TMI Blog2016 (5) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... to look at this issue on this angle and decide it afresh in the light of the above decision of the Mumbai Bench of the Tribunal - Decided partly in favour of assessee Allowance of expenditure in respect of preliminary expenses under section 35D - Held that:- There is no doubt that expenses were not incurred before the commencement of the business. Therefore, the first condition is not complied with. The second condition is that the expenses incurred after commencement of the business, should be incurred in connection with extension of its business or in connection with setting up of a new unit. There is no case of setting up of a new unit. The question is whether there was an extension of its existing undertaking ? A great emphasis has to be given on the expression "undertaking". Business expansion and market expansion of an existing business will not amount to extension of the "undertaking". The expression "undertaking" denotes a visible expenditure on the physical facilities for manufacture and production. An undertaking is always having an area of physical structure which produces goods and services by utilising the necessary factors of production. Enhancement of the geograph ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee voluntarily offered to reduce its claim towards depreciation on the software at the rates prescribed in new Appendix I under the Income-tax Rules, 1962, and depreciation on the intangible assets being IPR, at the rate of 25 per cent. as prescribed under the Rules. Accordingly, the assessee has revised its claim of depreciation on software and intangible asset of IPR. However, the Additional Commissioner of Income-tax denied the depreciation on the IPR, represented by the software GBM on the ground that depreciation to an extent of 100 per cent. in respect of this asset was already claimed by TGSL and in view of Explanation 3 placed under section 43(1), the actual cost of this asset, in the hands of the assessee, has to be reckoned as "nil" only. This conclusion of the Additional Commissioner of Income-tax was based on the financial statement of TGSL. The contention of the assessee is that the treatment given by TGSL in its account cannot be a reason to deny the depreciation on the cost incurred by the assessee. In our opinion, this argument of the assessee's counsel cannot be upheld. The actual cost of assets acquired from TGSL to be considered in terms of Explanation 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate finding, which is confirmed - I. T. A. Nos. 2780, 2781, 2782/Mds/2014and 1276/Mds/2015, 2789, 2790, 2791, 2792/Mds/2014and 1220/Mds/2015 - - - Dated:- 27-11-2015 - Chandra Poojari (Accountant Member) And Challa Nagendra Prasad (Judicial Member) For the Petitioner : Pathlavath Peerya For the Respondent : K. Ravi ORDER Chandra Poojari (Accountant Member) 1. These appeals by the Revenue as well as by the assessee are directed against different orders of the Commissioner of Income-tax (Appeals) for the assessment years 2006- 07 to 2010-11. Since certain issues involved in these appeals are common, these are clubbed together, heard together and disposed of by this common order for the sake of convenience. 2. The first ground in the assessee's appeal in I. T. A. No. 2789/Mds/2014 for the assessment year 2006-07 in the assessee's case is with regard to disallowance under prior period expenses of ₹ 9,65,903. 3. The facts of the issue are that the assessee has claimed an expenditure of ₹ 9,65,903 towards prior period expenses. Since these expenses do not relate to the assessment year 2006-07, the same was disallowed by the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ules. 8. The facts of the issue as narrated in the assessment year 2007-08 are that the Assessing Officer observed that the assessee has received an amount of ₹ 26,20,821 as a dividend during the year which has been claimed as exempt under section 10(34) of the Act. Since any expenditure relatable to earning of exempt income is not permissible to be claimed as expenditure, the Assessing Officer has worked out the disallowance by invoking the provisions of section 14A read with rule 8D. The Assessing Officer has observed that even though the assessee incurs various expenditure to maintain its establishment and administration, it has not allowed any amount pertaining to earning of exempt income. Since the managerial staff and directors are involved in making decisions on investments which have earned exempt income, the Assessing Officer has resorted to disallowance under section 14A. According to the Assessing Officer, the provisions of section 14A has been inserted with effect from April 1, 2007, and rule 8D has come into picture with effect from March 24, 2008, and by relying on the decisions in the case of ITO v. Daga Capital Management P. Ltd. (I. T. A. No. 1372/Delhi/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard both the parties. On a perusal of the order of the Mumbai Bench of the Tribunal in the case of Daga Global Chemicals Pvt. Ltd. [2016] 46 ITR (Trib) 70 (Mumbai), we find that an identical issue has been decided by the Tribunal holding that disallowance under section 14A read with rule 8D cannot exceed the exempt income. While holding so, the Tribunal observed as under (page 72) : '2. At the time of hearing, Dr. K. Shivaram along with Shri Rahul Hakani, learned counsels for the assessee, advanced their arguments which are identical to the ground raised by submitting that no expenditure directly or indirectly was incurred by the assessee for earning exempt income and further the investment in shares was made in earlier years out of own funds and not out of borrowed funds, therefore, no disallowance under section 14A read with rule 8D is to be made. 3. On the other hand, Shri Akhilendra Yadav strongly defended the conclusion arrived at by the learned Commissioner of Income tax (Appeals) by contending that a well reasoned order has been passed by the learned first appellate authority as apportionment of expend iture for earning the dividend income was done as per the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rule 8D. However, the alternative claim of the assessee was that disallowance if at all should be made, it should be restricted to exempt income earned and not beyond that. Accordingly, the Assessing Officer is directed to look at this issue on this angle and decide it afresh in the light of the above decision of the Mumbai Bench of the Tribunal. Accordingly, this ground of appeal is partly allowed for the assessment years 2008-09 and 2009-10. 