TMI Blog2019 (4) TMI 2064X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to Tatachem DAV public School - HELD THAT:- Similar issue has been decided in favour of the assessee-company in AYs 1992-93 to 2001-02, wherein the orders of AY 1992-93 have been confirmed in appeal by the High Court. It is stated that the Department s SLP to Supreme Court does not contain this ground. Further, it is stated that payment to Tatachem DAV School has been specifically considered in AY 1996-97, 1997-98 and 2000-01 as reflected in the CIT(A) s order for the said years. Disallowance of in respect of Prior Period Expenses - HELD THAT:- A perusal of the accounts clearly indicates that the delay in booking of the expenses was due to the late receipt of bills or events occurring during the year, for which the liability had crystallized after the balance sheet date. Further, we find that each of the above expenses were incurred to earn income, which was accounted and offered for tax during the current year. Similar issue arose before the Tribunal in assessee s own case for AY 1986-87 [ 2014 (5) TMI 956 - ITAT MUMBAI] , AY 1993-94, AY 1996-97 and AY 1997-98 - We find that the above issue has been decided in favour of the assessee by the Tribunal in the aforesaid order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed since it required heavy capital investment. Also it is seen that the design and drawing were received by the assessee-company in a book form. We agree with the contentions of the Ld. counsel that design and drawing represents some technical information which keeps on changing. Hence, we hold the above expenses as allowable u/s 37(1) of the Act. Finally, regarding expenses of Rs.41,50,756/- it is found that as per the directions of the Pollution Control Board, the assessee-company was required to grow trees all around its Cement Plant. The expenses were incurred towards growing of plantations, making drainage system for watering those trees. Definitely by growing the trees around the Cement Plant, the assessee-company did not acquire any capital asset. As this is only for Pollution Control, we hold it as allowable u/s 37(1). Disallowance u/s 14A - HELD THAT:- As noted the assessee s own funds during the impugned assessment year is much more than the investment. Thus the disallowance of interest expenses u/s 14A does not arise. Before us, the Ld. counsel submits that the assessee-company accepts the disallowance of Rs.5,98,950/- u/s 14A as determined by the Ld. CIT(A) as r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ergent division as capital loss , we find that the assessee has acquired the right to use the lease hold land in the financial year 1991-92. In the instant case the conditions stipulated in section 45 of the Act so as to bring a transaction chargeable under the head capital gains are fulfilled and therefore, the gains/loss arising on transfer of such right would be liable to capital gains. Accordingly, the assessee has rightly claimed the loss on sale of right in the lease hold land as a capital loss. Disallowance made u/s 40A(9) being payments made to various institutions - these expenses were not wholly and exclusively incurred for the business purpose and does not directly relate to the business activity of the assessee - CIT-A deleted the addition - HELD THAT:- We find that the above issues have been decided by the ITAT in favour of the assessee in assessee s own case for earlier assessment year. Disallowance of preliminary expenses and share issue expenses - addition on the ground that these are capital in nature - In respect of preliminary expenses claimed u/s 35D, the AO held that the conditions of section 35D are not satisfied - HELD THAT:- It is found that thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y has not incurred any expenses for earning dividend income. Surplus funds time to time are invested in shares, securities, units etc. of reputed companies. All the investments are out of the company s surplus taxed income. This can be verified from the huge reserves of the company. However, the AO was not convinced with the above explanation of the assessee for the reason that investments have been made out of a common pool of funds and considering the nature, quantum of transactions, it is not possible to identify the exact source of investment and it is not possible to prove that investments have been made out of the capital and reserves. The AO further observed that the common pool of funds is source of all outgoings including investments, advances, fixed assets and other current assets and is destination of all incoming funds from loans and advances, capital and retained earnings in the nature of reserves. Then referring to the decision in Rajasthan State Warehousing Corporation v. CIT (159 CTR 132), Tata Unisys Ltd. (47 TTJ 8). CIT v. Magan Lal Chhagan Lal Pvt. Ltd. (236 ITR 456), CIT v. United General Trust Pvt. Ltd. (200 ITR 488) and K Somasundaram Brothers v. CIT 238 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence to High Court on the issue and SLP to Supreme Court has been rejected. 2.4 On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A). 