TMI Blog2008 (12) TMI 314X X X X Extracts X X X X X X X X Extracts X X X X ..... -------------------------- 2. ESI Penalty 403 ------------------------------------------------------------ 3. Towards in lieu of damages under s. 14(B) of PF Act-EPFO account No. KN-50071. 2,48,262 ------------------------------------------------------------ 4. Int. payable under s. 70 of the EPF and Miscellaneous Provision Act, 1952 on related remittance of dues the period from July, 1997 to February, 2001 48,706 ------------------------------------------------------------ 5. Int. on ESI delay in payment 15,858 ------------------------------------------------------------ 6. Towards wrong supply of beer 19,657 ------------------------------------------------------------ 7. Sales-tax penalty and interest under ss. 10(6) and 11(D) for financial year 2001-02 5,18,041 ------------------------------------------------------------ 8. Sales-tax penalty and Int. under ss. 10(6) and 11 (D) for financial year 2002-03 2,13,524 -------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not imposed for any delayed payment of central sales-tax. The Hon'ble apex Court held that the amount of penalty is not having a compensatory element in it and therefore it cannot be allowed. 2.5 In the case of Malwa Vanaspati Chemical Co. vs. CIT (1997) 142 CTR (SC) 137 : (1997) 225 ITR 383 (SC), the Hon'ble apex Court had an occasion to consider the allowability of penalty imposed under sales-tax. In that case, raw material purchased at lower rate of sales-tax was used for the purpose other than specified. The Hon'ble apex Court held that such penalty comprises both elements of compensation and penalty. It was held that the amount should be bifurcated and should be allowed to the extent it is compensatory in nature. Penalty imposed for failure to file return and comply with the requirements of notice was held as not involving any clement of compensation and was therefore not allowable. 2.6 The Hon'ble apex Court in the case of Organo Chemical Industries vs. Union of India AIR 1979 SC 1803 had an occasion to consider the meaning of the expression 'damages' occurring in s. 14B of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952. The Hon'ble apex Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cerned, then one has to regard such payment as business expenditure of the assessee, allowable under s. 37......" 2.8 Thus, the law on the allowability of expenses debited as penalty has been fully settled by the Hon'ble apex Court and it is the duty of the assessee to show that the amounts claimed are compensatory in nature in case these are to be allowed. As per Explanation to s. 37, the expenditure incurred for any purpose, which is an offence or which is prohibited by law, is to be treated to have not been incurred for the purpose of the business. Thus, the payment, which is punitive, is not allowable and in case the payment is compensatory, then the payment to the extent of compensatory nature is to be allowed. Since the issue has not been properly dealt either by the AO or by the learned CIT(A), therefore, we have no alternative but to set aside this issue on the file of the AO so that the assessee files all the material before the AO to show that the amounts are allowable because these are compensatory in nature. In case the AO finds that the amount is punitive, then it is not allowable. In case, the amount is compensatory as well as punitive, then the AO will bifurcate th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s preliminary expenses of call centre venture. 4.2 Before the learned CIT(A), it was submitted that the assessee has earned income of Rs. 1,95,24,601 from the call centre during the year ending 31st March, 2003 i.e. relevant to the assessment year under consideration. It was submitted that the list of expenses were furnished before the AO and these lists show that the payments were largely consisting of staff salaries, electricity charges, dish net charges, traveling expenses, staff food expenses etc. There was business of call centre functioning during the year and such business was substantial. The fact that the assessee described the revenue expenditure as deferred revenue expenditure does not militate against the claim nor does not justify the inference that the amount paid is in the nature of capital expenditure. The call centre is only an extension of new line of business and not of new business by itself. There was already an established facility by leasing or otherwise. It is incorrect to assume that there was no business at all. The law required that there should be a business during the year for allowing the expenses incurred during the year. Even there was a particular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... report of the director to the shareholders. The learned Departmental Representative drew our attention to the following observation at p. 6 of the annual report: "During the year under review, the company had not commenced the call centre operations for M/s Khodays System Ltd. which has been merged with the company w.e.f. 1st April, 2002." Thereafter, the learned Departmental Representative