Gujarat Power Corporation Ltd. v. Add. CIT (2013) 21 ITR 683 (Ahd.) (Trib.)

S.37(1): Business expenditure-Commencement of business-Commercial production-Expenses incurred before

commencement of business is not deductible. (S.35E)

The assessee claimed deduction under section 35E of the Act. The Assessing Officer came to the conclusion that the assessee had not complied with the requirement of section 35E because, mining work was carried out by the

Commissioner Geology and Mining in respect of lease granted in the year 1988 and the expenditure incurred on account of payment to this party had been shown under the head "consultancy fee" towards project, pending allocation. He also observed that there was no evidence of commercial production and, therefore, held that the assessee was not eligible for deduction under section 35E of the Act. The assessee appealed before the Commissioner (Appeals) but without success.

On appeal to the Tribunal it contended that even if the claim was not allowable under section 35E, it should be allowed under section 37 because the assessee proposed to sell the project and recover the expenses. The Tribunal held that the assessee claimed deduction under section 37 because the assessee proposed to sell the project and recover these expenses from the buyer. No evidence had been produced in support of this argument that the assessee had ultimately sold the project in a subsequent year and recovered these expenses from the buyer. Moreover, even if this was done, no deduction was allowable in the present year because even if the expenditure was to be debited in the profit and loss account, it had to be considered in the credit side of the profit and loss account also as the closing stock of work-in progress and there could be no resultant deduction in the present year. The Tribunal also held that the land was purchased for the proposed joint venture power project and none of the power projects had commenced business. In the present case, the Assessing Officer had given this finding that the rates and taxes before commencement of production in a project were capital expenditure. The basis of the order of the Commissioner (Appeals) was that this expenditure did not enhance the value of the asset, i.e., the land in the present case. Even if it did not enhance the value of the land in question it could not be allowed as revenue expenditure because the business had not commenced and therefore, it was a pre-operational expenditure. It was not deductible.(A. Y. 2003-2004 to 2006-2007)