TMI Blog2010 (11) TMI 706X X X X Extracts X X X X X X X X Extracts X X X X ..... t allowable while computing the income under the head 'profit and gains of business and profession - Assessing Officer will examine the same and ascertain the true nature of payment, if required may make cross verification from M/s. Vital Link Associate and re-adjudicate this addition afresh in accordance with law It is pertinent to note that the expenses amounting to Rs.1,10,000/- was incurred for the purpose of business and no personal benefit is derived by the assessee-company - his social function was organized to promote the business of the assessee-company. In these circumstances, we are of the view that the Learned Commissioner of Income Tax (Appeals) should have taken a lenient view and allow the entire expenses of Rs.1,10,000 - Decided in favour of the assessee Regarding deduction u/s 35D - The company is operational and expenses were incurred for increasing the capital and not for raising the initial capital or for registering the Company with Registrar of Companies - High Court in the case of CIT vs. Hindustan Insecticides Ltd., (2001 -TMI - 14155 - DELHI High Court) wherein it is held that under section 35D(2)(c)(iii) of the Act, only fees paid for registration of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal. 5. Various grounds raised by the Revenue in its appeal are as under:- (1) The ld. CIT(A.) has erred in law and on the facts in deleting the disallowance of Rs.15,11,200/- made u/s. 35D of the Act. (2) The ld. CIT(A.) has erred in law and on facts in deleting the disallowance of consultancy charges of Rs.14,92,800/-. (3) The ld. CIT(A.) has erred in law and on facts in deleting expenses of Rs.85,000/- incurred for non-business purposes. 5.1. Various grounds raised by the assessee in its appeal are as under:- 1. The order passed by the Learned Commissioner of Income Tax (Appeals) is erroneous and requires to be modified. It is submitted that it be so held now. 2. The learned Commissioner of Income Tax Appeals) erred in confirming adjustment to book profit on accounts of deferred tax liability of Rs.15,83,20,88l/-. It is submitted that in facts and circumstances of the case the same is not required to be adjusted while computing the income in accordance with provisions of section 1I5JB of the Act, It is submitted it be so held now. 2.1. The learned Commissioner of Income Tax (Appeals) erred in holding that both from accounting and legal angle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses. It is submitted that on the facts and circumstances of the appellant case the same ought to have been held as business promotion expenses. It is submitted it be so held now. 6. At the time of hearing before us, on behalf of assessee Shri S.R. Shah, ld. counsel appeared and contended that Ground No. 1 of assessee's appeal is general in nature, therefore, needs no adjudication. 7. With regard to the Ground No. 2 of assessee's appeal, the ld. counsel of the assessee relying on the various contentions raised before the Learned Commissioner of Income Tax (Appeals) contended that the Assessing Officer be directed not to adjust deferred tax liability amounting to Rs.15,83,21,881/- while computing the book profit under section 115JB of the Act. 8. On the other hand, Shri Alok Johri, ld. CIT, D.R. appearing on behalf of the Revenue pointed out that the controversy involved in this ground of appeal is covered by the decision dated 14.08.2008 of ITAT, 'B' Bench, Ahmedabad in favour of Revenue in assessee's own case for the assessment year 2005-06 in ITA No.2130/AHD/2008. He accordingly contended that the view taken by the Learned Commissioner of Income Tax (Appeals) be uph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l nature even though the land was not ultimately acquired. While so holding he relied on the Gujarat High Court Decision in the case of Shree Digvijay Cement Co Ltd., 159 ITR 253. Before your honour the appellant submits that in The above referred decision of the Gujarat High Court it is held that expanses on the feasibility report for new project which was given up is a capital expenses and no1 allowable as deduction. In appellant's case the land was required to be acquired for regular business purposes and not for any new project which was given up. The land was ultimately not acquired due to some legal intricacies. It was not due to scrapping of any new project that we did not acquire the land. As the facts of our case can be distinguished the said case would not be applicable to our case. It is therefore submitted that the expenditure is allowable under section 28/37 of the Act. The appellant submits that because the project is abandoned there is no enduring benefit available from the said expenditure. Applying the Test of 'enduring benefit' as laid down in many judicial pronouncements for determining the nature of expenditure, it can be regarded that the expenditure is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l decisions that what the Income-tax Act purports to tax is business profits, and business profits are the true profits of a business as according to commercial principles. There may be an expenditure or there may be a loss which may not be an admissible loss under any of the provisions of section 10(2) and yet such an expenditure or loss would have to be allowed in order to determine what were the true profits of a business, and it is the duty of every one who has anything to do with taxing business people to understand what are the principles of commercial expediency. Unless one understands these principles it is difficult to make a proper assessment on a business or on a businessman." The Supreme Court has in the case of Badridas Daga v. CIT [1958] 34 ITR 10, also held that the principle of granting deduction with regard to the claim for which there is no specific provision under the Act on the basis of "accepted commercial practice and trading principles" is that loss for which the deduction is claimed arises out of carrying on the business and is incidental to it. The court held that loss resulting from embezzlement by on employee or agent in a business is admissible as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imilar observations were made by the apex court in case of Calcutta Co. Ltd. V. CIT [1959] 37 ITR 1 (SC) DCIT v. Bai Shirinbai K Kooka [1962] 46 ITR 86 (SC). The above decisions undisputed lays down a principle that the profits are to be understood in the manner a businessman would understand and oil the expenditure or losses should be deducted while computing such profits, unless specifically prohibited. Further, it is well settled law that the principle hid down by the Supreme Court under the Indian Income Tax Act, 1922 is applicable in the Income Tax Act, 1961 