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TMI Blog2007 (3) TMI 313X X X X Extracts X X X X X X X X Extracts X X X X ..... as noticed that the assessee had claimed deduction of Rs. 1,06,43,227 as market development and analysis group expenses in the computation of income. In the books of account this expenditure was treated as deferred revenue expenditure and was written off over a period of four years. Considering the nature of expenditure, the AO invoked the provisions of s. 35D of the Act. The AO was of the view that this expenditure was always treated as deferred revenue expenditure in the books of account because its benefits were long-term and of enduring nature. Therefore, to debit the entire expenditure in one year would give a distorted picture of the profits of the company. The main contention of the assessee was that the entire expenditure was claimed as deductible on the ground that it was wholly and exclusively laid out for the purpose of the business. It was also emphasized that there was common management, unity of control interconnection, interlacing, interdependence and dovetailing of one activity into the other. It was stated that no new business was set up and the expenditure was for the ongoing activities of the assessee. The AO observed that s. 35D was applicable to a going concern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore were of revenue nature. Referring to s. 35D, it was argued that the said provision contemplates substantial expansion. In the case of the assessee there was no preparation either of any feasibility report or project report. It was submitted that the AO had specifically picked up sub-cl. (iii) of cl. (a) of sub-s. (2) of s. 35D which referred to expenses incurred for conducting market surveyor any other survey without considering the facts in the case of the assessee. It was also pointed out that merely because it was treated as deferred revenue expenditure in the books of account, the same does not become capital expenditure. Reliance was placed on the decision of the Hyderabad Bench of the Tribunal in the case of Amar Raja Batteries Ltd. vs. Asstt. CIT (2004) 85 TTJ (Hyd) 20 : (2004) 91 ITD 280 (Hyd) and also on the decision of the Delhi Bench of the Tribunal in the case of Jt. CIT vs. Modi Olivetti Ltd. (2004) 84 TTJ 1038 (Del). Alternatively, it was contended that if s. 35D was held to be applicable, then at the most expenses attributable to the manufacture of Edge Board may be disallowed which amounted to Rs. 13,57,947. 5. The learned Departmental Representative submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expansion, then it may not be necessary for the assessee to incur the type of expenditure envisaged in s. 35D. On the other hand, if there is extension or where altogether a new industrial unit is set up, such extension or setting up of a new unit may be preceded with the preparation of a feasibility report or a project report or conducting market survey and so on. These preliminary expenses are envisaged in s. 35D for the reason that the extension or setting up of a new unit presupposes that the assessee is entering into altogether a new line of activity or is setting up an undertaking which is independent of the present undertaking. With this background, let us consider the facts of the present case. 7. The assessee company is in manufacture of state of art packaging systems. It manufactures several products like steel strapping, sealing tools, industrial packaging machines, stretch wrapping and packing systems, paper conversion products etc. It is not unknown to anyone that the market gets flooded with new innovative products everyday. It is also not uncommon that the manufacturers of such products always try to package them in a sophisticated way to attract customers. Secondly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 (asst. yr. 1997-98): The first ground in this appeal is against Rs. 1,00,00,000 being the amount written off in respect of inter-corporate deposit (ICD) due from Shaw Wallace & Company Ltd. (Shaw Wallace for short). It was noticed that the assessee had placed Rs. 1 crore as ICD with Shaw Wallace. On maturity, Shaw Wallace could not repay the amount and the assessee filed proceedings for recovery in Calcutta High Court. In the opinion of the assessee since the amount was irrecoverable, it wrote off the amount in the books of account and claimed deduction thereof as bad debt. The AO was of the view that this amount was never taken into account in computing the income at any point of time before such write off. Secondly, it was more in the nature of investment and hence had the said amount been recovered, the assessee would not have credited it to its P&L a/c. Thirdly, according to the AO, it was a capital loss and not a debt of revenue nature. Thus, according to the AO, since the conditions for claiming deduction under s. 36(1)(vii) were not fulfilled, he disallowed the claim of the assessee. 9. Almost the same contentions were made before the CIT(A). In addition, it was contende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative submitted that the nature of debt and other facts in the present case are different from the cited cases and hence those cases have no relevance here. It was submitted that there was no business relationship between the assessee and Shaw Wallace but merely surplus funds were parked by the assessee with Shaw Wallace. He placed full reliance on the conclusion drawn by the CIT(A). 