drew our attention to p. 15 of the annual report. At p. 15, it is mentioned that the company is one of the leading manufacturers and distributors of high quality alcoholic beverages in the country, catering to both Indian and overseas market. Of late the company has diversified its business activities by carrying on the business of high quality bottles and printing and writing papers etc. Pursuant to the scheme of amalgamation as approved by the Hon'ble High Court of Karnataka by its order dt. 22nd Aug., 2003, Khodays Systems Ltd., the sister concern of the Khoday group was amalgamated with the company thereby enabling the company to carry on the business of information technology as well. While highlighting the outlook for 2003-04, it is mentioned that the company is geared up to meet the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there was no business at all. The learned Authorised Representative also relied on the decisions which have been referred to by the learned CIT(A). The learned Authorised Representative drew our attention to Sch. 15 of the annual report. Schedule 15 contains the details of sales of various divisions. Under the head 'System division', the assessee has shown receipts of Rs. 2,10,57,000. Such receipts included the receipts from the call centre. The details of sales on system division has also been filed vide letter dt. 27th Nov., 2008. These details were filed as desired by the Bench. Call center details are of Rs. 1,95,25,602. Rs. 15,31,965 are the sales of trading division. The learned Authorised Representative filed the ledger account of technical service charges and has also enclosed copies of certain bills. From these details, the learned Authorised Representative submitted that the business of call centre was already in existence. 4.5 The learned Authorised Representative relied on the decision of the Mumbai Bench in the case of Situ Electro Instruments (P) Ltd. vs. ITO (2008) 19 SOT 13 (Mumbai). In this case it was held that the entries in books of account cannot be the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any other survey necessary for the business of the assessee; (iv) engineering services relating to the business of the assessee: Provided that the work in connection with the preparation of the feasibility report or the project report or the conducting of market survey or of any other surveyor the engineering services referred to in this clause is carried out by the assessee himself or by a concern which is for the time being approved in this behalf by the Board; (b) legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee; (c) where the assessee is a company, also expenditure (i) by way of legal charges for drafting the memorandum and articles of association of the company; (ii) on printing of the memorandum and articles of association; (iii) by way of fees for registering the company under the provisions of the Companies Act, 1956 (1 of 1956); (iv) in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, or brokerage and charges for drafting, typing, printing and advertisement of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (1) and (2) above, the following items of expenditure will also qualify for amortisation; (a) legal charges for drafting the memorandum and articles of association of the company; (b) expenditure on printing of the memorandum and articles of association; (c) fees for registering the company under the provisions of the Companies Act, 1956; (d) expenditure in connection with the issue, for public subscription, of share in or debentures of the company, by way of underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus. (This will include legal charges and auditors' fees for drafting of the prospectus). The CBDT is also empowered to specify in the IT Rules any other item or items of expenditure in respect of which the law does not provide for any allowance or deduction, and, thereupon the items of expenditure so specified will also be eligible for amortisation under s. 35D. 43. The aggregate amount of the expenditure under all the specified heads will, for the purpose of amortisation be limited to 2 1/2 per cent of the cost of the project. The 'cost of the project' has been defined to mean the actual cost of the fix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then s. 35AB may not apply. However, if it is found to be capital in nature, then the question of amortization and spread over as contemplated by s. 35AB would certainly come into play." 4.8 Sec. 35AB deals with expenditure on know-how. The Hon'ble apex Court has held that if the expenditure on know-how is revenue in nature, the same will be allowable under s. 37 and if it is capital, then s. 35AB will be applicable. Following the same analogy, the expenses of revenue nature are to be allowed and if there are ex-capital expenses or expenses covered under s. 35D(2), then 35D will come into play. 4.9 The Hon'ble apex Court in the case of India Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC) had an occasion to consider the allowability of expenditure incurred for raising loan. The Hon'ble apex Court allowed the expenditure as according