2.5 We have heard the rival submissions and perused the relevant materials on record. The reasons for decisions are given below. A perusal of the audited accounts of the assessee-company clearly indicates that the company has its own funds aggregating to Rs.2596.58 crores, more than the borrowed capital of Rs.1,060.71 crore, whereas the investment portfolio is just Rs.555.68 crores. We further find that on identical facts in AY 1992-93, the Tribunal has decided the issue in favour of the assessee and held that there is no scope for allocation of interest expenses towards investment income. Also in AY 1993-94 and AY 1994-95, in assessee s own case on similar facts, the Tribunal held that no interest is to be allocated towards investment income. The department s reference to the High Court on the issue and SLP to Supreme Court has been rejected. Facts being identical, we follow the above orders of the Co-ordinate Bench in assessee s own case and allow the 1st ground of appeal. 3. The 2nd ground of appeal The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed with the above explanation of the assessee and disallowed such prior period items and added the same to the total income. 4.2 In appeal, the Ld. CIT(A) observed that the assessee-company is following the mercantile system of accounts, under which it is supposed to have debited the expenses on accrual basis in the year in which they have accrued. From the details filed before him, the Ld. CIT(A) noted that most of these expenses have accrued in earlier years. Therefore, he confirmed the disallowance of Rs.74,66,381/- made by the AO. 4.3 Before us, the Ld. counsel of the assessee submits that the company had a turnover of Rs.1,516 crores and expenses of Rs.1,301 crores. The returned income of the assessee-company was Rs.160,73,70,148/ -. It is thus stated that such volume itself establishes that the expenses of Rs.74,66,381/- is miniscule. It is further submitted that the delay in booking of the expenses was due to the late receipt of bills or events occurring during the year, for which the liability had crystallized after the balance sheet. Thus it is stated that the liability for the items crystallized during the year under reference and the expenses were incurred to earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment proceedings, the assessee filed factual information in relation to the above expenses before the AO. However, the AO was not convinced with the said explanation as these expenses were capital in nature and thus not allowable u/s 37(1) of the Act. In this regard, the AO relied on the decision in Triveni Engineering Works Ltd. 232 ITR 639 (Del) and Hasmira Industries 230 ITR 927 (SC). 5.2 In appeal, the Ld. CIT(A) confirmed the above disallowances made by the AO. In respect of the disallowance of Rs.1,62,25,000/- (payment to L T as compensation towards cancellation of construction contract), the Ld. CIT(A) held that such expenditure incurred by it for a new project which was in the nature of capital expenditure remains such, and by claiming it in a subsequent year as revenue expenditure, the assessee cannot convert what was capital expenditure into revenue expenditure . In respect of disallowance of Rs.5,08,200/- (payment to M/s N.M. Raiji Co. towards due diligence for Paradeep Phosphates and NFL Projects) and disallowance of Rs.31,41,657/- (payment to ING Bank towards Paradeep Phosphates Projects), the Ld. CIT(A) held that the expenditure was incurred by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market conditions, the contract was cancelled and the assessee-company had to pay compensation towards cancellation. It is thus argued that the cancellation of contract was purely for business reasons, hence the same should be allowed as revenue expenses u/s 37(1) of the Act. In this regard reliance is placed by him on the decision in Ideal Cellular (2014) 47 taxmann.com 341 (Mum). Regarding, the expenses of Rs.5,08,200/- the Ld. counsel submits that during the year under reference, Government of India invited various industrial houses and corporations to offer a bid for Paradeep Phosphates and National Fertilizers Ltd. (both Government of India Companies). A sum of Rs.5,08,200/- was paid to M/s N.M. Raiji Co. for carrying out due diligence i.e. study of financial records of these two companies and submit report to Board. It is explained that financial study from public records of these two companies is in no way connected with the actual acquisition of these companies; the payment was for obtaining a report or financial health and hence the same is allowable as deductible revenue expenses. As regards the expenses of Rs.31,41,657/- the Ld. counsel submits that during the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement, L T asked for compensation for cancellation of contract and a sum of Rs.1,62,25,000/- was paid to them. The payment to L T was made for expansion in existing line of business. However, due to change in market conditions, the contract was cancelled and the assessee-company had to pay compensation towards cancellation. In view of the above factual scenario, the cancellation of contract was for business reasons. Therefore, we hold that the same is allowable as revenue expenses u/s 