Intermarket India Private Limited Vs DCIT (ITAT, Mumbai)
When the Factory Stays on Paper, the Write-Off Turns Revenue: ITAT Allows Abandoned Bharuch Project Cost u/s 28/37
Summary:
Facts: A Towel Unit That Never Took Off
Intermarket India Pvt. Ltd., a textile manufacturer & trader, proposed a towel-manufacturing facility at Bharuch, Gujarat, as an expansion. It required governmental permissions, particularly approval for water procurement. The assessee incurred ₹3,05,80,830 on architectural services, drawings, permissions, excavation, civil work, fencing, electrical consultancy, plant design & professional fees, accumulated as capital work-in-progress (CWIP).
The water-supply approval was not granted. Consequently, the manufacturing facility never became operational, the project was abandoned & the CWIP was written off in the profit & loss account for AY 2013-14. The assessee claimed the amount as business expenditure u/s 28/37, asserting that the proposed unit represented expansion of the same textile business & produced neither a completed asset nor an enduring benefit.
The AO disallowed the claim as capital expenditure, reasoning that abandonment could not change its character & section 37(1) excludes capital expenditure. The CIT(A) affirmed, stressing the assessee’s capitalisation, civil & site-development work, & the matching principle. The assessee appealed.
Core Issue: Capital Intent or Revenue Reality?
The issue was whether abandoned-project expenditure recorded as CWIP remained capital expenditure, or was deductible where the project expanded an existing business & no asset emerged. The Tribunal had to distinguish a new profit-making apparatus from expansion of an existing business.
Rival Contentions
The assessee argued that towel manufacturing fell within its existing textile line, with common control & funds. The decisive enquiry was true commercial purpose, not bookkeeping. Since approval failed, no unit, new income source or enduring advantage arose. Trigent Software Ltd., Tata Chemicals Ltd., Rediff.com India Ltd. & Tin Tar Retail Corp. supported revenue treatment for abandoned expansion creating no asset. The Supreme Court had also dismissed Revenue’s SLP against Trigent Software.
The Revenue maintained that architectural, excavation, fencing, civil & design costs targeted a capital facility. Their character crystallised when incurred; later failure could not convert capital outlay into revenue. Capitalisation & matching reinforced disallowance.
Tribunal’s Findings & Legal Reasoning
The ITAT allowed the appeal. It held that classification depends upon the expenditure’s real nature, purpose & business setting, not merely the accounting entry. Expenditure for an altogether new business or acquisition of a profit-making apparatus ordinarily belongs to the capital field. Conversely, spending connected with an existing business, including its expansion, may be revenue where it facilitates that business & creates no enduring asset.
The assessee already operated in textiles; towel production remained within that business. Bharuch was therefore an extension of the existing business, not a distinct undertaking. Water non-approval prevented commencement; no completed facility or usable capital asset resulted. CWIP treatment was relevant but not conclusive because book entries cannot determine deductibility.
Abandonment was relevant. Purpose when incurred cannot be divorced from business context & the intended asset’s absence. Where same-line expansion never materialises, abandonment helps determine whether any enduring advantage arose.
Authorities involving a new product, distinct business, identifiable property or separate profit-making apparatus were distinguished. By contrast, Trigent Software, Tata Chemicals & Rediff.com more directly supported allowance where spending related to an existing business & no enduring asset resulted. The Tribunal thus rejected the broad proposition that initial capitalisation permanently fixed the expenditure’s character.
The CIT(A)’s reliance on the matching principle also failed. Drawing upon Taparia Tools Ltd., the ITAT explained that matching is an accounting rule, not a device enabling Revenue to override statutory deductibility or compel spreading of expenditure. Once the outlay was found revenue in nature, its write-off in the year of abandonment was permissible; no material showed that the assessee retained any capital benefit.
