TMI Blog2011 (10) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... en so done, it was the requirement of the Foreign Direct Investment Laws which made the assessee to act in the manner discussed above. The provisions of section 79 of the I.T. Act, therefore, cannot be said to envisage the transfer of shares by the subscribers of the Memorandum of Articles of Association as a change in the shareholding of the assessee company. - for the purpose of Explanation II, both legal ownership and beneficial ownership should be taken into account. - Decided in favor of assessee. - ITA Nos. 2223, 2224 & 2443(Del) 2010, ITA No.867(Del)2010 - - - Dated:- 5-10-2011 - ORDER PER A.D. JAIN, J.M. ITA No. 2223(Del)2010: This is Department s appeal for assessment year 2001-02, taking the following ground:- The learned Commissioner of Income Tax (Appeals) erred in law and on the facts and circumstances of the case, in deleting the addition of Rs.8,52,643/- made on account of depreciation on leasehold building treating the same as capital expenditure by the AO and directing to allow 100% depreciation. 2. The assessee is in the business of Air Freight, Ocean Freight, and Land Transport or any business of Freight Contractors and Agents, forwarding pack ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 32(1)(ii), the percentage to be applied will be the percentage specified against sub-item (1), (2) or (3) of item 1 as may be appropriate to the class of building in or in relation to which the renovation or improvement is effected; that where the structure is constructed or the work is done by way of extension of any such building, the percentage to be applied would be such percentage as would be appropriate, as if the structure or work constituted a separate building; and that therefore, in case the construction of structures and extensions is carried out in a building taken on lease for business purposes, the rate of depreciation to be applied is 10%. 5. In this manner, the AO treated the expenditure on the leasehold building as a capital expenditure and allowed depreciation @ 10% thereof, as against that claimed @ 100%. 6. By virtue of the impugned order, holding that the expenditure in question had been incurred on wooden partition, cabin making, interior work, fixing of door locks, fixing of glass partition, walls, etc., not constituting capital expenditure, the ld. CIT(A) directed the AO to allow 100% depreciation to the assessee. 7. Aggrieved, the Department is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could not be accepted . Reliance has been placed on the following case laws:- 1. DSP Meryill Lynch Ltd. v. JCIT, 102 ITD 337(TBOM); 2. CIT v. M/s. Hi Line Pens Pvt. Ltd., judgment dated 15.9.08, passed by the Hon ble Delhi High Court in ITA No. 1202/2006(copy placed on record); and 3. DCIT v. Chaya Lakshmi Creations (P)Ltd., order dated 30.6.2010, passed by the Hyderabad Bench of the Tribunal, in ITA Nos. 250 to 252/Hyd/2010 (copy placed on record. 10. It has been contended that therefore, there being no error whatsoever therein, the order of the ld. CIT(A) be upheld while dismissing the appeal filed by the Department. 11. We have heard the parties and have perused the material on record. Undisputedly, the lease in question was for a limited period. The improvements were qua terminus for the period of lease. The expenditure incurred by the assessee was on wooden partition, cabin making, interior work, fixing of door locks, fixing of glass partition, walls, etc. As to how this expenditure constituted capital expenditure, was nowhere elaborated upon by the AO in the assessment order. 12. In DSP Meryill Lynch Ltd. (supra), following Kedarnath Jute Mfg. Co. Ltd. v. CIT , ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... settled principles of law that the expenditure incurred for acquisition of an asset is capital expenditure and expenditure incurred in the process of earning profit is revenue expenditure. In the case before us, the assessee incurred the expenditure in order to attract more customers and make the customers comfortable. Therefore, it is obvious that the assessee has to incur the expenditure, in order to carry on the business and in the process of earning profit and, therefore, the expenditure is of revenue in nature. 15. In the present case, as observed by the ld. CIT (A), the assessee made its claim u/s 37 during the assessment proceedings, though it had claimed depreciation to start with. The ld. CIT (A) held that the AO was wrong in rejecting the claim of the assessee. In this regard, M/s. Hi Line Pens Pvt. Ltd. (supra), has rightly been pressed into service. Therein, it has been held, besides the above, that the repairs all kind carried out therein like in the present case, were expenses incurred for repairs for making the premises more conducive to the assessee s business activities and its expenses did not bring about any new capital asset. 