IN HIGH COURT AT CALCUTTA Special Jurisdiction ( Income Tax) Original Side Present: Hon ble Justice Girish Chandra Gupta & Hon ble Justice Arindam Sinha Income Tax Appeal no. 265 of 2009 M/s Binani Cement Ltd., Kolkata Vs. Commissioner of Income Tax, Kolkata Central-I & Anr. For Appellant : Mr. R. N. Bajoria Sr. Adv. with Mr. Moloy Dhar, Adv., Mr. A.K. Dey Adv. and Mr. Akhilesh Gupta, Adv. For Respondent : Mr. R.N. Bandopadhyay, Adv. with Ms. Smita Das De, Adv. Heard on : 15.01.15, 29.01.15, 09.02.15, 11.02.15,20.02.15, 25. 02.15 & 27.02.15 Judgment on : 23rd March, 2015 Arindam Sinha, J. subject matter of challenge in this appeal is judgment and order dated 15th May, 2009 by which learned Tribunal allowed appeal preferred by Revenue against order passed by CIT (A) by which CIT (A) had held that when construction/acquisition of new facility is abandoned at work-in-progress stage, expenditure does not result in enduring advantage and such expenditure, when same is written off, has to be allowed under section 37 of Income Tax Act, 1961. learned Tribunal reversing order of CIT (A) held that expenditure incurred in earlier years could not be deducted in year under consideration. Aggrieved by order of learned Tribunal, assessee has come up in appeal. following question of law was framed when appeal was admitted. Whether Tribunal substantially erred in law in disallowing expenditure allegedly incurred by assessee for preparation of feasibility study report and capital-work-in-progress in earlier years, but written off during previous year corresponding to assessment year 2002-03 since proposed project was abandoned? Mr. Bajoria, learned Senior Advocate, appearing for appellant submitted that question is partly covered by decision in CIT Vs. Graphite India Ltd. reported in (1996) 221 ITR 420 (Cal). relevant question referred by Tribunal to this court in that case was whether in facts and circumstances of that case, Tribunal was justified in holding that expenditure incurred for assessee s proposed petro-chemical project was revenue expenditure and to be allowed as deduction? This court in answering question, held as follows:- So far as question no.4 is concerned, Tribunal recorded finding that assessee spent amount of Rs.56,665 as project expenditure. expenditure represented fees paid to Engineering India Ltd. in connection with petro- chemical project report. amount was paid by assessee in order to explore possibility of setting up of petro-chemical project which could provide captive plant for manufacture of raw material at assessee s own factory which would help assessee in getting continuous supply of raw material even during periods of acute shortage. In fact, project did not materialise. Income-tax Officer as well as Commissioner of Income-tax (Appeals), therefore, held that expenditure was capital in nature. However, Tribunal found that expenditure did not result in bringing into existence any capital asset of enduring in nature. Tribunal further found that decision of Calcutta High Court in case of Hindusthan Aluminium Corporation Ltd. v. CIT [1986] 159 ITR 673 was applicable and following that decision held that expenditure was allowable as incurred wholly and exclusively for purpose of assessee s business. Therefore, Tribunal deleted disallowance. case relied upon by Tribunal was subsequently followed in case of Asiatic Oxygen Ltd. v. CIT [1991] 190 ITR 328 (Cal). This court in said case reiterated view taken in Hindusthan Aluminium Corporation Ltd. s case [1986] 159 ITR 673 (Cal). According to us, question no.4 in this reference stands concluded by aforementioned two decisions. We, accordingly, answer question no.4 in affirmative and in favour of assessee and against Revenue. Mr. Bajoria further relied on two decisions of Supreme Court being respectively decision in CIT Madras Vs. Gajapathy Naidu reported in (1964) 53 ITR 114 (SC) and CIT Madhya Pradesh Nagpur and Bhandara Vs. Swadeshi Cotton and Flour Mills Pvt. Ltd. reported in (1964) 53 ITR 135 (SC). In Gajapathy Naidu on question of power of Income Tax Officer to relate back income Apex court was of following view:- When Income-tax Officer proceeds to include particular income in assessment, he should ask himself, inter alia, two questions, namely: (i) what is system of accountancy adopted by assessee, and (ii) if it is mercantile