Deduction allowed on expenditure incurred in abandoned project in the relevant year

Expenditure made for construction/acquisition of new facility subsequently abandoned at the work-in progress stage was allowable as incurred wholly or exclusively for the purpose of assessee’s business.

CIT(A) in the present matter had held that when construction/ acquisition of new facility is abandoned at the work-in-progress stage, the expenditure does not result in an enduring advantage and such expenditure and when the same is written off, it has to be allowed under section 37 of the Income Tax Act, 1961 was the subject matter of challenge. This finding was reversed by tribunal vide impugned order challenged in the present petition before the High Court.

The Tribunal in its impugned order held that the expenditure incurred in the earlier years could not be deducted in the year under consideration. The question before the Court was to determine as to whether the Tribunal substantially erred in law in disallowing the expenditure allegedly incurred by the assessee for preparation of the feasibility study report and capital-work-in-progress in the earlier years, but written off during the previous year corresponding to the relevant assessment year (2002-03) since the proposed project was abandoned?”

The CIT (A) in his order had found that the company claimed as allowable the expenditure on this abandoned project. While it was found to be unviable, the expenditure on it was for the 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 – the capital-work-in-progress had to be written off as such.

There was no challenge to above finding on facts before the Tribunal or even the High Court. 
It was accordingly held that the expenditure made for construction/acquisition of new facility subsequently abandoned at the work-in progress stage was allowable as incurred wholly or exclusively for the purpose of assessee’s business. There would have been no occasion to claim the deduction if the work-in-progress had completed its course. Since the project was abandoned the work-in-progress did not proceed any further. The decision to abandon the project was the cause for claiming the deduction, which was taken in the relevant year. It can therefore be safely concluded that the expenditure arose in the relevant year.

[M/s Binani Cement Ltd., Kolkata vs. CIT, Kolkata Central-I & Anr.]
(Calcutta HC, 23.03.2015 – Income Tax Appeal No. 265 of 2009)