37(1) of the Act. In respect of the expenses of Rs.5,08,200/-, it is found that a sum of Rs.5,08,200/- was paid by the assessee-company to M/s N.M. Raiji Co. for carrying out due diligence i.e. of financial records of Paradeep Phosphates and National Fertilizers Ltd. (both Government of India Companies). It is no way connected with the acquisition of these companies. Hence, we hold the above as allowable as business expense u/s 37(1) of the Act. As regards the expenses of Rs.31,41,657/-, we find that during the year under consideration, the above amount was paid to ING Bank for working out final viability and financial tie-up for Paradeep Phosphates. The project was finally not awarded to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares and other securities and at no stage, borrowed funds are diverted for investment in shares. However, the AO was not convinced with the above explanation of the assessee and calculated the interest cost allocable with the above investments at Rs.14.49 crores (3.87% interest cost to capital employed). 6.2 In appeal, the Ld. CIT(A) set aside the disallowance of interest and directed the AO to workout disallowance in respect of indirect expenses on the basis of the CIT(A) s directions for AY 2000-01, viz. 5% of salary of CFO, Deputy CFO, Head Treasury and Salary of other employees of Treasury plus 10% overheads thereon as on AY 2000-01. 6.3 As noted earlier at para 2.5, the assessee s own funds during the impugned assessment year is much more than the investment. Thus the disallowance of interest expenses u/s 14A does not arise. Before us, the Ld. counsel submits that the assessee-company accepts the disallowance of Rs.5,98,950/- u/s 14A as determined by the Ld. CIT(A) as reasonable and does not press the above ground of appeal. Considering the above, the 5th ground of appeal is partly allowed. 7. The 6th ground of appeal The Ld. CIT(A) erred in directing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn of income, an amount of Rs.2,58,92,853/- being the provision for lease deposit towards machinery was disallowed by the assessee and added back in the computation of income. However, during the course of assessment proceedings, the same was claimed as an allowable revenue expenditure u/s 37(1) of the Act. While finalizing the assessment order, the AO observed that this claim of write off of provision for lease deposit is not allowable as per the provisions of section 37(1) as the above referred lease deposit is capital in nature. 8.2 In appeal, the CIT(A) followed the order of his predecessor-in-office for AYs 2003-04 and 2004-05 and confirmed the disallowance made by the AO. 8.3 In appeal, the Ld. counsel submits that in the financial year 1994-95, the assessee entered into sale and lease back agreements with L T, Bajaj Auto and HDFC Ltd. The lease agreements provided for certain lease deposits and annual rent. For the year under reference i.e. financial year 2001-02 (AY 2002-03), the rent has come down to a token amount but the lease deposit continued to remain with the lessors. It was agreed between the assessee-company and the lessors that this deposit is to be written ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely a direction for adjustment of the security amount against the arrears of license fee. The Revenue did not suggest before the Tribunal that the failure to pay any installment of license fee entailed a criminal penalty, nor pointed out that there was any other breach of condition of license or any excise law to support its plea that the said forfeiture resulted from a violation of law disentitling the assessee s claim for deduction of the amount as a business expenditure, (ii) The finding given by the Tribunal that the security deposits was adjusted towards the arrears of license fee and the same was not a forfeiture by way of penalty for the breach of any term of the license etc., was a finding of fact and no question of law arose. In Thackers H.P. Co. v. CIT (1982) 134 ITR 21 (MP), the assessee-firm, carrying on the business of purchase and sale of tendu leaves, entered into a contract with Orissa Forest Corporation Ltd. for the purchase of tendu leaves and in connection there with, deposited a certain sum as security with the Corporation. As the contract was not fulfilled, the Corporation forfeited the security. For the AY 1974-75, the assessee claimed the security money ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreements provided for certain lease deposit and annual rent. During the year under reference, an amount of Rs.2,58,92,853/- was amortized and provided towards lease deposit. We find that on the basis of above facts, the present case is distinguishable from the above case laws relied on by the Ld. counsel. We are of the considered view that the amount paid as consideration for obtaining the lease is for the acquisition of a capital asset which enables the lessee to carry on its business. It is a capital expenditure. It cannot be split up into the number of years of the duration of the lease in order to claim a proportionate fraction as revenue expenditure each year. The acquisition is of exclusive right or privilege over the lease, it a strong point that the consideration paid is on capital account. Receipts and payments in connection with acquiring or disposing of lease are usually on capital account. In view of the above, we uphold the order of the Ld. CIT(A) and dismiss the 7th ground of appeal. 