16. Apropos Uttar Bharat Exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n holding that the appellant does not fulfill the conditions laid down in sec. 79 of the Income Tax Act even though the transfer of shares by subscribers was in conformity to legal compliance. 22. Apropos ground Nos. 1 2, the AO disallowed an amount of Rs. 1, 01,500/- paid by the assessee to Qadir Carpenters against interior works, due to non-production of bills. The ld. CIT (A) confirmed the disallowance. 23. Before us, it has been contended that the assessee could not produce before the Taxing Authorities, the bills with regard to the expenditure incurred towards wooden work and decoration of office at Bombay, since the Branch Manager, Mr. Varghese had resigned and the payment was routed through his impressed account, the record whereof untraceable hitherto. Now the record has been traced out and the bill is being filed by way of additional evidence. 24. The learned DR has opposed the admission of the bill by way of additional evidence. We, however, are not in agreement with the Department s stand. The bill of Rs. 1,01,500/- shows wooden work and decoration of new office building, cabin and work expenses , at Bombay. It has been approved by George V . George V has been s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cially held by persons who beneficially held shares of the company carrying not less than fifty one per cent of the voting power on the last day of the year or years in which the loss was incurred; that in the present case, 100% of the shares were, as on 31.3.2002, held by persons who beneficially held shares on the last day of March, 2001; that as on 31.3.2001, S. Net Freight (Holding) Pvt. Ltd. and G.A. GOSS (S)Pvt. Ltd. beneficially held shares carrying 100% of the voting power through their nominees, Dr. Prem Chand Jain and Mrs. Dakshayani Reddy; that the essential condition is that the shares should have been beneficially held by certain persons; that the legislation has not used the words shareholders which would necessarily imply their being registered shareholders ; that on the other hand, such words have been used wherever such intendment was there, e.g., in section 2(22)(d) and section 47. Reliance has been placed on CIT v. Swadeshi Match Co. , 139 ITR 833 (Bom). 28. The learned DR, on the other hand, has strongly relied on the impugned order in this regard. It has been contended that the legal requirements were not followed by the assessee; that as rightly noted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter necessary approvals were obtained. Therefore, the appellant s case is that the company had to abide by the relevant laws relating to foreign direct investments before the shares could be allotted to the foreign shareholders. However, after considering the arguments of the appellant it is observed that it cannot be accepted that the nominees were used only as a legal necessity which could be acceptable as per the relevant provisions in order to facilitate the formation of the company by the foreign equity holders. In terms of sec. 79 the transfer of shares by subscribers to Memorandum and Articles has to be necessarily viewed as a change in the shareholding of the assessee company. Hence, it is held that the brought forward loss cannot be adjusted or a carried forward when 51% beneficial shareholders are not the same in the two years. Hence, for the reasons relied upon by the AO, the addition made by him is upheld and the loss is directed not to be carried forward. This ground is dismissed. 31. Thus, as per the Taxing Authorities, section 79 of the Act provides that no loss incurred by closely held company in any year prior to the previous year shall be carried forward and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e process started from 05.06.2000 and ended on 20.11.2001, i.e., F.Y. 2001-02 relevant to assessment year 2002-03; that the company had allotted shares to subscribers to the Memorandum of Association for Rs. 2,000/- only; that the further sum of Rs. 49.90 lakhs was contributed from the Foreign Shareholders as capital and the company s activities could only happen with this share capital and the whole infrastructure was built using that money; that the company had to abide by relevant laws of Foreign Direct Investment, before the shares could be allotted to the foreign shareholders; and that the subscribers to the Memorandum of Association were never intended to be the shareholders of the company at the outset. 34. These contentions of the assessee have nowhere been refuted by the ld. CIT (A) and he has only observed that it could not be accepted that the nominees were used only as a legal necessity. Now, once, the requirements of the provisions were FEMA the facts are to be stringently followed and it has been so done, it was the requirement of the Foreign Direct Investment Laws which made the assessee to act in the manner discussed above. The provisions of section 79 of the I.T. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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