HINDUJA FOUNDRIES LTD.,CHENNAI vs. ACIT, CHENNAI

This appeal of the assessee is directed against the order of the Commissioner of Income Tax (Appeals) – 6, Chennai, dated 18.03.2015 and pertains to assessment year 2007-08.

Sh. R. Vijayaraghavan, the Ld.counsel for the assessee, submitted that the assessee incurred an expenditure of `2,01,14,335/- towards expansion of the existing business and claimed the same as revenue expenditure. However, the Assessing Officer disallowed the claim of the assessee on the ground that the expenditure incurred by the assessee was with regard to setting up of new foundry and the operation of the foundry has not commenced during the year under consideration. Therefore, the expenditure incurred prior to commencement of operation of industry should be capitalized. Therefore, the Assessing Officer found that the expenses cannot be allowed as revenue expenditure.

On the contrary, Sh. Pathlavath Peerya, the Ld. Departmental Representative, submitted that during the course of assessment, the Assessing Officer found that there was increase in the capital work in progress. The assessee claimed before the Assessing Officer that setting up of a new grey iron casting foundry was in progress. The capital expenditure incurred with such foundry was shown under the head “Capital work in progress”. The assessee has also clarified that the assessee has not commenced the operation during the year under consideration. The entire expenditure was capitalized in the books of account and shown under the head “Capital work in progress”. However, while computing the taxable income, the assessee has deducted a sum of `2,01,14,335/- in the computation of total income. Referring to Section 36(1)(iii) of the Income-tax Act, 1961 (in short 'the Act'), the Ld. D.R. pointed out that the interest on borrowed funds, though it is revenue in nature, cannot be allowed as revenue expenditure when the borrowed capital was for an expansion of existing business till the asset was first put to use. Therefore, according to the Ld. D.R., the entire cost of expenditure, including interest, salary, wages, has to be capitalized till the industry commences its operation. Once it commences its operation, then naturally the expenditure like salary, wages, interest, has to be allowed as revenue expenditure. In the case before us, according to the Ld. D.R., the assessee has not commenced its operation, therefore, whatever nature of expenditure, it has to be capitalized in view of Section 36(1)(iii) of the Act.

We have considered the rival submissions on either side and perused the relevant material available on record. Admittedly, the assessee incurred the expenditure for expansion of its existing business and the expenditure incurred by the assessee was shown in the books of account as “Work in progress” in the capital asset.

We have carefully gone through the judgment of Madras High Court in Rane (Madras) Limited (supra). The Madras High Court examined the issue on identical circumstances and found that when the industry is set up as extension of existing business, the deduction claimed by the assessee with regard to expenditure incurred in connection with new unit, even though it is independent, because of interconnection of management, financial, administrative, production aspects, has to be construed as revenue in nature and therefore, liable for deduction while computing the taxable income. In the case before us, the assessee is claiming payment of interest, insurance, loan processing fees, travelling and conveyance, professional and consultancy charges and other expenditures including salary and wages. The lower authorities had no occasion to consider the judgment of Madras High Court in Rane (Madras) Ltd. (supra) . Therefore, this Tribunal is of the considered opinion that the details of the expenditure have to be considered in the light of judgment of Madras High Court in Rane (Madras) Ltd. (supra) and other statutory provisions of the Income-tax Act. Since the lower authorities have not examined the details of the expenditure incurred, and in view of the judgment of Madras High Court in Rane (Madras) Ltd. (supra), this Tribunal is of the considered opinion that the matter needs to be reconsidered by the Assessing Officer. Accordingly, the orders of the lower authorities are set aside and the entire issue is remitted back to the file of the Assessing Officer. The Assessing Officer shall reconsider the issue afresh and thereafter decide the same in accordance with law after giving reasonable opportunity to the assessee.

In the result, the appeal of the assessee is allowed for statistical purposes.