system, subject to deeming provisions, when has right to receive accrued? If he comes to conclusion that such right accrued or arose to assessee in particular accounting year, he should include said income in assessment of succeeding assessment year. No power is conferred on Income-tax Officer under Act to relate back income that accrued or arose in subsequent year to another earlier year, on ground that that income arose out of earlier transaction. Nor is question of reopening of accounts relevant in matter of ascertaining when particular income acccrued or arose. In Swadeshi Cotton and Flour Mills Pvt. Ltd. on similar question said court held:- system of re-opening of accounts does not fit in with scheme of Income-tax Act. As far as receipts are concerned there can be no re-opening of accounts, and position is same in respect of expenses . Mr. R.N Bandopadhyay, learned Advocate appearing on behalf of Revenue relying upon decision in Delhi Tourism and T.D.C Ltd. Vs. CIT reported in (2006) 285 ITR (Delhi) submitted that expenditure was rightly disallowed by learned Tribunal as it was made and related to earlier years. We accept Mr. Bajoria s submission regarding expenditure made for construction/acquisition of new facility subsequently abandoned at work-in- progress stage was allowable as incurred wholly or exclusively for purpose of assessee s business as covered by decision in Graphite India Ltd. (supra). issue whether such expenditure could be allowed in relevant assessment year is however yet to be resolved. CIT (A) in his order had found as follows:- company claimed as allowable expenditure on this abandoned project. While it was found to be unviable, expenditure on it was for purpose of business. It was not claimed or allowed earlier as business expenditure because it was of capital nature entitled to depreciation after completion and on commencement of its use for business. But since that stage is not reached no asset having come into existence capital-work-in-progress had to be written off as such. There was no challenge to such finding on facts before learned Tribunal or even before us. decision in Delhi Tourism and T.D.C. Ltd. is distinguishable on facts in as much as in that case Delhi High Court had held that electricity charges for power consumed was known expenditure and assessee, on basis of average, could make provision for that expenditure in every year of assessment even if no bill was received in particular year of assessment. Following judgment in case of Gajapathi Naidu (supra) question to be asked is when did expenditure claimed by way of deduction arise? There would have been no occasion to claim deduction if work-in-progress had completed its course. Because project was abandoned work-in-progress did not proceed any further. decision to abandon project was cause for claiming deduction. decision was taken in relevant year. It can therefore be safely concluded that expenditure arose in relevant year. Reference in this regard may be made to decision in case of CIT Vs. Indian Mica Supply Co. P. Ltd. reported in (1970) 77 ITR 20 (SC) wherein Supreme Court in considering claim for deduction on arrear lease rents, ascertained subsequently consequent to compromise arrived in suit and paid in relevant assessment year held, inter alia, as under:- Tribunal, in present case, had clearly found that it was only as result of compromise that respondent became entitled to remain in possession of demised land. Its liability also became ascertained only at that point of time. It cannot be disputed that respondent in incurring expenditure had acted in interest of and for purpose of its business. expenditure was not laid out for any purpose other than that of carrying on business. deduction was properly admissible under section 10 (2)(xv) of Act and matter being self- evident High Court was fully justified in declining to accede to prayer made under section 66 (2) of Income-tax Act, 1922. Section 10 (2) (xv) of old Act corresponds to section 37 (1) of present Act. Our above conclusion is fortified by view expressed by Supreme Court in said decision. For aforesaid reasons question is answered in affirmative in favour of assessee. appeal is thus allowed. I agree. (Girish Chandra Gupta, J.) (Arindam Sinha, J.) M/s Binani Cement Ltd. v. Commissioner of Income Tax, Kolkata Central-I & Anr