IT: Where transfer was completed in terms of section 2(47) by giving possession of property on date of sale agreement, but registration was delayed on bona fide reasons and execution of sale deed was only a legal formality, stamp duty value on date of sale agreement was required to be adopted for computing capital gains
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[2013] 32 taxmann.com 324 (Hyderabad - Trib.)
IN THE ITAT HYDERABAD BENCH 'B'
Deputy Commissioner of Income-tax, Circle-11(1), Hyderabad
v.
S. Venkat Reddy*
CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SAKTIJIT DEY, JUDICIAL MEMBER
AND SAKTIJIT DEY, JUDICIAL MEMBER
IT APPEAL NOS. 974 & 975 (HYD.) OF 2010
[ASSESSMENT YEAR 2006-07]
[ASSESSMENT YEAR 2006-07]
NOVEMBER 9, 2012
Section 50C, read with section 2(47), of the Income-tax Act, 1961 - Capital gains - Special provisions for full value of consideration in certain cases [Date of transfer] - Assessment year 2006-07 - Assessee sold property and transferred possession vide sale agreement on 13-6-2005, but sale deed was registered only on 25-11-2005 - Assessing Officer took stamp duty value on date of registration as full value of consideration under section 50C for computing capital gains - Whether, where transfer was completed in terms of section 2(47) by giving possession of property on date of sale agreement, but registration was delayed on bona fide reasons and execution of sale deed was only a legal formality, stamp duty value on date of sale agreement and not on date of registration was required to be adopted for computing capital gains - Held, yes [Para 19] [In favour of assessee]
FACTS
| ■ | The assessee entered into agreement of sale of immovable property for Rs. 2.75 crore on 13-6-2005. The possession of the property was given on 13-6-2005 itself. However the agreement was registered on 25-11-2005, when the market value for purpose of stamp duty was Rs. 4.3 crore, which was mentioned in the sale deed. The assessee took Rs. 2.75 crore as the consideration for computing capital gains as the possession was transferred on 13-6-2005. | |
| ■ | The Assessing Officer took Rs. 4.3 crore as the full value of consideration under section 50C and calculated capital gains accordingly. | |
| ■ | On first appeal, the Commissioner (Appeals) held that as transfer had already taken place on 13-6-2005 and execution of registered sale deed on 25-11-2005 was merely a formality to confirm legal ownership of purchaser, invoking provisions of section 50C by taking SRO value on 25-11-2005 was improper. |
HELD
| ■ | There was a sale of property and the sale deed was dated 25-11-2005. the only issue for consideration is what is the sale consideration for sale of property for computation of capital gain. Under the common law, the date of execution of sale deed shall be taken as date of sale of property. However under the Act, the legislature made a departure from the common law. Under the Act, the provisions of section 2(47)(v) prescribe that any transfer involving allowing of possession of any immovable property or retained in part performance of a contract of nature as provided in section 53A of the Transfer of Property Act would also be considered a transfer under the Act. Therefore, it is to be seen whether the assessee handed over the physical possession of property on 13-6-2005, when the agreement of sale was executed. [Para 16] | |
| ■ | The assessee filed a copy of registered rectification deed of sale deed dated 14-10-2009 which confirms the fact that the possession was given to the purchaser on 13-6-2005. The law is that provisions of section 50C are applicable on registration of sale deed. As per provisions of section 50C, valuation adopted for stamp valuation purposes is to be considered as the consideration received or accrued to the assessee. Thus, only on registration of sale deed, the provisions of section 50C are applicable. However, when the assessee is not accepting the value mentioned in the sale deed for stamp valuation purposes on treating the same as consideration received on transfer of the property, the assessee could exercise the provisions of section 50C(2) to refer the matter to the DVO. In the present case, the assessee has not exercised this option and only challenged the adoption of the value considered for stamp valuation purposes to determine the consideration on transfer of the property as the transfer was completed vide sale agreement dated 13-6-2005. In the case of Smt. S. Suvaran Rekha, [IT Appeal No. 743 (Hyd.) of 2009, dated 29-10-2009 relied on by the assessee, of the Tribunal gave a finding that since the physical possession of the property on transfer was given vide agreement of sale, the value mentioned therein has to be considered instead of the value adopted by the state authorities for stamp duty purposes. [Para 17] | |
| ■ | Further it was decided in the following cases that as per section 2(47)(v), when the vendor had given the possession of the property to the purchaser, it is to be considered that the transfer is complete on the date of agreement of sale: |
| (a) | CIT v. Veepees Enterprises [2010] 325 ITR 414/175 Taxman 11 (Ker.) wherein it was held that where pursuant to the agreement for sale, possession itself was given by vendor to purchaser, vendor was not entitled to contend that section 2(47)(v) was not applicable. | |
| (b) | Chaturbhuj Dwarkadas Kapadia v. CIT [2003] 260 ITR 491/129 Taxman 497 (Bom.) wherein it was held that in case of development agreement, if the contract, read as a whole indicates passing of or transferring of complete control over the property in favour of the developer, then date of the contract would be relevant to decide the year of chargeability of capital gain and substantial performance of the contract would be irrelevant. | |
| (c) | M. Siva Parvathi v. ITO [2010] 129 TTJ 463 (Vishakh.) wherein it was held that where the delay in registering the sale deed had occurred because of genuine reasons which were beyond the control of the assessee, the provisions of section 50C could not be applied to the sale agreement since the section was introduced in the statute book only after sale agreement had been entered into. Since the final registration of the sale was only in fulfilment of the contractual obligation, the logical conclusion was that the provisions which did not apply at the time of entering into the transaction initially would not be applicable at the time of completion of the transaction. [Para 18] |
| ■ | Considering all these facts, if the transfer is completed in terms of section 2(47)(v) by giving the possession of the property in terms of the sale agreement dated 13-6-2005 and SRO rate as on this date was considered in the sale agreement and if the registration was delayed on bona fidereasons which was beyond the control of the assessee and the sale deed executed on 25-11-2005 is only a legal formality, then, the Assessing Officer is required to adopt the SRO rate as on the date of transfer vide sale agreement for the purpose of determining capital gain consequent to the transfer of capital asset. Accordingly, the Assessing Officer is directed to cause necessary enquiry with regard to SRO rates on 13-6-2005 and also the fact of giving the possession of the property to the purchaser on 13-6-2005 itself, and to decide the issue in the light of the Tribunal order in the cases of M. Siva Parvathi (supra) and the judgment of Kerala High Court in the case of Veepee Enterprises (supra) and the Bombay High Court judgment in the case of Chaturbhuj Dwarkadas Kapadia (supra). [Para 19] |
CASE REVIEW
CIT v. Veepee Enterprises [2010] 325 ITR 414/175 Taxman 11 (Ker.) (para 19), Chaturbhuj Dwarkadas Kapadia v. CIT [2003] 260 ITR 491/129 Taxman 497 (Bom.) (para 19) and M. Siva Parvathi v. ITO [2010] 129 TTJ 463 (Vishakha.) (para 19) followed.
CASES REFERRED TO
Ambattur Clothing Company Ltd. v. Asstt. CIT [2010] 326 ITR 245 (Mad.) (para 11), Jitendra Mohan Saxena v. ITO [2008] 305 ITR 62 (Luck) (para 11), Asstt. CIT v. Pravin V. Gandhi [2011] 38 (II) ITCL 311 (Mum) (Trib) (para 12), Navneet Kumar Thakkar v. ITO [2008] 110 ITD 525 (Jodh) (SMC) (para 12), CIT v. Chandni Bhuchar [2010] 323 ITR 510/191 Taxman 142 (Punj. & Har.) (para 15), ITO v. Smt. Anshu Jain [2010] 36 SOT 263 (JP) (para 15), K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13 (SC) (para 15), Cauvery Spg. Wvg. Mills Ltd. (in liquidation)v. Dy. CIT [2011] 11 taxmann.com 193/200 Taxman 27 (Mad.) (para 15), Smt. S. Suvarna Rekha [IT Appeal No. 743 (Hyd.) of 2009, dated 29-10-2009] (para 17), Rahul Constructions v. Dy. CIT [2010] 38 DTR 19 (Pune) (para 17), CIT v. Veepees Enterprises [2010] 325 ITR 414/175 Taxman 11 (Ker.) (para 18), Chaturbhuj Dwarkadas Kapadia v. CIT [2003] 260 ITR 491/129 Taxman 497 (Bom.) (para 18), M. Siva Parvathi v.ITO [2010] 129 TTJ 463 (Vishakhapatnam) (para 18).
Smt. Amisha S. Gupt for the Appellant. K.C. Devdas for the Respondent.
ORDER
Chandra Poojari, Accountant Member - These two appeals by the Department are directed against different orders of the CIT(A) dated 16.4.2010 in respect of co-owners of same property bearing No. 7-2-1813/5/A/1, Sanat Nagar, Hyderabad. The grounds in these appeals are common in nature and hence these are clubbed together, heard together and are being disposed of by this common order, for the sake of convenience.
2. The common grounds are as follows :
| 1. | The CIT(A) erred both in law and facts. | |
| 2. | The CIT(A) ought to have appreciated the fact that in the registered sale deed the value of the property as per market value was correctly adopted by the Registration authorities. | |
| 3. | The CIT(A) would have rejected the impugned agreement of sale which was notarised by the assessee but not registered with registration authorities. | |
| 4. | The CIT(A) would not have allowed the assessee to submit additional evidence which was not filed by the assessee before the Assessing Officer and would have given due cognisance to the remand report submitted by the Addl. CIT, Range-11, Hyderabad. |
3. Brief facts of the issue are that the assessee along with his brother Mr. S. Venkat Reddy and two others acquired a property at 7-2-1813/5/A/1, Sanath Nagar, Hyderabad through a sale cum GPA agreement on 25.4.2005 for Rs. 25,000,000. The assessee's share in the property is 40%. The particulars of other co-owners along with their share holding are as under:
| Sl. No. | Co-owner | Extent of share |
| 1. | S. Venkat Reddy | 40% |
| 2. | Mahaveer Infoway Ltd. | 10% |
| 3. | Purushottam Mandhana | 10% |
4. The assessee had entered into an agreement of sale cum GPA on 13.6.2005 with M/s. Victator Homes for sale of the above immovable property for a sum of Rs. 2,75,00,000. As per clause 7 of the agreement the possession of the property was given to M/s. Victator Homes on the same day. The Agreement of Sale was notarized and finally the property was registered on 25.11.2005 vide sale document No. 3637/2005 to M/s. Victator Homes for Rs. 2,75,00,000. In the Sale Deed the possession is stated to be given on 25.11.2005 although there is a reference to the Agreement of Sale of 13.6.2005 in the Sale Deed, under which possession was given on 13.6.2005. The Assessee returned a short-term capital gain of Rs. 9,48,436 as under:
| Particulars | Amount in Rs. |
| 40% share of the cost (Rs. 25,00,000 x 40%) | 10,000,000 |
| 40% cost of stamp duty | 869,888 |
| 40% share of total cost of land | 10,869,888 |
| 40% of sale consideration (27,50 000) | 11,000,000 |
| Reimbursement of Registration charges | 818,324 |
| Total share of consideration | 11,818,324 |
| Selling consideration | 11,818 324 |
| (-) Cost of acquisition | 10,869,888 |
| Short Term Capital Gain | 948,436 |
5. A copy of the Sale Deed of the above property was filed during the course of assessment proceedings. As per the Sale Deed, the market value for the purpose of stamp duty was Rs. 4,30,70,000. Stamp duty was paid by the purchaser on the value of Rs. 4,30,70,000. The purchasers did not dispute the stamp duty valuation. The Addl. Commissioner of Income Tax addressed a letter to the Sub-Registrar to confirm the valuation who responded as under:
"With reference to the subject cited, I am herewith submitting the Basic Market value of the land and built up area of property bearing House No. 7-1-1813/5/1, Sanath Nagar, Hyderabad for the Document No. 3637/2005, dated 25.11.2005 is as follows:
| | Land 4840 Sq. Yds x 8000 | = | 3,87,20,000 |
| Building 15000 Sq. Yds x 290 | = | 43,50,000 | |
| Total Market value | 4,30,70,000 |
The party has paid the stamp duty of Rs. 9,69,100/- Registration fees to Rs. 2,15,350/- and Transfer duty of Rs. 8,61,400/- total comes to Rs. 20,45,850/-."
6. Based on the above information, the Additional Commissioner of Income Tax issued a Show Cause Notice on 10.12.2008 to adopt the sum of Rs. 4,30,70,000 as the sale consideration u/s 5OC of the Income Tax Act, 1961 which reads as under:
"Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed by any authority of a State Government (hereafter in this section referred to as the "stamp valuation authority") for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer."
Thus the provisions of Section 50C are applicable whenever:
| (a) | the value adopted by the Sub-Registrar for the purpose of levying stamp duty is higher than the consideration as per the document. | |
| (b) | The value fixed by the Sub-Registrar is accepted and not challenged and the stamp duty as demanded is paid. " |
7. In response to the above show cause notice the assessee has made the following submissions:
| (a) | "Assessee has entered into an agreement of sale on 13.6.2005 with GPA cum Agreement holders. A copy is enclosed. It could be seen from the agreement that the possession of the property is handed over on the same day i.e.13.6.2005.as per clause 7 of the Agreement at page 4 and the part consideration of Rs. 1,00,00,000 also is paid by the date of agreement. | |
| (b) | This agreement is also mentioned in the last paragraph of the sale deed at page 8. | |
| (c) | I submit that as per the provisions of Sec. 2(47) of IT Act, the capital accrues and arise on the date of giving possession and receiving part consideration. As such in my case the capital gains accrued on 13.6.2005 and not at a later date. | |
| (d) | The SRO value referred to by the Addl. Commissioner is as on 30.11.2005. Whereas as on the date of agreement of sale that is 13.6.2005 the SRO Value is Rs. 4800. I am submitting a copy of the Annexure 11 given by SARO, Sanjeeva Reddy Nagar certifying the same. Therefore, I submit that though as on the date of registration of document of sale the SRO value is Rs.8000 per sq. yard the same cannot be adopted in my case since the capital gains arose on 13.6.2005 and not on the date of registration of the property. On the date of agreement of sale i.e. 13.6.2005 the value is only Rs. 4800/-. | |
| (e) | If the rate of Rs. 4800 is adopted there will not be any difference. The value of land comes to Rs. 2,30,40,000 and the building has not value since it is more than BO years old building it has no value. Therefore we have valued the same at higher value than the SRO value. But it is valued by SRO as per the Addl. CIT's letter at Rs.43,40,000 as on 30.11.2005. | |
| (f) | This we have not contested since the purchaser is paying the stamp duty and not by me. | |
| (g) | In the light of the same I submit that it will not be correct to adopt the sale consideration at Rs. 4,30,70,000 invoking provisions of Sec. 50C since it will be contrary to provisions of law. As per the provisions of law, the value should be as at 13.6.2005 when the capital gains accrued and become taxable and not as on 30.11.2005. I, therefore, request the Addl. Commissioner to accept the sale consideration as admitted by me." |
8. On the above basis, the Assessing Officer computed the capital gain considering the total consideration at Rs. 4,30,70,000 and each of the assessee's case herein worked out at Rs. 1,80,46,324 and the short term capital gain determined on each case of the assessee are as follows:
| 40% share of total cost of land | Rs. 1,08,69,888 |
| Short term capital gains | Rs. 71,76,436 |
9. An amount of Rs. 71,76,436 has been considered as short term capital gain in each of the above assessee's case as against the returned short term capital gain of Rs. 9,48,436. Against this the assessee carried an appeal to the CIT(A). The CIT(A) observed that provisions of section 50C are not applicable in these cases as original sale agreement was made vide sale agreement dated 13.6.2005 through which the possession given to the purchaser which is also evident by the recital in the agreement of sale, the affidavit of the advocate and the rectification of sale deed vide rectification deed dated 14.10.2009. At the time of agreement of sale, guideline value for registration is different and thereafter there was change in the SRO value. The CIT(A) was of the opinion that the date of sale deed executed on 25.11.2005 cannot be considered for determining the SRO value and thereby invoking provisions of section 50C of the Act is improper. It is because transfer has already taken place on 13.6.2005 and the execution of registered sale deed on 25.11.2005 was merely a formality to confirm the legal ownership of the purchaser. Against these findings of the CIT(A), the Revenue is in appeal before us in ground Nos. 1 to 4.
10. The learned DR submitted that provisions of section 50C are mandatory with effect from 1.4.2003 and the property considered to be sold by the assessee vide Absolute Sale Deed executed on 25.11.2005. According to the DR no credence could be given to the sale agreement dated 13.6.2005 and she also submitted as per registered sale deed the possession has been given on the date of sale deed which is evident from the clause no. 3 which reads as follows.
"The scheduled property is under the possession of the vendor, the vendor has at the time of execution of this sale deed have delivered vacant physical possession of the scheduled property to the vendee and the vendee has taken possession of the same".
11. Further she submitted in view of the above clause no. 3 the CIT(A) is not justified in giving any credence to the sale agreement entered by assessee on 13.6.2005. Further she submitted that the assessee having not availed of the opportunity provided under sub-sections (2) and (3) of section 50C to object to the value adopted by the stamp valuation authorities, the Assessing Officer was justified in treating the value adopted by registration authorities as the deemed sale consideration received by the assessee as a result of the transfer. For this proposition she relied on the judgement of the Madras High Court in the case of Ambattur Clothing Co. Ltd v. Asstt. CIT [2010] 326 ITR 245. Further she relied on the order of the tribunal Lucknow bench in the case of Jitendra Mohan Saxena v. ITO [2008] 305 ITR AT 62 wherein held that "Fair market value of the property arrived at by stamp valuation authorities being higher than the sales consideration transferred by the assessee and fair market value reported by DVO on reference being higher than the one adopted by the stamp valuation authorities, the Assessing Officer was justified in applying provisions of sec 50C and taking the value adopted by the stamp valuation authorities as full value of consideration for computing the capital gain, provisions of sec 50C are mandatory.
12. Further she relied on the order of the tribunal in the case of Asstt. CIT v. Pravin V. Gandhi [2011] 38 (II) ITCL 311 (Mum 'C'-Trib) where in held that - it is not in dispute that the property in question was transferred by an agreement not registered with the registering authorities. The Assessing Officer while invoking the provisions of sec 50C had taken the value of the property on the basis of the letter given by the sub registrar wherein he had mentioned that as on the date of agreement the value of open plot was Rs. 8000 per sq. yard. However, according to the provisions of sec 50C where the consideration received are accrued as a result of transfer by the assessee of a capital asset being land or building or both, is less than the value adopted or assessed by any authority of a state government. For the purpose of payment of stamp duty in respect of such transfer the value adopted or assessed shall, for the purpose sec 48, be deemed to be the full value of consideration received or accruing as a result of such transfer. Section 50C is applicable only on registration of sale deed and not otherwise. For the same proposition the DR also relied on the order of Tribunal Jodhpur Bench in the case ofNavneet Kumar Thakkar v. ITO [2008] 110 ITD 525 (SMC).
13. On the other hand on the above issue the AR submitted that as per section 2(47)(v) the property has been transferred vide agreement dated 13.6.2005 as all the conditions laid down u/s 2(47)(v) have been fulfilled as possession of the property has been given. The registration of sale deed dated 25.11.2005 is only a legal formality. He submitted that the date of transfer has to be considered as 13.6.2005 instead of 25.11.2005. Further he submitted that after entering into sale agreement there was a change in the SRO rate and the SRO rate prevailing on the date of sale agreement has to be considered. Otherwise it gives rise to injustice. Further, he submitted that the valuation of Rs. 4,30,70,000 cannot be adopted as the property was subject matter of agreement of sale on 13.6.2005 on which date the possession of the property was handed over thus attracting the provisions of section 2(47)(v) of the Act. This fact cannot be ignored.
14. The AR submitted that the Assessee filed an affidavit of Advocate D. Jitendra Kumar who drafted the Sale Deed who clearly brought out the draftman's error and confirmed that possession was given on 13.6.2005. The AR submitted that under the provisions of the Act, capital gains is attracted on date of transfer which includes possession under section 2(47)(v) of the Act. The possession of the property was given on 13.06.2005 on which date the SRO's value of land was Rs 4,800 per Sq. yard and this accords well with the consideration shown in the sale deed. The property transferred consisted of land admeasuring 4840 Sq yards along with structures in the premises bearing Municipal Numbers 7-2-1813/5/A/1, Sanathnagar, Hyderabad. Further during the course of appellate proceedings, the assessee filed a copy of the Registered Rectification Deed of 14.10.2009 wherein under the Clauses in relation to date of handing over possession of property in the Sale Deed executed on 25.11.2005 was rectified which confirms the fact that possession was given on 13.6.2005. The CIT(A) forwarded a copy of the Affidavit of Advocate D. Jitendra Kumar and a copy of the Registered Rectification Deed of 14.10.2009 to the Sale Deed executed on 23.11.2005 to the Addl. Commissioner of Income Tax for his comments and report. The Addl. Commissioner of Income Tax forwarded the Remand Report dated 11.11.2009 confirming the fact as stated in the Assessment Order.
15. The AR submitted that the Agreement of Sale of 13.6.2005 clearly brought out the fact that possession was given on 13.6.2005 and the Agreement of Sale was referred to at page 8 of the Agreement of Sale of 25.11.2005 which was filed before the Addl. Commissioner of Income Tax. Further the Affidavit of the Advocate D. Jitendra Kumar of 20.1.2009 coupled with the Registered Deed of Rectification dated 14.10.2009 to the Registered Sale Deed clearly brought out the fact of possession being given on 13.6.2005 and therefore the transfer took place on 13.6.2005 notwithstanding the fact that the Registered Sale Deed was executed on 25.11.2005 which was only for the purpose of confirming Title under the Transfer of Property Act. The decision of the Tribunal in the case of Navneet Kumar Thakkar (Supra) according to the assessee supports its case. The AR further submitted that the onus of proving the receipt of consideration adopted for stamp duty purposes was on the department and in its absence the consideration disclosed by the assessee as stated vide Agreement of Sale by 13.6.2005 should be adopted as transfer within the meaning of section 2(47) of the Income Tax Act took place on 13.6.2005. Therefore, it was pleaded that the capital gains as reported be accepted. He relied on the following judgements:
| (a) | CIT v. Chandni Bhuchar [2010] 323 ITR 510/191 Taxman 142 (Punj. & Har.) wherein held that the view taken by the Tribunal while accepting the order of the Commissioner (Appeals) did not suffer from any legal infirmity. The argument of the Revenue that the Tribunal should have asked the Assessing Officer to make a reference to the Valuation Officer under section 142A of the Act did not require any detailed consideration because the Commissioner (Appeals) had sent the evidence produced by the assessee to the Assessing Officer for his comments. He conducted an inquiry and asked the assessee to produce the original bank statement. Then he sent a reply to the Commissioner (Appeals) authenticating the whole transactions. Thereafter, the Commissioner (Appeals) and the Tribunal had accepted the sale consideration depicted in the sale deed as fact. The assessee had discharged the burden of proving the sale consideration as projected in the sale deed. There was no question of law warranting admission of the appeal. | |
| (b) | ITO v. Smt. Anshu Jain [2010] 36 SOT 263 (JP) wherein held that the case set up by the assessee is that once there is invoking of provisions of s. 50C and thereafter the provisions of s. 69B have been invoked then the primary evidence for consideration and appreciation coming into play is that of s. 69B wherein the addition is being made by invoking the deeming provision and the onus to prove with regard to the payment over and above the declared amount is on the revenue and there cannot be transaction unilaterally by the assessee himself till a corroborative piece of direct evidence has been brought on record adverse the assessee which in the present case, has been none. When there is no corroborative piece of evidence placed on record by the Revenue to substantiate contention raised emerging from the order under challenge in form of verification from the seller then the assessee cannot put to tax on the lapse of the Department to which extent written pleadings were advanced at the very initial stage during the course of assessment proceedings and which remains and unrebutted fact till date. In such circumstances and facts of the case, the CIT(A) is not justified in confirming the action of the AO and the addition sustained is directed to be deleted. - K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13 (SC) applied. | |
| (c) | Cauvery Spg. & Wvg. Mills Ltd. (In liquidation) v. Dy. CIT [2011] 11 taxmann.com 193/200 Taxman 22 (Mad.) wherein held: Here s. 2(47)(v) needs to be underscored. This provision creates a notional or artificial transfer on the day when possession is transferred in terms of s. 53A of the Transfer of Property Act. It is common knowledge that transfer of title by way of sale takes place only on the execution of the sale deed as provided in s. 54 of the Transfer of Property Act. But, for the purposes of the IT Act notional/ artificial transfer is effected on the date when transfer of possession is made under s. 53A of the Transfer of Property Act. The object of introduction of s. 2(47)(v) in this Act is easily discernible. In my considered opinion, it was only to make any amount which is received by transfer from the date of such notional/artificial transfer as income, this provision has been made. Before introduction of this provision by Finance Act of 1988 with effect from 1st April, 1988, there was no such provision anywhere in the Act. Therefore, prior to 1st April, 1988, the legal position was that the transfer will take place only as per the provisions of the Transfer of Property Act. Therefore, any amount received prior to such transfer would be only part of sale consideration, though it might have been received under any name like interest. Only to prevent such kind of evasion, probably, the Parliament had thought it fit to introduce the said provision with effect from 1st April, 1988. This would only to go indicate the correctness of the argument advanced by the learned senior counsel for the petitioner that any amount received, whatever name if may bear, prior to the transfer will be only part of sale consideration and the same can never be considered as income from other sources. |
16. We have heard both the parties and perused the material on record. Admittedly, there was a sale of property and the sale deed was dated 25.11.2005. The only issue for consideration is what is the sale consideration for sale of property for computation of capital gain. The learned AR pleaded before us that as on the date of sale agreement dated 13.6.2005, the guidelines value as per SRO rate as notified by the State Government is at Rs. 4,800 per sq. yd. However, later the SRO rate was modified at Rs. 8,000 per sq. yd., thereby resulted in enhanced value for the purpose of registration with the SRO. Under the common law, the date of execution of sale deed shall be taken as date of sale of the property. However under the Income Tax act the legislature made a departure from the common law. Under the Income-tax Act, 1961 the provisions of section 2(47)(v) prescribed that any transfer involving allowing of possession of any immovable property has to be taken or retained in part performance of a contract of nature as provided in section 53A of the Transfer of Property Act would also to be considered a transfer under the Income-tax Act. Therefore, we have to see whether the assessee has handed over the physical possession of property on 13.6.2005 when the agreement of sale was executed. The assessee has filed a copy of sale agreement before us. The important clause no. 7 reads as under.
