Law:

Section:

I. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1981-82 - Assessee was engaged in manufacture of certain products - Wanting to add a new product, it incurred expenditure by way of entering into a collaboration agreement for purchase of machinery over a period of time from 1975 to 1978 - Subsequently, it abandoned said project and claimed deduction on account of expenditure incurred for said project in assessment year 1981-82 - Whether expenditure incurred by assessee was clearly capital expenditure and not revenue expenditure and, therefore, same was not allowable as deduction for relevant assessment year - Held, yes FACTS-I The assessee wanting to set up a new project incurred expenditure on various items such as engineering fee, travel expenses, interest, salary for employees working in the project, legal fees, etc., over a period of time from 1975 to 1978. The assessee sought to claim these items as deductible items as expenditure for the assessment year 1981-82. That claim of the assessee was negatived by the Assessing Officer, by the appellate authority as also by the Tribunal. On reference : HELD-I It was clear from the assessee's own case that the expenditure was incurred for the purpose of setting up a new project. The expenditure had been incurred in the years prior to the assessment year in question. The assessee's case that it subsequently abandoned that project did not on that score convert what was an expenditure in the nature of capital expenditure into a revenue expenditure. The setting up of a new project was clearly in the capital filed and not in that of revenue. The abandonment of that project was the abandonment of a project of which capital expenditure had been incurred. The expenditure incurred on that capital project was not something which could be regarded as revenue expenditure laid out exclusively and wholly for the purposes of business of the assessee as what the assessee was trying to start was a new business for the manufacture of a new product. The expenditure incurred therein was clearly capital expenditure and not revenue expenditure. It was evident that the assessee was…

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