Expenditure on abandoned project (in relation to existing business) is allowable as revenue expenditure – Mumbai ITAT


Idea Cellular Ltd. v Addln CIT (ITA No 3260 & 3493 (MUM.) OF 2008 dated13.05.2014) – Mumbai ITAT 

Background:

The assessee has incurred expenses on abandoned project of Rs. 3,94,75,619. The assessee was required to put up cell-sites for enabling its business. In certain cases the assessee had incurred expenses for putting up cellsites but this could not be completed and were therefore, abandoned. The assessee claimed that the expenses were incurred for the purpose of its business and, therefore, is allowable as business expenditure. The AO disallowed the claim of the assessee on the ground that the expenditure has been spent by the assessee on sites to bring into existence the new asset and new source of income. Accordingly the AO held that the loss incurred due to abandonment of project, is capital in nature and accordingly disallowed the deduction claimed by the assessee. 

On appeal, the CIT(A) has concurred with the view of the AO and held that the expenses incurred on cell sites were definitely capital expenses, when such a project is abandoned, the entire expenditure incurred is a capital loss. 

Assessee’s contentions:

  • The expenditure has been incurred for setting up/construction of cell towers which were abandoned due to unavoidable circumstances/reasons as it was not found suitable in the area of operation, therefore, the expenditure was incurred for the purpose of existing business of the assessee and not intended for any new business. 
  • Since the towers could not be brought into existence, therefore, the expenditure on the abandoned project is allowable business expenditure. Reliance is placed on the decision of Hon’ble Jharkhand High Court in the case of CIT v. Tata Robins Fraser Ltd. [2012] 211 Taxman 257/26 taxmann.com 15
HELD:
  • As far as the cellular towers being new source of income is concerned, the towers were being erected for the purpose of assessee’s own business of providing cellular services to its customers. Therefore, the tower is only a mean through which the assessee is able to provide cellular services and it is not an independent source of income.
  • Therefore, when the towers are not exclusively meant for leasing out to third parties for earning the revenue but used for transmission of telephone signals of assessee’s own cellular services then it cannot be said that the towers which are used for the assessee’s own business are new source of income.
  • Since this project of erecting towers is undisputedly abandoned by the assessee, therefore, there is no question of any new asset came into existence
  • The expenditure no doubt has been incurred wholly and exclusively for the purpose of assessee’s business. Therefore, to examine the allowability of such expenditure u/s 37(1), the only requirement which has to be seen is that the expenditure is of revenue nature and not capital nature. 
  • There are series of decisions wherein the Hon’ble High Courts and Hon’ble Supreme Court has laid down the principle that if an expenditure is incurred for doing the business in a more convenient and profitable manner and has not resulted in brining any new asset into existence then such expenditure is allowable business expenditure. 
  • It is also pertinent to note that in the case in hand the expenditure has been incurred only in respect of the existing business and not for setting up of a new business or line of business.
  • Since the expenditure has been incurred for the project which could not be accomplished and it was intended to facilitate the assessee’s business activity to be carried out more conveniently and profitably, therefore, the said expenditure is an allowable revenue expenditure following the decision of Hon’ble High Court of Jharkhand in the case of Tata Robins Fraser Ltd. (supra).
Other Issues 
  • There is nothing under law to prevent assessee to raise claim before appellate authorities, if facts relating to new claim are already on record which do not require any investigation.
  • Where revenue taxed gains arising from foreign exchange fluctuation as income of assessee, loss arising therefrom would be allowable as revenue expenditure.

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