"7. That the vacant, physical peaceful possession of the schedule property is hereby delivered by the Intending Seller to the Intending Purchaser on this day and the Intending Purchaser is at liberty to enjoy the same."
17. We have carefully gone through the above clause of the sale agreement dated 13.6.2005 and sale deed dated 23.11.2005. Further the assessee also filed a copy of registered rectification deed of sale deed dated 14.10.2009 wherein under the clauses in the relation to the date of handing over the possession of the property in the sale deed executed on 25.11.2005 was rectified which confirms the fact that the possession was given to the purchaser on 13.6.2005. To support the claim of the assessee an affidavit from the advocate namely D. Jitendra Kumar was also filed. According to the DR clause no. 3 of the sale deed shows that the possession of the property has been given to the purchaser on the date of sale deed. Being so, there cannot be handing over of the same property at two times. She submitted that there cannot be transfer even under section 2(47)(v) of the act. We have carefully gone through submission of the learned DR. The law is that provisions of the section 50C are applicable on registration of sale deed. As per provisions of section 50C valuation adopted for stamp valuation purposes is to be considered as the consideration received or accrued to the assessee. Thus only on registration of sale deed the provisions of section 50C are applicable. However when the assessee is not accepting the value mentioned in the sale deed for stamp valuation purposes on the treating the same as consideration received on transfer of the property the assessee could exercise the provisions of 50C(2) of the IT Act to refer the matter to the DVO. In the present case, the assessee has not exercised this option and only challenged the adoption of the value considered for stamp valuation purposes to determine the consideration on transfer of the property as the transfer was completed vide sale agreement dated 13.6.2005 and for this purpose he relied on the order of the Tribunal in the case of Smt. S. Suvarna Rekha dated 29.10.2010 in ITA no. 743/HYD/09 for the A.Y. 2006-07. In the case of Smt. S. Suvarna Rekha wherein the Tribunal given a finding that since the physical possession of the property on transfer was given vide agreement of sale as the value mentioned therein has to be considered instead of the value adopted by the state authorities for stamp duty purposes. In that case the Tribunal rested its conclusion on the decision of Pune Bench in the case of Rahul Constructions v.Dy. CIT [2010] 38 DTR 19 wherein the Tribunal directed the Assessing Officer to take the consideration at Rs. 70 lakhs against the estimated value by valuation officer at Rs. 75,76,712 as the value of the property so estimated that a difference of ± 10 % which is because of the opinion of the individual valuation officer. No one is expected to value the property accurately since some of the items are to be valued on guess work or notionally. Being so the difference of ± less than 10% is to be ignored.
18. Further it was decided in the following cases that as per section 2(47)(v), when the vendor given the possession of the property to the purchaser, it is to be considered that the transfer is complete on the date of agreement of sale:
| (a) | CIT v. Veepees Enterprises [2010] 325 ITR 414/175 Taxman 11 (Ker.) wherein held that pursuant to the agreement for sale possession itself was given by vendor to purchaser and in the circumstances vendor is not entitled to contend that section 2(47)(v) of the Income-tax Act was not applicable. | |
| (b) | Chaturbhuj Dwarkadas Kapadia v. CIT [2003] 260 ITR 491/129 Taxman 497 (Bom) wherein held that in case of development agreement, if the contract, read as a whole indicates passing of or transferring of complete control over the property in favour of the developer, then date of the contract would be relevant to decide the year of chargeability of capital gain and substantial performance of the contract would be irrelevant. | |
| (c) | M. Siva Parvathi v. ITO [2010] 129 TTJ 463 (Vishakhapatnam) wherein held that the delay in registering the sale deed had occurred because of genuine reasons which were beyond the control of the assessees. The average cost according to the sale agreement was more than the market value fixed by the Joint Sub-Registrar at the time the sale agreement was entered into. There was no understatement or suppression of actual consideration and the Department failed to bring out any other material to show that there was suppression of actual consideration. The provisions of section 50C of the Act could not be applied to the sale agreement since the section was introduced in the statute book only after sale agreement had been entered into. Since the final registration of the sale was only in fulfilment of the contractual obligation, the logical conclusion was that the provisions which did not apply at the time of entering into the transaction initially would not be applicable at the time of completion of the transaction. |
19. Considering all these facts, if the transfer is completed in terms of section 2(47)(v) by giving the possession of the property in terms of the sale agreement dated 13.6.2005 and SRO rate as on the date of this date was considered in the sale agreement and if the registration was delayed on bona fide reasons which is beyond the control of the assessee and the sale deed executed on 25.11.2005 is only a legal formality, then, the Assessing Officer is required to adopt the SRO rate as on the date of transfer vide sale agreement for the purpose of determining capital gain consequent to the transfer of capital asset. Accordingly, we direct the Assessing Officer to cause necessary enquiry with regard to SRO rate as on 13.6.2005 and also the fact of giving the possession of the property to the purchaser on 13.6.2005 itself, and to decide the issue in the light of the Tribunal order in the case of M. Siva Parvathi (supra) and the judgement of Kerala High Court in the case of Veepee Enterprises (supra) and the Bombay High Court judgement in the case of Chaturbhuj Dwarkadas Kapadia (supra). The Assessing Officer is also directed to consider all the documents produced by the assessee before the CIT(A) while deciding the issue as the grievance of the Assessing Officer is that assessee has submitted additional evidence which was not filed by the assessee before the Assessing Officer.
20. In the result, both the appeals of the Revenue are allowed for statistical purposes.
IT : A trust, which is in process of establishing educational institution, cannot be refused registration under section 12AA on ground that it has not yet commenced charitable or religious activity
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[2013] 32 taxmann.com 341 (Allahabad)
HIGH COURT OF ALLAHABAD
Hardayal Charitable & Educational Trust
v.
Commissioner of Income Tax-II, Agra*
SUNIL AMBWANI AND BHARAT BHUSHAN, JJ.
IT APPEAL NO.107 OF 2012
MARCH 15, 2013
Section 12AA of the Income-tax Act, 1961 - Charitable or religious trust - Registration procedure [Commencement of charitable activity] - Whether where a trust, set up to achieve its objects of establishing educational institution, is in process of establishing such institutions, and receives donations, registration under section 12AA cannot be refused, on ground that trust has not yet commenced charitable or religious activity - Held, yes - Whether enquiry of Commissioner at such preliminary stage should be restricted to genuineness of objects and not activities, unless such activities have commenced - Held, yes [Para 21] [In favour of assessee]
FACTS
Facts
| ■ | Assessee-trust was established with object of establishment and maintenance of the schools, colleges and institutions for imparting education in different fields/subjects for helping the poor and destitute. | |
| ■ | Its application for grant of registration under section 12AA was rejected by the Commissioner on the grounds that the trust was in the process of construction of colleges for medical, engineering and management studies; that it had spent considerable amount on advertisement of the institution, which had not started its activities as yet; and that the prospectus of the assessee-trust had devoted substantially on carrying out business activities of the group concern showing logo of milk product. | |
| ■ | The Tribunal dismissed the assessee's appeal. |
Issue involved
| ■ | Whether it is essential for a trust to commence charitable/educational activity before it can be considered eligible for registration under section 12AA? |
HELD
| ■ | At the time of registration under section 12AA which is necessary for claiming exemption under sections 11 and 12, the Commissioner is not required to look into the activities, where such activities have not commenced or are in the process of its initiation. Where a trust, set up to achieve its objects of establishing educational institution, is in the process of establishing such institutions, and receives donations, the registration under section 12AA cannot be refused on the ground that the trust has not yet commenced the charitable or religious activity. Any enquiry of the nature would amount to putting the cart before the horse. At this stage only the genuineness of the objects has to be tested and not the activities, which have not commenced. The enquiry of the Commissioner at such preliminary stage should be restricted to genuineness of the objects and not the activities unless such activities have commenced. The trust or society cannot claim exemption, unless it is registered under section 12AA and, thus, at such initial stage the test of the genuineness of the activity cannot be a ground on which the registration may be refused. [Para 21] | |
| ■ | In the instant case, it is not denied that for subsequent year the assessee has been granted exemption under section 12AA and has also been approved under section 80G subject to certain conditions. If the Commissioner was satisfied with the genuineness of the objects of the trust for the subsequent assessment year, the refusal of the registration for the previous assessment year 2011-12 was not justified. [Para 22] | |
| ■ | The question of the exemption of the application of income received by way of donation is a separate issue which may be required to be considered, when the return is filed by the trust and is examined by the Income Tax Officer. The question as to whether the donation by the societies was the expenditure of the trust for charitable and religious purposes will be examined at the time of examining the return. [Para 23] | |
| ■ | In the result the income tax appeal is allowed. [Para 24] |
CASES REFERRED TO
Self-Employers Services Society v. CIT [2001] 247 ITR 18/[2000] 113 Taxman 703 (Ker.) (para 8), All India J.D. Educational Society v. DGIT (Exemption) [2011] 338 ITR 218/198 Taxman 443/10 taxmann.com 177 (Delhi) (para 8), CIT v. Real Rose School [2007] 163 Taxman 19 (All.)(para 8), DIT v. Garden City Education City Trust [2010] 191 Taxman 238 (Kar.) (para 8), DIT (Exemption) v. Meenakshi Amma Endowment Trust [2011] 50 DTR 243 (Kar.) (para 8), DIT v. Foundation of Ophthalmic & Optometry Research Education Centre [2012] 25 taxmann.com 376/250 Taxman 36 (Delhi) (para 12) and CIT v. Surya Education & Charitable Trust [2011] 203 Taxman 53/15 taxmann.com 123 (Punj. & Har.)(para 20).
Rahul Agarwal for the Appellant. Govind Krishna for the Respondent.
ORDER
1. We have heard Shri Rahul Agarwal for the appellant. Shri Govind Krishna appears for the Commissioner, Income Tax.
2. The appeal was admitted on 11.12.2012 on the following substantial questions of law.:-
| "(a) | Whether it is essential for a trust to commence charitable/educational activity before it can be considered eligible for registration under Section 12 AA of the Income Tax Act and the order of the Tribunal below is legally sustainable? | |
| (b) | Whether the findings of the Tribunal that the appellant had failed to provide any explanation regarding the use of logo of a family concern in its prospectus and rebut the finding of the Commissioner of Income Tax-II, Agra is perverse and liable to be set aside? | |
| (c) | Whether in any view of the matter, the order of the Tribunal below is legally not justifiable and the application for registration under Section 12 AA and for approval under Section 80 G move by the appellant deserves to be allowed?" |
3. Briefly stated the facts giving rise to this appeal are that Hardayal Charitable & Educational Trust, 318, Shambhu Nagar, Shikohabad, was established by a Trust deed executed on 17.11.2008. It was registered with Sub-Registrar, Shikohabad on 26.11.2008. The objects of the trust include establishment and maintenance of the schools, colleges and institutions for imparting education in different fields/ subjects with the object of helping the poor and destitute. The trust deed also provides for medical benefits to the poor, needy and the aged.
4. The Trust applied for grant of registration under Section 12AA of the Income Tax Act, 1961 (in short the Act) along with application for registration on Form No.10A and for grant of approval under Section 80G (5) (iv) in Form No.10G, with certified copy of the Trust deed. The Commissioner of Income Tax-II, Agra directed the trust to furnish certain information, which was provided by the trustees with its letter dated 1.8.2011. The trustees disclosed the donations received as trust fund/ corpus fund from Shri Hardayal Singh Education Samiti, 318A, Shambhu Nagar, Shikohabad, and Chaudhary Hardayal Singh Shiksha Samiti, 318, Sambhu Nagar, Shikohabad, with the information that both the societies are filing regular income tax returns. The balance sheets of both the donor societies were enclosed. The counsel appearing for the Trust, also disclosed that its first Chairman Shri Praveendra Kumar, Secretary Shri Sachin Yadav and the Treasurer Shri Amol Yadav are regularly assessed to income tax enclosing the copy of income tax acknowledgments and it further stated in para 6 as follows:-
"6. That the objects of the trust are described in Sub Clause (a) to (k) of clause 5 of the Trust Deed. In furtherance of the educational objects, the applicant has started 'Hardayal Technical Campus' an engineering college at Farah, Distt. Mathura. The construction of university campus is towards completion and admission for various educational courses are in progress. Copy of the prospectus issued by the university is filed. The advertisement appearing in July 2011 issue of Out Look magazine is also enclosed."
5. The Trust received a letter dated 1.8.2011 from the Income Tax Officer (Tech), for Commissioner, Income Tax-II, Agra requiring it to produce books of accounts for the F.Y.2010-11 and for the period from April 11 to July 11, copy of the sale deed in respect of purchase of land, the construction account in respect of the building and extent of construction done, details of advertisement-publication of brochure including prospectus, the rate at which prospectus is sold and the PAN of Choudhry Hardayal Singh Shiksha Samiti. The entire information was provided by the trust by the Chairman of the trust by its letter dated 16.8.2011.
6. By an order dated 17/23.8.2011, the Commissioner of Income Tax-II, Agra after providing an opportunity of hearing to the Trust, refused to grant registration under Section 12AA of the Act and the approval under Section 80G on the grounds that the trust is in the process of construction of colleges for medical, engineering and management studies. A lot of money has been spent on advertisement of the institution, out of which Rs.1,58,82,526/- has been spent only during the period 1.4.2011 to 2.8.2011. The Trust has published a very high quality prospectus of college. One full page of the prospectus is devoted to the Industry of the group in the name of Hardayal Milk Product (P) Ltd., complete with logo of the milk product company, which shows that the Trust intends to promote the business of its family concern and that the commercial motive is in no way subservient to, charity as the object of the Trust.
7. The Commissioner of Income Tax-II, Agra further recorded in her order that she is not satisfied that the objects of the Trust are charitable in nature and that since Trust deed is not registered as reported by JCIT on enquiry, the trust is not liable for approval under Section 80G also.
8. The Trust filed ITA No.443/444/Agra/2011, which was heard on 2.3.2012 and dismissed on 7th March, 2012. The Tribunal discussed the provisions of Section 12AA of the Act and judgment of Kerala High Court in the case of Self-Employers Service Society v. CIT [2001] 247 ITR 18/[2000] 113 Taxman 703; judgment of Delhi High Court in All India J.D. Educational Society v. DGIT (Exemptions) [2011] 338 ITR 218/198 Taxman 443/10 taxmann.com 177, judgment of Allahabad High Court in CIT v. Red Rose School [2007] 163 Taxman 19, the judgment of Karnataka high court in DITv. Garden City Educational Trust [2010] 191 Taxman 238 (Kar.) and one other judgment of Karnataka High Court in DIT (Exemption) v.Meenakshi Amma Endowment Trust [2011] 50 DTR 243 and held that though apparently on consideration of the objects of the trust, the same is for educational or charitable in nature, but the findings of fact given by the learned Commissioner about the commercial activities of the group concern have not been refuted by the assessee by producing any material on record. The ITAT found that the assessee has spent considerable amount on advertisement of the institution, which has not started its activities as yet. The prospectus of the assessee Trust has devoted substantially on carrying out business activities of the group concern showing logo of milk product. The CIT thus rightly rejected both the applications of the assessee particularly, when no educational or charitable activities have been actually carried out and the assessee in initial stage, itself has tried to promote business of group concern. The Tribunal held:- "considering the totality of the facts and circumstances, we are of the view that the assessee failed to establish that it has carried out genuine activities towards the objects of the assessee trust. Whatever other activities were carried out were found for promoting commercial activities of the group concern. Therefore, the assessee has failed to satisfy the requirements u/s. 12AA of the Act and as such, the ld. Commissioner was justified in refusing to grant registration and approval under the above provisions of the IT Act. We are, therefore, of the view that there is no irregularity or illegality in the impugned order".
9. The Tribunal, thereafter, observed that considering the facts of the case that the assessee Trust is still at the stage of raising construction for schools and colleges and yet to start educational and charitable activities, it is given an opportunity to file fresh application before the ld. Commissioner for grant of registration and approval, when it would actually start educational and charitable activities and in that event, the led. Commissioner shall consider fresh applications of the assessee in accordance with law.
10. It is admitted that in the subsequent assessment year the Commissioner of Income Tax-II by his order dated 24.9.2012 has granted registration to the appellant on its application dated 26.3.2012 under Section 12AA of the Act, as also approval under Section 80G of the Act, on 24.9.2012, with the conditions that the exemption certificate will be effective from assessment year 2012-13, the number and date of the order should be mentioned on each and every receipt issued to the donor and that the exemption under Section 11 (2) will be granted on merits after proper investigation. The conditions further provide that information on any change in the constitution of the trust / society should be intimated immediately to CIT-II and concerned Assessing Officer and that the income and expenditure accounts statement of the trust/ society should be furnished for each financial year regularly before the concerned Assessing Officer.
11. Shri Rahul Agrawal appearing for the appellant trust submits that there was no material with the Commissioner of Income Tax-II and the Income Tax Appellate Tribunal, Agra to record its conclusions against the Trust. The object of the trust is not to carry out commercial activity and promote the business of family concerned. As a new entity the appellant had to necessarily spend money on advertising and rely upon the established brand equity enjoyed by the other concern, to attract the students to its courses. The Commissioner never questioned the appellant on the lack of registration of the Trust deed. The Tribunal did not advert to the issue of registration and lack thereof. The trust deed was registered with the Sub-Registrar, Shikohabad on 26.11.2008. He further submits that the objects of the Trust are charitable in nature. There was no doubts expressed on the objects set out in the Trust deed. The genuineness of the activities of the Trust, in the year in question, when the construction of the college building was in progress, and the charitable activity had not yet commenced, was not required to be assessed until the commencement of the activity. He submits that the test of the genuineness of the activity of the Trust can be applied only after its activities actually commence. The use of the logo of one of the brand equities of the other concern, the heavy expenditure incurred on advertising and publishing the high quality prospectus, could not be a ground on which the registration could be denied.
12. Shri Rahul Agrawal relies on Meenakshi Amma Endowment Trust (supra), DIT v. Foundation of Ophthalmic & Optometry Research Education Centre [2012] 25 taxmann.com 376/210 Taxman 36 (Delhi), and the opinion of the Punjab and Haryana High Court in Commissioner of Income-tax-II, Chandigarh v. Surya Educational & Charitable Trust decided on October 5th, 2011. In these judgments the High Court of Karnataka, Delhi and Punjab & Haryana have held that the object of Section 12AA of the Act is to examine the genuineness of the object of the Trust and not its activities, which may not have begun at the time, when the application is made for registration. At such stage, the Commissioner (Enquiries) should address his enquiries on the application of the income of the trust for charitable or religious purposes. The stage for allocation of income arrives, when the trust or the institution files its return.
13. Shri Govind Krishna on the other hand submits that the application for registration of the trust under Section 12AA should be moved within one year under Section 12A. The trust deed was executed on 7.11.2008 and the application for registration under Section 12AA was presented on 11.3.2011. The Trust has received heavy donations from the Societies of the same concern. A highly disproportionate amount of money was spent on advertisement of the institution to the extent of Rs.1,58,82,526 between 1.4.2011 to 2.8.2011. The construction of the college for medical, engineering and management studies was in progress. The Commissioner has not made any observations with regard to objects of the trust. He found that the prospectus was actually used for advertisement of the other industries of the group namely Hardayal Milk Product (Pvt.) Ltd. and carried the logo of the milk product company. The object was to promote the business of the family concern, and had commercial motive, which was subservient to the stated charitable motive. The Commissioner was not satisfied that the objects of the trust is charitable in nature and thus she refused to grant registration. Shri Govind Krishna has relied upon the same judgment, which have been cited by learned counsel appearing for the appellant and submits that so far as the substantial question of law no. (b) is concerned, the findings recorded by the Commissioner of Income Tax-II, Agra and the Tribunal are findings of fact, which cannot be treated as perverse. The appellant has not denied that while the construction of the college was in progress, a heavy amount was invested in publishing the prospectus, which carried one full page advertising the products of the group company and carried its logo. Shri Govind Krishna submits that the registration in the subsequent year cannot be a ground on which the orders passed by the Commissioner and Tribunal can be questioned. In the absence of registration for the year 2010-11, the donations made by the societies would not qualify for exemption.
14. We have considered the respective submission, perused the orders and the judgments of High Courts of Karnataka, Delhi and Punjab & Haryana. Section 11, 12A and 13 of the Act, fall in Chapter-III- on Incomes, which do not form part of total income. Section 12 (1) provides for exemption of voluntary contribution received by a Trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes not being contribution made with a specific direction that they shall form part of corpus of the trust or the institution. These contributions shall for the purposes of Section 11 be deemed to be income derived from property held under the Trust wholly for charitable or religious purposes and the provisions of that Section and Section 13 shall, apply to such income.
15. Section 11 (1) (a) exempts the income derived from property held under trust wholly for charitable or religious purposes to the extent to which such income is applied to such purposes in India, and where any such income is accumulated or set apart for application for such purposes to the extent to which the income was accumulated or set apart is not in excess of 15% of the income from such property, subject to condition and percentage of income set out in the Section.
16. Section 12A (1) provides that the provisions of Section 11 and Section 12 shall not apply in relation to the income of any trust or institution unless the conditions in Clause (a), (aa), (b) are satisfied. One of the condition is that the application is made before the expiry of the period of one year from the date of the creation of the trust or the establishment of the institution, whichever is later and such trust or institution is registered under Section 12AA provided where an application for registration of the trust or institution is made after the expiry of the period aforesaid the provisions of Section 11 and 12 shall apply in relation to the income of such trust or institution- (i) from the date of the creation of the post or the establishment of the institution. If the Commissioner is for the reasons to be recorded in writing satisfied that the person in respect of income was prevented from making the application before the expiry of the period for sufficient reasons, and (ii) from the first date of the financial year in which application is made, if the Commissioner is not so satisfied.