12. We have duly considered the rival contentions and the material on record. The facts are not in dispute. Recently, Supreme Court had the occasion to explain the meaning of the expression "commercial expediency". It was explained that it is a term of wide import and includes such expenditure for which there may not be any legal obligation but is incurred for the purpose of the business. It referred to its earlier judgment in the case of Madhav Prasad Jatia vs. CIT (1979) 10 CTR (SG) 375 : (1979) 118 ITR 200 (SC) where the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named. It was held that if the borrowed amount was donated for some sentimental or personal reasons then it could not be said that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1, we delete the addition of Rs. 28,02,328. 14. Third ground in the appeal is against the disallowance of Rs. 1,26,95,765 as bad debt due from Glen View Plastic Systems (P) Ltd. (Glen View for short). The assessee had advanced a sum of Rs. 3,12,31,754 to Glen View which is its sister concern over a period of five years. The amount was purportedly shown to have been given towards advance for material supply. The assessee obtains its requirement of PP Strap of various sizes from Glen View. However, the AO made the observation that the supply was not commensurate with the advances given. During the year under consideration, the assessee came to the conclusion that Glen View may not be in a position to supply the material and hence wrote off the advances standing to the debit of Glen View. The AO was of the view that existence of Glen View was entirely dependent on the assessee as the latter had given on lease to it the factory and plant and had also provided funds to it. The AO was also of the view that the advances given were of capital nature and that to write off these advances was premeditated and make-belief arrangement. Therefore, again, the AO referred to the provisions of s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess, the assessee had to keep on pumping funds to Glen View. This is nothing but pure commercial expediency which has been discussed in detail in respect of ground NO. 1. In fact, the case of the assessee here is much stronger than what it was in ground No. 1. Further, the balance does include lease rent and commission due from Glen View which was offered for taxation in the earlier years. Therefore, the condition laid down in s. 36(1)(vii) is also fulfilled. Accordingly, in the light of this discussion and in the light of the reasons given in respect of ground No. 1, we delete the disallowance of Rs. 1,26,95,765. 18. Fourth ground in the appeal is against the disallowance of Rs. 69,16,756 as bad debt on account of unrealized benefit under advance license scheme. The assessee was entitled to advance licenses for import of raw material pursuant to the import and export policy of the Government of India. Against these licenses the assessee could import raw material free of customs duty. At the same time, it was required to fulfill its export obligations. So far as accounting aspect is concerned, on receipt of advance license, the assessee used to credit its P&L a/c with the value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The learned Departmental Representative submitted that this issue may be set aside to verify whether the notional benefit was offered for tax in earlier years or not. 20. On due consideration of the matter, we do not see any legal or accounting infirmity in the write off effected by the assessee. The AO is not right in observing that the assessee used to debit the P&L a/c with the anticipated amount of duty payable by it in future. That cannot be the case and in fact is not the case also. The amount credited to license benefit account will get adjusted only on actual import of raw material by the amount of the duty which the assessee saved on account of advance license. Thus, though the entries are notional in the sense that there is in reality no inflow or outflow of money, yet it is a benefit derived by the assessee and hence the same was rightly credited to the P&L a/c. Similarly, the benefit so derived and credited in the books got adjusted either on import of raw material or in the event of changes in the duty structure. It can be seen that unless these transactions, though notional, are recorded, the true profit or loss of the assessee cannot be determined. The benefit obt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one by the Madras High Court in CIT vs. Chinnapandi (2006) 201 CTR (Mad) 13 : (2006) 282 ITR 389 (Mad) and the other by the Punjab & Haryana High Court in the case of Rani Paliwal vs. CIT (2003) 185 CTR (P&H) 333 : (2004) 268 ITR 220 (P&H). Both these judgments have been considered at length by the Delhi High Court. Considering all the judgments, we are inclined to follow the judgment of the Delhi High Court as it is well established that between two views expressed, the one which is favourable to the assessee should be accepted. Therefore, respectfully following the same we direct the AO to exclude 90 per cent of net interest from the business profits. With regard to the observation of the CIT(A) that the AO has taken the same amount of interest as was taken by the assessee, we may only add that if the assessee has taken gross amount on some mistaken belief, it should not be prevented from taking the net amount because after all correct income has to be determined in accordance with law. Therefore, this ground of the assessee is upheld. 22. Last ground in the appeal relates to the disallowance in respect of expenditure on food and beverages and expenses in connection with the mai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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