TMI Blog2013 (7) TMI 451X X X X Extracts X X X X X X X X Extracts X X X X ..... TMI 1 - SUPREME Court] - Decided against the Revenue. Deduction u/s 80G - Exemption also granted u/s 10A - Double deduction - Donation made to Keonics Unit - Held that:- It is not in dispute that the assessee is entitled to the benefit of deduction under Section 80G - As the entire income from the Keonics Unit is exempted from payment of tax, the debiting of donation in the first instance and adding it back subsequently makes no difference - Therefore the deduction under Section 80G is claimed from the total income excluding the income of Kenoics Unit and in law, the assessee is entitled to the said benefit - Decided against the Revenue. Deduction u/s 37(1) - Installation of traffic signal - A.O. held deduction can only claimed u/s 80G - Held that:- If the contribution by an assessee is in the form of donations of the category specified under section 80G, but if it could also be termed as an expenditure of the category falling under section 37(1), then the right of the assessee to claim the whole of it as allowance under section 37(1) cannot be denied - But such money must be "laid out or expended wholly and exclusively for the purpose of business" - If the expenditure has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order passed by the Tribunal granting various reliefs to the assessee. 2. Assessee is a leading exporter of software. It filed its return of income on 27.11.1998 admitting a total income of Rs.3,33,91,389/-. The return was processed under Section 143(1) of the Income Tax Act, 1961 (for short hereinafter referred to as the Act ) on 23.8.2000 accepting the income returned. The case was selected for scrutiny and notice under Section 143(2) of the Act was issued. In response to the notice, details called for were also filed. After going through various details and explanations offered by the assessee, the assessment was finalized. 3. Assessee paid a sum of Rs.44.43 lakhs to National Security Depository Limited (NSDL) as one time custody charges for 80,08,600 shares. Consequent to introduction of Demat, all share holders have to deposit their shares with depositories. The assessee company had taken over the liability of payment of Rs.44.43 lakhs as one time custody charges. The assessing officer has held that the assessee has paid the said amount as a goodwill measure and therefore the same is not allowable as deduction under Section 37(1) of the Act. He further held that it c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the projects. Hence, the traffic signals have been installed to ensure that employees of Bannerghatta Circle would reach office in time without facing any traffic problems and hence should be allowed as revenue expenses. The assessing authority held that regulating traffic is the lookout of Traffic Police and Government and not that of the assessee. If traffic signals were not there in such busy circle, traffic police will be very much available to regulate the traffic. Even assuming that installation of traffic signals will regulate traffic better than traffic police, what the employees of assessee would have been benefited from installation of traffic signals will be very remote. Hence, benefit from installation of traffic signals derived by assessee being very remote, the expenditure cannot be allowed under Section 37(1) of the Act. In fact, what assessee has done is to donate these traffic signals to State Government which is not allowable as deduction, as donation in kind is not eligible for deduction under Section 80G. Therefore, the said amount was added back as the income of the Keonics Unit. 6. A sum of Rs.1,23,09,815/- is debited towards provision for post-sales custome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 102/- consisting of travel expenses, professional charges and other expenses but, did not furnish further breakup of expenditure. Therefore, the entire amount was treated as expenses incurred for providing technical services outside India and hence reduced from export turnover and total turnover. Thus he proceeded to frame the assessment order. 8. Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals). Though the appeal was partly allowed, the Appellate Authority confirmed the findings on the aforesaid issues. 9. Therefore, aggrieved by the said order of the Appellate Authority, the assessee preferred an appeal to the Tribunal. The Tribunal on re-appreciation of the entire evidence on record and taking note of the various judgments relied upon by the parties held that, the charges paid to NSDL having not brought into existence any capital asset and is for the purpose of efficient functioning of the business, it was held as business revenue expenses and allowable as such under Section 37(1) of the Act. After referring to the several judgments including the judgment of a Division Bench of this Court the Tribunal held that, the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsequently entitled to claim deductions? (5) Whether the assessee is entitled to the benefit of deduction under Section 80HHE in a sum of Rs.31,93,41,102/- which is treated as expenditure incurred for providing technical services outside India? FIRST SUBSTANTIAL QUESTION OF LAW 12. The Depositories Act, 1996 was enacted