13. The next common ground for the assessment years 2007-08, 2008-09, 2009-10 and 2010-11 both, in the assessee's appeals as well as the Revenue's appeals is with regard to allowance of expenditure in respect of preliminary expenses under section 35D of the Act. 14. The facts of the issue as narrated for the assessment year 2007-08 are that the Assessing Officer observed that the assessee had claimed an amount of ₹ 1,00,28,477 as deduction under section 35D for the year in respect of expenses incurred in connection with the initial public offer (IPO). The Assessing Officer disallowed the above sum claimed by the assessee by following the directions given by the Additional Commissioner of Income-tax in his order under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue proceeds ₹ 19.71 crores were unutilised during the year and balance was utilised only in the next two years. 16. The Commissioner of Income-tax (Appeals) observed that with regard to the funds not utilised during the relevant year by the assessee, it was submitted that the expansion was complete in the relevant year itself and the new unit acquired had also commenced its operation and generated income from the same expanded unit which was offered to taxation. It was also submitted that since the assessee has put to use the application software acquired from TGSL it has claimed depreciation of ₹ 16.19 crores during the year. It was further submitted before the Commissioner of Income-tax (Appeals) that the utilisation of funds which were earmarked for working capital were as per the issue document itself. According to the Commissioner of Income-tax (Appeals), the explanation given by the assessee with regard to utilisation of funds is reasonable. 17. Further, the Commissioner of Income-tax (Appeals) observed that with regard to the application of section 35D(1)(ii), a similar issue came up for consideration before the jurisdictional High Court in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e High Court in the above referred case is as under (page 666) : Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the word 'being' as used in section 35D(2)(c)(iv) is not 'illustrative' but only 'restricted' to ? 21. According to the Commissioner of Income-tax (Appeals), following the above decision of the jurisdictional High Court, the meaning of being will be taken as restrictive and not illustrative . 22. Further, the Commissioner of Income-tax (Appeals) observed that with regard to issue management fee shown as expenditure by the assessee, the Additional Commissioner of Income-tax held that it is not fitting into the permissible expenditure mentioned in section 35D(2)(c)(iv). The assessee has objected for the same stating that issue management fee is nothing but underwriting commission. The Commissioner of Income-tax (Appeals) has not agreed with the argument of the assessee and held that as per the SEBI guidelines the company which is going for public issue has to engage underwriters for the guarantee of its issue through its lead merchant banker. The Commissioner of Income-tax (A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in the case of Agrocargo Transport Ltd. v. CIT [1997] 224 ITR 90 (Mad), as the provisions of section 35D(1) and (2) of the Act are not satisfied. 26. We have also gone through the decision in the case of Agrocargo Transport Ltd. v. CIT (supra). As observed by the jurisdictional High Court, in that case, deduction under section 35D is not allowable in the absence of necessary particulars to show that the expenditure was covered by section 35D(1) or (2) of the Act. In the present case, the assessee made an argument that the funds was utilised by the assessee during the relevant assessment year that the expansion was complete in the relevant year itself and the new unit acquired had also commenced its operation and generated income from the same expended unit, which was offered to taxation. However, there is no evidence to support the findings of the Commissioner of Income-tax (Appeals) that expansion or extension was undertaken by the assessee within the meaning of section 35D(1)(ii) of the Act. The Commissioner of Income-tax (Appeals) did not appreciate the facts relating to applicability of section 35D(1) or (2) by applying the judgment of the jurisdictional High Court in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also decided against the assessee and in favour of the Department. 30. The alternate plea of the assessee is to allow the same under section 37 of the Act and the expenditure was incurred for services rendered in connection with the issue of shares to raise the capital block of the assessee-company. The funds raised by a company through issue of shares automatically increases the capital volume of that company. The funds raised by increasing the capital in that manner may be used by the assessee-company for various purposes. The capital funds may be used to set up the business ; to purchase capital assets ; or to pay off liabilities ; or to augment its working capital, etc. Once shares are issued for cash, the assessee-company gets the funds in its hands and once the funds have come into the hands of the assessee-company, the process of issue of share capital is complete. Therefore, the scope of expenditure incurred for raising the share capital by issuing shares must also stop at that point. The scope should not be enlarged further. It is the wisdom of the company to decide in which manner the funds available with it, collected by way of issue of shares, should be applied. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on on it and allowed 25 per cent. depreciation on intangible assets (IPR) of ₹ 12,29,57,845 and 60 per cent. on the remaining software of ₹ 81,97,292. Aggrieved by this, the assessee went in appeal before the Commissioner of Income-tax (Appeals). 