17. Section 12AA provides for procedure for registration and is quoted as below:-
"Section 12AA. Procedure for registration. - (1) The Commissioner, on receipt of an application for registration of a trust or institution made under clause (a) of section 12A, shall - (a) Call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution and may also make such a inquiries as he may deem necessary in this behalf; and
(b) After satisfying himself about the objects of the trust or institution genuineness of its activities, he - (i) shall pass an order in writing registering the trust or institution;
(ii) Shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution, and a copy of such order shall be sent to the applicant :
Provided that no order under sub-clause (ii) shall be passed unless the applicant has been given a reasonable opportunity of being heard.
(1A) All applications, pending before the Chief Commissioner on which no order has been passed under clause (b) of sub-section (1) before the 1st day of June, 1999, shall stand transferred on that day to the Commissioner and the Commissioner may proceed with such applications under that sub-section from the stage at which they were on that day.
(2) Every order granting or refusing registration under clause (b) of sub-section (1) shall be passed before the expiry of six months from the end of the month in which the application was received under clause (a) of section 12A.
(3) Where a trust or an institution has been granted registration under clause (b) of sub-section (1) and subsequently the Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution;
Provided that no order under this sub-section shall be passed unless such trust or institution has been given a reasonable opportunity of being heard."
18. In Red Rose School (supra) it was held that to ascertain the genuineness of the activities of the trust or the institution whose object do not run contrary to public policy and are infact related to charitable purpose, the CIT is empowered to make enquiries as he think fit. In case the activities are not genuine and they are not being carried out in accordance with object of the trust/society or the institution, registration can again be refused but on mere presumption and on surmise that the income is being misused or that there is some apprehension that same would not be used in the proper manner, and for the purposes relating to any charitable purposes, rejection is not justified. It was further held that the registration under Section 12AA does not necessarily entitle the assessee to get the income excluded from the income of the previous year for the purposes of determining the tax liability; it only entitles the assessee to claim such exemption, which otherwise can not be claimed in the absence of registration. The enquiry by CIT is restricted at the time of registration to the activities, which are genuine. Genuineness of the activities of the trust or the institution has to be seen keeping in mind the object thereof, which means the Commissioner shall satisfy himself to the fact that the activities are genuine and in consonance with the object of the trust or the institution. In other words it was held that after establishing and running a school set out as object of the society, given in the bylaws, he has to be satisfied that the Society has established the school, where education is being imparted as per rules and the factum of establishment and running school is genuine activity. The enquiry regarding genuineness of the activity cannot be stretched beyond this.
19. In Meenakshi Amma Endowment Trust (supra), the Karnataka High Court held that where a trust is formed and within a week registration under Section 12A is sought, there is no prohibition under the Act seeking such registration. The activities of the trust have to be considered, after the formation of trust or after expiry of the period of registration granted in favour of the Trust. In a case where the Trust has approached the authority for registration, under Section 12A, within a few months of its formation (in that case it was eight months) the criteria namely the object of trust will have to be examined to record satisfaction to its genuineness. The activities of the trust cannot be the criteria at that stage since it is yet to commence its activities. InFoundation of Ophthalmic & Optometry Research Education Centre (supra) the Delhi High Court similarly ruled that the statute does not prohibit or enjoin the Commissioner from registering a trust solely on its objects, without any activity, in the case of a newly registered trust, the statute does not prohibit a waiting period, to qualify for registration.
20. The Punjab and Haryana High Court in CIT v. Surya Educational & Charitable Trust [2011] 203 Taxman 53/15 taxmann.com 123 (Punj. & Har.) also held that the object of Section12AA of the Act to examine the genuineness of the objects of the trust and not the income of the trust for charitable or religious purposes. The stage for allocation of income will arrive, when the trust or institution files its return.
21. The preponderance of the judicial opinion of all the High Court including this Court is that at the time of registration under Section 12AA of the Income Tax Act, which is necessary for claiming exemption under Section 11 and 12 of the Act, the Commissioner of Income Tax is not required to look into the activities, where such activities have not or are in the process of its initiation. Where a trust, set up to achieve its objects of establishing educational institution, is in the process of establishing such institutions, and receives donations, the registration under Section 12AA cannot be refused, on the ground that the Trust has not yet commenced the charitable or religious activity. Any enquiry of the nature would amount to putting the cart before the horse. At this stage only the genuineness of the objects has to be tasted and not the activities, which have not commenced. The enquiry of the Commissioner of Income Tax at such preliminary stage should be restricted to genuineness of the objects and not the activities unless such activities have commenced. The Trust or society cannot claim exemption, unless it is registered under Section 12AA of the Act and thus at that such initial stage the test of the genuineness of the activity cannot be a ground on which the registration may be refused.
22. It is not denied that for subsequent year the appellant has been granted exemption under Section 12AA and has also been approved under Section 80G of the Act, subject to certain conditions. If the Commissioner of Income Tax was satisfied with the genuineness of the objects of the trust for the subsequent assessment year, the refusal of the registration for the previous assessment year 2011-12 was not justified.
23. The question of the exemption of the application of income received by way of donation, is a separate issue and which may be required to be considered, when the return is filed by the Trust and is examined by the Income Tax Officer. The question as to whether the donations by the societies was the expenditure of the Trust for charitable and religious purposes will be examined at the time of examining the return.
24. In the result the income tax appeal is allowed. All the three substantial questions of law formulated as above are decided in favour of the assessee, and against the revenue with a clarification that the registration under Section 12AA and approval under Section 80G would not by itself entitle the Trust for exemption of the income of its donors or of the Trust for the assessment year 2011-12. For claiming such exemption the returns of the donor and the Trust will be examined, for orders to be made in accordance with law.
VARSHAIT : Amount received by subsidiary company from its parent company in consideration of services rendered by it would be assessed as business income
IT : WDV has to be arrived at only after reducing depreciation actually allowed
IT : In case of amalgamation, depreciation on assets of amalgamated company is to be allowed on basis of market value of such assets on date of amalgamation
IT : To decide whether expenditure on purchase of computer software is capital or revenue expenditure, nature of software and its role in business of assessee have to be considered
IT : Assessee can have two different accounts - one for purpose of Companies Act and other for purpose of section 115JA
IT : Liability on account of redemption of debentures is ascertained liability and should be excluded from book profit computed under section 115JA
IT : When depreciation was not allowed on leased assets and assessee was not held to be owner of said assets, amount of forfeited security deposit on termination of lease could not be charged as short-term capital gain under section 50
IT : Provision for leave encashment is an allowable deduction while computing book profit under section 115JA
IT : Professional fee paid in respect of new project would be treated as capital expenses
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[2013] 32 taxmann.com 283 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'E'
Additional Commissioner of Income-tax
v.
Nicholas Piramal India Ltd.*
P.M. JAGTAP, ACCOUNTANT MEMBER
AND N.V. VASUDEVAN, JUDICIAL MEMBER
IT APPEAL NO. 4602 (MUM.) OF 2001
C.O. NO. 119 (MUM.) OF 2002
[ASSESSMENT YEAR 1997-98]
MAY 16, 2012
I. Section 28(i) of the Income-tax Act, 1961 - Business income - Chargeable as [Holding and subsidiary company] - Assessment year 1997-98 - A company BMIL got amalgamated with assessee-company - As per scheme, appointed date was 1-4-1996 but effective date for amalgamation was 24-7-1997 - In November 1996, BMIL received certain amount from it's German parent company BMG in recognition of services rendered by erstwhile BMIL to establish, protect and enhance goodwill and image of BMG in India - Assessee claimed said receipt as capital receipt not liable to tax - Whether payment being connected with business of BMIL was liable to be taxed under section 28(i) and fact that it was voluntary or that it was an unconditional payment, would not make it a capital receipt - Held, yes [Para 21] [In favour of revenue]
II. Section 43(6), read with section 32, of the Income-tax Act, 1961 - Written down value [Computation of] - Assessment year 1997-98 - Whether in absence of claim of depreciation allowance thereof can be thrust upon assessee - Held, no - Whether WDV has to be arrived at only after reducing depreciation actually allowed and in a case where assessee has not claimed depreciation, it cannot be said that it was notionally allowed - Held, yes [Paras 25 and 26] [In favour of assessee]
III. Section 43(6) of the Income-tax Act, 1961 - Written down value [Computation of] - Assessment year 1997-98 - During previous year relevant to assessment year 1996-97 assessee took over Bulks Drugs Division (BDD) of SPCL and claimed depreciation on market value of assets of BDD as determined in scheme of arrangement which was approved by High Court - Assessing Officer, on other hand, allowed depreciation on WDV of assets in hands of SPCL - On appeal, Tribunal held that WDV of assets had to be actual cost to assessee - For year under appeal, assessee claimed depreciation on WDV of assets of BDD as on 31-3-1996 taking into account market value of assets as fixed in scheme of arrangement - Whether in view of Tribunal's order for assessment year 1996-97, assessee's claim was allowable - Held, yes [Para 33] [In favour of assessee]
IV. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Software expenses] - Assessment year 1997-98 - Assessee incurred certain expenditure for acquiring and implementing software programme and claimed it to be revenue expenditure - Assessing Officer treated it as capital expenditure resulting in enduring benefit to assessee - On appeal, Commissioner (Appeals) allowed expenses as revenue expenditure - Whether to decide whether expenditure on purchase of computer software was capital or revenue expenditure, nature of software and its role in business of assessee had to be considered - Held, yes [Para 37] [Matter remanded]
V. Section 115JA of the Income-tax Act, 1961 - Minimum alternate tax [Balance sheet] - Assessment year 1997-98 - Whether under scheme of section 115JA, there is no prohibition for having two different accounts-one for purpose of Companies Act, 1956 and other for purpose of section 115JA; only restriction in section 115JA(2) is regarding depreciation which has to be in conformity with method adopted under Companies Act - Held, yes - Whether where profit and loss account prepared by assessee for purpose of section 115JA had been duly certified by chartered accountant and there was no complaint that same was not in accordance with provisions of Part I and Part II of Schedule VI to Companies Act, 1956, book profit as computed by assessee was to be accepted - Held, yes [Para 48] [In favour of assessee]
VI. Section 115JA of the Income-tax Act, 1961 - Minimum alternate tax [Debenture redemption reserve] - Assessment year 1997-98 - Whether liability on account of redemption of debentures is ascertained liability and, therefore, amount transferred to debenture redemption reserve should be treated as provision made for known liability and should be excluded from book profit as provided in clause (c) of Explanation to section 115JA - Held, yes [Para 55] [In favour of assessee]
VII. Section 50 of the Income-tax Act, 1961 - Capital gains - Computation in case of depreciable assets [Leased assets] - Assessment year 1997-98 - Assessee had entered into certain lease transaction during assessment year 1994-95 - Assessing Officer treated lease transaction to be not genuine and disallowed depreciation on leased assets for assessment year 1994-95 - However, availing of KVSS, 1998 for assessment year 1994-95 and VDIS, 1997 for assessment year 1995-96, assessee offered for assessment amount of depreciation claimed on asset in question - By time original return of income for assessment year 1997-98 was filed, security deposit was forfeited as a result of terminating lease agreement - Assessing Officer held that forfeited security deposit was assessable as short-term capital gain under section 50 - Whether when depreciation was not allowed on assets in question and assessee was not held to be owner of assets, question of charging short-term capital gain on sale of assets, by way of forfeiting outstanding security deposit did not arise - Held, yes [Para 66] [In favour of assessee]
VIII. Section 115JA of the Income-tax Act, 1961 - Minimum alternate tax [Leave encashment] - Assessment year 1997-98 - Whether provision for leave encashment is ascertained liability and, consequently, in computing book profit under section 115JA, it should be treated as an allowable deduction - Held, yes [Para 66] [In favour of assessee]
IX. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Professional fee] - Assessment year 1997-98 - Assessee paid certain amount to various professionals in respect of better and improved method of producing bulk drugs and pharmaceutical formulation products and claimed same as revenue expenditure - Revenue authorities treated said expenses as capital expenses - Whether since fees were in respect of new project and its relevance to existing business of assessee could not be established by assessee, expenditure was rightly treated as capital expenses - Held, yes [Para 71] [In favour of revenue]
FACTS-I
Facts
■ The assessee-company was engaged in the business of manufacture of pharmaceutical formulations and bulk drugs. During the relevant previous year, a company, namely, BMIL, got amalgamated with the assessee. As per the scheme the appointed date was 1-4-1996. The effective date for amalgamation was 24-7-1997. BMIL had received a payment of Rs. 29.26 crores from its holding company (BMG) in November 1996. This amount was credited to the capital reserve in the books of the assessee-company. During assessment proceedings, the assessee claimed that the amount received was an unconditional grant from BMG which did not relate to any particular source of income or any specific reimbursement of expenditure; and that it was payment made by BMG, being a substantial stakeholder in BMIL, to rectify the erosion in the net worth of one of its subsidiaries.
■ According to the Assessing Officer, the payment was not connected at all to repairing the erosion in the net worth of BMIL but had been made in order to promote the image of the BMG group. He, therefore, held that the amount in question was received by virtue of business connection and, therefore, was taxable.
■ On appeal, the Commissioner (Appeals) held that the payment was in the nature of gift by BMG which partook the character of a capital receipt in the hands of the assessees and could not be subjected to income-tax. The Commissioner (Appeals) also held that the assessee was not in the business of public relations or image building and, therefore, the efforts taken by it to protect and enhance the goodwill and image of the group could not be said to be part of its business activity.
Issue in question
■ Whether amount received by BMIL from BMG was capital receipt not liable to tax as held by the Commissioner (Appeals)?
HELD-I
■ It is clear from the letter written by BMG to BMIL that the payment is in recognition of the services rendered by BMIL to BMG. Moreover, business consideration did give way for making aforesaid payments. It is also a fact that the assessee had incurred expenses in connection with the effort it had taken to protect and enhance the goodwill and image of BMG in India and those have been claimed as deductible revenue expenditure.
■ It is not a payment to enable BMIL to recoup its losses nor is it a payment which did not have business consideration for making such payments. The fact that it was voluntary or that it was an unconditional payment, will not make it a capital receipt not chargeable to tax. The stand of the assessee before the revenue authorities that BMIL was in losses and the payment in question was made to recoup such losses is contrary to the material on record.
■ There was holding and subsidiary company relationship between BMIL and BMG besides business relationship, viz., BMIL was using the brand image of BMG, making use of the technical know-how of the parent company and was also acting as the marketing agent for BMG for sale of diagnostic products, bio-chemicals and bio-catalysts. It is only because of such relationship and also in the light of the help rendered by BMIL in terms of protecting and promoting the interests of BMG, the payment in question was made by BMG and was, therefore, a payment connected with the business of BMIL and was liable to be taxed under section 28(i), read with section 2(24). [Para 21]
FACTS-II
Facts
■ BMIL merged with the assessee-company as per the scheme of amalgamation with effect from 1-4-1996. The assessee has claimed depreciation on the assets taken over as part of the merger.
■ The Assessing Officer noticed that depreciation was claimed on the WDV without making adjustment for depreciation allowable for assessment years 1995-96 and 1996-97 in the hands of earstwhile BMIL. Admittedly, the erstwhile BMIL did not opt to claim depreciation for the assessment years 1995-96 and 1996-97 although assets had been used in the business carried on by BMIL during those years. The Assessing Officer was of the view that depreciation was not available to the assessee on the WDV without taking into consideration the allowable depreciation on the use of the assets during the assessment years 1995-96 and 1996-97 by BMIL. Accordingly, the WDV in respect of the assets belonging to erstwhile BMIL was adjusted (by reduction of the WDV) for the foregone depreciation for the assessment years 1995-96 and 1996-97.
■ On appeal, the Commissioner (Appeals) held that depreciation on the WDV as claimed by the assessee on the assets in question should be allowed. He held that WDV has to be arrived at only after reducing depreciation actually allowed and in a case where the assessee has not claimed depreciation, it cannot be said that it was notionally allowed.
Issue in question
■ Whether WDV of an asset has to be arrived at after reducing depreciation allowable though not actually allowed?
HELD-II
■ The Supreme Court, in CIT v. Mahendra Mills [2000] 243 ITR 56/109 Taxman 225 has laid down that the assessee is entitled to exercise his option even through the filing of revised return and that option cannot be denied to him nor can depreciation be thrust on the assessee against his willingness. It was held that until a claim is made for allowing deductions of the nature covered under section 32 along with necessary particulars, there would hardly be any occasion for the ITO to 'allow' any 'claim'. Two conditions - the making of a claim and the furnishing of particulars have been read as cumulative conditions by the Supreme Court in Mahendra Mills (supra). If either of the two conditions is not fulfilled, the Assessing Officer cannot force the depreciation allowance on the assessee. It further follows logically that in the absence of a claim by the assessee, the allowance cannot be thrust upon him even if the particulars are available to the Assessing Officer. Therefore, the mere fact that the assessee did not make a claim for depreciation places a fetter upon the powers of the Assessing Officer to allow depreciation. [Para 25]
■ The judgment also lays down in principle that irrespective of whether the statute requires the furnishing of the particulars or not, if there is no claim for depreciation, it cannot be allowed by the Assessing Officer. The Supreme Court observed that in order to obtain an allowance or deduction, it is necessary for the assessee to make a claim and also support it by necessary particulars or evidence. Therefore, the contention on behalf of the revenue that after the omission of sub-sections (1) and (2) of section 34 and rule 5AA with effect from 1-4-1988, depreciation has to be mandatorily claimed cannot be accepted. [Para 26]
■ Thus, it can be safely said that omission of section 34 has not affected the assessee's choice to claim depreciation allowance. This choice is, however, expressly taken away by insertion of Explanation 5 in section 32 with effect from 1-4-2002, from the assessment year 2002-03 onwards. [Para 26]
■ Therefore, the order of the Commissioner (Appeals) was to be upheld. [Para 28]
CASE REVIEW
CIT v. Mahendra Mills [2000] 243 ITR 56/109 Taxman 225 (SC) (para 26) followed.
FACTS-III
Facts
■ During the previous year relevant to the assessment year 1996-97, the assessee took over the Bulk Drugs Division (BDD) of SPCL and claimed depreciation on the market value of the assets of the BDD as determined in the scheme of arrangement which was approved by the High Courts. The Assessing Officer, on the other hand, allowed depreciation on the WDV of the assets in the hands of SPCL.
■ For the assessment year 1997-98 which was under appeal, the assessee claimed depreciation on the WDV of the assets of the BDD as on 31-3-1996. This claim was made taking into account the market value of the assets as fixed by valuation report at figures higher than the WDV in the books of account of SPCL.
■ The Assessing Officer, however, allowed the depreciation taking into account the WDV of the assets in the books of SPCL as on 31-3-1995 and the depreciation allowed for the assessment year 1996-97.
■ On appeal by the assessee, the Commissioner (Appeals) noticed that similar issue came up for consideration for the assessment year 1996-97 wherein it was held that depreciation should be allowed on the assets of the BDD taken over from SPCL taking into account the market value of the assets as determined in the valuation report as per the scheme of arrangement, which was approved by the High Court. Following that decision, the Commissioner (Appeals) held for the assessment year 1997-98 that depreciation should be allowed on the assets of BDD taking into account the market value of the assets as on 1-4-1995 fixed by valuation report as reduced by the depreciation allowable for the assessment year 1996-97.
Issue for consideration
■ Whether depreciation on assets of amalgamated company would be allowed by taking market value of assets on date of amalgamation?
HELD-III
■ In the assessment year 1996-97, the Tribunal held that the WDV of the assets has to be the actual cost to the assessee and upheld that order of the Commissioner (Appeals). [Para 32]
■ The fact and circumstances under which the addition was deleted by the Commissioner (Appeals) in the earlier assessment year and the facts of the relevant assessment year being identical, the decision of the Tribunal for preceding year was to be followed and the order of the Commissioner (Appeals) was to be upheld. [Para 33]
FACTS-IV
Facts
■ The assessee incurred certain expenditure for acquiring and implementing a software programme and claimed it to be a revenue expenditure.
■ The Assessing Officer treated it as capital expenditure resulting in enduring benefit to the assessee observing that the recent amendment made in the Act providing for one time exception with regard to expenditure towards Y2K compliance made it clear that the intention of law is to treat software expenditure to be capital in nature.
■ On appeal, the Commissioner (Appeals) allowed the assessee's claim holding that any software programme becomes obsolete within a short time which requires to be replaced or upgraded and, hence, expenditure incurred for acquiring a software programme cannot be said to have conferred advantage of enduring nature to the customers.
Issue for consideration
■ Whether expenditure incurred for acquiring a software programme would be revenue expenditure?
HELD-IV
■ In view of decision of the Special Bench of the Tribunal, Delhi in the case of Amway India Enterprises v. Dy. CIT [2008] 111 ITD 112/21 SOT 1, the nature of the software and the purpose that the software will serve in the business of the assessee are important criteria to decide whether expenditure on purchase of computer software is capital or revenue expenditure. Therefore the nature of the software and its role in business of the assessee have to be considered. Therefore, it would be appropriate to set aside the order of the Commissioner (Appeals) on this issue and remand the same to the Assessing Officer for fresh consideration in the light of the principles laid down by the Special bench in the case of Amway India Enterprises (supra). [Para 37]
FACTS-V
Facts
■ The assessee computed book profits as per section 115JA.
■ The Assessing Officer noticed that the assessee had adopted different accounting practices when it came to furnishing of the financial results for the year to income-tax. In this regard he referred to the fact that in the notes to the published accounts the losses of bulk drug division BDD which was acquired with effect from 1-4-1995 (appointed date) had been set off against time revaluation reserve in the annual accounts put before the annual general meeting and submitted to all the other authorities but when it came to submission of the accounts to the income-tax, the accounting policy itself had been changed and the loss of the BDD between the appointed date and the effective date had been incorporated in the profit and loss account and, thus, the profit as per profit and loss account stood reduced. He held that the corporate accounting should be in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act and the assessee was bound to adopt the same.
■ On appeal, the assessee contended that under scheme of section 115JA there was no prohibition for having two different accounts - one for the purpose of Companies Act, 1956 and the other for the purpose of section 115JA and the only requirement under section 115JA(2) is that the profit and loss account prepared for the purpose of section 115JA should be in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956.
■ The Commissioner (Appeals) accepted the assessee's submission and held that the assessee was justified in claiming the impugned loss in the computation of book profit under section 115JA.
Issue for consideration
■ Whether assessee can have two different accounts - one for purpose of Companies Act, 1956 and other for purpose of section 115JA?
HELD-V
■ The profit and loss account prepared by the assessee for the purpose of section 115JA has been duly certified by the chartered accountant and there is no complaint that the same is not in accordance with provisions of Part I and Part II of Schedule VI to the Companies Act, 1956. The only restriction in section 115JA(2) is regarding the depreciation which has to be in conformity with the method adopted under the Companies Act. There is however, departure in section 115JB(2) which provides that the accounting policies and Accounting Standards adopted while preparing profit and loss account for section 115JB should correspond to the one adopted for the purpose of the Companies Act, 1956. In that view of the matter, the order of the Commissioner (Appeals) has to be upheld. [Para 48]
CASE REVIEW-I
Handicrafts & Handloom Exports Corporation of India v. CIT [1983] 140 ITR 532/[1982] 10 Taxman 232 (Delhi) (para 15); CIT v. Stewarts & Lloyds of India Ltd. [1987] 165 ITR 416/[1986] 28 Taxman 381 (Cal.) (para 16); CIT v. Indian Textile Engineers (P.) Ltd. [1983] 141 ITR 69/[1982] 11 Taxman 48 (Bom.) (para 17); Cadell Wvg. Mill Co. (P.) Ltd. v. CIT [2001] 249 ITR 265/116 Taxman 77 (Bom.) (para 18) and CIT v. D.P. Sandu Bros. Chembur (P.) Ltd. [2005] 273 ITR 1/142 Taxman 713 (SC) (para 19) distinguished.
CIT v. G.R. Karthikeyan [1993] 201 ITR 866/68 Taxman 145 (SC) (para 21) followed.
CASE REVIEW-II
CIT v. Mahendra Mills [2000] 243 ITR 56/109 Taxman 225 (SC) (para 27) followed.
CASE REVIEW-IV
Amway India Enterprises v. Dy. CIT [2008] 111 ITD 112/21 SOT 1 (Delhi) (SB) (para 37) followed.
