as towards issue expenses incurred during the year and they found there was no justifiable ground to dissect one part of the expenditure as revenue expenditure and another part as capital expenditure. As pointed out by the Hon'ble Supreme Court in Empire Jute Co. Ltd. (supra), we cannot take a decision sans facts and the factual position as set out in the preceding paragraph would clearly show that the abandoned project was not a new one and it was a decision taken by the Government after about 12 years after the petitioner was invited to take over the project, which was already in existence, as they were an expert in the same line of business. Therefore, on facts, we find that the CIT(A) was perfectly right in deleting the addition and holding that the expenditure was revenue not capital expenditure. We may point out that the decision in the case of Ideal Cellulura Ltd. (supra) was also a case where the expenditure was incurred to bring into existence a new asset, which is not so in the case on hand. Therefore, the said decision is also distinguishable on facts.

In the result, both the tax case appeals are allowed, the order passed by the Tribunal is set aside and the substantial questions of law framed for consideration are answered in favour of the assessee and against the revenue.”

Though the assessee has cited the above said case law before the AO, yet the AO distinguished the same on the reasoning that, in the case decided by the Hon‟ble Madras High Court, the project had to be abandoned on account of order passed by the Tamil Nadu Government, which is not the position in the instant case. In our view, the reasoning given by AO is not correct. It is well settled proposition that the ratio decidendi of a decision needs to be followed. The fact would remain that the assessee was constrained to abandon an expansion of the project already carried on by it for the reasons beyond its control and hence, it was constrained to write off the expenses booked under „work in progress‟ in the books of account, as those expenses will not result in creation of any new asset, which could be put to use. We notice that the assessee has cited various reasons which compelled them to abandon the projects. It cannot be disputed that they were commercial decisions taken by the assessee and it is well settled that the wisdom of commercial decisions cannot be questioned by the tax authorities. Hence, in the facts of the present case, we hold that the amount so written off will be allowable as deduction.

Accordingly, we set aside the orders passed by both the appellate authorities and direct the AO to delete the disallowance made in the intimation passed u/s 143(1) of the Act and also in the assessment order passed u/s 143(3) of the Act.

In the appeal filed against intimation issued u/s. 143(1) of the Act, the assessee has raised a ground relating to non-granting of TDS credit. The Ld.AR did not press that ground. Accordingly, the same is dismissed as not pressed.

In the result, the appeal of the assessee in is partly allowed and the appeal in is allowed.