The ruling therefore applied a substance-over-form approach. Initial capitalisation reflected the project’s then-expected destination, but did not create an irreversible tax consequence after that destination disappeared. Equally, the ITAT did not hold that abandonment automatically changes every capital expense into revenue. Allowance followed from the combined facts that the proposed unit belonged to the same business, approvals failed, operations never commenced & no transferable, completed or enduring asset survived. This factual combination separated the case from unsuccessful attempts to acquire identifiable capital assets.
Accordingly, the Tribunal set aside the CIT(A)’s order & directed the AO to allow the entire ₹3,05,80,830 as business expenditure for AY 2013-14.
Practical Implications: Books Do Not Write the Tax Law
The decision supports businesses shelving expansion projects. CWIP classification does not automatically defeat deduction where unity with the existing business, genuine abandonment & absence of a usable enduring asset are proved. Taxpayers should preserve approvals, correspondence, permission refusals & abandonment records.
However, the ruling does not make every abandoned capital project deductible. Costs connected with a genuinely new business, acquired property or identifiable capital asset may remain capital despite abandonment. The practical test is fact-sensitive: same business, common control, no completed asset & demonstrable abandonment. The decision therefore aligns tax treatment with commercial substance while preventing accounting nomenclature or the matching concept from becoming an artificial barrier to a legitimate business write-off.
Cases Discussed
- PCIT Vs Rediff.Com India Ltd. — Bombay High Court; considered on allowability of expenditure relating to abandoned projects where the expenditure was connected with the existing business and no new asset came into existence.
- Trigent Software Ltd. — considered on revenue treatment of expenditure relating to expansion of an existing business where the proposed project did not result in a completed enduring asset.
- Tata Chemicals Ltd. — considered in relation to the distinction between capital and revenue expenditure arising from business expansion and abandoned projects.
- Tin Tar Retail Corp Vs ACIT — ITAT Mumbai; considered in the context of CWIP write-off and revenue expenditure under section 37(1).
- Taparia Tools Ltd. Vs JCIT — Supreme Court; relied upon regarding the limited role of the matching concept and statutory allowability of expenditure notwithstanding accounting treatment.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, MUMBAI
This appeal has been preferred by the assessee against the order dated 22.01.2026 passed by the learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as “the ld. CIT(A)”], under section 250 of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), for the Assessment Year 2013-14. The dispute before us, in substance, relates to the allowability of expenditure written off by the assessee in respect of the Bharuch project, which had earlier been reflected as capital work-in-progress and was subsequently abandoned.
2. Briefly stated, the material facts emerging from the record are that the assessee is engaged in the business of manufacturing and trading of textile products, including made-ups, fabrics, home fashion products and other related products. During the relevant period, the assessee undertook a project at Bharuch, Gujarat, with the object of setting up a manufacturing facility for towels. The project was subject to obtaining the requisite approvals from the concerned Government authorities, including approval relating to procurement of water. In the course of development of the project, the assessee incurred various expenses such as architectural fees, expenses relating to drawings and commencement permissions, preparation of the base, excavation, civil work and fencing, consultancy charges for electrical systems design, plant designing charges, professional fees and miscellaneous expenses. These expenses were accumulated in the books under the head “Capital Work-in-Progress” in the earlier years.
3. The Bharuch project, however, could not be brought to fruition on account of non-grant of the requisite approvals, particularly the approval for the proposed source of water supply. The assessee accordingly abandoned the project and wrote off the capital work-in-progress in its profit and loss account during the previous year relevant to Assessment Year 2013-14. The assessee claimed the resultant write-off as an allowable business expenditure under sections 28/37 of the Act, contending that the expenditure was incurred in connection with the expansion of its existing business and that no new business or independent source of income was brought into existence. The Assessing Officer, however, treated the expenditure as capital in nature and disallowed the claim, principally on the ground that the character of expenditure does not change merely because the project for which it was incurred is subsequently abandoned. The Assessing Officer also proceeded on the footing that capital expenditure is specifically excluded from the ambit of section 37 of the Act.
4. In appeal before the ld. CIT(A), the assessee reiterated that the Bharuch project was not a new or unrelated line of business, but was undertaken in continuation and expansion of its existing business. It was submitted that the expenditure was inextricably linked with the assessee’s existing business and was intended to increase the profitability thereof; further, owing to the failure to obtain the requisite approvals, no capital asset or enduring benefit ultimately came into existence. The assessee relied upon various judicial precedents, including the decisions in Empire Jute Co. Ltd. v. CIT, Idea Cellular Ltd., Indo Rama Synthetics (I) Ltd., Gujarat Narmada Valley Fertilizers Co. Ltd., Trigent Software Ltd., Tata Robins Fraser Ltd., Binani Cement Ltd. and other decisions concerning abandoned projects. The assessee’s principal submission was that expenditure incurred in the course of expansion of an existing business, where there is unity of control and commonality of funds and no new enduring asset ultimately comes into existence, may retain the character of revenue expenditure notwithstanding its initial capitalization.
5. The ld. CIT(A), however, did not accept the assessee’s contention. The ld. CIT(A) proceeded on the basis that the assessee itself had treated the expenditure as capital in nature by capitalising it as capital work-in-progress over the earlier years. The ld. CIT(A) further noted that the expenditure was not confined to feasibility studies or exploratory activities, but included architectural fees, drawings, commencement permissions, excavation, fencing, site development and civil work, which, according to him, were intrinsically connected with setting up a manufacturing facility and were therefore within the capital field. The ld. CIT(A) held that the subsequent abandonment of the project did not alter the character of expenditure and that the write-off of capital work-in-progress could not be converted into revenue expenditure or business loss merely because the intended project did not materialise.
6. The ld. CIT(A) also rejected the assessee’s reliance upon the absence of any ultimate enduring benefit. According to the ld. CIT(A), the test of enduring benefit could not be applied in isolation or mechanically and, where expenditure was incurred with the objective of acquiring or bringing into existence a capital asset, the fact that such asset did not eventually materialise would not change the character of the expenditure. The ld. CIT(A) further accepted the Assessing Officer’s reasoning based upon the matching principle, observing that the expenditure had been incurred over several earlier years and accumulated as capital work-in-progress and that allowing the entire amount as a deduction in the year of write-off would distort the profits of the relevant year. On this reasoning, the ld. CIT(A) agreed with the Assessing Officer that the expenditure was capital expenditure, specifically excluded from the ambit of section 37(1) of the Act, and upheld the disallowance of Rs.3,05,80,830/-. The appeal of the assessee was accordingly dismissed.
7. During the course of hearing before us, the learned Authorised Representative (“ld. AR”) submitted that the abandoned project was merely an expansion of the assessee’s existing line of business and not an altogether new project or a new source of income. He submitted that the authorities relied upon by the Assessing Officer and the ld. CIT(A) were distinguishable because those decisions dealt with projects constituting a new and distinct line of business or the acquisition of a profit-making apparatus, whereas, in the present case, the project was intended to continue the assessee’s existing business. The ld. AR specifically referred to the principles emerging from the decisions in Triveni Engineering Works Ltd. v. CIT, E.I.D. Parry (India) Ltd. v. CIT, Hasimara Industries Ltd. v. CIT and Atcom Technologies Ltd. v. DCIT and submitted that the true test is whether the expenditure was incurred for facilitating the existing business or for bringing into existence an asset or advantage in the capital field.
8. The ld. AR further placed reliance upon the decision of the Hon’ble Bombay High Court in Trigent Software Ltd.,[2023] 147 taxmann.com 52, as referred to in the record, wherein the distinction between expenditure incurred for starting a new business and expenditure incurred in connection with the same business, including expansion thereof, was considered. According to the ld. AR, where expenditure is incurred in respect of the same business already carried on by the assessee, even though the expenditure relates to a new unit or an expansion, and there is unity of control and a common fund, such expenditure is to be regarded as business expenditure. He also submitted that, where no new asset of enduring benefit comes into existence, the expenditure cannot be treated as capital merely because it was initially capitalised.