CASES REFERRED TO
Addl. CIT v. Handicrafts & Handloom Exports Corporation [1982] 133 ITR 590/[1981] 7 Taxman 335 (Delhi) (para 5), CIT v. India Textile Engineers (P.) Ltd. [1983] 141 ITR 69/[1982] 11 Taxman 48 (Bom.) (para 5), Padmaraje R. Kadambande v. CIT [1992] 195 ITR 877/62 Taxman 456 (SC) (para 5), CIT v. Stewarts & Lloyds of India Ltd. [1987] 165 ITR 416/[1986] 28 Taxman 381 (Cal.) (para 5), W.H. Maharani Shri Vijay Kuverba Saheb of Morvi v. CIT [1963] 49 ITR 594 (Bom.) (para 5), S.R.Y. Sivaram Prasad Bahadur v. CIT [1971] 82 ITR 527 (SC) (para 5), P.H. Divecha v. CIT [1963] 48 ITR 222 (SC) (para 5), P. Krishna Menon v. CIT [1959] 35 ITR 48 (SC) (para 6), CIT v. G.R. Karthikeyan [1993] 201 ITR 866/68 Taxman 145 (SC) (para 9), Sushil C. Sen, In re [1941] 9 ITR 261 (Cal.) (para 10), Asstt. CIT v. India Gelatine & Chemicals Ltd. [2011] 47 SOT 134/12 taxmann.com 475 (Ahd.) (para 10), Handicrafts & Handloom Exports Corporation of India v. CIT [1983] 140 ITR 532/[1982] 10 Taxman 232 (Delhi) (para 15), Cadell Wvg. Mill Co. (P.) Ltd. v. CIT [2001] 249 ITR 265/116 Taxman 77 (Bom.) (para 16), CIT v. D.P. Sandhu Bros. Chembur (P.) Ltd. [2005] 273 ITR 1/142 Taxman 713 (SC) (para 19), CIT v. Premier Automobiles Ltd. [1994] 206 ITR 1/[1993] 70 Taxman 495 (Bom.) (para 23), CIT v. Mahendra Mills [2000] 243 ITR 56/109 Taxman 225 (SC) (para 24), CIT v. Sree Senhavalli Textiles (P.) Ltd. [2003] 259 ITR 77/[2004] 134 Taxman 725 (Mad.) (para 27), CIT v. Solomon & Sons [1933] 1 ITR 324 (Rangoon) (para 32), CIT v. Groz Beckert Saboo Ltd. [1979] 116 ITR 125 (SC) (para 32), Francis Vallabarayar v. CIT [1960] 40 ITR 426 (Mad.) (para 32), CIT v. Poulose & Mathen (P.) Ltd. [1999] 236 ITR 416/[1998] 101 Taxman 97 (Ker.) (para 32), Dalmia Ceramic Industries Ltd. v. CIT [2005] 277 ITR 219/144 Taxman 669 (Delhi) (para 32), Forbes Compbell & Co. Ltd. [IT Appeal No. 8489 (Bom.) of 1998, dated 15-4-1994] (para 35), Dy. CIT v. Lubi Electricals Ltd. [2003] 133 Taxman 113 (Ahd.) (para 35), Amway India Enterprises v. Dy. CIT [2008] 111 ITD 112/21 SOT 1 (Delhi) (SB) (para 37), CIT v. Asahi India Safety Glass Ltd. [2011] 203 Taxman 277/15 taxmann.com 382 (Delhi) (para 37), CIT v. Southern Roadways Ltd. [2008] 304 ITR 84/[2009] 183 Taxman 234 (Mad.) (para 37), CIT v. Amway India Enterprises [IT Appeal Nos. 1344 & 1363 of 2009, dated 13-9-2011] (para 37), Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273/122 Taxman 562 (SC) (para 46), Marshall Sons & Co. (India) Ltd. v. ITO [1997] 223 ITR 809/[1996] 89 Taxman 619 (SC) (para 46), Dy. CIT v. Arvind Mills Ltd. [2009] 314 ITR 251/183 Taxman 189 (Guj.) (para 21), CIT v. Surat Textile Mills Ltd. [2009] 317 ITR 367/[2010] 288 Taxman 158 (Guj.) (para 47), CIT v. Prakash Industries Ltd. [2010] 324 ITR 391/194 Taxman 508 (Punj. & Har.) (para 47), Swan Mills Ltd. v. Addl. CIT [2006] 6 SOT 420 (Mum.) (para 47), National Rayon Corpn. Ltd. v. CIT [1997] 227 ITR 764/93 Taxman 754 (SC) (para 51), Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 (SC) (para 64) and Sitalpur Sugar Works Ltd. v. CIT [1963] 49 ITR 160 (SC) (para 73).
B. Jaya Kumar for the Appellant. Jehangir D. Mistri for the Respondent.
ORDER
N.V. Vasudevan, Judicial Member - ITA No. 4608/Mum/2001 is an appeal by the Revenue against the order dt. 23rd April, 2001 of CIT(A)-II, Mumbai, relating to asst. yr. 1997-98. The assessee has filed C.O. No. 119/Mum/2002 against the very same order of CIT(A).
2. We shall first take up for consideration ITA No. 4608/Mum/2001, the appeal by the Revenue.
3. The first ground of appeal of the Revenue reads as follows :
"On the facts and in the circumstances of the case and in law, the learned CIT(A), Mumbai erred :
(1a) In deleting the addition of Rs. 29.26 crores received from Boehringer Mannheim GmbH, Germany (BMG) ignoring the fact that the above receipt constitutes income under s. 28(iv) of the IT Act, 1961 in disregard of Supreme Court's decision of CIT v. G.R. Karthikeyan [1993] 112 CTR 302 : [1993] 201 ITR 866.
(1b) In deleting the addition of Rs. 29.26 crores received from Boehringer Mannheim GmbH, Germany (BMG) ignoring the fact that the above receipt were receipt to avoid adverse publicity as is evident from the contents of letter dt. 14th Nov., 1996."
4. The assessee is a company engaged in the business of manufacture of pharmaceutical formulations and bulk drugs. During the previous year a company by name Boeheringer Mannheim India Ltd. (BMIL) got amalgamated with the assessee as per the scheme of amalgamation approved by the Hon'ble Bombay High Court. As per the scheme the appointed date was 1st April 1996. The effective date for amalgamation was 24th July 1997. Boeheringer Mannheim India Ltd. (BMIL) had received a payment of Rs. 29.26 crores from Boeheringer Mannheim GmbH Germany (BMG) in November, 1996. This amount was credited to the capital reserve in the books of the assessee company. Note No. 6 forming part of the accounts states as under :
"An unconditional grant of Rs. 2,926.17 lakhs received by the erstwhile BMIL after the appointed date from Boeheringer Mannheim GmbH, Germany has been credited to the capital reserve. After the merger, certain non-recurring expenses aggregating to Rs. 18.61 crores are determined by the new management as pertaining to the period prior of the effective take over of the company by the new management or are on account of the Comsat incident and accordingly an equivalent amount has been drawn from capital grant reserve during the year and reduced from other expenses."
In a note appended to the computation of income, the foresaid amount received from BMG-was claimed by the assessee to be a capital receipt and therefore, not offered for taxation. The note further mentions the fact that certain non-recurring expenses aggregating to Rs. 1,860.84 lakhs were incurred by BMIL are deductible expenditure under s. 37(1) of the IT Act.
5. In the course of assessment proceedings, the assessee reiterated its stand that the receipt from BMG was a capital receipt not chargeable to tax. The assessee claimed that the receipt in question is an unconditional grant in appreciation of the efforts and actions taken by the erstwhile BMIL to establish, protect and enhance the goodwill and image of BMG in India. The assessee further claimed that in the last couple of years BMIL has been making persistent losses, consequent upon which the net worth of that company had eroded considerably. Since BMG had an approximately 64 per cent holding in BMIL, the goodwill and image of BMG in India were also likely to be affected. The assessee submitted that the payment by the German company BMG had to be viewed in the foregoing context. It was claimed by the assessee that BMG made the aforesaid payment out of benevolence or compassion, it was a payment made without any legal obligations on its part to do so and that BMIL had no legal right to receive the same from BMG. It was claimed that the amount received was an unconditional grant from BMG which does not relate to any particular source of income or any specific reimbursement of expenditure. It was payment made by BMG, being a substantial stakeholder in BMIL, to rectify the erosion in the net worth of one of its subsidiaries. The assessee in this regard relied on the following decisions wherein the proposition that payment to subsidiary to rectify erosion in net worth is a capital receipt not chargeable to tax has been laid down.
(a) Addl CIT v. Handicrafts & Handloom Exports Corporation [1982] 133 ITR 590/[1981] 7 Taxman 335 (Delhi).
(b) CIT v. Indian Textile Engineers (P.) Ltd. [1983] 141 ITR 69/[1982] 11 Taxman 48 (Bom.).
(c) Padmaraje R. Kadambande v. CIT [1992] 195 ITR 877/62 Taxman 456 (SC)
(d) CIT v. Stewarts & Lloyds of India Ltd. [1987] 165 ITR 416/[1986] 28 Taxman 381 (Cal.)
(e) H.H. Maharani Shri Vijaykuverba Saheb of Morvi v. CIT [1963] 49 ITR 594 (Bom.);
(f) S.R.Y. Sivaram Prasad Bahadur v. CIT [1971] 82 ITR 527 (SC);
(g) P.H. Divecha v. CIT [1963] 48 ITR 222 (SC).
6. The AO however was of the view that the payment in question though was an unconditional grant without any legal obligation on the part of BMG and without any legal right vesting with BMIL to receive the payment was not conclusive that the same is not chargeable to tax. He held that the amount in question was received by virtue of business connection and therefore taxable and further was of the view that the character of the receipt has to be viewed from the point of the recipient and not the giver. In this regard the AO referred to the decision of the Hon'ble Supreme Court in the case of P. Krishna Menon v. CIT [1959] 35 ITR 48 wherein it was laid down that the test is from the standpoint of the recipient as to whether he receives it by virtue of his occupation and not whether it is voluntary or otherwise in the hands of the giver. The AO further held that assessee's statement that BMIL has been making persistent losses and as a 64 per cent stakeholder BMG wanted to reimburse the losses was also factually incorrect. In this regard the AO referred to the fact that BMIL in their letter dt. 14th Nov., 1996 addressed to BMIL had clearly stated the purpose for which the payment was made by them to BMIL as under :
"We refer to our discussions from time to time about the actions being taken by Boehringer Mannheim India Ltd. to establish, protect and enhance the goodwill and image of the Boehringer Mannheim Group in India.
We appreciate the said efforts and particularly the efforts and actions taken in the recent past in the light of the adverse publicity arising from the problems relating to 'Comsat'.
As a token of such appreciation and to encourage such efforts, we have today remitted as unconditional grant a sum of US$ 8.2 million. Please acknowledge the receipt of the same."
According to the AO it was clear from the above that the payment was not connected at all to repairing the erosion in the net worth of BMIL. The payment has been made in order to promote the image of the BMG Group. The AO was of the view that the only test for deciding the taxability of the amount was to see whether the receipt arose out of the assessee's business. In this regard the AO referred to the fact that BMG and its associates held 64 per cent of the share capital in BMIL. BMIL was using the brand image of BMG, making use of the technical know-how of the parent company and was also acting as the marketing agent for BMG for sale of diagnostic products, bio-chemicals and bio-catalysts. In the month of August, 1996, a contaminated batch of "Comsat Forte" formulated at the factory of BMIL was released in the market causing severe illness in many cases and 3 deaths. The Food and Drug Administration directed BMIL to withdraw four batches of "Comsat Forte" and also cancelled the license for manufacture and sale of products out of Thane plant. The incident caused adverse publicity for the BMG Group. The above payment was paid to BMIL in lieu of the services rendered by BMIL in terms of protecting and promoting the interests of BMG. The AO held that the receipt arises out of the business activity of the assessee. It was clear that the payment was not made to improve the net worth of BMIL and was not in any way connected with the capital structure of BMIL. Accordingly, the receipt was held to be part of the profits and gains of the business carried on by the assessee. The AO also held that the case law relied upon by the assessee were on their own facts and not applicable to the facts of the assessee's case.
7. Before CIT(A) the assessee reiterated submissions made before the AO. It was further submitted that the assessee had no legal right to receive the money from the parent company. It was argued that the payment was made out of benevolence or compassion. The receipt was an unconditional grant which does not relate to any particular source of income and therefore was a revenue (sic—capital) receipt not chargeable to tax. The CIT(A) accepted the contention of the assessee and he held as follows :
"After considering the facts and circumstances of the case and the rival arguments I am of the view that there is no material to hold the receipt in question was income taxable under any provisions of the IT Act.
From the point of view of the assessees it was gratuitous payment made by the parent company without any legal obligation to do so and with no legal right for the assessee to receive it. The receipt was not related to any business services rendered or goods supplied by the assessee to the German company. Thus the amount was not received by virtue of the business carried on by the assessees company. As the German company clarified in its letter dt. 14th Nov., 1996 addressed to the assessee, quoted by the AO in p. 4 of the assessment order, it was an unconditional grant given by it. It was an amount given voluntarily without being solicited by the assessees. If the German company chose not to pay the amount, the assessee had no legal right to enforce the payment. The receipt in the hands of the assessee cannot be related to any specific source of income or any specific reimbursement of expenditure. The assessee also did not render any services in expectation of or on the promise of any such payment. The payment was in the nature of gift by the German company which partakes the character of a capital receipt in the hands of the assessees that cannot be subjected to income-tax.
The assessee argued that the payment has to be viewed in the context of the assessee making persistent losses consequent upon which the net worth of the company had eroded considerably. As a 64 per cent shareholder of the company, BMG came forward with this voluntary payment to ensure that its goodwill and image in India were not affected. It cannot be denied that the assessee company had made losses but for which the parent company would not have come forward voluntarily to make this payment. This was an obvious inference even though the parent company did not say so explicitly in its letter."
The CIT(A) also held that the assessee was not in the business of public relations or image building and therefore the efforts taken by it to protect and enhance the goodwill and image of the group cannot be said to be part of its business activity. The CIT(A) also held that the decision of the Hon'ble Supreme Court in the case of P. Krishna Menon (supra) was not applicable because in that case the assessee was carrying on the vocation of giving discourse in Vedanta and hence the receipt of money from disciples was held to arise from vocation whereas the assessee received the money in question for nothing.
8. Aggrieved by the order of the CIT(A), the Revenue has raised ground No. 1 before the Tribunal. The Revenue vide letter dt. 22nd June, 2010 has sought to revise ground No. 1. Instead ground No. 1 referred to earlier, the following ground is sought to be substituted, viz. :
"1(a) On the facts and circumstances of the case, the learned CIT(A) erred in deleting the addition of Rs. 29.26 crores received from Boeheringer Mannheim GmbH, Germany (BMG) ignoring the fact that the above receipts constitute income under the head 'Profits and gains of business or profession', in disregard of Supreme Court's decision in CIT v. G.R. Karthikeyan (1993) 112 CTR (SC) 302 : (1993) 201 ITR 866"
As can be seen from the revised grounds, the only difference is that originally the sum in question was brought to be taxed under s. 28(iv) of the Act, which lays down that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession is taxable under the head income from business or profession, whereas the revised ground seeks to bring the sum in question to tax under s. 28(i) of the Act which lays down that the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year are chargeable to tax under the head income from business or profession.
9. The learned Departmental Representative submitted that the payment in question was for services rendered viz., promoting image of the German company in India and Comsat incident. It was submitted that BMG and BMIL are closely connected. There was therefore a business connection between the two. He submitted that the definition of the word "income" under s. 2(24) of the Act is an inclusive definition and has very wide connection (sic—connotation). He reiterated the case of the AO by relying on the decision of the Hon'ble Supreme Court in the case of P. Krishna Menon (supra). His submission was that one has to see the reason as to why the sum in question was paid and not to see as to whether the same was voluntary or not. He drew our attention to the decision of the Hon'ble Supreme Court in the case of CIT v. G..R. Karthikeyan [1993] 201 ITR 866/68 Taxman 145. The facts of the case were that the assessee an individual, who had income from salary and business, participated in a car rally during the accounting year relevant to the asst. yr. 1973-74. The rally was restricted to private motor cars. The length of the rally route was about 6,956 kms. One could start from any one of the cities of Delhi, Calcutta, Madras or Bombay, proceed anti-clockwise and arrive at the starting point. The rally was designed to test endurance driving and reliability of the automobiles. A competitor had to drive his vehicle observing traffic regulations as well as the regulations of the rally committee. The method of ascertaining the first prize winner was based on a system of penalty points for various violations, and the competitor with the least penalty points was adjudged the winner of the first prize. On this basis, the respondent won the first prize and received Rs. 22,000 in all, Rs. 20,000 from the Indian Oil Corporation and Rs. 2,000 from the organisers of the rally. The question was whether the sum of Rs. 22,000 was taxable in the hands of the respondent ? The Tribunal found that (i) the rally was not a race; it was predominantly a test of skill and endurance as well as of reliability of the vehicle; (ii) the rally was not a "game" within the meaning of s. 2(24)(ix) of the IT Act, 1961; and (iii) the receipt was casual in the nature and not an income receipt; and held that the amount was not taxable. The High Court, on a reference, upheld the decision of the Tribunal holding that the rally was not a race and that the receipt did not represent "winnings" which had acquired the meaning of money won by gambling or betting, and that s. 2(24)(ix) could not take in the amount received by the respondent in a race which involved skill in driving. On appeal to the Supreme Court, the Hon'ble Supreme Court reversed the decision of the Hon'ble High Court. The learned Departmental Representative highlighted the following observations (laying emphasis on the underlined portion, italicized in print) of the Hon'ble Supreme Court:
(i) that since the definition of income in s. 2(24) was an inclusive one, its ambit should be the same as that of the word "income" in Entry 82 of List I of Sch. VII to the Constitution of India.
(ii) that the definition of "income" in s. 2(24) was inclusive, the purpose of the definition was not to limit the meaning of "income" but to widen its net, and the several clauses therein were not exhaustive of the meaning of income; even if a receipt did not fall within the ambit of any of those clauses, it might still be income if it partook of the nature of income.
(iii) that the rally was a contest, if not a race and the respondent entered the contest to win it. What he got was a return for his skill and endurance. It was "income" construed in its widest sense. Though, it was casual in nature, it was nevertheless.
(iv) The word "income" is of the widest amplitude and it must be given its natural and grammatical meaning.
10. Our attention was drawn to the decision of the Hon'ble Calcutta High Court in the case of Susil C. Sen, In re [1994] 9 ITR 261. The facts of the case were that the assessee, an attorney and advocate, acting for one K who was a shareholder in a company, interviewed the managing agents of the company, attended a meeting of the shareholders under a proxy from K, made a speech at the meeting and secured a substantial issue of new shares to the public. X, a firm of stock brokers who were also benefitted by the issue of the new shares, paid a sum of Rs. 10,000 to the assessee, even though the assessee had not acted for them and they were not legally bound to pay anything to the assessee. The Hon'ble High Court held that assuming that the receipt was of a casual and non-recurring nature, it arose from the exercise by the assessee of his profession as a lawyer and advocate and it was part of the assessee's income which was not exempt from tax under s. 4(3)(vii) of the Indian IT Act, 1922 which provided that any receipts not being receipts arising from business or the exercise of a profession, vocation or occupation, which are of a casual and non-recurring nature, or are not by way of addition to the remuneration of an employee. Our attention was also drawn to the decision of the Tribunal Ahmedabad Bench in the case of Asstt. CIT v. India Gelatine & Chemicals Ltd. [2011] 47 SOT 134/12 taxmann.com 475 wherein it was held that compensation for sterilization of a source of income was held to be capital but where assessee continued to remain in business but payments were made to compensate for loss of profit then the same would be revenue receipt chargeable to tax.
11. The learned Departmental Representative highlighted the fact that in its letter dt.l4th Nov., 1996 BMG had clearly stated that the payment was being made to BMIL to establish, protect and enhance the goodwill and image of BMG in India and the efforts and actions taken in recent past in the light of the adverse publicity arising from the problems relating to "Comsat". The learned Departmental Representative highlighted the fact that in note No. 6 to the accounts, the assessee had clearly mentioned the fact that after the merger, certain non-recurring expenses aggregating to Rs. 18.61 crores are determined by the new management as pertaining to the period prior of the effective take over of the company by the new management or are on account of the Comsat incident and accordingly an equivalent amount has been drawn from capital grant reserve during the year and reduced from other expenses. Thus the payment was reimbursement of expenses already incurred by the assessee BMIL on account of Comsat incident which had already been claimed as deduction by BMIL/assessee and the receipt in question had to be considered as income of the assessee. His submission was that the stand of the assessee before the Revenue authorities that BMIL was in losses and the payment in question was made to recoup such losses is far from truth and was contrary to the material on record. He highlighted the fact that BMG and its associates held 64 per cent of the share capital in BMIL. BMIL was using the brand image of BMG, making use of the technical know-how of the parent company and was also acting as the marketing agent for BMG for sale of diagnostic products, bio-chemicals and bio-catalysts. In view of the above relationship and also in the light of the help rendered by BMIL in terms of protecting and promoting the interests of BMG in the wake of Comsat incident, the payment in question was made by BMG and was therefore a payment connected with the business of BMIL and was liable to be taxed under s. 28(i) r/w s. 2(24) of the Act.
12. The learned counsel for the assessee submitted that the assessee had no legal right to receive the money from the parent company. It was argued that the payment was made out of benevolence or compassion. The receipt was an unconditional grant which does not relate to any particular source of income and therefore was a revenue (sic—capital) receipt not chargeable to tax. It was further submitted that the assessee was not in the business of public relations or image building and therefore the efforts taken by it to protect and enhance the goodwill and image of the group cannot be said to be part of its business activity. It was further submitted that the decision of the Hon'ble Supreme Court in the case of P. Krishna Menon supra was not applicable because in that case the assessee was carrying on the vocation of giving discourse in Vedanta and hence the receipt of money from disciples was held to arise from vocation whereas the assessee received the money in question for nothing. He reiterated the stand of the assessee that where a holding company reimburses losses incurred by a wholly owned subsidiary company, the amount so reimbursed by holding company cannot be treated as income. In this regard he drew our attention to the various decisions which were referred to in the submissions made before the AO. The learned counsel also highlighted the fact that the payment in question was made by BMG to BMIL and the assessee by virtue of amalgamation takeover of BMIL. Thus the assessee had no business relationship with BMG and payment in question cannot be said to be arising out of any business of the assessee. This argument deserves to be rejected at this stage itself. The scheme of amalgamation recognises all businesses of BMIL will be that of the assessee. Therefore the character of the receipt in the hands of the assessee will be the same as it would be had the money been received by BMIL.
13. The learned counsel for the assessee also distinguished the cases relied upon by the learned Departmental Representative by pointing out that P. Krishna Menon's case (supra) was a case where the receipt was linked to a vocation. He submitted that in all other cases there was a connection between the receipt and the business and therefore the same was taxed.
14. We have considered the rival submissions. To appreciate the contentions raised on behalf of the assessee it is necessary to look into the ratio laid down in the several cases relied upon by the assessee before the Revenue authorities. In the case of Handicrafts & Handloom Exports Corporation (supra), the assessee, a Government company, became a wholly-owned subsidiary of the STC as a result of the latter acquiring the entire paid-up share capital in the assessee in June, 1962. For the asst. yrs. 1964-65 and 1965-66, the assessee incurred losses which were reimbursed by the STC. The question was whether for the purposes of income-tax the losses could be said to be wiped off as a result of the reimbursement by the STC. The Tribunal held that the amounts reimbursed by the STC could not be taken into account as part of the assessee's trading receipts or for that matter as a part of its total income, because the holding company and the subsidiary were distinct entities and what had happened was that the assessee's capital was eroded by the losses and that erosion was rectified by a contribution from the holding company and this was analogous to a sole proprietor introducing additional capital in a business which had been losing or to a holding company diverting some of its surplus funds to the subsidiary to enable it to tide over the loss of capital. On a reference, the Hon'ble Delhi High Court upheld the decision of the Tribunal observing that the receipt was analogous to the case of a person agreeing to meet the losses incurred by another person in carrying on a business and to discharge the debts incurred by him out of affection or regards.