to the Hon'ble apex Court, the loan obtained is not an asset or advantage of an enduring nature. It is irrelevant to consider the object with which the loan was obtained. In that case, the contention was raised by the Revenue that even if the expenditure is held to be revenue, then it is not to be allowed as it has not been incurred wholly and exclusivel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) refers to expenditure incurred for conducting market surveyor any other survey for the business of the assessee. Sub-s. (2)(a) in which this sub-clause is contained is with reference to the expenditure referred to in sub-s. (1) of s. 35D. Sec. 35D(1) provides for a spread over of the expenses over ten assessment years with regard to certain preliminary expenses. For such amortization, the provision contemplates either of the two situations. The first situation is where expenditure is incurred before the commencement of business. In the present case, we are not concerned with this situation. The second situation is where the assessee incurs the expenditure after the commencement of business in connection with the extension of its industrial undertaking or in connection with the setting up of a new industrial unit. Since the assessee has commenced its business long back and has incurred the impugned expenditure after the commencement of its business, we have to appreciate the facts in the light of this situation. This second situation further visualizes either of the two situations. One is, the expenditure is incurred in connection with the extension of its industrial undertaking. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t centre and hence its expenses are shown separately. To cope tip with its expanding activities and production, the assessee has to install new plants or new machinery. Installing such new plants or machinery is sometimes loosely referred to as setting up a new unit. The contention of the assessee before the CIT(A) that it has set up new units was in this context and not in the context in which it is envisaged in s. 35D. Therefore, there is no gainsaying that the assessee has put up new industrial unit and hence the expenditure in connection therewith should be amortised under s. 35D. In the two Tribunal decisions, the assessee had launched altogether a new product and had incurred huge advertisement expenditure. In both the cases, the expenditure was treated as deferred revenue expenditure by the assessee in its books of account. The assessee had claimed the entire expenditure in the return of income as revenue expenditure. The Tribunal allowed the entire expenditure by observing that by its very nature, deferred revenue expenditure presupposed that the expenditure was in revenue field. It was also observed that though the expenses may have enduring benefit, no estimate can be mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ---------------------------------- Advertisement - Recruitment 1,48,088.00 -------------------------------------------------- Bonus financial year 2002-03 2,17,000.00 -------------------------------------------------- Car hire charges 16,93,960.00 -------------------------------------------------- Commission/handling charges 11,400.00 -------------------------------------------------- Computer hire charges 1,06,750.00 -------------------------------------------------- Courier charges 814.00 -------------------------------------------------- Depreciation 4,24,570.00 -------------------------------------------------- Miscellaneous expenses 59,436.00 -------------------------------------------------- Office equipment hire charges 2,52,500.00 -------------------------------------------------- Office maintenance charges 2,14,776.00 -------------------------------------------------- Rates and taxes 16,78,009.00 -------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amined all the expenses from the angle as to whether any of the expenditure is of capital nature. The AO has disallowed the expenses by holding that these are covered under s. 35D. After considering the rival contentions, we are holding that if the expenses are of revenue nature, then the same are to be allowed and s. 35D will not be applicable. Therefore, the AO will examine the details and in case any of the expenditure is in capital nature, then the same will not be allowed. 4.16 Before us, the learned Authorised Representative fairly submitted that expenditure of Rs. 16,78,009 debited towards fees to RAC towards increase of authorized capital and stamp duty is capital and it is not allowable in view of the decision of the Supreme Court in Brooke Bond India Ltd. Hence, it is held that the expenditure of Rs. 16,78,009 will not be allowable. With the above observations, grievance No. 3 of the Revenue is disposed of. 5. The last grievance of the Revenue is that the learned CIT(A) has erred in allowing delayed payment of employees' and employer's contribution to PF/ESI. 5.1 The main contention of the Revenue is that the amendment made in s. 43B by the Finance Act, 2003 is w.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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