by the Parliament to provide for regulation of depositories in securities and for matters connected therewith or incidental thereto. In line with developments in the securities industry worldwide and in the wake of the increasing trading volume on the local bourses, there emerged the need to replace the existing settlement and clearing system with Depository System or a Scripless Trading System. India has the largest number of listed companies in the world today. It also boasts of a very large investor population and substantial volumes of trade. The present system of settlement based on physical delivery of paper certificates was probably adequate in the past when there was just a handful of investors participating in the transactions of the capital market. The old trading system was plagued by various problems such as, unwarranted delay in transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Securities and Exchange Board of India. 14. Clause 2.1.5 of the SEBI (Disclosure and Investor Protection) Guidelines, 2000 reads as under : - 2.1.5 Issue of securities in dematerialised form 2.1.5.1 No company shall make public or rights issue or an offer for sale of securities, unless (a) the company enters into an agreement with a depository for dematerialisation of securities already issued or proposed to be issued to the public or existing shareholders; and (b) the company gives an option to subscribers/shareholders/investors to receive the security certificates or hold securities in dematerialized form with a depository. 15. Therefore, after coming into force of the Act, an obligation is cast on each company to enter into an agreement with a depository for de-materialisation of security already issued or proposed to be issued. Therefore, the assessee herein by virtue of the said obligation imposed under law approached the NSDL vide the letter dated 21.7.1997. In reply to the said letter, the NSDL by their letter dated 22.7.1997 informed them that the total one time custody charges on 80,80,600 shares work to Rs.44.43 Lakhs and on payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would be of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y purchase of loom hours no new asset has been created. There is no addition to or expansion of the profit making apparatus of the assessee. The income earning machine remains what it was prior to the purchase of loom hours. The assessee is merely enabled to operate the profit making structure for a longer number of hours. And this advantage is clearly not of an enduring nature. It is limited in its duration to six months and, moreover, the additional working hours per week transferred to the assessee have to be utilised during the week. and cannot be carried forward to the next week. It is, therefore, not possible to say that any advantage of enduring benefit in the capital field was acquired by the assessee in purchasing loom hours and the test of enduring benefit cannot help the Revenue. 17. From the aforesaid two judgments of the Apex Court, it is clear that if the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring the benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand, it is made not for the purpose of bringing into existence any such asset advantag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are affected through the mechanism provided by the depository system. The expenditure has helped in reducing the cost of handling physical share certificates. The dematerialization has obviated the need for the Board of Directors to meet and approve the share transfers. It has reduced the risk associated with the physical share certificate, i.e., forgery and loss of certificates. The process of getting the shares in demat form has benefited the company in getting the periodic information, for example, FII holding, promoter holding, holding that trigger acquisition of substantial holding for purpose of application takeover code of SEBI, etc., at a much faster pace with less administrative hassles and with a lesser cost. The expenditure has been incurred in the normal course of business. Thus the dematerilization has helped significantly in reducing the administrative costs. Even if certain benefits go to the shareholders, consequently, the assessee has gained good will. Therefore this expenses incurred squarely falls within the phrase laid out or expended wholly and exclusively for the purpose of business and therefore it shall be deducted in computing the income chargeable under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness". The assessee can claim the whole of it for deduction in computing the income chargeable under the head "Profits and gains of business or profession". The basic requirements for invoking sections 37(1) and 80G, are, therefore, quite different, but none the less, the two sections are not mutually exclusive. If the contribution by an assessee is in the form of donations of the category specified under section 80G, but if it could also be termed as an expenditure of the category falling under section 37(1), then the right of the assessee to claim the whole of it as allowance under section 37(1) cannot be denied. But such money must be "laid out or expended wholly and exclusively for the purpose of business". The word "wholly" refers to the quantum of