15. In Handicrafts & Handloom Exports Corporation (supra) and Handicrafts & Handloom Export Corporation of India v. CIT [1983] 140 ITR 532/[1983] 10 Taxman 232 (Delhi) the facts were that the assessee, a wholly-owned subsidiary of the STC, incurred loss in its business of export of handloom, etc., for the asst. yr. 1970-71. The STC agreed to recoup the losses and gave a cash assistance at 6 per cent of the foreign earnings of the assessee, the cash assistance so received by the assessee from the STC was held to be not part of the assessee's trading receipts and was not taxable as its income. The Delhi Hon'ble Court applied its earlier ruling in Handicrafts & Handloom Exports Corporation (supra). The Hon'ble Court observed that there was a basic difference between grants made by a Government or from public funds generally to assessees in a particular line of business or trade, with a view to helping them in the trade or to supplement their general revenues or trading receipts and not earmarked for any specific or particular purpose and a case of a private party agreeing to make good the losses incurred by an assessee on account of a mutual relationship that subsists between them. The former are treated as trading receipts because they reach the trader in his capacity as such and are made in order to assist him in the carrying on of the trade. The latter are in the nature of gifts or voluntary payments motivated by personal relationship and not stemming from any business considerations.
16. In Stewarts & Lloyds of India Ltd. (supra), the facts were S, the assessee, was a wholly-owned subsidiary of a foreign company. In December, 1963, the assessee entered into a contract with the Indian Oil Corporation at the Baroda Refinery project. In June, 1965, the assessee was converted into a public limited company but remained a subsidiary of the UK company. The assessee incurred a loss in executing the contract with the Indian Oil Corporation. The UK company offered to indemnify the assessee against the loss and after discussion with the assessee agreed to pay Rs. 22.5 lakhs. In the asst. yr. 1969-70, the relevant accounting period ending on 30th Sept., 1968, the assessee credited a sum of Rs. 22.5 lakhs as receivable from the UK company. In its IT return filed for the said assessment year, the assessee did not, however, include the said amount of Rs. 22.5 lakhs as a receipt under any head of income and claimed that the said amount was not taxable. The ITO held that the said amount of Rs. 22.5 lakhs was taxable as a revenue receipt as the said amount had been agreed to be paid to the assessee by the UK company to compensate the assessee for the loss sustained by it. The Tribunal, however, held that the said amount did not have the character of income. On a reference, the Hon'ble Calcutta High Court held that the material on record showed that there had been no business transaction between the assessee and the UK company after the assessee was converted into a public limited company on 8th June, 1965. In the IT return filed by the UK company in the UK, the payments made to the assessee were not claimed to be the business expenses of the UK company. The said amount of Rs. 22.5 lakhs was paid without any claim from the assessee. There was no evidence that the said payment by the UK company to the assessee was attributable to any legal obligation or custom or past practice. It was, therefore, clear that there was no obligation, contractual or statutory, to make the said payment to the assessee. It was not the case of the Revenue that the assessee was induced to take up the contract with the Indian Oil Corporation on the expectation that the UK company would indemnify the assessee if the assessee suffered a loss in executing the work. No consideration passed from the assessee to the UK company for the said payment and no quid pro quo was involved. The fact that, at the relevant time, the assessee was a subsidiary of the UK company would make no difference to the legal position. The UK company and the assessee at all material times were and remained different entities. Similarly, the fact that there were prior discussions between the assessee and the UK company regarding the method and manner of the payment and determination of the quantum to be paid would not affect the character of the receipt. There is nothing to bar consultation and discussion between a donor and a donee. The fact that the amount received from the UK company had been shown in the P&L a/c of the assessee for the relevant assessment year under the head "Income from other sources" would also not be decisive in the determination of the character of the receipt. The sum of Rs. 22.5 lakhs receivable by the assessee from the UK company with reference to the Baroda Refinery project was not of the character of income.
17. In Indian Textile Engineers (P.) Ltd. (supra), the facts were the assessees, Indian Textile Engineers, Bombay, were agents of PB, a non-resident company incorporated in the UK. TMM, a company registered in the UK, carried on the business of manufacture and sale of textile machinery and spare parts. It had a number of subsidiaries including PB. Indian Textile Engineers was the selling agent of PB in India. PB was in receipt of £ 300,000 during the asst. yr. 1966-67 as "subvention payment". Sec. 20 of the UK Finance Act, 1953, made a provision for a subvention payment to one associated company, in respect of losses that may be incurred by it, by other associated companies. Under sub-s. (2), it was stated that the amount which was received by the payee-company as a subvention payment was an amount which would not be ordinarily taken into account in computing the profits or losses of the payee-company but for the express provisions of s. 20. Sec. 20 expressly provided that in computing the profits or losses of these companies for the purpose of income-tax, a subvention payment should be treated as a trading receipt in the hands of the payee company and as an allowable deduction to the paying company. Under sub-s. (2), in order that a payment made by one company to the other could be treated as a subvention payment, it was necessary that there should be an agreement providing for the paying company to bear or share in the losses of the payee company. Under the provisions of s. 20(2) of the UK Act, TMM entered into an agreement dt. 22nd Feb., 1957, with its subsidiary companies including PB for the making of subvention payments. During the asst. yr. 1966-67, PB made a provision of £ 330,000 for bad and doubtful debts which was a permissible deduction under the law in the UK. On the allowance of this deduction PB's results turned into a loss. Thereupon pursuant to the agreement dt. 22nd Feb., 1957, the other associated companies contributed £ 300,000 to PB as subvention payment. The income in India of the assessee-company as agents of PB for the asst. yr. 1966-67 had admittedly to be determined under the provisions of s. 9 of the IT Act, 1961, read with r. 10(ii) of the IT Rules, 1962. While determining the income of the assessee for the asst. yr. 1966-67, the ITO held that the provision for bad and doubtful debts amounting to £ 330,000 could not be deducted in computing the total income of PB since such a provision was not a permissible deduction under the IT Act. The ITO also treated the receipt of £ 300,000, being subvention receipt, as the income of PB. The Tribunal, however, held that the receipt of £ 300,000 by PB, being subvention receipt, could not be treated as income in the hands of PB. On a reference, the Hon'ble Bombay High Court held that the amount of £ 300,000 had been received by PB towards the loss which is suffered and this loss was on account of certain bad or doubtful debts. If the debts, in respect of which payments had been made, could not be considered as deductible under the provisions of Indian IT Act, then a payment, which had been made to reimburse the company in respect of such non-allowable bad debts, could not be considered as a trading receipt. The receipt of £ 330,000 was intrinsically linked with the loss suffered by the company. If this loss was not to be considered as a trading loss for the purpose of income-tax then the receipt could not be considered as a trade receipt, because the receipt was by way of reimbursement of that loss. The receipt, therefore, was de hors the trading activity of the company as far as the provisions of the IT Act were concerned. Such a receipt could not be considered as a receipt by way of income. From the language of s. 20 of the UK Act also, it was clear that a subvention payment was not ordinarily treated as a trade receipt. In fact, the statute laid down that such a payment must be of such a nature as would not ordinarily qualify as a trade receipt. The statute further provided that such a payment, though not ordinarily a trading receipt, would be treated as such. There is no such deeming provision under the IT Act. The subvention receipt could not also be regarded as a subsidy. The subvention payment of £ 300,000 was not liable to be taken into account in the computation of the profit of PB liable to tax in India under r. 10(ii).
18. In Cadell Wvg. Mill Co. (P.) Ltd. v. CIT [2001] 249 ITR 265/116 Taxman 77 (Bom.), it was held that in order to attract s. 10(3) of the IT Act, 1961, two conditions are required to be satisfied, viz., that the receipt should be casual and non-recurring and that it should not arise by way of business income, salary income or capital gains chargeable under s. 45. In other words, business income, salary income and capital gains chargeable under s. 45 stand outside s. 10(3) because salary income, business income and such capital gains are chargeable and computable under a different set of sections. Therefore, when the source of a receipt has a link with business income or salary income or capital gains chargeable under s. 45 then s. 10(3) will not apply.
19. In CIT v. D.P. Sandu Bros. Chembur (P). Ltd. [2005] 273 ITR 1/142 Taxman 713 (SC), the aforesaid principle laid down by the Hon'ble Bombay High Court was reiterated. In the case of Padmaraje R. Kadambande (supra) the assessee was entitled to monthly payment under orders of Ruler of native State. The native State later merged with Bombay State and the payment was apportioned on such merging. The statute abolishing such payment provided for compassionate payment at the discretion of the State Government. The assessee received payment from the State Government on compassionate ground. The Hon'ble Supreme Court held that the receipt was capital and not taxable under the Act. The Hon'ble Supreme Court emphasized the fact that the payment was purely discretionary and that there was no real source of income.
20. Thus it can be seen from all the aforesaid decisions that the common thread of reasoning by the Courts was that the payments are voluntary. It was given to persons whose relationship was either holding or subsidiary company and were given in a situation where the subsidiary company were making losses and to enable the subsidiary company by offering the losses. Another line of reasoning is that the payments are modified by personal relationship and do not stem from any business consideration. The case of Indian Textile Engineers (P.) Ltd. (supra) which stands on a totally different footing as it is based on specific context of the UK Finance Act, 1953.
21. In the present case we find that BMG in its letter dt. 14th Nov., 1996 addressed to BMIL had clearly explained the purpose of the payment, which we have already referred to in the earlier part of this order. It is clear from the aforesaid letter of BMG that the payment is in recognition of the services rendered by BMIL to BMG. Moreover, business consideration did give way for making aforesaid payments. It is also a fact that the assessee had incurred expenses in connection with the effort it had taken to protect and enhance the goodwill and image of BMG in India and those have been claimed as deductible revenue expenditure Thus the case of the assessee stands on totally different footing from all the cases relied upon by the learned counsel for the assessee before us. It is not a payment to enable BMIL to recoup its losses nor is it a payment which did not have business consideration for making such payments. The fact that it was voluntary or that it was an unconditional payment, in our view, will not make it a capital receipt not chargeable to tax. The stand of the assessee before the revenue authorities that BMIL was in losses and the payment in question was made to recoup such losses is contrary to the material on record. There was holding and subsidiary company relationship between BMIL and BMG besides business relationship, viz., BMIL was using the brand image of BMG, making use of the technical know-how of the parent company and was also acting as the marketing agent for BMG for sale of diagnostic products, bio-chemicals and bio-catalysts. It is only because of such relationship and also in the light of the help rendered by BMIL in terms of protecting and promoting the interests of BMG in the wake of Comsat incident the payment in question was made by BMG and was therefore a payment connected with the business of BMIL and was liable to be taxed under s. 28(i) r/w s. 2(24) of the Act. We are of the view that the decision of the Hon'ble Supreme Court in the case of G.R. Karthikeyan (supra) would be clearly applicable in the present case. We are of the view that the CIT(A) erred in coming to the conclusion that receipt was not in the nature of income. In fact we find that the CIT(A) has given contradictory finding. On the one hand the CIT(A) says that the assessee was in the business of manufacture and sale of drugs and not in the business of public relation or image building. Thus it is an admitted position that the payment was made for protecting and enhancing the goodwill and image of BMG in India. The CIT(A) contrary to the above finding has come to the conclusion that there was no quid pro quo for the payment. As held in the decision of the Hon'ble Supreme Court in the case of G.R. Karthikeyan (supra) the payment had all the characteristics of income and was liable to be brought to tax. In our view the CIT(A) erred in reversing the order of the AO. We, therefore, reverse the order of CIT(A) and restore the order of the AO in this regard. Ground No. 1 raised by the Revenue is accordingly allowed.
22. Ground No. 2 raised by the Revenue reads as follows :
"2. Erred in a accepting assessee's device of not claiming depreciation ignoring omission of the provisions of s. 34(1) of the IT Act w.e.f. 1st April, 1988 relying on the Hon'ble Supreme Court judgment in the case of CIT v. Mahendra Mills (2000) 159 CTR (SC) 381 : (2000) 243 ITR 56 which pertained to the period prior to the section's omission."
23. As already seen BMIL merged with the assessee company as per the scheme of amalgamation w.e.f. 1st April, 1996. The assessee has claimed depreciation on the assets taken over as part of the merger. The AO noticed from the schedule of depreciation furnished by the assessee that depreciation was being claimed on the WDV without adjusting for depreciation allowable for asst. yrs. 1995-96 and 1996-97 in the hands of erstwhile BMIL. The erstwhile BMIL did not opt to claim depreciation for the asst. yrs. 1995-96 and 1996-97 although assets have been used in the business carried on by BMIL during those years. The AO was of the view that depreciation is not available to the assessee on the WDV without taking into consideration the allowable depreciation on the use of the assets during the asst. yrs. 1995-96 and 1996-97 by BMIL. Depreciation charge being in the nature of a deduction for wear and tear of the assets, it was mandatory that depreciation is charged to arrive at the correct income for any given year. The AO referred to the decision of the Hon'ble Bombay High Court in the case of CIT v. Premier Automobiles Ltd. [1994] 206 ITR 1/[1993] 70 Taxman 495, wherein it was held as follows :
"Under s. 32 of the Act, the assessee is entitled to allowance of depreciation. It is for him to claim the same. If he does not claim the same or wants to forgo the same, he is free to do so. This judgment does not say anything about carry forward of depreciation which has not been claimed by the assessee in the particular year. So far as the current year's depreciation is concerned, it is for the assessee to claim the same or not to claim the same. If he does not claim it, he loses the depreciation. There is no question of any depreciation allowable for that year and in that event the question of any unabsorbed depreciation of that year will not arise. This decision, however, cannot be carried any further to contend that the assessee is free not to claim depreciation in the year to which it pertains but carry forward the same to the subsequent year or years as it likes."
It was further held that:
"What s. 32 allows an assessee is the deduction by way of depreciation of an asset of an amount calculated as a percentage of the WDV thereof as may be prescribed. It is for the assessee to claim the same and furnish the requisite particulars. If the assessee does not claim the same, it - cannot be allowed. But in that case, there will be no depreciation for that year which can be said to be unabsorbed to be carried forward to a subsequent year under s. 32(2) of the Act. In other words, an assessee who does not claim deduction for the depreciation allowable to him under s. 32 of the Act in the particular year loses it once for all."
Accordingly, the WDV in respect of the assets belonging to erstwhile BMIL was adjusted (by reduction of the WDV) for the foregone depreciation for asst. yrs. 1995-96 and 1996-97.
24. On appeal by the assessee the, CIT(A) held that depreciation on the WDV as claimed by the assessee on the assets in question should be allowed. The CIT(A) held that the AO was not correct in reading the judgment of the Hon'ble Bombay High Court in the case of Premier Automobiles Ltd. (supra) as laying down a limitation that notional allowance has to be reduced from the WDV to arrive at the WDV of the subsequent year. The CIT(A) also found that the decision of the Hon'ble Supreme Court in the case of CIT v. Mahendra Mills [2000] 109 Taxman 225 clearly lays down the proposition that WDV has to be arrived at only after reducing depreciation actually allowed and in a case where the assessee has not claimed depreciation it cannot be said that it was notionally allowed. Aggrieved by the order of the CIT(A) the Revenue has raised ground No. 2 before the Tribunal.
25. We have heard the rival submissions. We are of the view that the order of the CIT(A) has to be upheld. The Hon'ble Supreme Court in Mahendra Mills (supra) has laid down that the assessee is entitled to exercise his option even through the filing of revised return and that option cannot be denied to him nor can depreciation be thrust on the assessee against his willingness. It was held that until a claim is made for allowing deductions of the nature covered under s. 32 along with necessary particulars, there would hardly be any occasion for the ITO to 'allow' any 'claim'. Two conditions-the making of a claim and the furnishing of particulars have been read as cumulative conditions by the Hon'ble Supreme Court in Mahendra Mills (supra). If either of the two conditions is not fulfilled the AO cannot force the depreciation allowance on the assessee. It further follows logically that in the absence of a claim by the assessee the allowance cannot be thrust upon him even if the particulars are available to the AO. Therefore, the mere fact that the assessee before us did not make a claim for depreciation places a fetter upon the powers of the AO to allow depreciation.
26. The contention of the Revenue was that after 1st April, 1988, the condition of furnishing the particulars required by sub-ss. (1) and (2) of s. 34 has been done away with and that has altered the effect of the judgment in Mahendra Mills (supra). It is difficult to uphold the contention because not only has the Supreme Court viewed the conditions as cumulative, but more importantly, they have viewed the claim for depreciation as something over which the AO has no control and is the choice of none else than the assessee. It would be proper to understand the judgment as also laying down, impliedly, that if there is no claim of depreciation by the assessee, that should be an end of the matter. Therefore, the judgment also lays down in principle that irrespective of whether the statute requires the furnishing of the particulars or not, if there is no claim for depreciation, it cannot be allowed by the AO. The debate, therefore, as to whether the omission of s. 34(1) and (2) and r. 5AA of the IT Rules would change the position prima facie appears to be academic but since it has been raised and that question has also been answered by Mahendra Mills (supra) we proceed to decide the same. The following observations of the Supreme Court in this regard clinch the issue in favour of the position that despite the omission of the above sub-sections of s. 34 and the rule, still depreciation allowance cannot be thrust upon the assessee in the absence of a claim :
"The language of the provisions of ss. 32 and 34 is specific and admits of no ambiguity. Sec. 32 allows depreciation as deduction subject to the provisions of s. 34. Sec. 34 provides that deduction under section shall be allowed only if prescribe particulars have been furnished. We have seen r. 5AA of the Rules which though since deleted provided for the particulars required for the purpose of deduction under s. 32. Even in the absence of r. 5AA, the return of income in the form prescribed itself requires particulars to be furnished by the assessee and no claim for the depreciation has been made in the return. The ITO in such a case is required to compute the income without allowing depreciation allowance. The circular of the Board, dt. 11th April, 1955, is of no help to the Revenue. It imposes merely a duty on the officers of the Department to assist the taxpayers in every reasonable way, particularly, in the matter of claiming and securing relief. The officer is required to do no more than to advise the assessee. It does not place any mandatory duty on the officer to allow depreciation if the assessee does not want to claim that. The provision for claim of depreciation is certainly for the benefit of the assessee. It if does not wish to avail that benefit for some reason, benefit cannot be forced upon him. It is for the assessee to see if the claim of depreciation is to his advantage. Rather the ITO should advise him not to claim our view in the spirit of the Circular, dt. 11th April, 1955. Income under the head 'Profits and gains of business or profession' are chargeable to income-tax under s. 28 and that income under s. 29 is to be computed in accordance with the provisions contained in ss. 30 to 43A. The argument that since s. 32 provides for depreciation if has to be allowed in computing the income of the assessee cannot in all circumstances be accepted in view of the bar contained in s. 34. If s. 34 is not satisfied and the particulars are not furnished by the assessee, his claim for depreciation under s. 32 cannot be allowed. Sec. 29 is thus to be read with reference to other provisions of the Act. It is not in itself a complete code."
27. The Supreme Court has observed that even in the absence of the rule, since the return form itself prescribes particulars to be furnished in support of the claim of depreciation, the allowance can be granted on if the assessee makes a claim and the particulars required in the return form are furnished. The ratio of the observations is that in order to obtain an allowance or deduction, it is necessary for the assessee to make a claim and also support it by necessary particulars or evidence. Therefore, the contention on behalf of the Revenue that after the omission of sub-ss. (1) and (2) of s. 34 and r. 5AA w.e.f. 1st April, 1988, depreciation has to be mandatorily claimed cannot be accepted. It is further seen that Explns. 5 to 32 was introduced by the Finance Act, 2002 w.e.f. 1st April, 2002 and it provides as follows :
"Explanation 5 : For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income."
"Thus, it can be safely said that omission of s. 34 has not affected the assessee's choice to claim depreciation allowance. This choice is, however, expressly taken away by insertion of Expln. 5 in s. 32 w.e.f. 1st April, 2002, from asst. yr. 2002-03 onwards. In CIT v. Sree Senhavalli Textiles (P) Ltd. [2003] 259 ITR 77/[2004] 134 Taxman 725 (Mad.) the Hon'ble Madras High Court has held that though after judgment was rendered by the Apex Court in Mahendra Mills (supra), Expln. 5 was inserted in s. 32(1) by the Finance Act 2001, w.e.f. 1st April, 2002, declaring that 'for the removal of doubts' the provisions of sub-s. (1) will apply whether or not the assessee claims deduction in respect of depreciation in computing his total income, that Explanation cannot be regarded as taking away the effect of the judgment of the Supreme Court for the years prior to the date of introduction of the Explanation. The law declared by the Supreme Court cannot be regarded as having merely raised doubts. The interpretation of the relevant provisions of the Act by the Apex Court settles the law, and unless the subsequent amendment to the statute is expressly given retrospective effect, the law laid down by the Apex Court will remain the binding law for the period prior to the amendment. The newly added Explanation takes effect only on and from 1st April, 2002, and will not be applicable for prior years. If claim made in the original return had been given up in the revised return, there was no obligation to consider the claim for depreciation.
27. The Hon'ble Supreme Court in the case of Mahendra Mills (supra) had made the following observations :
"….Allowance of depreciation is calculated on the WDV of the assets, which WDV would be the actual cost of acquisition less the aggregate of all deductions 'actually allowed' to the assessee for the past years. 'Actually allowed' does not mean 'notionally allowed'. If the assessee has not claimed deduction of depreciation in any past year it cannot be said that it was notionally allowed to him. A thing is 'allowed' when it is claimed. A subtle distinction is there when we examine the language used in s. 16 and ss. 34 and 37 of the Act. It is rightly said that a privilege cannot be to a disadvantage and an option cannot become an obligation. The AO cannot grant depreciation allowance when the same is not claimed by the assessee."
28. In the light of the above observations of the Hon'ble Supreme Court, let us see the decision of the Hon'ble Bombay High Court in the case of Premier Automobiles Ltd. (supra). The question before the Hon'ble Court and the circumstances under which it arose were as follows :
"Whether, on the facts and in the circumstances of the case, the assessee-company could lawfully claim the development rebate in priority to depreciation allowance prescribed under s. 32 of the IT Act, 1961, while computing its total income for each of the asst. yrs. 1970-71, 1971-72 and 1972-73?"
As is evident from the question, the controversy related to priority in the matter of set off of unabsorbed depreciation allowance and unabsorbed development rebate. The assessee had substantial amount of unabsorbed depreciation and unabsorbed development rebate which had been carried forward from year to year. The claim of the assessee was that as there was a time-limit fixed under the Act for carrying forward of unabsorbed development rebate, it should be set off first against the current year's profit in the respective years and thereafter if any profit is left, the unabsorbed depreciation should be adjusted. According to the ITO, under the scheme of the Act, the unabsorbed depreciation had to be adjusted first and then only, if any profits are left, the unabsorbed development rebate can be adjusted. Thus, the question was of priority between carried forward unabsorbed development rebate and unabsorbed depreciation in the matter of set off against the current year's profits. In the light of the above controversy, the Hon'ble Bombay High Court held as follows :
"Thus, it is clear that what s. 32 allows an assessee is the deduction by way of depreciation of an asset of an amount calculated as a percentage of the WDV thereof as may be prescribed. It is for the assessee to claim the same and furnish the requisite particulars. If the assessee does not claim the same, it cannot be allowed. But in that case, there will be no depreciation for that year which can be said to be unabsorbed to be carried forward to a subsequent year under s. 32(2) of the Act. In other words, an assessee who does not claim deduction for the depreciation allowable to him under s. 32 of the Act in the particular year, loses it once for all. He is not entitled to claim the same in a subsequent year though he will again be entitled in that subsequent year to claim depreciation for that year."
(underlining, italicised in print, by us for emphasis)
The AO has relied on the underlined, italicised, portion of the judgment to hold that an assessee who does not claim deduction for depreciation allowable to him under s. 32 of the Act in a particular year loses it once for all. The AO has overlooked the fact that the above observations are in the context of priority of claims for development rebate of depreciation under s. 32 of the Act in our view the above observation does not support the case made out by the AO. We, therefore, uphold the order of the CIT(A) and dismiss the ground No. 2 raised by the assessee (sic-Revenue).
