High Court Of Delhi
CIT Vs. Priya Village Roadshows Ltd.
Section : 37(1)
A.K. Sikri And Valmiki J. Mehta, JJ.
IT Appeal No. 145 Of 2007
August  24, 2009
JUDGMENT
A.K. Sikri, J. – While admitting the appeal, following substantial question of law was framed:—
“(a) Whether the ITAT was correct in law in holding that expense of Rs. 14,44,239 on new project development are allowable as business expenditure under section 37 of the Income-tax Act, 1961 ?”
2. As the counsel for the parties were prepared to argue the matter finally at the stage of admission itself, we proceeded to hear the arguments. Filing of the paper-book was dispensed with and finally arguments were heard on that very day. We now propose to decide the aforesaid question. For doing so, it is necessary to take stock of relevant facts leading to the formation of the aforesaid question of law.
3. The assessee-company was pursuing the owners of Savitri Cinema at New Delhi for taking over the Cinema for conversion into a multiplex and operation and management thereof. In order to carry out technical and financial feasibility, the assessee availed of services of an architect and paid him Rs. 2,05,000 as fee in preceding year. However, it was found that the project was not financially and technically viable. The assessee, therefore, decided to drop the project and amount spent was claimed as revenue expenditure. Similarly, there was another proposal before the assessee to take over Priya Cinema for the purpose of conversion into a four-screen cinema complex. Detailed technical feasibility was carried out and building plans were prepared by M/s. Consultancy Engineering Group and Morphagenisi Architecture Studio, who were paid remuneration of Rs. 1,69,500 and Rs. 10,69,739 (Total Rs. 12,39,239) respectively. On subsequent market research the assessee preferred to retain single-screen cinema and proposal of conversion of the said cinema into a multiplex was shelved. This expenditure was also treated as revenue expenditure by the assessee.
4. Thus, whereas the case of the assessee is that keeping in view the aforesaid nature of expenditure, which was for the expansion of business and not for starting new business, it is to be treated as business expenditure, the revenue holds it to be a capital expenditure on the ground that expenses were incurred for creating a new asset. According to the revenue, the expenses incurred on the feasibility study for establishing another PVR cannot be termed as revenue expenditure. Thus, the issue involved in the present appeal is as to whether the expenses incurred for preparation of feasibility report of a new project, which has not materialised, is an expense of capital nature or revenue nature.
5. From the admitted facts noted above, following aspects are dis-cernible:—
(a) The expenditure on feasibility report is not disputed.
(b) The purchase, which was conceived and for which expenditure was incurred by paying fee to the architects and consultants, could not materialise and had to be abandoned.
(c) The assessee is already involved in the business of running cinemas and it was not a new activity for the assessee. The attempt of the assessee was to expand its area of activity by opening more PVRs.
(d) New capital asset, in fact, did not come into existence.
6. Insofar as Savitri Cinema project is concerned, the same was abandoned as not feasible. Insofar as Priya Cinema project is concerned, again it was decided to continue by retaining single screen cinema and the project of conversion of said cinema into a multiplex was shelved. In this backdrop, we have to answer the issue involved. This Court in the case of Triveni Engg. Works Ltd. v. CIT[1998] 232 ITR 639 after taking note of various judgments of the Supreme Court observed that test to determine an expenditure to be capital or revenue is not straight. However, the test of “enduring benefit” is largely accepted and applied by the courts. Further, if the expenditure is incurred with a view to bringing an asset or advantage into existence, it is to be treated as capital expenditure and while doing so, it is not necessary that such expenditure should have that result. Relevant portion of the discussion contained in that judgment is reproduced below :—
“The test to discriminate between a capital and a revenue expenditure is not straight. An item of expenditure though incurred wholly and exclusively for the purpose of the business may nevertheless be inadmissible as an allowance if it is of a capital nature. The border line between a capital expenditure and a revenue expenditure is a blurred one. Different minds may come to different conclusions and may yet have valid reasons justifying each of the two view points. In the leading case of Atherton v. British Insulated & Helsby Cables Ltd. [1925] 10 TC 155, it was held that when an expenditure is made not only once and for all but also with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is a very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. A perusal of the available case law on the point reveals that the test of enduring benefit has been accepted and applied by and large. It has also been held that the expenditure is to be attributed to capital, if it be made with a view to bringing an asset or advantage into existence and it is not necessary that it should have that result – Collins v. Joseph Adamson & Co.[1939] 7 ITR 92, 99 [KB].
In Empire Jute Co. Ltd. v. CIT[1980] 124 ITR 1 (SC), their Lordships have held (headnote) :—
‘There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. 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 the 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. 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. The test of enduring benefit is, therefore, 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.’
In the case at hand the amount spent on the project reports was not for the purpose of facilitating the assessee’s existing trading operations or enabling management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched. If only the project reports had been successfully accepted and put into implementation, the assessee would have gone into manufacturing of a new product which would have certainly required investment of fresh capital and coming into existence of additional fixed assets.” (p. 644)
7. In that case the amounts were paid to the consultants for preparing project reports on manufacturing insecticide formulation—an item to be used for improving the quality of cane produced in the area by individual agriculturists and societies and also for another project, namely, for survey report on extra melkral alcohol as the assessee wanted these reports for better use of its byproducts, namely, molasses. After explaining the principle to be applied for determining the nature of expenditure in the afore-quoted portion, the Court was of the view that the expenditure was attributable to capital having been incurred with a view to bringing an asset or advantage into existence and having enduring benefit. It was categorically observed that merely because the project did not materialise the nature of the expenditure would not change to revenue.
