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Expenses incurred on abandoned project held to be deductible.

Assessee had claimed deduction for project expenses related to a project which was ordered to be closed by the Government of Tamil Nadu. Consequently, upon considering the commercial prudence, major portion of intangible assets were shown as revenue expenditure by the assessee. The AO held that the expenditure is capital in nature and therefore, declined to accept the assessee’s claim of expenses in the profit & loss account, as they had utilised money from the capital account and aid from the Government of Tamil Nadu termed as “capital work- in-progress”. Further, the AO held that the assessee was making expenses for the new venture from the capital account and in the balance-sheet only, it would have been better if the capital work-in- progress was reduced instead of operating revenue.

The CIT(A) noted that assessee’s basic intention was to take over the 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. Noting that no new venture came into existence, CIT(A) allowed the deduction as revenue expenses. ITAT ruled in favour of Revenue, aggrieved by which, the assessee appealed before the Madras High Court.

High Court noted 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. Assessee had entered into arrangement with bank and had imported machineries, but 12 years had passed by and the project had not taken off. High Court noted that therefore, IBDI bank had withdrawn from the project as it was found to be unviable and another co-promoter also expressed his inability to continue the project. High Court noted that 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. Thus though the assessee had entered into an 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 did not fructify, not on account of the conduct of the assessee, but on account of the decision of the Government of Tamil Nadu. As per the High Court, the AO was incorrect in holding that the expenditure was non-deductible being capital in nature; as the parameters to ascertain as to whether the expenditure is revenue or capital are that there should be an enduring benefit, which should accrue to the assessee and there should be a creation of a new asset, and which remained unfulfilled.

High Court relied on Co-ordinate bench ruling in Tiruvengadam Investments Pvt. Ltd [(2016) 95 CCH 0024], wherein it was held that the film production expenses of abandoned films should be treated as revenue expenditure. High Court held that the abandoned project was not a new one and it was a decision taken by the Government after about 12 years after the assessee was invited to take over the project, which was already in existence.

High Court thus held, that the expenditure was revenue in nature and not capital, and thus ruled in favour of the assessee.
 
Order

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