expenditure and the word "exclusive" refers to the move, object or purpose of the expenditure. There is yet one more thing to be remembered while applying section 37(1). The expenditure claimed therein need not be "necessarily" spent by the assessee. It might be incurred "voluntarily" and without any "necessity", but it must for promoting the business. In other words, if the expenditure has been incurred by the assessee vo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or away". It is something which is gone irretrievably, but should not be in respect of an unascertained liability of the future. It must be an actual liability in praesenti, as opposed to a contingent liability of the future. Some of these principles have been explained by the Supreme Court in Indian Molasses Co. (Private) Ltd. v. CIT [1959] 37 ITR 66, wherein it has been observed (at pages 75 and 76) : "The income-tax law does not allow as expense all the deductions a prudent trader would make in computing his profits. The money may be expended on grounds of commercial expediency but not of necessity. The test of necessity is whether the intention was to earn trading receipts or to avoid future recurring payment of a revenue character. Expenditure in this sense is equal to disbursement which, to use a homely phrase, means something which comes out of the trader's pocket. Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the income-tax law does not take every such allowance as legitimate for purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the payment has been made to the police and rowdies to keep them away from the business premises which payment be held as illegal and such illegal payment cannot be an allowable deduction. This is not a case where any payment is made to the police or rowdies to keep them away from the business premises, which payment is ex facie illegal and illegal payment cannot be an allowable deduction under Section 37(1) of the Act. Secondly, the judgment of the Division Bench in the aforesaid Mysore Kirloskar Ltd case, was not brought to the notice of the coordinate Bench which dealt with the case of the assessee. More over, in the said judgment, the question was, a sum of Rs.6.93 lakhs was contributed towards traffic regulation. It was not an expenditure incurred by the assessee. It was not in the nature of donation made to the police towards traffic regulation. Therefore, in that context, it was held relying on the judgment of Swaminathan s case, it does not qualify as deduction under Section 37 of the Act. 24. As is clear from the case of Mysore Kirloskar Ltd, the expenditure claimed need not be necessarily spent by the assessee. It might be incurred voluntarily and without any neces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghata Circle. This expenditure is laid out or expended wholly and exclusively for the purpose of business. Therefore, the said expenditure incurred is allowable as deduction under Section 37(1) of the Act. That is precisely what the Tribunal has held. The said finding is in accordance with law and based of legal evidence. Therefore no case for interference is made out. Hence the said substantial question of law is answered in favour of the assessee and against the Revenue. THIRD SUBSTANTIAL QUESTION OF LAW 26. The donation of Rs.15 lakhs is paid out of Keonics Unit, the profit of which is exempted under Section 10A of the Act. While computing the profit of Keonics Unit, donation paid is added back, as the same is not allowed to be deducted while computing the profit under Section 10A of the Act. Thus the disallowance in computing the income of Keonic Unit is per the statutory provisions of the Act, the donation being not considered as expenditure incurred wholly and exclusively for the purpose of business. Therefore it cannot be said that the donation paid has been allowed as deduction under the Act. The reason being the entire income incurred from the Keonics was exempted fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntific basis, the said amount is allowable as deduction. 29. In the instant case, when particulars are sought for by the Assessing Authority to state what is the amount actually debited in provision account for the assessment year 1997-98 and 98-99 towards post sales customer support, the assessee stated that such expenditure gets accounted under normal head and there is no specific debit to warranty provision in any year. In the subsequent year, the provision is written back on the first day of the accounting year and actual expenses incurred towards post sales customer support are debited to respective heads. The assessee states that it is not possible to give the details called for. This aspect has been completely missed by the Tribunal. It proceeds on the assumption that figures given for warranty is based on sound accounting principle. In fact, in the aforesaid judgment of the Apex Court before the assessee could be granted the benefit, he has to establish: (a) an enterprise has a present obligation as a result of a past event, (b) it is probable that an outflow of resources will be required to settle the obligation and (c) a reliable estimate can be made of the amount of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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