8. Obviously, heavy reliance is placed on this judgment by the learned counsel for the revenue on the basis of which it was argued by Mr. Subhash Bansal that merely because the projects were shelved ultimately, is of no consequence. Mr. Aggarwal, learned counsel appearing for the respondent, on the other hand submitted that the entire argument is misconceived inasmuch as the project reports were got prepared with the intention of starting new business. The assessee was already in the business and the study in question was conducted for the same and existing business. He sought to distinguish the judgment of this Court in Triveni Engg. Works Ltd.’s case (supra) by drawing our attention to the fact that in that case the manufacturing of insecticide formulation was not carried out by the assessee and the assessee had incurred the expenditure for starting a new line of business, whereas in the instant case it was only an expansion of business. He submitted that this fine distinction is taken note of by the Tribunal in the instant case which materially affected the final outcome. He submitted that the Tribunal referred to various judgments on these aspects. In addition, he also placed reliance upon Jay Engg. Works Ltd. v. CIT[2009] 311 ITR 405 (Delhi).
9. One of the judgments on which the Tribunal based its decision is of this Court, i.e.,CIT v. Modi Industries[1993] 200 ITR 341 . In that case the assessee-company which was manufacturing various commodities like sugar, vanaspati, soap, paints and varnish, torch and lantern, started manufacturing a new commodity, viz., special alloy wire and billets. Debentures were issued for raising funds for this new steel unit and the assessee incurred expenditure for issuing of debentures. The question was whether the expenditure incurred by the assessee in the year in which the unit had not started working was allowable as business expenditure. The Appellate Tribunal found that the management of the new unit and the earlier business were the same and there was unity of control and a common fund, and held that the manufacture of special alloy and billets was an expansion of the assessee’s business and not a new business and allowed deductions of expenditure. The decision of the Tribunal was affirmed by the High Court holding that all the assessee’s bid was to start manufacturing a new commodity. In the larger sense, the business of the assessee remained the same, viz., the business of manufacture. The assessee was already manufacturing diverse items and a new item was added to this business. The Tribunal had found that there was complete unity of control and that there was a common fund which was most material for testing whether the business was the same. In considering whether the two business run by an assessee are the same business, what is important is that unity of control and interfacing of the two businesses and not the nature of the business.
10. A harmonious reading of the aforesaid two judgments of this Court, namely, Triveni Engg. Works Ltd. (supra) on the one hand and Modi Industries (supra) on the other, would clearly demonstrate that one has to keep in mind the essential purpose for which such an expenditure is incurred. If the expenditure is incurred for starting new business which was not carried out by the assessee earlier, then such expenditure is held to be of capital nature. In that event it would be irrelevant as to whether project really materialised or not. 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, namely, to start 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 expendi- ture. In such a case whether new business/asset comes into existence or not would become a relevant factor. If there is no creation of new asset, then the expenditure incurred would be of revenue nature. However, if the new asset comes into existence which is of enduring benefit, then such expenditure would be of capital nature.
11. When we keep in mind the aforesaid fine distinction, the conclusion on the facts of this case becomes obvious. The expenditure was incurred in respect of same business which is already carried on by the assessee. Two projects which were undertaken were for the expansion of same business, namely, one for taking over Savitri Cinema for conversion into multiplex and operation and management thereof and other for conversion of Priya Cinema into four-screen multiplex. Payments were made to the consultants for preparing feasibility reports in respect of both the projects. However, ultimately projects were not found to be financially and technically viable and were shelved. Thus, we find that no new asset came into existence, which was the basis adopted by the Assessing Officer for treating the expenditure as capital expenditure but wrongly.
12. In the present case both the ingredients are satisfied, namely,—
(i) the feasibility study conducted by the assessee was for the same and existing business with a common administration and common fund, and
(ii) the study was abandoned, without creating any new asset.
13. We note two judgments of other High Courts taking this view in identical circumstances. One case is decided by Gauhati High Court which is reported as Dy. CIT v. Assam Asbestos Ltd.[2003] 263 ITR 357 . In that case the assessee was in the business of manufacturing asbestos sheets. Contemplating to set up a mini cement plant, which was the same line of business activity of the assessee, a feasibility report was prepared. However, the project would not be undertaken as Government refused to grant required permission. The Court opined that no new capital asset came into existence and the expenses incurred on preparation of the feasibility report, same line of business, were in the nature of revenue expenditure. Rajasthan High Court had also occasion to deal with this issue in the case of Maharaja Shri Umaid Mills Ltd. v. CIT [1989] 175 ITR 732. There also the expenditure incurred in obtaining survey and feasibility report for setting up polyethylene plant for manufacturing packing material was treated as revenue expenditure as the new venture was inter-connected and formed part of existing business.
14. In these circumstances, we answer the question in the affirmative, i.e., against the revenue. As a consequence, this appeal is dismissed.
[Citation : 332 ITR 594]