29. Ground No. 3 raised by the Revenue reads as under :
"Erred in deleting addition on account of depreciation claimed by the assessee at enhanced value ignoring that such claim is contrary to the provision of Expln. 1 to s. 43(6) of the IT Act, 1961"
30. Before 1st April, 1995 i.e during the previous year relevant to the asst yr. 1996-97 the assessee took over the Bulks Drugs Division (BDD) of Sumitra Pharamaceuticals & Chemicals Ltd. (SPCL) and claimed depreciation on the market value of the assets of the BDD as determined in the scheme of arrangement which was approved by the High Courts of Andhra Pradesh and Bombay. The AO on the other hand, allowed depreciation on the WDV of the assets in the hands of SPCL The depreciation allowed on these assets by the AO was less than what the assessee claimed. For the asst. yr. 1997-98 under appeal now, the assessee claimed depreciation of Rs. 8,97,04,377 on the WDV of the assets of the BDD as on 31st March, 1996. This claim was made taking into account the market value of the assets as fixed by valuation report at figures higher than the WDV in the books of account of SPCL. The AO, however allowed the depreciation of Rs. 2,41,21,753 taking into account the WDV of the assets in the books of SPCL as on 31st March. 1995 and the depreciation allowed for the asst. yr. 1996-97.
31. On appeal by the assessee, the CIT(A) noticed that similar issue came up for consideration in the appeal filed by the assessee for the asst. yr. 1996-97 and for the elaborated reasons discussed in the appellate order for the asst. yr, 1996-97, it was held that depreciation should be allowed on the assets of the BDD taken over from SPCL taking into account the market value of the assets as determined in the valuation report, as per the scheme of arrangement, which was approved by the High Courts of Andhra Pradesh and Bombay. Following that decision the CIT(A) held for asst. yr, 1997-98 that depreciation should be allowed on the assets of BDD taking into account the market value of the assets as on 1st April, 1995 fixed by valuation report as reduced by the depreciation allowable for the asst. yr. 1996-97 as per the appellate order for asst. yr. 1996-97 mentioned above. Accordingly he held that the assessee is entitled to depreciation of Rs. 8,97,04,377 as against Rs. 2,41,21,753 allowed by the AO.
32. Aggrieved by the order of CIT(A), the Revenue has raised ground No. 3 before the Tribunal. It is not in dispute before us that identical issue came up for consideration in assessee's own case in asst. yr. 1996-97 in ITA No. 4601/Mum/2001 and this Tribunal held as follows :
"3. As regards ground No. 1 brief facts of the case are that the assessee company which is engaged in the business of manufacturing of pharmaceuticals products filed its return of income on 30th Nov., 1997 declaring a loss of Rs. 70,67,21,243. Subsequently, assessee filed a revised return of income on 30th Nov., 1998 revising the loss figure to Rs. 70,66,81,323. During the assessment proceedings under s. 143(3), the AO noticed that during the relevant previous year the assessee company had taken over the bulk drug unit of M/s Sumitra Pharmaceutical & Chemicals Ltd. (SPCL) located near Hyderabad and that it is as per the scheme of arrangement approved by the shareholders of both the companies and also by the jurisdictional High Courts of both the companies. He further observed that as per the scheme of arrangement, appointed date for the takeover was the 1st April, 1995 and accordingly the assessee company has filed the return of income along with the consolidated balance sheet and P&L a/c incorporating the result of the operations of the bulk drugs unit also. From the details filed along with the revised return of income, the AO observed that the assessee company has taken over the assets and liabilities of the bulk drugs unit at their estimated market value as on the appointed date after making all the necessary provisions for the appreciation, increase of efficiency, diminution in the value of any asset or for the anticipated shortfall in realization of any assets or for any dividend or other liability or obligation transferred to the assessee company in pursuant to the scheme of arrangement but not provided for in the books of SPCL. He observed that the assessee company claimed depreciation on the revalued figures of depreciable assets instead of the corresponding figures of the WDV in the books of SPCL as on 31st March, 1995. The AO asked the assessee company to explain as to how the depreciation under the IT Act is allowable on the revalued figures. The assessee company submitted that all the assets and liabilities of SPCL have been taken over as per the scheme of arrangement approved by the Hon'ble High Courts of Andhra Pradesh and Bombay and as per cl. 10 of the scheme, the company was required to record the assets taken over at their estimated market value and accordingly the valuation report of M/s Sabnis & Co., dt. 20th Dec, 1995 was obtained and the assets have been revalued and the depreciation is accordingly claimed on the revalued figures. It was also submitted that the WDV of the assets in the hands of SPCL has no relevance to the cost of the same in the assessee company's hands for the purpose of depredation allowance under s. 32 of the Act. It was stated that 'cost' for the purpose of depreciation allowance should relate to the person who owns it and not with respect to his predecessor. In this connection, assessee placed reliance upon the following decisions:
(a) CIT v. Solomon & Sons [1933] 1 ITR 324 (Rangoon);
(b) CIT v. Groz Beckert Saboo Ltd. [1979] 116 ITR 125 (SC);
(c) Francis Vallabarayar v. CIT [1960] 40 ITR 426 (Mad.)
The AO, however, was not satisfied with the assessee's explanation and held that the WDV of the depreciable assets in the hands of the previous owner is to be adopted as the value of assets in the hands of the assessee for the purpose of claim of depreciation. He, accordingly, reworked the depreciation allowable on the basis of WDV at Rs. 2,98,85,394 as against the claim of the assessee of Rs. 11,48,96,238. Aggrieved, assessee filed an appeal before the CIT(A) who allowed the same holding that the cost of appreciation of the assets of the bulk drugs unit in the hands of the assessee was the market value of the assets entered into the books of the assessee on the basis of the valuation report as approved by the High Courts of Andhra Pradesh and Bombay and also by the shareholders of both the companies and, therefore, for the purpose of allowing depreciation this valuation is to be taken. Aggrieved by the same, the Revenue is in appeal before us.
5. The learned Departmental Representative strongly supported the order of the AO and submitted that the scheme of arrangement as approved by the High Courts of Andhra Pradesh and Bombay is only with regard to the transfer of assets and liabilities and not with regard to the valuation of assets and liabilities as adopted by the two companies. According to him, the correctness or otherwise of the valuation of assets has not been gone into by the respective High Courts and therefore the valuation cannot be said to be genuine. Further, he submitted that the legislative intention as can be perused from various Explanations on 'actual cost' incorporated in the Act is to allow depreciation on the original WDV of the depreciable assets even when the ownership is transferred unless actual cost can be directly determinable with reference to any specific asset. He placed reliance upon the following decisions in support of his contentions :
(i) CIT v. Poulose & Mathen (P) Ltd. [1999] 236 ITR 416/[1998] 101 Taxman 97 (Ker.);
(ii) Dalmia Ceramic Industries Ltd. v. CIT [2005] 277 ITR 219/144 Taxman 669 (Delhi)
6. The learned counsel for the assessee, on the other hand, supported the order of the CIT(A) and reiterated the submissions made before the authorities below. He submitted that the assessee company is in no way related to SPCL and therefore the market value of the assets as approved by the Honb'le High Courts of Andhra Pradesh and Bombay, being at arm's length has to be adopted for the purpose of claiming depreciation thereof.
7. Having heard both the parties and having considered their rival contentions, we find that s. 32 of the IT Act provides for depreciation on tangible and intangible assets. It is also provided that in the case of block of assets, depreciation shall be allowed on the WDV thereof as may be prescribed.
Explanation 2 to sub-s. (1) of s. 32 provides that for the purpose of this sub-section, 'WDV of the block of assets' shall have the same meaning as in cl. (c) of sub-s. (6) of s. 43.
Sub-s. (6) of s. 43 defines WDV to mean.—
(a) In the case of assets acquired in the previous year, the actual cost to the assessee;
(b) In the case of assets acquired before the previous year, the actual cost to the assessee less all depreciations actually allowed to him under this Act, or under the Indian IT Act, 1922 or any Act repealed by that Act, or under any executive orders issued when the Indian IT Act, 1886 was in force;
(c) In the case of any block of assets—
(i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the WDVs of all the assets falling within that block of assets at the beginning of the previous year and adjusted………..
Explanation 1 : When in a case of 'succession in business or profession, an assessment is made on the successor under sub-s. (2) of s. 170 the WDV of 'any asset or any block of assets' shall be the amount which would have been taken as its WDV if the assessment had been made directly on the person succeeded to.
Explanation 2 : Where in any previous year, 'any block of assets' is transferred,—
(a) by a holding company to its subsidiary company, or by a subsidiary company to its holding company and the conditions of cl. (iv) or, as the case may be, of cl. (v) of s. 47 are satisfied; or
(b) by the amalgamating company to the amalgamated company in a scheme of amalgamation, and the amalgamated company is an Indian company,
then, notwithstanding anything contained in cl. (i), the actual cost of the block of assets in the case of the transferee company or the amalgamated company, as the case may be shall be the WDV of the block of assets as in the case of transferor company or the amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year.
From the above provisions, it is clear that in the following cases the WDV of the assets or block of assets in the hands of the transferor company has to be adopted for the purpose of grant of depreciation in the hands of transferee company.
(1) where the transfer of block of assets is by a holding company to the subsidiary company or by a subsidiary company to holding company;
(2) by the amalgamating company to the amalgamated company in a scheme of amalgamation, and the amalgamated company is an Indian company.
In all other cases cl. (a) of sub-s. (6) of s. 43 applies, i.e. the actual cost to the assessee. In the case before us the bulk drugs unit of SPCL was taken over by the assessee company. It is not the case of the Revenue that it is the transfer of assets by a holding company to a subsidiary or by a subsidiary to the holding company or that it is a case of amalgamation. The AO has observed that the facts of the assessee's case are in a sense akin to a case of full fledged amalgamation and that the scheme of arrangement has been designed in such a manner so as to escape the definition of amalgamation but the substantial conditions have been fulfilled. He also observed that it is obvious from the scheme that the shareholders of SPCL holding not less than 9/10th in value of shares have to be shareholders of MPIL and that all fixed depreciable assets are secured loans and unsecured loans and most of the current assets and liabilities have been taken over and what is left behind is only a husk of the corporate entity. He has held that a miniscule portion of the assets and liabilities are retained by SPCL and therefore the scheme is nothing but the amalgamation though it does not cover the definition of amalgamation under s. 2(B) of the Act. This observation of the AO cannot be accepted. To consider a transaction as amalgamation, there has to be a complete merger of one or more company with another company or merger of two or more companies to form one company in such a manner that all the properties and liabilities of the amalgamating companies become the properties or liabilities of the amalgamated companies as defined in sub-s. (1B) of s. 2 of the IT Act. From the above it can be observed that in the case of an amalgamation the amalgamating company looses its identity and independent existence. All the assets and liabilities also have to be transferred. In the case before us, the assessee company has taken over the assets and liabilities of only one division of SPCL and SPCL has not lost its identity or independent existence. Therefore, it does not satisfy the conditions of amalgamation as laid down under sub-s. (1B) of s. 2 of the Act. Before the take over of the bulk drug unit there is no connection whatsoever between the two companies and the market value of the block of assets has been arrived at as per the valuation report of M/s Sabnis & Co. Therefore, it cannot be said that it is not genuine or is not at arm's length. In such a case, the WDV of the assets has to be the actual cost to the assessee. The decisions relied upon by the learned Departmental Representative are not applicable to the facts of the case before us, as they are cases relating to transfer of assets by a subsidiary company to its holding company and incorporation of a partnership firm into a limited company. In view of the same, we do not see any reason to interfere with the order of the CIT(A) and this ground of appeal is rejected."
33. The facts and circumstances under which the addition was deleted by CIT(A) in the earlier assessment year and the present assessment year being identical, respectfully following the decision of the Tribunal, we uphold order of CIT(A) and dismiss ground No. 3 of the Revenue. Consequently ground No. 3 raised by the Revenue is dismissed.
34. Ground No. 4 raised by the Revenue reads as follows :
"4. Erred in holding software development product expenses as revenue expenditure allowable under s. 37(1) of the IT Act ignoring that these are for enduring benefit and falling within the definition of plant."
35. During the previous year relevant to this asst. yr. 1997-98 the assessee incurred an expenditure of Rs. 32.90 lakhs for acquiring and /implementing software programme known as ERP package MFG Proversion 7.4f. The assessee claimed it to be a revenue expenditure whereas AO treated it as capital expenditure resulting in enduring benefit to the assessee. The AO also observed that the recent amendment made in the IT Act providing for one time exception with regard to expenditure towards Y2K compliance makes it clear that the intention of law is to treat software expenditure to be capital in nature. The assessee contended before CIT(A) that because of very high degree of obsolescence of computer software it cannot be said that anybody gets enduring benefit by acquiring the software programme. The assessee relied on printout taken from the official website of QAD, the original developers of MFG Pro-software, in which it was clearly mentioned that MFG provision 7.4f is currently in a retirement phase and urges its customers to upgrade this software in view of the fact that this version of the software is no longer being sold and it can be provided limited standard support on a best effort basis. It was submitted that the assessee company had to migrate from version 7.4 of the ERP software MFG Pro to version 9.1 (eB version) within a span of 4 years. In support of the contention that such software expenditure is revenue in nature the assessee relied on the following case law:
(i) Forbes Campbell & Co. Ltd. (ITA No. 8489/Bom/1988 and ITA No. 8785/Bom/1988, dt. 15th April, 1994);
(ii) Dy. CIT v. Lubi Electricals Ltd. [2003] 133 Taxman 113 (Ahd.)
36. The CIT(A) was of the view that expenditure incurred for acquiring and implementing the software programme cannot be treated as capital expenditure. Specific amendment made in support of the expenditure relating to Y2K compliance, referred to by the AO, cannot be taken as an expression of the intention of the Legislature to treat software expenditure as capital in nature. He held that any software programme becomes obsolete within a short time which requires to be replaced or upgraded and hence expenditure incurred for acquiring a software programme cannot be said to have conferred advantage of enduring nature to the customers. Regarding the software package acquired by the assessee, the CIT(A) was of the view that as per the information furnished, it became obsolete within a span of 4 years and hence no advantage of enduring nature was enjoyed by the assessee by incurring this expenditure. The AO was accordingly directed to allow deduction of Rs. 32.90 lakhs in computing the total income.
37. Before us learned Departmental Representative submitted that the Special Bench of Tribunal, Delhi in the case of Amway India Enterprises v. Dy. CIT [2008] 111 ITD 112 /21 SOT 1 has laid down principles as to when expenditure incurred on software can be considered as capital or revenue expenditure and the AO should be directed to consider the claim of the assessee in the light of the principles laid down by the Special Bench. The learned counsel for the assessee on the other hand, relied on the decisions of the Hon'bIe Delhi High Court in the case of CIT v. Asahi India Safety Glass Ltd. [2011] 203 Taxman 277/15 taxmann.com 382 and CIT v. Southern Roadways Ltd. [2008] 304 ITR 84/[2009] 183 Taxman 234 (Mad.). According to him the Honb'le Delhi High Court in the case of Asahi India Safety Glass Ltd. (supra) held that installation of software application for assistance in areas related to financial accounting, inventory and purchase was revenue expenditure. It was also submitted by him that the Hon'ble Delhi High Court in the case of CIT v. Amway India Enterprises [IT Appeal Nos. 1344 & 1363 of 2009] by judgment dt. 13th Sept., 2011 [reported at (2012) 65 DTR (Del) 313—Ed.] followed the decision in the case of Asahi India Safety Glass Ltd. (supra) and held that expenditures incurred on purchase of MS Office software, anti-virus software, Lotus notes software and message exchange application were revenue expenditure.
37.l We have considered the rival submissions. In our view the nature of the software and the purpose that the software will serve in the business of the assessee are important criteria laid down by the Special Bench of Tribunal to decide whether expenditure on purchase of computer software is capital or revenue expenditure. Therefore, the nature of the software and its role in business of the assessee have to be considered. The decisions relied upon by the learned counsel for the assessee were rendered in the context where there was no dispute that the softwares were used for the better running of the business of the assessee. We are, Therefore, of the view that it would be appropriate to set aside the order of the CIT(A) on this issue and remand the same to the AO for fresh consideration in the light of the principles laid down by the Special Bench in the case of Amway India Enterprises (supra).
38. Ground No. 5 raised by the assessee (sic—Revenue) reads as follows :
"Erred in directing deletion of loss of Rs. 5.7 crores from the computation of profit under s. 115JA ignoring the computation made by the assessee as per Companies Act."
38.1 Sec. 115JA(1) of the Act provides that where in the case of an assessee, being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st April, 1997 is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit. Sec. 115JA(2) of the Act provides for the manner in which book profits have to be calculated for the purpose of s. 115JA(1) of the Act. For asst. yr. 1997-98, the total income of the assessee computed under the normal provisions of the Act was less than the book profits computed as per s. 115JA(2) of the Act and therefore the said book profits will be the total income of the assessee chargeable to tax. The dispute raised by the Revenue in the aforesaid ground of appeal is with regard to the computation of book profits under s. 115JA of the Act.
39. The assessee computed book profits as per s. 115JA of the Act at Rs. 39,32,12,671. The AO noticed from the published accounts prepared as per Sch. VI to the Companies Act that the profit after tax was Rs. 45.02 crores. However, another set of accounts had been prepared and enclosed to the return of income along with a certificate from the auditor. The certificate explains the computation of book profits at Rs. 39,32,12,671 as follows :
"NIPL has acquired Bulk Drug Division of Sumitra Pharmaceutical & Chemicals Ltd. of Hyderabad. As per the Court orders the effective date of such acquisition was on 19th June, 1996. In the annual accounts of NPIL, the income and expenses in respect of B.D. Division for the period from 1st April, 1996 to 18th June, 1996 (pre-acquisition period) were adjusted against general reserve and were not incorporated in the P&L a/c of NIPL. For the purpose of submission to the IT authorities, NIPL has prepared a revised P&L a/c for the year ended 31st March, 1997, incorporating the income and expenses of B.D. Division for pre-acquisition period. We have verified the revised P&L a/c given in Annex. I and we state that the account gives a true and fair view of the profit of NIPL (after incorporating the income and expenses of B.D. Division for the period from 1st April, 1996 to 18th June, 1996) for the year ended 31st March, 1997."
40. On perusal of the above, the AO was of the view that the assessee has adopted different accounting practices when it came to furnishing of the financial results for the year to income-tax. In this regard the AO referred to the fact that in the notes to the published accounts the losses of bulk drug division which is acquired w.e.f. 1st April, 1995 (appointed date) have been set off against time revaluation reserve in the annual accounts put before the annual general meeting and submitted to all the other authorities. When it came to submission of the accounts to income tax, the accounting policy itself has been changed and the loss of the BDD of SPCL between the appointed date and the effective date had been incorporated tin the P&L a/c and thus the profit as per P&L a/c stood reduced. According to the AO, doing so was not in accordance with the provisions of s. 115JA of the Act. Therefore the AO called upon the assessee to explain the basis for such a change in computing the income under s. 115JA.
41. In reply the assessee submitted that cl. (i) of the Explanation to s. 115JA(2) provides that any amount withdrawn from any reserves or provisions, if any such amount is credited to the P&L a/c shall reduce the "book profits". It was submitted that the accounting effect of withdrawal from the general reserve for crediting it to the P&L a/c was achieved by the assessee by reducing losses amounting to Rs. 570.30 lakhs directly from the general reserve account which otherwise would have been debited to the company's published P&L a/c. The assessee explained that this was done to give effect to the specific provision for the scheme of arrangement whereby BDD of SPCL was taken over by the assessee. The assessee reiterated that the P&L a/c showing a profit of Rs.3,932,11 lakhs has been prepared in accordance with the provisions of s. 115JA(2). The assessee further brought to the notice of the AO proposed amendment in the Finance Bill, 2000 wherein under s. 115JB it was proposed that the annual accounts including P&L a/c—(i) the accounting policies; (ii) the accounting standards followed for preparing such accounts including P&L a/c; (iii) the method and rates adopted for calculating the depreciation, were required to be the same as have been adopted for their purposes of preparing such accounts including P&L a/c and laid before the company at its annual general meeting in accordance with the provisions of s. 210 of the Companies Act, 1956. Such a rigorous requirement is not available in s. 115JA. So long as the accounts are prepared in accordance with Sch. VI Parts II and III of the Companies Act, 1956 the requirements of s. 115JA are met with. The P&L a/c showing the "book profit" of Rs. 3,932.11 has been made upkeeping the existing provisions and requirements of s. 115JA(2). The assessee thus claimed that the book profits for the purpose of calculation of MAT should be Rs. 3,932.11 lakhs as shown in the computation of income.
42. The AO did not accept the assessee's argument He rejected the claim of the assessee that the accounting effect of withdrawal from the general reserve for crediting it to the P&L a/c has been achieved by reducing the losses directly from the general reserve account as factually incorrect. He held that the losses of BDD of SPCL between the appointed date and effective date have not been recognized in the corporate accounts. Such losses have been set off against the revaluation reserve created during the take over of the BDD from SPCL. He held that revaluation reserve created was a mere book entry and withdrawal from the said reserve for crediting it to the P&L a/c does not arise for consideration at all. He was of the view that the assessee was attempting to frustrate the intention of law. He held that the corporate accounting should be in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act and the Assessee is bound to adopt the same. He further held that the object of the legislation was only to find out the book profits according to the system adopted by the assessee. That can be achieved only if the P&L a/c is prepared in accordance with the method adopted by the assessee for corporate accounting. If the other method is permitted then the object of the Act would be frustrated.
43. Before CIT(A) the assessee submitted that under scheme of s. 115JA of the Act there was no prohibition for having two different accounts— one for the purpose of Companies Act, 1956 and the other for the purpose of s. 115JA of the IT Act. The only requirement under s. 115JA(2) is that the P&L a/c prepared for the purpose of s. 115JA should be in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act, 1956. It was argued that under the provisions of MAT the Legislature never intended that the P&L a/c prepared for corporate accounting has to be adopted in toto for the purpose of s. 115JA of the Act.
44. The CIT(A) was of the following view :
"18.2 As per the original provisions of s. 115J, a company was free to adopt either straight line method or WDV method of calculating depreciation to work out the figure of book profit. In the case of Nippon Denro Ispat Ltd. v. Dy. CIT (1998) 62 TTJ (Cal.) 544 : (1998) 67 ITD 205 (Cal.), the Calcutta Bench of the Tribunal upheld this position. It was only after introduction of s. 115JA(2) w.e.f. 1st April, 1997 that a company is required to follow the same method of calculating depreciation to arrive at book profit for purpose of s. 115JA as the method adopted for Company Law. It is significant to note that this amendment still left upon the possibility of following different accounting policies in respect of other incomes and expenses. It is only by introducing s. 115JB, in the place of s. 115JA w.e.f. 1st April, 2001 that it was made mandatory to follow the same accounting policies both for the Companies Act and MAT under the IT Act. The AO was not correct in holding that the provisions of s. 115JB were implied in s. 115JA.
18.3 The possibility of companies following different accounting policies in separate P&L a/c prepared for the Companies Act and prepared for s. 115J of the IT Act have been recognized by the Tribunal in the following cases :
(i) Asstt. CIT v. Bell Ceramics Ltd. (1999) 64 TTJ (Ahd.) 771 : (1999) 69 ITD 156 (Ahd.);
(ii) Nippon Denro Ispat Ltd. (supra);
(iii) Modern Woollens Ltd. v. Dy. CIT [1993] 47 ITD 154 (Bom.).
In the case of Nippon Denro Ispat Ltd. (supra) the Calcutta Bench noted the contrary view of the Pune Bench of the Tribunal in the case of Sudarshan Chemical Industries Ltd. v. Dy. CIT [1997] 57 TTJ (Pune) 718/(1997) 60 ITD 629 (Pune), referred to by the AO and concluded that s. 115J nowhere provides that net profit shown in the P&L a/c for corporate accounting should be adopted. The same principle applies with respect to s. 115JA also. In any case the decision in Sudarshan Chemical Industries Ltd. (supra), was based on a concession by counsel for the appellants that case and hence cannot be applied in other cases.
19. In the light of what is discussed above, the assessee was justified in claiming the loss of Rs. 5,70,29,630 in the computation of book profit under s. 115JA, even though the same adjusted against the general reserve in the published accounts represented before the shareholders. The AO is directed to compute the book profit under s. 115JA accordingly.
