Section 37(1) of Income-tax Act, 1961 : Expenditure on setting up new units are allowable as a revenue expenditure on ground that same are incurred for expansion of assessee’s existing business


[2010] 6 109 (Mad.)




Sakthi Sugars Ltd.

TAX CASE (APPEAL) No. 411 of 2004

August 10, 2010



The substantial question of law that arises for consideration in this appeal and as framed at the time of admission is as under:

"Whether on the facts and in the circumstances of the case the Income-tax Appellate Tribunal was right in holding that the expenditure on setting up new sugar units in Orissa were allowable as a revenue expenditure on the ground that the said expenditure has been incurred for the expansion of the assessee's existing business ?"


The assessment year was 1992-93.  The issue centres around the expenses relating to Baramba and Dhenkanal sugar units of the respondent.  The respondent is having three different lines of manufacturing activities viz., Sugar Division, Distillery Division and Foundry Division. 


The Appellate Authority noted that subsequent to the filing of the original return, the assessee filed revised return and claimed further revenue expenses relating to the expansion of the sugar units.  It was claimed by the respondent assessee that the Baramba Sugar unit with crushing capacity of 1250 TCD was taken over by the company on 'Management Contract' for a period of 10 years and steps were being taken to start the mill by the middle of December, 1991.  As far as the Dhenkanal Sugar unit was concerned, it was claimed that the sugar factory with 2500 TCD capacity at Haripus Village, Dhenkanal District, Orissa State was planned and lands were purchased and civil construction work was in progress.  It was also claimed that the machinery supply had commenced and the new sugar factory was expected to commence production during 1992-93 season.


It was not in dispute that in respect of the said two units, the respondent assessee also claimed to have obtained various incentives like subsidy etc., which were available to a new industrial undertaking.



For the above stated reasons, the Assessing Authority held that the assessee's business and installed capacity had gone up and the business was expanded in a different State and that the assessee cannot claim the expenses incurred on the installation of new factories as revenue expenditure.  Accordingly, the same were treated as capital expenditure.


The assessee went on appeal before the Commissioner of Income-tax (Appeals) in ITA No.196-C/95-96. The Commissioner of Income-tax (Appeals) by taking note of the nature of expenses involved viz., cane development expenses, travelling expenses, interest charges, administrative expenses, lease rents, etc. which were all in the nature of revenue expenses and also the decisions in various cases that such expenses incurred in setting up of a new units does not amount to starting of a new business but only expansion or extension of the business which was being carried on by the assessee held that they are deductible as revenue expenditure.  The Commissioner of Income Income-tax (Appeals) also placed reliance upon the earlier decisions reported in 175-ITR-215 (Commissioner of Income Tax Vs. Indian Telephone Industries Ltd.,), 175-ITR-216 (Commissioner of Income Income-tax Vs. Hindustan Machine Tools), 196-ITR-845 (Kesoram Industrials & Cotton Mills Ltd. case) and 109-ITR-715 (Commissioner of Income Tax Vs. Allambic Glass Mills Ltd.).  The Commissioner of Income Tax (Appeals) further directed the Appellate Authority to verify whether the entire expenses claimed were incurred during the year and if so allow the claim in full.


The Revenue went on appeal before the Tribunal.  The Tribunal also held that expenses incurred by the assessee in setting up the new sugar factories at Baramba and Dhenkanal in Orissa to an extent of Rs. 6,84,78,570/ does not amount to starting of a new business, but only expansion or extension of the business already being carried on and the expenses in connection with such expansion of business are deductible as revenue expenditure.  The decisions relied upon by the Commissioner of Income Tax (Appeals) was followed by the Tribunal also.  The Tribunal also noted that the same issue was earlier decided by the Tribunal in the assessee's own case in ITA No.2020(Mds.)/1994, for the assessment year 1991-92 and ultimately upheld the assessee's claim and rejected the appeal.




Under section 37 of the Act, any expenditure not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'.


 It is the case of the appellant that all the expenses relating to a sum of Rs. 6,84,78,570/ in respect of the Baramba Sugar Mill and Dhenkanal Sugar Mill were covered by the Explanation to section 37(1) or 37(2B) of the Act.  In the said circumstances, we are convinced that every one of such expenditure was revenue in nature and therefore the same were allowable deduction as provided under sections 36(1)(i) & (iii) and 37(1) of the Act.  We, therefore, do not find any scope to interfere with the orders of the Commissioner of Income-tax (Appeals) or that of the Tribunal which confirmed the order of the Commissioner of Income-tax (Appeals).


In other words, applying the principles set out in the various decisions referred to above, as stated earlier, the expenses which were in a sum of Rs. 6,84,78,570 were all expenses which were incurred by way of salaries, wages, bonus, provident fund contribution,  workmen welfare expenses, power, fuel and water, manufacturing expenses, rent for office building etc., were all expenses which were incurred for the purpose of running of the business and it cannot be held to be by way of investment.  In fact there was no dispute that whatever investments made for Baramba Unit and Dhenkanal Unit were capitalised and were never claimed by way of revenue expenditure.