ITAT, ‘E’ BENCH, MUMBAI Shapoorji Pallonji Power Co. Ltd. v. ITO Income-tax Appeal Nos. 4843 & 759/Mum/2006 April 20, 2009

Reclassification of an expenditure claimed as capital in nature in earlier years as being revenue on ground of abandonment of project



Once the expenditure has been classified as capital in nature it cannot partake the character of revenue on account of supervening circumstances.
RELEVANT EXTRACTS:

** ** ** ** ** ** ** ** ** ** ** **

10. We have considered the rival submissions and perused the record of the case. The controversy in the present case is two folds. Firstly, whether the business of the assessee could be said to have been set up on 18-11-1997, which was the date of agreement with MPEB. Secondly, if the answer to first issue is in affirmative, whether the expenses once classified as capital expenditure in earlier years, could be treated as business expenditure in the year of abandonment of project. As regards the first issue, it is well settled law that whether the business is set up or not, depends on facts and circumstances of each case and there may not be any similarity between two cases. The business is said to have been set up when one amongst all the integrated activities, which necessarily precedes the commencement of business and which is first in point of time, has been taken up. A business comprise of various activities before it is set up and ready for commencement. The business activities may be classified into two broad categories, firstly the activities which are in furtherance of setting up of a business and secondly the activities which are in furtherance of commencement of business after it has been set up. Business is set up when it is ready for take off but the activities following the setting up of business prior to its commencement constitute the essential activities for commencement of business and the expenditure incurred in carrying on such activities is allowable deduction under the head “income from business”. However, the expenditure incurred prior to the setting up of business is only in capital field and cannot be treated as business expenditure. As is evidence from the facts noted earlier, the assessee had only entered into agreement with MPEB but MPEB finally backed out from the said agreement. This was only an assurance to the assessee for purchasing power from it subject to fulfillment of series of activities. It cannot be said that the assessee’s business had been set up on 18-11-1997 when the agreement had been entered into with MPEB. Entering into agreement with MPEB can at best be said to be an activity in furtherance of setting up of business but per se, cannot lead to the conclusion that the business had been set up. It is true that entering into an agreement with MPEB was one of the essential activities for the business but this essential activity was in furtherance of setting up business. The term ‘business’ connotes various activities starting from incorporation of company/partnership firm/proprietorship firm to the setting up of business and then final commencement of business. The assessee has pointed out that it had employed managerial and other staff in order to start the business. All these actions were essential for setting up of business because, admittedly, in order to priorities for Escrow Protection the assessee had submitted its officer for better terms on different parameters in pursuance to letter no. 07/11/IPC/1006 dated 24-7-1998 as mentioned in the written submissions filed by assessee placed on record. The assessee had undertaken this venture in pursuance to liberalized government policy which could not be implemented on account of change in policy decision itself and, therefore, it could not be said that the assessee’s business had been set up because setting up implies that assessee is only few steps away from formal sign commencement of business. In this regard, we may refer to some decisions relied upon by Learned Counsels for the assessee.

16. Now the second aspects is whether the assessee could at all re-classify the expenditure claimed in nature in earlier years as being revenue on the ground of abandonment of project. In this regard we may observe that it is well settled commercial principle of accounting that the nature of expenditure is determined at the first instance when it is incurred and its nature cannot be altered on account of subsequent events. Once the expenditure has been classified as capital in nature, it cannot partake the character of revenue on account of supervening circumstances.



** ** ** ** ** ** ** ** ** ** ** **


visit my main blog www.taxmannindia.blogspot.com