9. The 8th ground of appeal The Ld. CIT(A) erred in upholding the treatment of sale of assets as a slump Sale and subjecting the same to Tax as a Short Term Capital Gain. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eating them as itemized sale) would be restored and the assessee would be entitled to additional depreciation of Rs.69,18,105/-. 9.2 In appeal, the Ld. CIT(A) observed that in the sale agreement dated 19.11.2001 between the assessee and Jyothi Laboratories, the assessee has sold its detergent manufacturing facility at Pitampura Industrial Estate in Madhya Pradesh for a lump sum consideration of Rs.3.75 crore, however, in the said agreement there is no bifurcation of the sale consideration amongst the individual assets. Therefore, the Ld. CIT(A) confirmed the order of the AO and held that the sale constitutes a slump sale within the meaning of section 2(42C) and hence section 50A is clearly attracted. 9.3 In appeal, the Ld. counsel submits that sale of individual assets for lump sum consideration cannot be treated as a slump sale. Further, it is stated by him that such itemized sale is essentially different from sale of an entire going concern (including all assets and liabilities). The Ld. counsel argues that since the basic condition of transfer of undertaking for treating the sale as a slump sale is not satisfied, the provisions of section 2(42C) are not applicable. Rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the ratio of their original cost and reduced from the WDV of the respective block of assets in the Income tax depreciation schedule. In Mahindra Sintered Products Ltd. (supra), it is held that where price had been fixed before hand in respect of identifiable assets of undertaking and no liability was transferred to buyer, transfer of undertaking would not constitute a slump sale. In Kampli Co-op. Sugar Factory Ltd. (supra), it is held that sale of assets of factory excluding investment and deposits while retaining the liabilities was not a slump sale and long term and short term capital gains had to be computed separately by allocating the lump sum consideration over depreciable and non-depreciable assets; consideration attributable to land will give rise to long term capital gains while consideration attributable to depreciable assets will give rise to deemed short term capital gains u/s 50(2). Having perused the documents, we find that in the instant case the sale of individual assets for a lump sum consideration cannot be treated as a slump sale. The fact remains that such itemized sale is essentially different from sale of an entire going concern (including all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tata Chem Sports and Cultural Club 67,255 Flag Day Collection 1,103 Fort Medical Society 12,04,750 Thatachem Co-operative Credit Society 53,500 11.2 The Ld. DR supports the order passed by the AO. On the other hand, the Ld. counsel of the assessee submits that on similar facts, similar additions made by the AO in earlier assessment years have been deleted either by the CIT(A) or by the Tribunal. 11.3 We have heard the rival submissions and perused the relevant materials on record. As per the decisions filed by the Ld. counsel, we find that the above issues have been decided by the ITAT in favour of the assessee in assessee s own case for earlier assessment year. In the case of Tata Sports Club, similar issue has been decided by the Tribunal in favour of the assessee in AY 1995-96 (ITA No. 3082/M/02, dated 26.07.2006) and AY 1996-97 (ITA No. 6496/M/04, dated 17.08.2007). In case of Nutan Bal Sikshan Sangh and Kindergarten Primary School and Mithapur/Kamgar Club, Mithapur, in AY 1992-93 (ITA No. 4442/M/96, dated 04.02.2000), in ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imilar issue has been decided in favour of the assessee by the Tribunal in assessee s own case in AY 1997-98 (ITA No. 7035/M/04, dated 17.05.2017), AY 1998-99 (ITA No. 7036/M/04, dated 21.06.2017), AY 1999-00 (ITA No. 5153/M/11, dated 21.06.2017), AY 2000-01 (ITA No. 5446/M/14, dated 21.06.2017) and AY 2001-02 (ITA No. 6366/M/14, dated 15.09.2017). In view of the above facts and the decision in earlier years, we uphold the order of the Ld. CIT(A) and dismiss the 2nd ground of appeal. 13. The 3rd ground of appeal On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the additions of Rs.3,39,29,363/- for subscription of brand equity treating it as business expenditure ignoring the fact that it is a capital expenditure and the ratio of ITAT s decision in the case of M/s Rallies India Ltd. for AY 2004-05 does not apply to the case. 13.1 The tax auditors in their tax audit report i.e. clause 17(a) have mentioned that subscription paid for brand equity is not considered as capital expenditure. The AO observed that an amount of Rs.3,39,29,363/- has been debited on account of subscription to brand equity and the said expenditure was incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