45. Aggrieved by the order of the CIT(A) the Revenue has appreciated (sic) ground N.. 5 before the Tribunal.
46. The learned Departmental Representative strongly placed reliance on the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273/122 Taxman 562 (SC) and submitted that the P&L a/c prepared for the purpose of the approval of the AGM of a company is conclusive for determining book profits under s. 115JA of the Act. The learned counsel for the assessee on the other hand submitted that s. 115JA(2) clearly lays down that every assessee being a company shall for the purposes of s. 115JA prepare its P&L a/c for the relevant previous year in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act, 1956. He pointed out that the proviso to s. 115JA(2) only lays down that in such P&L a/c so prepared the depreciation shall be calculated in the same method and rates at which it is calculated while preparing the P&L a/c laid before the company at its AGM in accordance with the provisions of s. 210 of the Companies Act, 1956. His submission was that preparation of a separate P&L a/c for the purpose of s. 115JA is not prohibited and it is not necessary that the very same P&L a/c prepared for the purpose of laying before the company at this AGM under s. 210 of the Companies Act should be adopted for the purpose of s. 115JA of the Act also. The only condition required to be complied as laid down in proviso to s. 115JA(2) is that while preparing the P&L a/c for the purpose of s. 115JA of the Act, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the P&L a/c laid before the company at its annual general meeting in accordance with the provisions of s. 210 of the Companies Act, 1956 (1 of 1956). He further pointed out that s. 115JB of the Act, which was introduced by the Finance Act, 2000 specifically provides in the second proviso to sub-s (2) thereof that the accounting policies and accounting standards adopted for preparing such accounts and P&L a/c and the method and rates adopted for calculating depreciation shall be the same as are adopted under the Companies Act, 1956. The learned counsel for the assessee pointed out that this deliberate departure in s. 115JB only goes to show that under s. 115JA the accounting policies and the Accounting Standards adopted under s. 115JA can be different from the one adopted for the purpose of the Companies Act, 1956. It was his further submission that the Hon'ble Supreme Court in the case of Apollo Tyres (supra) does not lay down any prohibition on having two accounts or two P&L a/c but only lays emphasis on the condition that the same should be prepared in accordance with the provisions of the Companies Act, 1956. The learned counsel for the assessee in this regard referred to the decision of the Hon'ble Supreme Court in the case of Marshall Sons & Co. (India) Ltd. v. ITO [1997] 223 ITR 809/[1996] 89 Taxman 619 wherein the Hon'ble Supreme Court held that when a scheme of amalgamation is sanctioned by Court the effective date from which the amalgamation shall take place is specified. Where such date is not specified but the scheme is sanctioned by the Court the date of amalgamation is the date specified in the scheme as date of transfer. The earned counsel for the assessee submitted that the date of transfer in this case was 1st April, 1997 but the effective date from which the business was actually transferred was 19th June, 1997. Therefore, for the period from 1st April, 1997 to 18th June, 1997 the losses of the amalgamated company namely M/s Sumitra Pharmaceuticals & Chemicals Ltd. (SPCL) ought to be treated as losses of the assessee and this was correctly given effect to in the P&L a/c filed by the assessee for the purpose of s. 115JA of the Act. Our attention was also brought to the fact that such P&L a/c was duly certified as true by the auditors.
47. The learned counsel for the assessee drew our attention to the lecision of the Hon'ble Gujarat High Court in the case of Dy. CIT v. Arvind Mills Ltd. [2009] 314 ITR 251/183 Taxman 189, wherein the Hon'ble Gujarat High Court took the view that P&L a/c prepared in accordance with Parts II and III of Sch. VI to Companies Act, 1956 for the purpose of s. 115JA of the Act which is different from P&L a/c placed before AGM is permissible. The Hon'ble Gujarat High Court considered the decision of the Hon'ble Supreme Court in the case of Apollo Tyres (supra) while so holding. The following other decisions laying down similar proposition were also referred to by the learned counsel for the assessee :
(1) CIT v. Surat Textile Mills Ltd. [2009] 317 ITR 367/[2010] 288 Taxman 158 (Guj.)
(2) CIT v. Prakash Industries Ltd. [2010] 324 ITR 391/194 Taxman 508 (Punj. & Har.)
(3) Swan Mills Ltd. v. Addl. CIT [2006] 6 SOT 420 (Mum.).
48. We have considered the rival submissions. We find force in the submissions of the learned counsel for the assessee. Admittedly the losses of SPCL were for the period from 1st April, 1997 to 18th June, 1997. As per the scheme sanctioned by the Hon'ble High Court, the date of transfer of SPCL was 1st April, 1997 and in accordance with law laid down by the Hon'ble Supreme Court in the case of Marshall Sons & Co. (supra) income of the amalgamating company from the date of transfer has to be assessed in the hands of the amalgamating company. Accordingly the loss of SPCL for the aforesaid period had to be taken into consideration. In the P&L a/c prepared in accordance with the provisions of Companies Act, 1956 the assessee has not shown this loss in the P&L a/c. In the P&L a/c and appropriation account a sum of Rs. 1 crore was transferred to general reserve account in the balance sheet. From this general reserve the loss incurred by SPCL from 1st April, 1997 to 18th June, 1997 was reduced. The effect of such book entries according to the learned counsel for the assessee would be the same as was done in the P&L a/c prepared for the purpose of s. 115JA of the Act. We do not wish to go into this aspect regarding the effect of such accounting entry as there was a revaluation reserve created on amalgamation. We are of the view that the P&L a/c prepared by the assessee for the purpose of s. 115JA of the Act has been duly certified by the chartered accountant. There is no complaint that the same is not in accordance with provisions of Part I and Part II of Sch. VI to the Companies Act, 1956. As rightly pointed out by the learned counsel for the assessee the only restriction in section 115JA(2) is regarding the depreciation which has to be in conformity with the method adopted under Companies Act. There is however, departure in s. 115JB(2) of the Act which provides that the accounting policies and Accounting Standards adopted while preparing P&L a/c for s. 115JB of the Act should correspond to the one adopted for the purpose of Companies Act, 1956. In that view of the matter we are of the view that the order of the CIT(A) has to be upheld. Accordingly ground No. 5 raised by the Revenue is dismissed.
49. Ground No. 6 raised by the Revenue reads as follows :
"Erred in directing to reduce an amount of Rs. 98.35 lakhs transferred to the reserves while computing profits under s. 115JA ignoring the computation made by the assessee as per Companies Act."
50. In computing the book profit the assessee had reduced an amount of Rs.98,50,000 from profit as per P&L a/c. This sum was shown as transfer to reserve in the profit and loss appropriation account. It was the claim of the assessee that this sum was transferred to the reserve account to meet liability on account of redemption of debentures issue by the assessee. According to the AO since the said amount was appropriation of the profits and since it was in the nature of application of income, the assessee was asked to explain as to how such an appropriation can be claimed as deductible from book profits for the year.
51. The assessee submitted that during the financial year 1996-97, the assessee company made a provision for transfer of a sum of Rs. 98,50,000 in respect of its ascertained future liability to redeem debentures issued by the company. The assessee pointed that in accordance with Explanation to sub-s. (2) of s. 115JA, "book profits" means the net profit as shown in the P&L a/c for the relevant previous year prepared in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act, 1956. If the book profits are arrived at after reducing amounts set aside to provisions then, such profits as per the Explanation shall be increased by the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities. Thus, in arriving at "book profit", if the profits do not include any amounts set aside for ascertained liabilities, the same shall have to be reduced from such book profits to arrive at the figure of chargeable book profits under s. 115 JA. Since the aforesaid sum of Rs. 98,50,000 has to be set aside to meet the liability on account of redemption of debentures to the debenture redemption reserve, it is for meeting ascertained liability to redeem/repay the debentures issued by it in the past and therefore it has to be reduced from the profits to arrive at book profits under s. 115JA of the Act. These debentures are redeemable in future and our company's liability to do so on specified dates in future is ascertained in accordance with the terms of redemption of these debentures. The assessee claimed that Explanation to s. 115JA(2) clearly permits reduction of the amounts transferred to debenture redemption reserve in arriving at the chargeable "book profits" under the said section. The assessee further pointed out that the term ascertained liabilities is not specifically defined in s. 115JA and therefore its meaning will have to be gathered from the meaning attached to it by the Companies Act, 1956. The words "provision" and "reserve" have been defined in Part III of Sch. VI to the Companies Act, 1956. The definition clearly indicates that if an amount is retained by way of providing for any known liability, that amount shall not be treated as "reserve". Assessee also cited the decision of the Supreme Court in the case of National Rayon Corpn. Ltd. v. CIT [1997] 227 ITR 764/93 Taxman 754.
52. The AO however did not agree with the above submissions of the assessee. He was of the view that the sum in question was transferred to reserve as part of the appropriation account. He did not agree with the contention of the assessee that the debenture redemption reserve is not a reserve as per the definition under Part III of Sch. VI to the Companies Act. He held that Part III of Sch. VI to the Companies Act, 1956 provides the definitions for the purpose of interpretation of Part I and Part II of the said Schedule. He referred to Part III of Sch. VI to the Companies Act, 1956 wherein it was stated as under :
"7(1) For the purpose of Parts I and II of this Schedule, unless the context otherwise requires -
(b) The expression 'reserve' shall not, subject as aforesaid, include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability.
Whereas, Part II of the Schedule deals with the requirements as to P&L a/c and it is provided in cl. 3(vii) that the P&L a/c. shall disclose :
(vii) The amount reserved for—
(a) repayment of share capital; and
(b) repayment of loans."
Based on the above, the AO was of the view that the amount set aside for redeeming the debentures is after all repayment of loan and therefore it is a reserve as per Parts II and III of Sch. VI to Companies Act. Therefore, assessee's contention that it was not a reserve was rejected by the AO. He further held that as per Explanation to s. 115JA(2) of the IT Act, the book profit has to be adjusted by increasing the net profit by "the amounts carried to any reserves by whatever name called". He also held that the assessee's reliance on the Supreme Court decision was also misplaced because the decision is with regard to the provisions of Companies (Profits) Surtax Act, 1964. Accordingly, the book profit was recomputed by disallowing the amount transferred to debenture redemption reserve.
53. Before CIT(A), the assessee pointed out that as per the various debenture trust deeds, the assessee was required to create a debenture redemption reserve of Rs. 1,055.80 lakhs for meeting its ascertained liability in future for redeeming the debentures. The assessee had created a reserve of Rs. 957.45 lakhs upto 31st March, 1996. For the year ended 31st March, 1997 the assessee transferred further sum of Rs. 98.35 lakhs to this reserve. In the published accounts for the year this was shown as appropriation from the P&L a/c. In the computation of book profit for purpose of s. 115JA, the assessee reduced this amount from the book profit. According to the assessee this was nothing but a provision made to meet the ascertained liability in future and hence should not be included in the book profit.
54. CIT(A) agreed with the contention of the assessee that the provisions of Parts II and III of Sch. VI to the Companies Act, relied upon by the AO, do not support his finding that the amount in question was a reserve. Part III clearly laid down that "reserve" shall not include any amount retained by way of providing for any known liability. The amount of Rs. 98.35 lakhs transferred to the DRR was the amount retained by way of providing for the known liability of repayable debentures in future. He was of the view that liability on account of redemption of debentures was known liability of the assessee. Therefore the amount of Rs. 98.35 lakhs cannot be characterized as reserve within the meaning of Part III of Sch. VI to the Companies Act. He also held that Part II of the Schedule, quoted by the AO in the assessment order, deals with what should be disclosed in P&L a/c and does not say what constitutes a reserve. He also agreed with the submission of the assessee that the amount transferred to DRR represented the provision made for meeting an ascertained liability, namely the debentures. He was of the view that the decision of the Supreme Court in the case of National Rayon Corporation Ltd. (supra) supported the claim of the assessee. He held that the basic principle laid down in that case was that liability on account of redemption of debentures was a known liability and that any amount retained by way of providing for such known liability will not be "reserve". That principle would apply to the case of the assessee and if the liability on account of redemption of debentures in question is treated as ascertained liability, the amount transferred to the DRR should be treated as provision made for known liability but not a reserve created. Therefore the amount of Rs. 98.35 lacs should be excluded from the book profit as provided in cl. (c) of the Explanation to s. 115JA of the IT Act. The AO was directed to compute the book profit accordingly.
55. Aggrieved by the order of the CIT(A), the Revenue has raised ground No 6 before the Tribunal. We are of the view that the order of the CIT(A) on this issue has to be upheld and the reliance placed by the Departmental Representative on the order of the AO cannot be accepted. As rightly held by the CIT(A) the amount in question cannot be said to be a reserve but was only a provision. The liability for which such provision was made was an ascertained or known liability and, therefore, amount was to be reduced from the profit as per P&L a/c prepared in accordance with provisions of Companies Act, 1956 to arrive at the book profits under s. 115JA of the Act. Consequently ground No. 6 raised by the Revenue is dismissed.
56. Ground Nos. 7 and 8 raised by the Revenue read as follows :
"(7) Erred in deleting addition of Rs. 44.06 lakhs on account of security deposit taken on the account of bogus lease transaction disclosed by the assessee under VDIS and KVSS by admitting fresh grounds of appeal.
(8) Erred in directing to delete provisions for leave encashment while computing profits under s. 115JA ignoring that these are unascertained liabilities."
57. Before CIT(A) the assessee raised the following additional grounds of appeal in the course of hearing of the appeal:
(i) That the AO erred in not excluding short-term capital gain of Rs. 44,06,615 being capital gains arising on sale of assets leased in pursuance of lease agreement which was held to be not operative.
(ii) That the AO erred in computing the book profit as per Explanation to s. 115JA of the IT Act by adding an amount of Rs. 19,02,000 being provision for leave encashment treating it as contingent liability.
58. The CIT(A) forwarded the additional grounds to the AO for his comments. After taking into account the comments of the AO and the argument of the assessee on the additional grounds of appeal, the CIT(A) gave the following findings as given below :
59. Short-term capital gain :
The assessee had entered into certain lease transaction during the financial year 1993-94 relevant to the asst. yr. 1994-95. The details of these lease transactions were as under :
(a) Cost of the assets leased Rs. 1,04,48,708
(b) Date of purchase 25-9-1993
(c) Outstanding security deposit in respect of the lease during financial year 1996-97 (asst. yr. 1997-98) Rs. 44,06,615
(d) Depreciation claimed 50% in asst. yr. 1994-95
50% in asst. yr. 1995-96
60. Treating the lease transaction to be not genuine the AO disallowed depreciation on the leased assets for the asst. yr. 1994-95 which was confirmed by the CIT(A). However, availing of the KVSS, 1998 for the asst. yr. 1994-95 and VDIS, 1997 for the asst. yr. 1995-96, the assessee offered for assessment the amount of depreciation claimed on the asset in question. In other words, the assessee withdrew the claim of depreciation mentioned above for these two assessment years. Consequent to that the assessee terminated the lease agreement during the asst. yr. 1996-97 and forfeited the outstanding security deposit of Rs. 44,06,615 as on the date of termination of the lease agreement.
61. By the time the original return of income for asst. yr. 1997-98 was filed on 31st Dec., 1997, the security deposit of Rs. 44,06,615 was forfeited as a result of terminating the lease agreement on 11th March, 1997. However, by that time the assessee had not offered for assessment the depreciation claimed for asst. yrs. 1994-95 and 1995-96 under the KVSS and VDIS mentioned above. Therefore, in the return of income the forfeited security deposit of Rs. 44,06,615 was offered for assessment as short-term capital gain as per provisions of s. 50 of the IT Act since the WDV of leased assets became nil after claiming 100 per cent depreciation. The assessee claimed that since the entire lease transactions had been reduced as inoperative and the entire depreciation on the leased assets claimed earlier were offered to tax by availing of the KVSS and VDIS, the forfeited outstanding security deposit of Rs. 44,06,615 was nothing but return of the assessee's capital on which levying of short-term capital gain did not arise. In this view of matter the assessee argued that the short-term capital gain of Rs. 44,06,615 should be deleted from the total income assessed. In his assessment order the AO, stated that there was no case to exclude this short-term capital gain, arising out of the forfeited outstanding security deposit, from the total income assessed. The AO observed that the assessee was not clear in his contention that the lease agreement was inoperative. According to the AO the short-term capital gain was leviable because as per the assessee's books the assets existed, they were sold and the assessee received payment by cheque.
62. On the above facts and stand of the AO, the CIT(A) was of the view that there was no question of levying any short-term capital gain on the forfeited amount of outstanding security deposit after the assessee offered for assessment the depreciation claimed for the asst. yrs. 1994-95 and 1995-96 under the KVSS and VDIS respectively. When the depreciation was not allowed on the assets in question and the assessee was not held to be the owner of the assets, the question of charging short-term capital gain on sale of the assets, by way of forfeiting the outstanding security deposit did not arise. Charging short-term capital gain on the assets in question runs counter to the scheme of KVSS and VDIS under which the assessee paid taxes by withdrawing the claim for depreciation on the assets. The AO was, therefore, directed to exclude short-term capital gain of Rs. 44,06,615 from the total income assessed.
63. Aggrieved by the order of the CIT(A), the Revenue has raised ground No. 7 before the Tribunal.
64. Provision for leave encashment on computation of book profit under s. 115JA: The claim of the assessee was that the liability on account of provision for leave encashment was a known and ascertained liability in view of the Supreme Court decision in the case of Dharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61, and provision for leave encashment cannot be treated as contingent liability. The CIT(A) agreed with the stand of the assessee and held that the said liability should be treated as allowable deduction from the profits of the assessee and consequently in computing the book profit under s. 115JA also it should be treated as allowable deduction and hence should be excluded from the book profit. The AO was directed to allow deduction of Rs. 19,02,200 in computing the book profit for purpose of s. 115JA.
65. Aggrieved by the order of the CIT(A), the Revenue has raised ground No. 8 before the Tribunal.
66. We have heard the submissions of the learned Departmental Representative as well the learned counsel for the assessee on ground Nos. 7 and 8. The learned Departmental Representative could not controvert the factual position as emanating from the order of the CIT(A) as far as ground No. 7 is concerned. As far as ground No. 8 is concerned provision for leave encashment is ascertained liability as held by the Hon'ble Supreme Court in the case of Bharat Earth Movers (supra).
We, therefore, do not find any ground to interfere with the order of the CIT(A). Consequently ground Nos. 7 and 8 of the Revenue are dismissed.
67. C.O. No. 119/Mum/2002:
Ground No. 1 raised in the cross-objection reads as under:
"1. The CIT(A) erred in upholding the disallowance of Rs. 67,91,000 claimed as project expenses.
2. The appellant prays that aforesaid expenditure may be allowed as a deduction in computation of the taxable income."
68. The following expenses incurred by the assessee were claimed as revenue expenditure whereas the AO treated it as capital expenditure :
(i) Rs. 44.94 lakhs paid to various professional and consulting agencies like National Institute of Technology, obtaining assistance from these institutions in respect of better and improved method of producing bulk drugs and pharmaceutical formulation products.
(ii) Rs. 12.74 lakhs spent on travelling of senior executives to Vietnam for exploring the preliminary feasibility for setting up the plant there.
(iii) Rs. 10.23 lakhs paid to various professionals for rendering services by way of suggesting improvements in the bulk drug plant at Hyderabad.
69. According to the assessee, the AO treated the expenditure as capital expenditure without any discussion or reasons. The assessee claimed before CIT(A) that the expenses of Rs. 44.94. lakhs and Rs. 10.23 lakhs mentioned were incurred to improve the productivity of the manufacturing facilities and hence it should be treated as revenue expenditure. The expenditure for travel to Vietnam was incurred in connection with the plans to expand the existing business of pharmaceuticals by setting up a factory there. It was argued that such expenditure incurred for expanding the existing business should be treated only as a revenue expenditure.
70. The CIT(A) was not convinced with the arguments advanced by the assessee. He held that any expenditure claimed to be revenue in nature should be proved to have been incurred for purpose of the business. But no evidence has been let by the assessee to show that the amounts of Rs. 44.94 lakhs and Rs. 12.74 lakhs were expenses incidental to the business of the bulk drugs and pharmaceuticals formulations and hence they were rightly treated as capital expenses. He also held that travelling expenses to Vietnam have also not been proved to have been incurred for purpose of the assessee's business. The disallowances of these expenses were therefore, confirmed.
71. Aggrieved by the order of the CIT(A), the assessee has raised ground No. 1 in cross-objection. We are of the view that the assessee had not given enough information on the nature of expenses. Admittedly fees were in respect of new project and its relevance to the existing business of the assessee could not be established by the assessee. We, therefore, do not find any ground to interfere in the order of the CIT(A). Ground No. 1 raised in the cross-objection is dismissed.
72. Ground No. II of the cross-objection reads as under :
"1 The CIT(A) erred in upholding the disallowance of Rs. 8,19,005 claimed as machinery shifting expenses.
2. The appellant prays that the disallowance be directed to be deleted."
73. It was fairly accepted by the parties that the issue has to be decided against the assessee following the ratio laid down by the Hon'ble Supreme Court in the case of Sitalpur Sugar Works Ltd. v. CIT [1963] 49 ITR 160 wherein it was held that the expenditure incurred on shifting of factory would be a capital expenditure. Consequently ground No. II raised in the cross-objection is dismissed.
74. The assessee has filed an application seeking to raise the following additional grounds :
"1. The Dy. CIT erred in not granting depreciation on Rs. 13,73,793 being amount capitalized in asst. yr. 1989-90 out of repairs to building.
2. He failed to appreciate and ought to have held that since certain amount of repairs to building were disallowed by treating it as capital expenses, it was incumbent on him to allow depreciation on the same.
3. The appellant prays that the Dy. CIT be directed to grant depreciation pertaining to repairs capitalized in asst. yr. 1989-90."
75. The additional ground being purely legal, requiring no examination of new facts and being purely consequential is admitted for adjudication. The AO is directed to grant depreciation after considering capitalized value of the repairs of the building after verification.
76. In the result, the appeal by the Revenue is partly allowed while the cross-objection by the assessee is partly allowed for statistical purposes.
IT : Interest income from share application money is inextricably linked with requirement of company to raise share capital and, thus, adjustable towards expenditures involved for share issue
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[2013] 32 taxmann.com 296 (Gujarat)
HIGH COURT OF GUJARAT
Commissioner of Income-tax-IV
v.
Shree Rama Multi Tech Ltd.*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
TAX APPEAL NO. 235 OF 2012†
DECEMBER 18, 2012
Section 35D of the Income-tax Act, 1961 - Preliminary expenses - In impugned judgment Tribunal had allowed benefit of set off of interest income from share application money against public issue expenses following decision of High Court in Asstt. CIT v. Panama Petrochem Ltd. [Tax Appeal No. 315 of 2010, dated 26-7-2011] - In said decision High Court had held that assessee was statutorily required to keep share application money in separate account till allotment of shares was completed and interest earned on such separately kept amount was adjusted towards expenditure for raising share capital - Therefore, interest earned was inextricably linked with requirement of company to raise share capital and thus adjustable towards expenditures involved for share issue - Whether issue being covered by said decision, no question of law arose - Held, yes [Para 4] [In favour of assessee]
CASE REVIEW
Asstt. CIT v. Panama Petrochem Ltd. [Tax Appeal No. 315 of 2010, dated 26-7-2011] (para 4) followed.
Ms. Paurami B. Sheth for the Appellant. S.N. Soparkar and Bandish Soparkar for the Respondent.
ORDER
Akil Kureshi, J. - Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal ('Tribunal' for short) dated 21.10.2011 raising following questions for our consideration:
| "A. | Whether the Appellate Tribunal has substantially erred in setting aside the issue of set off of interest income from share application money against public issue expenses? | |
| B. | Whether the Appellate Tribunal has substantially erred in setting aside the issue of disallowance u/s.35D of the Act? | |
| C. | Whether the Appellate Tribunal has substantially erred in directing to allow the deduction u/s 80IA of the Act on income on account of Exchange rate fluctuation, Excise credit, Kasar/vatav and Excess provision written back of bonus? | |
| D. | Whether the Appellate Tribunal has substantially erred ion setting aside the issue of disallowance out of shares and debentures issue expenses?" |
2. Considering the issues involved, we have heard learned counsel Ms. Sheth for the Revenue and Senior advocate Shri Soparkar with Shri Bandish Soparkar for the respondent-assessee appearing on caveat who waived notice of final disposal of the appeal.
