As held by the Apex Court in the case of Empire Jute Co. Ltd. vs Commissioner Of Income Tax – 1980 124 ITR 1 (SC), since there does not exist an all-embracing formula which can provide a ready solution to the problem; no touchstone has been devised and that every case has to be decided on its own facts keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred.
The question must be viewed in the larger context of business necessity or expediency. If the outgoing expenditure. is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit- earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure.
In Indo Rama Synthetic (I) Ltd. Vs. Commissioner of Income-tax – [2011] 333 ITR 18 (Delhi), it was held that if the expenditure was incurred for starting a new business which was not carried out by the assesses earlier, then such expenditure would be held to be of a capital nature, and it would be irrelevant as to whether the project really materialised or not. However, if the expenditure incurred was in respect of the same business, which was already carried on by the assesses, even if it was for the expansion of the business, I.e., to start a new unit and there was unity of control and a common fund, then such an expense was to be treated as business expenditure. It was held that in such a case whether a new business/asset came into existence or no would become a relevant factor and that if there was no creation of a new asset, then the expenditure incurred would be of revenue nature and that if the new asset came into existence which was of an enduring benefit, then such expenditure would be of a capital nature.
The fact that earlier the expenditure was categorised as Capital-Work-In Progress and now written off as “Exceptional Item” would be of no consequence as held int the case of PR.
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