33. On appeal, the Commissioner of Income-tax (Appeals) observed that during the course of assessment proceedings, the assessee has revised the depreciation claim and restricted the claim of depreciation on intangible assets (IPR) to 25 per cent. and claimed 100 per cent. on other assets. According to the Commissioner of Income-tax (Appeals), the directions of the Additional Commissioner of Income-tax are reasonable, since the assessee is not entitled to claim depreciation on the amount which is already claimed by the TGSL, the restriction of depreciation to 25 per cent. on intangible assets and 60 per cent. on the other software is also reasonable and he dismissed the ground of appeal. Against this, the assessee is in appeal before us. 34. We have heard both the parties and perused the material on record. As seen from the order of the Commissioner of Income-tax (Appeals) during the course of the assessment proceedings, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er dated July 21, 2014, are as under : (Rs.) 1. Electrical items, fittings, accessories and labour charges 31,77,305 2. Plumbing items, fittings, accessories and labour charges 26,62,533 3. Tiles, ceramics and floor materials and masonry charges 26,01,480 4. Wood and plywood, carpentry work and labour charges 57,32,530 5. Interior works, aluminium materials, venetial blinds fittings and polishing 12,52,197 6. False ceiling materials, fittings and architectural charges 7,38,897 38. The Commissioner of Income-tax (Appeals) observed that from the above details, the expenditure incurred under first two heads appear to be recurring expenditure and needs to be treated as revenue. In the case of remaining heads, the expenditure is in the nature of creating a lasting asset which will have an enduring benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision in the case of CIT v. Saravana Spinning Mills P. Ltd. [2007] 293 ITR 201 (SC). (v) to see whether the expenditure is of very temporary in nature eligible for 100 per cent. depreciation. A temporary structure means it will be dismantled within the same year or the next year. The expenditure on improvement of the building like partitioning, false ceiling, etc., should not be confused with the temporary structure which will be dismantled within a very short period. 41. According to the Commissioner of Income-tax (Appeals), in the present case, the assessee has put up cubicle partitions, false ceiling, tiled flooring, etc., which are not temporary structures. Since it is an improvement on the building, it is capital in nature. There is also no hard and fast rule that all the expenditure on leasehold premises will partake of the character of revenue expenditure. The expenditure incurred by the assessee is definitely for improving the leased premises, making it fit for carrying out its business. Further, the improvements carried out by the assessee on the leased premises are not meant for dismantling in the same year or in the very next year. Therefore, the Commissioner of In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsion of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.' 11. To fall within the ambit of Explanation 1 the questions which are to be answered are : (i) Whether the assessee is carrying on business or profession in a leased building or other rights of occupancy ? (ii) Whether the assessee has incurred any capital expenditure for the purpose of business on the construction of any structure or doing of any work in or in relation to and by way of renovation or extension or improvement in the building ? 12. If the answer to the aforementioned questions is in affirmative, the assessee falls within the purview of Explanation 1 to section 32(1). In the instant case, it is an admitted fact that the assessee has taken building on lease for setting up of bakery. It is also undisputed that the assessee has carried on interior work in the leased building. These interior decoration works carried out by the assessee if put on to the test of Explanation 1 would show that the construction made by the assessee on the leased out premises would amount to capital expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew. What advantage did the assessee get by constructing a building which belonged to somebody else and spending money for such reconstruction ? The assessee got a long lease of a newly constructed building suitable to its own business at a very concessional rent. The expenditure therefore, was made in order to secure a long lease of new and more suitable business premises at a lower rent. In other words, the assessee made substantial savings in in monthly rent for a period of 39 years by expending these amounts. The saving in expenditure was a saving in revenue expenditure in the form of rent. Whatever substitutes for revenue expenditure should normally be considered as revenue expenditure. Moreover, the asses see in the present case did not get any capital asset by spending the said amounts. The assessee therefore could not have claimed any depreciation. Looking to the nature of the advantage which the asses see obtained in a commercial sense, the expenditure appears to be revenue expenditure.' 16. Thereafter, the apex court referring to several cases decided held as under (page 475) : 'All these cases have looked upon expenditure which did bring about some kind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in nature and decide afresh. 43. Accordingly, we remit the issue in dispute to the Assessing Officer to consider whether the expenditure is revenue or capital in nature and decide afresh in the light of the above order of the Tribunal. 44. The next ground in the Departmental appeal for the assessment years 2007-08, 2008-09 is with regard to apportioning common expenses towards STPI unit, not on the basis of turnover followed by the company. 45. The Assessing Officer observed that the assessee has apportioned the common expenses to STPI unit, which worked out to 1.56 per cent. (Rs. 3,30,747). However, the Assessing Officer following the directions of the Additional Commissioner of Income-tax in his order under section 144A of the Act, to rework the apportionment of common expenses considering one-third of the audit fees and directors remuneration towards the STPI unit, recomputed the allocation of common expenses at ₹ 39,39,208. Against this, the assessee went in appeal before the Commissioner of Income-tax (Appeals). 46. Before the Commissioner of Income-tax (Appeals), the learned authorised representative submitted that the assessee had allocated common reve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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