3. So far as question 'A' is concerned, we notice that the Tribunal had in the impugned judgment allowed the benefit of set off of interest income from share application money. The Tribunal followed the decision of this Court in Tax Appeal No.315 of 2010. In the said decision in para 11, this Court had made following observations :
"11. Coming back to the facts of the case, we may reiterate that the assessee was statutorily required to keep share application money in the separate account till the allotment of shares was completed. Interest earned on such separately kept amount was adjusted towards expenditure for raising share capital. We are therefore, of the opinion that interest earned was inextricably linked with requirement of company to raise share capital and was thus adjustable towards the expenditures involved for the share issue. Line of decisions of Apex Court in case of Bokaro Steel Ltd.(supra), Karnal Co-operative Sugar Mills Ltd. (supra) and Bongaigaon Refinary and Petrochemicals Ltd. (supra), would closely match with the facts of the present case. We do not find that tribunal committed any error in confirming the view of CIT(Appeals)."
4. The issue being covered by the said decision, no question of law arises.
5. With respect to question 'B', counsel for the Revenue rightly pointed out that the Tribunal remanded the issue for fresh consideration erroneously relying on a remand order passed in Tax Appeal No. 667/05 for the assessment year 2001-02. She pointed out that such issue had reached the Tribunal after a round of remand and full consideration by the Assessing Officer and CIT(Appeals). The Tribunal was, therefore, required to examine the issue on merits and give its decision. Such issue, therefore, shall have to be placed back before the Tribunal for consideration on merits.
6. With respect to question 'C', we are of the opinion that the Tribunal has granted certain benefits as claimed by the assessee for deduction under section 80IA of the Act without full discussion. These issues are also placed back before the Tribunal for consideration on merits and disposal by a speaking order. We are informed that while considering the assessee's claims under section 80IA of the Act, the Tribunal has not given any specific verdict on some of the issues raised at the hands of the assessee in rectification application. We are sure, the Tribunal will consider the same and take steps on such application irrespective of the order in this appeal.
7. With respect to question 'D', we notice that the Tribunal has remanded the issue once gain relying on a remand in the case of this very assessee for another year. Here also, the issue had been discussed and decided by the Assessing Officer and the CIT(Appeals) on merits. The Tribunal, therefore, would have to judge issue on merits rather than remanding the issue all over again.
8. Under the circumstances, Tax Appeal is disposed of placing back the issues involved in questions B, C and D before the Tribunal for consideration on merits and disposal afresh in accordance with law. Tax Appeal is disposed of accordingly.
LATA IT : Where assessee claimed deduction under section 80-IB(10) on development of a housing project on land not owned by it, it was entitled for deduction as prayed for
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[2013] 32 taxmann.com 291 (Gujarat)
HIGH COURT OF GUJARAT
Commissioner of Income-tax, Ahmedabad -IV
v.
Mahadev Developers*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
TAX APPEAL NO. 570 OF 2012†
JANUARY 28, 2013
Section 80-IB of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings other than infrastructure development undertakings [Housing project] - Assessee claimed deduction under section 80-IB(10) on development of a housing project - Assessing Officer disallowed claim of deduction on ground that assessee had not developed housing project, as land was not owned by it - Tribunal having noticed that (i) as per development agreement assessee had to incur and bear all expenses for development of land, and (ii) it had right to allot possession of constructed units to members of housing project after developing housing project, allowed claim of deduction - Whether Tribunal was justified in its view - Held, yes [Para 2][In favour of assessee]
CASE REVIEW
CIT v. Radhe Developers [2012] 341 ITR 403/204 Taxman 543/17 taxmann.com 156 (Guj.) (para 2) followed.
CASES REFERRED TO
CIT v. Radhe Developers [2012] 341 ITR 403/204 Taxman 543/17 taxmann.com 156 (Guj.) (para 2).
Varun K. Patel for the Appellant.
ORDER
Akil Kureshi, J. - Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal dated 20th April 2012 raising following question for our consideration :
"Whether, in the facts and circumstances of the case, the Income Tax Appellate Tribunal has erred in law in deleting the addition of Rs.59,47,889/- made under section 80IB(10) of the Income Tax Act, 1961?"
2. Issue pertains to deduction claim by the assessee under section 80IB(10) of the Act on development of a housing project. Revenue, however, holds a belief that the respondent-assessee had not developed the housing project on the ground that the land was not owned by the assessee. The Tribunal, however, held that as per the development agreement, the assessee had to incur and bear all expenses for development of the land. The assessee had the right to allot possession of the constructed units to the members of the housing project after developing the housing project. The Tribunal relied on the decision of this Court in the case of CIT v. Radhe Developers [2012] 341 ITR 403/204 Taxman 543/17 taxmann.com 156 (Guj.) in which this Court had upheld the decision of the Tribunal under similar circumstances making following observations:
"34. We have reproduced relevant terms of development agreements in both the sets of cases. It can be seen from the terms and conditions that the assessee had taken full responsibilities for execution of the development projects. Under the agreements, the assessee had full authority to develop the land as per his discretion. The assessee could engage professional help for designing and architectural work. Assessee would enroll members and collect charges. Profit or loss which may result from execution of the project belonged entirely to the assessee. It can thus be seen that the assessee had developed the housing project. The fact that the assessee may not have owned the land would be of no consequence.
35. With respect to the question whether the assessee had acquired the ownership of the land for the purposes of the Income Tax Act and, in particular, Section 80IB (10) of the Act and to examine the effect of Explanation to Section 80IB(10) introduced with retrospective effect from 1.4.2001, since several aspects overlap, it would be convenient to discuss the same together.
36. We have noted at some length, the relevant terms and conditions of the development agreements between the assessees and the land owners in case of Radhe Developers. We also noted the terms of the agreement of sale entered into between the parties. Such conditions would immediately reveal that the owner of the land had received part of sale consideration. In lieu thereof he had granted development permission to the assessee. He had also parted with the possession of the land. The development of the land was to be done entirely by the assessee by constructing residential units thereon as per the plans approved by the local authority. It was specified that the assessee would bring in technical knowledge and skill required for execution of such project. The assessee had to pay the fees to the Architects and Engineers. Additionally, assessee was also authorized to appoint any other Architect or Engineer, legal adviser and other professionals. He would appoint Sub-contractor or labour contractor for execution of the work. The assessee was authorized to admit the persons willing to join the scheme. The assessee was authorised to receive the contributions and other deposits and also raise demands from the members for dues and execute such demands through legal procedure. In case, for some reason, the member already admitted is deleted, the assessee would have the full right to include new member in place of outgoing member. He had to make necessary financial arrangements for which purpose he could raise funds from the financial institutions, banks etc. The land owners agreed to give necessary signatures, agreements, and even power of attorney to facilitate the work of the developer. In short, the assessee had undertaken the entire task of development, construction and sale of the housing units to be located on the land belonging to the original land owners. It was also agreed between the parties that the assessee would be entitled to use the the full FSI as per the existing rules and regulations. However, in future, rules be amended and additional FSI be available, the assessee would have the full right to use the same also. The sale proceeds of the units allotted by the assessee in favour of the members enrolled would be appropriated towards the land price. Eventually after paying off the land owner and the erstwhile proposed purchasers, the surplus amount would remain with the assessee. Such terms and conditions under which the assessee undertook the development project and took over the possession of the land from the original owner, leaves little doubt in our mind that the assessee had total and complete control over the land in question. The assessee could put the land to use as agreed between the parties. The assessee had full authority and also responsibility to develop the housing project by not only putting up the construction but by carrying out various other activities including enrolling members, accepting members, carrying out modifications engaging professional agencies and so on. Most significantly, the risk element was entirely that of the assessee. The land owner agreed to accept only a fixed price for the land in question. The assessee agreed to pay off the land owner first before appropriating any part of the sale consideration of the housing units for his benefit. In short, assessee took the full risk of executing the housing project and thereby making profit or loss as the case may be. The assessee invested its own funds in the cost of construction and engagement of several agencies. Land owner would receive a fix predetermined amount towards the price of land and was thus insulated against any risk."
3. In the result, Tax Appeal is dismissed.
SKJAs addition have been confirmed by ITAT , the loss of Rs. 38,02,820 has been wiped out in A.Y. 2004-5 itself. So, link records of subsequent years and rectfy the order correspondingly. There are chances that if subsequent returns are not selected for scrutiny.
[2013] 30 taxmann.com 355 (Chennai - Trib.)
IN THE ITAT CHENNAI BENCH 'B'
EDAC Engineering Ltd.
v.
Deputy Commissioner of Income-tax, Co. Circle V(i) Chennai*
ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
AND V. DURGA RAO, JUDICIAL MEMBER
AND V. DURGA RAO, JUDICIAL MEMBER
IT APPEAL NO. 1140 (MDS.) OF 2008
[ASSESSMENT YEAR 2004-05]
[ASSESSMENT YEAR 2004-05]
JANUARY 17, 2013
I. Section 28(i) of the Income-tax Act, 1961 - Business loss/deductions - Allowable as - Expected loss - Assessment year 2004-05 - Whether booking of expected loss, when circumstances are adverse, might be warranted in terms of Accounting Standards, as a matter of conservatism; but, for tax purposes, it is a cardinal principle that only expenses incurred or losses suffered could be allowed - Held, yes - Assessee, a contractor, was recognizing revenue based on percentage completion method - It claimed expected loss on grounds that contracts had no escalation clause and price of steel and cost of wages and spares had increased manifold - Whether since there was no legal right on any person for claiming a cost which was still to be incurred, said loss could not have been allowed - Held, yes [Para 7] [In favour of revenue]
II. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Staff welfare expenses - Assessment year 2004-05 - Assessee incurred staff welfare expenditure and claimed deduction - Assessing Officer disallowed claim on ground that break-up of expenditure was not given - Assessee had explained expenses - There was no finding of Assessing Officer that assessee had not recorded such expenditure in its books under head 'others' - Whether just because break up of expenditure had not been produced, disallowance could not have been made and, thus, matter be remanded to Assessing Officer - Held, yes [Para 11] [Matter remanded]
III. Section 36(1)(vii) of the Income-tax Act, 1961 - Bad debts - IllustrationsAssessment year 2004-05 - Assessee claimed a sum as bad debt - However, records showed that lower amount was due from concerned party - Whether, therefore, sum to extent recorded only could be allowed as bad debt - Held, yes [Para 12] [Partly in favour of assessee]
FACTS - I
Facts
| • | Assessee, a contractor, was recognizing revenue based on percentage completion method. | |
| • | It claimed a certain sum as expected loss on the ground contracts had no escalation clause and price of steel and cost of wages and spares had increased manifold. | |
| • | However, the Assessing Officer was of the opinion there was no crystallized liability. It was in nature of provision, which could not be allowed even for computing book profit. He disallowed the claim. | |
| • | The Commissioner (Appeals) held that the disallowance was rightly made by the Assessing Officer. |
Arguments of assessee
| • | When it was probable that the total contract cost would exceed the total contract revenue, expected loss had to be recognized as an expense. |
Issue involved
| • | Whether claim of loss not yet incurred in respect of a contract was allowable? |
HELD - I
Expected loss is an anticipated future loss
| • | It is an admitted position that loss expected was not yet incurred. May be it true that the cost of steel and other inputs had increased manifold, but assessee was recognizing income based on percentage completion method. If the actual cost was booked in accordance with percentage completion method, then such actual cost would include expenses incurred for the percentage of work done. Or in other words all costs incurred stood recognized and charged. Thus, expected loss is nothing but an anticipated loss that might arise in future. It is based on expected completion cost. If estimated costs are allowed as period expenditure, matching concept will not be satisfied. No doubt, AS-7 at paragraph 21 says that when probable contract cost would exceed total contract revenue, expected loss should be recognized immediately. This is only a principle of conservatism generally followed in mercantile system of accounting as a measure of abundant precaution. It does not mean that such costs have already incurred. |
Conclusion
| • | There is no legal right on any person for claiming a cost from the assessee, which is still to be incurred. Booking of expected loss, when circumstances are adverse, might be warranted in terms of Accounting Standards, as a matter of conservatism; However for tax purposes, it is a cardinal principle that only expenses incurred or losses suffered could be allowed. If assessees are allowed to consider future costs as a current period expense, then there will be few assessees left, who are liable to pay any tax. No tax regime can work based on subjective estimations and future exigencies which are not amenable to a reasonable determination. [Para 7] |
CASE REVIEW
CIT v. Virtual Soft Systems Ltd. [2012] 341 ITR 593/205 Taxman 257/18 taxmann.com 119 (Delhi) and CIT v. Secit Spa Societa Ecologoca [2009] 316 ITR 378(Mad.) (para 7) distinguished
CASES REFERRED TO
State Bank of Patiala v. CIT [1996] 219 ITR 706/85 Taxman 416 (SC) (para 4), CIT v. Virtual Soft Systems Ltd. [2012] 341 ITR 593/205 Taxman 257/18 taxmann.com 119 (Delhi) (para 5) and CIT v. Secit Spa Societa Ecologoca [2009] 316 ITR 378 (Mad.) (para 5).
S. Sridhar for the Appellant. Dr. S. Moharana for the Respondent.
ORDER
Abraham P. George, Accountant Member - This appeal of the assessee has been filed with a delay of 31 days. Assessee has filed a condonation petition. Reasons shown are justifiable and hence delay is condoned and appeal admitted. This appeal, which is directed against an order dated 03.01.2008 of Commissioner of Income Tax(appeals)-V, Chennai, has raised four effective grounds.
2. First is with regard to the addition of a provision of Rs. 47,18,514/- for expected loss on contracts.
3. Short facts apropos of the fact are that assessee engaged in engineering construction business, had filed return for impugned assessment year declaring loss of Rs. 38,02,820/-. Book profit for MAT was computed at Rs. 52,22,890/-. Return filed was appended with Profit & Loss Account, Balance Sheet as well as Audit Report under section.44AB of the Income Tax Act, 1961 (In short 'the Act'). During the course of assessment proceedings, it was noted by the Assessing Officer that assessee had debited in its Profit & Loss Account an item of expenditure called "expected loss" Rs. 47,18,514/-. When required to explain, assessee gave the following break-up.
"Detail break-up.
| Description | Amount | |
| V A TECH WABAG Ltd. | 667,197 | |
| ASGEC MYSORE SUGARS | 670,562 | |
| CHENNAI PETROLEUM CORPORATION LTD | 354,236 | |
| BHEL,TARAPORE | 826,519 | |
| ALSTHOM | 2,200,000 | |
| Total | 4,718,514 |
Submission of the assessee was that total contract cost would exceed total contract revenue in respect of the above parties and hence, it was required to recognize such loss as an expense for the relevant previous year. Assessee also justified the book profit computed under section 115JB, which was after considering such debit of expected loss. However, Assessing Officer was of the opinion that this was a claim of expenditure, which was not incurred. There was no crystallized liability. Therefore, according to him, it was in the nature of a provision which could not be allowed, even for calculating the book profit under section 115 JB. Such a provision could not be allowed for normal income computation also. As per Ld. Assessing Officer, it was an amount set aside to meet unascertained liabilities. In this view of the matter, he disallowed the claim of Rs. 47,18,514/-.
4. Assailing the above before the CIT(A), assessee argued that when income was accounted on accrual basis, related expenditure/loss had to be accounted based on principles of matching concept. Though termed as expected loss, it was nothing but an actual loss. As per the assessee, it was doing contract works in which steel was one of the main items. An increase in cost of steel had considerable bearing on the financial results. Similar was the case of diesel prices, and wages. There were no escalation clause in the contract with clients. Relying on the decision of Hon'ble Apex Court in the case of State Bank of Patiala v. CIT[1996] 219 ITR 706/85 Taxman 416, assessee submitted that when a liability was known or anticipated, it could be provided. However, CIT(A) was not impressed. According to him, accrual system recognized the point of time at which liability was crystallized; expenses claimed by the assessee were only likely but not definite. It was nothing, but a contingent liability. Thus, according to him, the disallowance was rightly made by the Assessing Officer.
5. Now before us, Ld. A.R strongly assailing the orders of the lower authorities submitted that there was no escalation clause in the contracts entered by the assessee with the various parties. Revenue and expenses were to be recognized in the books, when the work to which they related was performed, as long as the going was good. However, if the circumstances were adverse, which would result in a loss, i.e, when expected contract cost was in excess of contract revenue, it had to be recognized immediately. According to him, when it was probable that the total contract cost would exceed the total contract revenue, expected loss had to be recognized as an expense. Ld. A.R submitted that assessee was following the project completion method. It was mandatory to follow Accounting Standards-7 (AS-7) of the Institute of Chartered Accountants of India. Accordingly expected loss was debited in the Profit & Loss Account. To prove that loss claimed were correctly ascertained, Ld. A.R submitted a project status statement as on 31.03.04. Ld. A.R submitted that expected loss was correctly worked out considering the price increases and absence of escalation clause in the respective contracts. Reliance was placed on the decision of Hon'be Delhi High Court in the case of CIT v. Virtual Soft Systems Ltd [2012] 341 ITR 593/205 Taxman 257/18 taxmann.com 119 and also that of Hon'ble jurisdictional High Court in the case of CIT v. Secit Spa Societa Ecologoca [2009] 316 ITR 378 (Mad.). As per Ld. A.R, in the latter case Tribunal had remitted the matter back to the Assessing Officer for determining the stage to which project was completed and allowing the claim of expenditure accordingly, and this was upheld.
6. Per contra, Ld. D.R strongly supported the order of the CIT(A).
7. We have heard the rival contentions and perused the orders of the lower authorities. Admittedly, assessee was doing contract work and it was recognizing revenue based on percentage completion method. Assessee had debited expected loss of Rs. 47,18,514/- in its profit and loss account. As per the assessee, contracts had no escalation clause and price of steel, cost of wages and spares had increased manifold. It is an admitted position that loss expected was not yet incurred. May be it true that the cost of steel and other inputs had increased manifold, but assessee was recognizing income based on percentage completion method. If the actual cost was booked in accordance with percentage completion method, then such actual cost would include expenses incurred for the percentage of work done. Or in other words all costs incurred stood recognized and charged. Thus, expected loss is nothing but an anticipated loss that might arise in future. It is based on expected completion cost. In our opinion, if estimated costs are allowed as period expenditure, matching concept will not be satisfied. No doubt, AS-7 at pagragraph-21 says that when probable contract cost would exceed total contract revenue, expected loss should be recognized immediately. This is only a principle of conservatism generally followed in mercantile system of accounting as a measure of abundant precaution. It does not mean that such costs have already incurred. There is no legal right on any person for claiming a cost from the assessee, which is still to be incurred. Booking of expected loss, when circumstances are adverse, might be warranted in terms of Accounting Standards, as a matter of conservatism. However for tax purposes, it is a cardinal principle that only expenses incurred or losses suffered could be allowed. If assessees are allowed to consider future costs as a current period expense, then there will be few assessees left, who are liable to pay any tax. No tax regime can work based on subjective estimations and future exigencies which are not amenable to a reasonable determination. In our opinion the case of Secit Spa Societa Ecologoca (supra) relied on by the assessee, is really in favour of Revenue. There also, claim of estimated loss was rejected and Hon'ble Jurisdictional High Court held that it was rightly done so. Situation in our opinion, is very same whether computation is with regard to the total income as per the Act or Book profit as per Sec.115JB of the Act. Coming to the decision in the case ofVirtual Soft systems Ltd (supra) Hon'ble Delhi High Court, there the issue was with regard to treatment of lease equalization charges debited in the accounts of an assessee engaged in the business of leasing. Assessee had relied on guidance note dated 20th September, 1995, of Institute of Chartered Accountants of India while claiming the amount as a Revenue outgo. No doubt, their Lordships allowed the claim of the assessee. A reading of the said judgment will clearly show that the claim was considered allowable on account of the following reasons.
| (i) | Lease equalization charge represented the amount set aside to equalize the im-balance between lease rentals and depreciation created over a period of time. | |
| (ii) | Sec.211(3C) of the Companies Act, 1956, required companies to follow the Accounting Standards prescribed by Institute of Chartered Accountants of India till Accounting Standards were notified by Government. | |
| (iii) | Assessee could show that only a part of cost of asset could be recovered through the period of lease and depreciation provided was not sufficient to cover the deficit, even after considering the scrap value. | |
| (iv) | If the depreciation claimed over the period of lease was less than capital recovery difference is debited as lease equalization charges and if it was more, difference was treated as lease equalization income. |
Thus what can be discerned from the above are that the amount of expected lease equalization charges was accurately determinable, and it could result in an outgo or surplus. Intention was to recoup the capital cost and even out the imbalances arising on application of standard depreciation rates over assets of varying kinds. Here on the other hand can we envisage an assessee showing as current income, if his expected contract cost is lower than the total contract receipts? Can we determine with reasonable accuracy the surplus or deficit that would arise in a contract execution which is far from complete? Can we say that such loss claimed were to off-set any deficiency in the depreciation claim? Answer to all these, in our opinion are a firm 'No'. Therefore, in our opinion this case will not help the assessee here in any manner. Relevant grounds of assessee stand therefore, dismissed.
8. Next issue raised by the assessee is with regard to the disallowance of staff benefit expenses of Rs. 13,56,382/-. Assessing Officer during the course of assessment proceedings found that the assessee had incurred expenditure of Rs. 24,35,718/- as staff benefits expenses. A break-up thereof was given by the assessee as under:-
| | Rs. |
| Cultural Expenses | 2,34,954.94 |
| Drinking water | 1,42,683.50 |
| Electricity | 27,882.50 |
| Food expenses | 5,65,234.40 |
| Housing subsidy | 63,331.00 |
| Pooja Expenses | 45,249.30 |
| Others | 13,56,382.38 |
| Total | 24,35,718.02 |
Out of the above, Assessing Officer disallowed a sum of Rs. 13,56,382/- for want of details. Before CIT(A) it seems that assessee filed a break up this amount. However, the CIT(A) refused to consider it. According to him, none of the circumstances prescribed under Rule 46A warranting admission of evidence at appellate stage was not satisfied. In this view of the matter, he confirmed the disallowance made by the Assessing Officer.
9. Now before us, Ld. A.R strongly assailing the orders of the authorities below submitted that assessee had given a breakup of the expenditure before the Assessing Officer in which the sum of Rs. 13,56,382.38 was mentioned. It was clearly stated that such amount was on account of overtime, staff master check up, purchase of milk, tea and coffee powders, pooja expenses, etc. Assessing Officer disallowed the amount only for a reason that breakup was not furnished. Ld. A.R submitted that, CIT(A) by not considering the breakup, but had done considerable injustice.
10. Per contra, Ld. D.R strongly supporting the orders of the authorities below submitted that assessee was given a number of chances by A.O for producing the breakup, but assessee had failed to furnish it. In such circumstances, CIT(A) was justified in not admitting additional evidence.
11. We have heard the rival contentions and perused the orders of the lower authorities. Without doubt, assessee had given a breakup of the total claim of staff benefits expenses of Rs. 24,35,718/- before the A.O and such breakup has been reproduced by us at para No. 8 above. When the breakup was given, assessee had given the following details as well.
"The staff benefit comprises of medical expenses and cost of medicines purchased, staff training expenses, staff welfare benefits which comprises of Cultural programme expenses, drinking water expenses, Food expenses, Housing subsidy expenses and others (Overtime, staff master check up, medical exp, magazine reimbursement, purchase of milk, tea and coffee powders, tissue papers for executives, poofa expenses, reimbursement of electricity charges)"
The above details are reproduced by the A.O. in the assessment order itself. Thus, the assessee had indeed given the nature of expenses included under the head "Others" . Only fault was that breakup was not given. A.O. has nowhere mentioned that assessee had failed to record such expenditure in its books of accounts. In our opinion just because a breakup was not furnished, disallowance could not have been made. When such break-up was produced before the CIT(A), it should have been admitted and adjudicated. In the fitness of the things, we are of the opinion that this issue has to be restored to the file of Assessing Officer for consideration afresh. