9911796707
TMI Blog2010 (11) TMI 706X X X X Extracts X X X X X X X X Extracts X X X X ..... x liability of Rs.15,83,20,881/- and this has been confirmed by the Learned Commissioner of Income Tax (Appeals) in the impugned order. 3. In the assessment order the Assessing Officer disallowed claim of the assessee u/s.35D amounting to Rs.15,11,500/- (being 1/5th of Rs.75,57,500/-). This is allowed by Ld. C.I.T.(A). In the assessment order A.O. also disallowed expenditure of Rs.21,80,505/- being consultancy fee paid in connection with acquisition of land. In the impugned order the Ld. CIT (A) confirmed the addition to the extent of Rs.14,92,800/-. Apart from this Assessing Officer disallowed: 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 In the impugned order, the Learned Commissioner of Income Tax (Appeals) deleted the expenses to the extent of Rs.85,000/- and confirmed the balance amount of Rs.25,000/-. 4. Aggrieved with the order of Learned Commissioner of Income Tax (Appeals), both the sides are in appeal before the Tribunal. 5. Various grounds raised by the Revenue in its appeal are as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income Tax (Appeals) erred in holding that deferred tax is a Reserve only. It is submitted that the provision for deferred tax liability is not in the nature of reserve. It is submitted it be so held now. 2.5 The Learned Commissioner of Income Tax (Appeals) erred in rejecting appellant's prayer for direction to exclude deferred lax assets which had been taxed in A.Y. 2004-05. It is submitted that on the facts and circumstances of the appellant's case, the CIT(A) ought to have given such directions. It is submitted it be so held now. 3. The learned Commissioner of Income Tax (Appeals) erred in confirming part addition of consultancy fees paid on the ground that Rs.8,87,704/- was a provision and provision tantamount to claim being contingent in nature. It is submitted that on the basis of mercantile system of accounting expenses are required to be provided on accrual basis and such provision cannot tantamount to contingency. It is submitted that it be so held now. 4. The learned Commissioner of Income Tax (Appeals) erred confirming addition of Rs.25,000/- by holding that it is not a business promotion expenses. It is submitted that on the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... written submissions dated 07.11.2006 and 27.09.2006, before the Assessing Officer the assessee pointed out that the expenses were incurred for the acquisition of land for business purposes. Such expenses were not for any new project and the same was admissible under section 28 or 37(1) of the Income Tax Act, 1961. In the assessment order, the Assessing Officer took the view that nature of expenses incurred was definitely capital in nature, therefore, these are not allowable. In support of this, the Assessing Officer relied on the judgment of the Hon'ble Gujarat High Court in the case of CIT vs Shri Digvijay Cement Co. Ltd. reported in 159 ITR 253. 11. On appeal before the Learned Commissioner of Income Tax (Appeals), the assessee made the following submissions:- "During the year under consideration appellant had incurred expenditure of Rs.21,80,505/- being consultancy fees paid in connection with the acquisition of land. As the said land was not ultimately acquired by the appellant they had written off these expenses to the profit and loss account and claimed the same under section 28/37 of the Act. The assessing officer held these expenses to be of capital nature even tho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oda [ITA No.2768, 2769 and 2770/Ahd/93] wherein on identical facts, it was allowed to be deducted while computing business profits. In support of our claim, we further rely on the decision of CIT v. Seshasayee Bros. Pvt. Ltd [1981] 127 ITR 218(Mad) [Refer page nos. 43 to 45 of the Paper Book], wherein it was held that if the project materialized, the expenses were transferred and recovered from the new unit by earning profits therefrom. If the projects were unsuccessful, the assessee company was writing off the expenses. Under the above circumstances, it was held that such written off expenditure is to be allowed as revenue expenditure and cannot be treated as capital expenditure. The appellant further submits that it is a settled law that profits should be computed after deducting the losses and expenditure incurred for the purpose of business unless the losses and expenditure ore expressly, or by necessary implication disallowed by the Act. In this context, it would be appropriate to refer to the following succinct observations made by Chagla C. J., In the case of Aruna Mills Ltd v. CIT[1957] 31 ITR 153,163 (Bom); "Now, we have had occasion to point out in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion in section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be identical to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act." (emphasis supplied) In Commissioner of Income-tax v. S. M. Chitnavis [1932] 6 ITC 453 (PC), the point for decision was whether a bad debt could be deducted under section 10(1) of the India Income Tax Act, 1922, there having been in the Act, as it then stood, no provision corresponding to section 10(2)(xi) of the said Act for deduction of such a debt In answering the question in the affirmative. Lord Russell observed: "Although the Act nowhere in terms authorizes the deduction of had debts of a business, such deduction is necessarily allowable. What are chargeable to income-tax in respect of a business are the profits and gains of a year; and in assessing the amount of the profits and gains of s year account must necessarily be taken of all losses incurred, otherwise you would not arrive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s. 28, all the expenditure or losses incurred for the purpose of business are required to be deducted, unless the same are specifically prohibited under the law. With regard to above it can be reasonably said that- (i) Expenditure on Consultancy for acquisition of land was incurred as part of business activity [The company is already in transmission of Petroleum products and there is complete identity of control, administratively or otherwise]; (ii) Expenditure or loss is not specifically prohibited under the scheme of law. Therefore, the loss incurred by the appellant on account of expenditure incurred on consultancy fees for acquisition of land, which was not successful and written off is required to be allowed as deduction u/s. 28/37 while computing business profits. It is therefore the prayer of the appellant that the Assessing officer be directed to allow the said expenditure under section 28/37 of the Act". 12. After considering the aforesaid submissions, the Learned Commissioner of Income Tax (Appeals) observed that one M/s. Vital Link Associates were retained for 'land identification and acquisition for a plot at Mora Village Distic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... always considered as capital asset which is evident from the fact that even on the land purchased for construction of building, depreciation is not allowable. He further submitted that Assessing Officer in the assessment order has mentioned that entire payment was for obtaining feasibility report which is not allowable as per the decision of Hon'ble Gujarat High Court in the case of CIT vs. CIT vs. Digvijay Cement Co. Ltd., (1986) 119 ITR 253. The Ld. DR further pointed out that neither before the Assessing Officer nor before the Learned Commissioner of Income Tax (Appeals) or the Tribunal the assessee has furnished the copy of bills/agreement if any with M/s. Vital Link Associates to whom the assessee has paid the consultancy charges. To sum-up, he pointed out that the entire expenditure in question cannot be allowed as revenue expenditure. 14. At the outset, the Ld. Counsel of the assessee pointed out that there is a mistake committed by the Learned Commissioner of Income Tax (Appeals) in para-5.2 on page-22 of the impugned order. As far as the total of Rs.4,71,855/- and Rs.2,15,842/- is concerned. It was pointed out that total of these two amounts would work out to Rs.6, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t liability. 17. In the assessment order, the Assessing Officer has mentioned that expenditure on acquisition of land even when the deal is ultimately not carried out is capital in nature. This aspect is completely ignored by the Ld. CIT (A) in the impugned order. It is well settled law that capital expenditure is not allowable while computing the income under the head 'profit and gains of business and profession'. This aspect is completely ignored by Ld. Learned Commissioner of Income Tax (Appeals) in the impugned order. Looking to the totality of the fact, we are of the view that it will meet the end of justice if the order of Ld. CIT (A) on this issue is set aside and the matter is restored to the file of the Assessing Officer with the direction that assessee shall furnish copy of agreement under which it paid consultancy charges to M/s. VitalLink Associates for alleged acquisition of land and copies of bills/project report issued by them, correspondence done with the said party. The 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 afres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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/-. In this view of the matter, we hold that the entire expense of Rs.1,10,000/- is allowable. Resultantly, Ground No. 4 of assessee's appeal is allowed and Ground No. 3 of Revenue's appeal is dismissed. 23. The facts relating to controversy involved in Ground No. 1 of Revenue's appeal are discussed by the Assessing Officer in para 4 of the assessment order. As per Assessing Officer, the assessee incurred the expenditure of Rs.75,57,500/- for increasing in share capital and not for setting up a Company. 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. Therefore, according to Assessing Officer, the only point to be examined is, if these expenses fall within the allowable categories of expenses as laid down in sub-section 2 of section 35D of the Income Tax Act, 1961. Sub-section 2 of section 35D deals with categories of expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the commencement of business as well as after the commencement of business in connection with the extension of the industrial undertaking. As per the facts not controverted by the Assessing Officer, the expenses had been incurred in connection with increase in the capital of the assessee in terms of payment to the Registrar of Companies, etc. The expenses clearly fall in section 2(c)(ii). Therefore, I do not agree with the Assessing Officer that the expenses incurred were not covered by section 35D. On the other hand, section 35D deals with capital expenses only, because amortization can be undertaken only in respect of such expenses. Therefore, to argue whether expenses were capital in nature or not is a redundant exercise. I agree with the contentions of the Authorised Representative that the ratio o the Supreme Court's decision in the case of Punjab State Industrial Development Corporation Ltd. -vs.- CIT reported in 225 ITR 792 is not really appropriate because even the appellant is admitting that the expenses in question are capital in nature. Therefore, the Assessing Officer is directed to allow 1/5th of the expenses amounting to Rs.77,57,500/- for the fees paid to ROC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd followed on the judgments of Hon'ble Supreme Court in the following two cases:- (1) Punjab State Industrial Development Corporation Ltd. vs. CIT (1997) 225 ITR 792(SC) (2) Brooke Bond India Ltd. vs. CITA (1997) 225 ITR 798(SC). The aforesaid two judgements of Hon'ble Supreme Court are not considered by Hon'ble Rajasthan High Court in the case of Multi Metals Ltd., (supra) relied by Ld. Counsel of the assessee. In our opinion, the judgement of Hon'ble Delhi High Court in the case of Hindustan Insecticides Ltd., is squarely applicable to the facts of the assessee's case and support the reasoning given by Assessing Officer in the assessment order. We therefore, following the judgment of Hon'ble Delhi High Court in the case of Hindustan Insecticides Ltd., (supra) hold that the assessee is not entitled to deduction u/s. 35D of the I.T. Act, 1961 in respect of expenditure incurred for increasing the authorized share capital. Consequently, the disallowance made by the A.O. is restored and this ground of appeal is allowed. 29. In the result, for statistical purposes both the appeals are treated as partly allowed. The Order was pronounced in the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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