9. The ld. AR also relied upon the decision of the Hon’ble Bombay High Court in Tata Chemicals Ltd., [2024] 167 taxmann.com 661, which, as recorded in the assessee’s submissions, followed the principle stated in Trigent Software Ltd. He submitted that the Special Leave Petition filed by the Revenue against the decision in Trigent Software Ltd. was dismissed in limine by the Hon’ble Supreme Court. Reliance was also placed on the decision of the Hon’ble Bombay High Court in Rediff.com India Ltd., [2021] 132 taxmann.com 71, for the proposition that expenditure incurred for carrying on business in a more convenient and profitable manner, without bringing any new asset into existence, is allowable as business expenditure.
10. The ld. AR further relied upon the decision of the Coordinate Bench in Tin Tar Retail Corp., dated 16.02.2026 in ITA Nos. 6485 to 6487/Mum/2024, wherein, it was held that expenditure incurred in the course of expansion of an existing business, where the new project does not constitute a new line of business but remains in continuation of the existing business, may be allowable as revenue expenditure even if initially capitalised, particularly where the project is abandoned and no enduring asset ultimately comes into existence. The learned Departmental Representative (“ld. DR”), on the other hand, supported the orders of the lower authorities and submitted that the expenditure was capital in nature and that the subsequent abandonment of the project could not alter its character.
11. We have carefully considered the rival submissions, perused the material placed on record and examined the reasoning adopted by the Assessing Officer as well as the ld. CIT(A). The controversy has to be examined by determining the true and commercial character of the expenditure in the light of the purpose for which it was incurred and the business context in which the project was undertaken. It is well settled, as emerging from the authorities relied upon by the parties, that expenditure incurred for setting up an altogether new and distinct business or for bringing into existence a profit-making apparatus would ordinarily fall within the capital field. Conversely, where the expenditure is incurred in connection with the existing business, including an expansion thereof, and is intended to facilitate or make more profitable the business already carried on, the expenditure may be revenue in character, particularly where no new asset of enduring benefit ultimately comes into existence. The mere accounting treatment adopted by the assessee cannot, by itself, be regarded as conclusive of the legal character of expenditure.
12. In the present case, the factual position recorded in the order under appeal shows that the assessee was already engaged in the business of manufacture and trading of textile products and that the Bharuch project was undertaken for manufacturing towels, which formed part of the existing line of business. The project was not a venture into an altogether different or unrelated business. The project could not be commenced because the requisite approval for procurement of water was not granted by the concerned authority, and the project was consequently abandoned. Significantly, the record does not establish that the expenditure resulted in the coming into existence of a completed manufacturing facility or any independent capital asset yielding an enduring advantage to the assessee. The fact that the expenditure had been accumulated as capital work-in-progress in the earlier years is relevant as an accounting fact, but it cannot be treated as determinative of the character of the expenditure for the purposes of the Act.
13. The nature of the expenditure also assumes importance. The expenditure comprised architectural fees, expenses relating to drawings, commencement permissions, preparation of the base, excavation, civil work and fencing, consultancy charges for electrical systems design, designing charges for the plant, professional fees and miscellaneous expenses. These items were incurred in the course of pursuing the proposed expansion of the assessee’s existing manufacturing operations. Since the project itself was abandoned before the contemplated manufacturing facility came into existence, and the material on record does not demonstrate the existence of any enduring capital asset available for use in the assessee’s business, the ultimate character and effect of the expenditure have to be considered in the context of the existing business as a whole.
