Pochiraju Industries Ltd. Vs ACIT (ITAT Chennai)
No Sales Yet? That Alone Cannot Turn a Set-Up Division’s Expenses into Capital Expenditure: Chennai ITAT Deletes ₹10.70 Crore Disallowance
A new business division may be ready for operations before it generates substantial commercial sales. Can all its expenses be capitalised merely because the Revenue says commercial production has not commenced? The Chennai Tribunal addressed this question in the case of Pochiraju Industries Ltd., where the Assessing Officer had disallowed ₹10,70,08,883 relating to the company’s Bio-Pharma Division.
The Tribunal deleted the blanket disallowance. It found that the company’s contemporaneous Annual Report recorded completion of the division’s first phase and commencement of production. It also emphasised the distinction between a business being set up and its commercial commencement. The ruling does, however, leave each category of expenditure subject to the statutory conditions applicable to that deduction.
Why was ₹10.70 crore disallowed?
The assessee-company carried on activities in agriculture, pharmaceuticals and bio-pharma. Following proceedings under section 263, the AO passed an assessment order disallowing expenses claimed for its Bio-Pharma Division in AY 2013–14.
The AO’s premise was that the division had not commenced commercial operations during the relevant year. He treated the expenditure as relating to a new project that was still being set up and therefore required the entire amount to be capitalised. The disallowance covered consumables and stores, staff costs, administrative and operating expenses, depreciation, bank term-loan interest and research expenditure.
