ITAT Mumbai Rules Abandoned Towel Manufacturing Project Write-Off Deductible as Business Expenditure Under Sections 28/37

Case Overview

Case Name: Intermarket India Private Limited Vs DCIT (ITAT, Mumbai)
Appeal Number: ITA 2993/MUM/2026
Date of Order: 31/08/2026
Assessment Year: 2013-14
Forum: Income Tax Appellate Tribunal, Mumbai

The Mumbai Bench of the Income Tax Appellate Tribunal delivered a significant ruling in the case of Intermarket India Private Limited Vs DCIT (ITAT, Mumbai), holding that expenditure incurred on an abandoned manufacturing project — initially recorded as capital work-in-progress (CWIP) — qualifies as deductible business expenditure under Section 28/Section 37 of the Income-tax Act, 1961, provided the project formed part of the assessee's existing line of business and no enduring capital asset ultimately came into existence.

Background and Facts

Intermarket India Pvt. Ltd. is a company engaged in manufacturing and trading of textile products, including made-ups, fabrics, home fashion products, and allied goods. During the relevant period, the assessee planned to expand its operations by establishing a towel manufacturing facility at Bharuch, Gujarat.

The proposed facility required multiple regulatory clearances, including, critically, governmental approval for procurement of water supply. In pursuit of this project, the assessee incurred the following categories of expenditure:

  • Architectural fees and drawing charges
  • Commencement permission expenses
  • Preparation of the base, excavation, and civil work
  • Fencing and site development charges
  • Electrical systems design consultancy fees
  • Plant designing charges
  • Professional fees and miscellaneous project-related expenses

All such amounts were accumulated in the books of account under the head "Capital Work-in-Progress" (CWIP) over the preceding years. The aggregate amount so capitalized stood at ₹3,05,80,830.

The water procurement approval was ultimately denied by the concerned government authority. Since this clearance was a prerequisite for the project's viability, the assessee had no option but to abandon the Bharuch project entirely. No manufacturing facility was established, and no operational infrastructure came into use. In Assessment Year 2013-14, the entire CWIP balance was written off through the profit and loss account.

The assessee claimed the write-off amount of ₹3,05,80,830 as deductible business expenditure under Section 28/Section 37 of the Act, on the ground that:

  1. The Bharuch project was an extension of its existing textile business.
  2. No new independent business or income source was created.
  3. No completed asset or enduring benefit survived the abandonment.

Positions Taken by Tax Authorities

Assessing Officer's Stand

The Assessing Officer (AO) disallowed the claim in its entirety, primarily reasoning that:

  • The expenditure was capital in nature at the time it was incurred.
  • The mere abandonment of the project cannot alter the character of expenditure from capital to revenue.
  • Section 37(1) of the Act explicitly excludes capital expenditure from its scope.

The AO therefore maintained the disallowance of ₹3,05,80,830.

CIT(A)'s View

The Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi, upheld the AO's disallowance by order dated 22.01.2026. The CIT(A)'s reasoning proceeded on multiple grounds:

  • The assessee itself had classified the expenditure as capital in nature by recording it as CWIP in earlier years, reflecting the assessee's own commercial understanding.
  • The expenditure was not limited to feasibility studies or exploratory activities but extended to architectural work, excavation, civil construction, and site development — activities intrinsically associated with creating a manufacturing facility, squarely within the capital field.
  • The test of "enduring benefit" cannot be applied in isolation. Where expenditure is incurred with the objective of creating or acquiring a capital asset, the non-materialisation of that asset does not alter the expenditure's character.
  • The matching principle supported disallowance, since the expenditure was accumulated across several years and allowing the full deduction in the year of write-off would distort the profits of AY 2013-14.