also so far as the old section under the act corresponds to the provision under 1961 Act. Reliance is placed on Consolidated Coffee Ltd. V. ITO 155 ITR 729 (Kar). In case of G.G. Dandekar Machine Works Limited v. CIT [1993] 202 ITR 161 (Bom), the Hon'ble High Court after examining above observations held that the principle is applicable under the Income Tax ACT, 1961 also and observed as under; "We have carefully considered the rival submissions. Section 28(i) read with section 4 of the Act imposes a charge on the profits and gains of any business or profession carried on by the assessee. The word "profits" has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n two instalments of Rs.7,46,400/- each. As per terms of the payment, the total amount to be paid was Rs.29,85,600/-. The figure of Rs.21,80,504/- debited under the head 'consultancy charges' consists of Rs.14,92,800/- for which the payments had been made and the provisions for further payment amounting to Rs.4,71,855/- + Rs.2,15,849/- is equivalent to Rs.8,87,704/-. On this basis, the Learned Commissioner of Income Tax (Appeals) observed that the issue involved is not only whether the expenses are allowable or not but also the fact about the quantum of allowability. This being a contract, which as per the assessee's own submission was part performed, making provisions for the rest of the amount tantamount to the claim as being contingent in nature. He also observed that subsequent events show that the said plot was not acquired and the reasons for non-acquisition as per the papers filed before him were that the appropriate notification under section 4 of the Land Acquisition Act was not issued by the Collector, for the land in question. Therefore, being a contingent liability, the same is not allowable. He accordingly considered the allowability of Rs.14,92,800/- instead of Rs.21, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x(Appeals) in para-5.2 on pages 22/23. For rectification of said mistake, the assessee filed an application u/s. 154 dated 8-4-2008 on 4-11-2008. The copy of the said application is placed on page-48 of the paper book. The said application is still pending before Learned Commissioner of Income Tax(Appeals). 15. The counsel of the assessee submitted that assessee has actually paid Rs.6,87,704/- and it is not the contingent liability. Therefore, the Ld. C.I.T.(A) ought to have allowed the entire amount instead of allowing only Rs.14,92,800/-. 16. After hearing both the sides we have carefully gone through the orders of the authorities below. It is pertinent to note that in the paper book at pages 15 to 18 assessee has filed the photo-copies of details in respect of consultancy fee for alleged to be paid for land acquisition. In these papers the assessee has merely furnished an application u/s. 154 filed before the Ld. C.I.T. (A) as well as copies of account of M/s. Vital Link Associates to whom the consultancy charges are paid. The bills issued by M/s. Vital Link Associates and copy of agreement if any under which the assessee has paid the consultancy charges are not furnishe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e's appeal and Ground No. 3 of Revenue's appeal are that in the assessment order, the Assessing Officer disallowed the following expenses amounting to Rs.1,10,000/-, details of which are as under:- Saptak Annual Music Festival Rs.50,000 Navratri Festival Expenses Rs.25,000 Summer Project awards, 2003 Rs.10,000 International Kite Festival expenses Rs.25,000 Rs.1,10,000 19. On appeal, in the impugned order, the Learned Commissioner of Income Tax (Appeals) deleted the disallowance to the extent of Rs.85,000/- and confirmed the expense to the extent of Rs.25,000/- on the ground that these were incurred in organizing International Kite Festival. According to Learned Commissioner of Income Tax (Appeals), these payments have been made not for sponsorship but for organizing a cultural festival, i.e. the professional fee of the dancer and the associated travel arrangements. He took the view that these expenses go beyond the boundaries of commercially expedient expenses and he disallowed the same. Aggrieved with the order of Learned Commissioner of Income Tax (Appeals), both sides are in appeals before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustrial undertaking/setting up of new industrial unit. The eligible expenditure are:- (i) Expenditure in connection with preparation feasibility report, project report, conducting market survey and engineering services. (ii) Legal charges for drafting agreement to set up business. (iii) In case of a company- (a) Legal charges for drafting the memorandum and articles, (b) Printing charges of memorandum and articles, (c) Fees for registering the company under Companies Act i.e. registration fees only, no other fee paid to ROC. (d) Underwriting commission and brokerage, for public issue of shares and debentures as well as charges for drafting, typing, printing and advertisement of prospectus. 23.1. The Assessing Officer in the assessment order at para 4.4 at page 9 observed that the expenses of above categories are allowable; none else, provided that condition laid down in subsection (1) is satisfied. In the case of assessee, the assessee has claimed expenses, which is not for registering the company and are not covered by sub-section (2) of section 35D of the Act. The expenses claimed to be incurred does not fall within the ambit of sub-section (2) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome Tax (Appeals), the Revenue is in appeal before the Tribunal. 26. At the time of hearing, on behalf of Revenue Shri Alok Johri CIT(DR) appeared and contended that Hon'ble Madras High Court in the case of Agrocargo Transport Ltd., vs. CIT (1997) 224 ITR 90 (Mad) held that where an assessee had not satisfied the conditions prescribed under section 35D(2), assessee will not be entitled to amortization u/s. 35D even if assessee proved that it was an industrial undertaking as contemplated u/s. 35D(1). He further relied on the decision of Hon'ble Delhi High Court in the case of CIT vs. Hindustan Insecticides Ltd., (2001) 250 ITR 338 (Delhi) wherein it is held that under section 35D(2)(c)(iii) of the Act, only fees paid for registration of a company is deductible. Fees paid for increase in share capital is not fees for registration of the company, and hence is not amortizable under this provision. With regard to the decision relied by the Ld. C.I.T.(A), he contended that said decision is not for allowance of expenditure u/s. 35D of the I.T. Act. Therefore, the same is inapplicable. 27. Shri S.R. Shah, counsel of the assessee contended that assessee has incurred expenditure of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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