14. We are also unable to accept the proposition, in the broad manner in which it has been applied by the lower authorities, that the fact of capitalization in the earlier years concludes the matter against the assessee. The Supreme Court and High Courts have repeatedly emphasised that the distinction between capital and revenue expenditure is to be determined on the basis of the real nature and purpose of the expenditure and not merely by the form in which the assessee records it in its books. Equally, the principle that the character of expenditure is determined when incurred cannot be divorced from the nature of the business and the object sought to be achieved. Where an expenditure is incurred in the course of an existing business for an expansion which does not constitute a new line of business and where the proposed capital asset never comes into existence, the subsequent abandonment is a relevant circumstance in determining whether the expenditure has, in fact, resulted in any enduring capital advantage.
15. The reliance placed by the ld. CIT(A) on the decisions dealing with expenditure incurred for a new and distinct business or for acquisition of a profit-making apparatus does not, in our considered view, advance the case of the Revenue on the facts before us. The distinction drawn by the assessee between such cases and the present case is material. The cases of Triveni Engineering Works Ltd., E.I.D. Parry (India) Ltd. and Hasimara Industries Ltd., as referred to in the record, concern circumstances where the expenditure was connected with a new product, a new business or a profit-making asset distinct from the assessee’s existing business. In contrast, the assessee before us was already carrying on the business in the same broad field and the Bharuch project represented an extension of that business. Likewise, the decision in Atcom Technologies Ltd., concerning interest expenditure accumulated in capital work-in-progress for acquisition of properties/flats, is distinguishable on facts where the expenditure was connected with acquisition of identifiable capital assets.
16. The decisions relied upon by the ld. AR, particularly the principles stated in Trigent Software Ltd., Tata Chemicals Ltd. and Rediff.com India Ltd., are more directly relevant to the factual issue before us. The principle emerging from those decisions, as presented before us, is that where expenditure is incurred in relation to an existing business and no new asset of enduring benefit ultimately comes into existence, the expenditure may be allowable as revenue expenditure notwithstanding the fact that it was initially capitalised or incurred in connection with a project which was subsequently abandoned. The Coordinate Bench decision relied upon by the assessee also proceeds on the same distinction between a new line of business and expansion or continuation of an existing business.
17. We may also deal with the Revenue’s reliance upon the matching principle. The fact that the assessee follows the mercantile system of accounting does not, in our view, by itself determine whether a particular outgoing is capital or revenue in character. The matching principle is a rule of accounting and computation and cannot override the substantive provisions governing deductibility. The Hon’ble Supreme Court in the case of Taparia Tools Ltd. (2015) 372 ITR 605 clarified that the matching concept can be applied only at the option of the assessee – i.e., where the assessee himself seeks to spread the expenditure over future years – and even then, only if the conditions of the matching concept are satisfied and the Revenue, however, cannot force such spreading or invoke the matching principle to restrict a deduction that is otherwise permissible under the statute. Once the expenditure is found to be revenue in nature and is written off upon the abandonment of the project in the relevant previous year, the question of the year in which the deduction is to be allowed has to be considered in accordance with the statutory provisions and the factual circumstances. In the present case, the expenditure was written off in the year in which the project was abandoned, and the lower authorities have not brought on record any material to establish that the assessee obtained any enduring capital benefit from the expenditure.
18. On an overall consideration of the facts and the legal position, we find that the Bharuch project was undertaken as an expansion of the assessee’s existing line of business, that there was no demonstrated change in the nature of the assessee’s business, that the project was abandoned because the requisite approval relating to water supply was not obtained, and that no completed capital asset or enduring benefit ultimately came into existence. The expenditure was therefore incurred in the course of and for the purposes of the assessee’s existing business. The mere fact that it was initially shown as capital work-in-progress cannot, in the facts of the present case, convert the expenditure into capital expenditure when the intended project itself did not materialise and no capital asset came into existence.
19. We accordingly hold that the expenditure incurred by the assessee on the abandoned Bharuch project is allowable as business expenditure in the year under consideration. The disallowance sustained by the ld. CIT(A) is therefore not sustainable. We, accordingly, set aside the impugned order of the ld. CIT(A) on this issue and direct the Assessing Officer to allow the claim of the assessee. The corresponding ground of appeal is allowed.
20. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 31.08.2026
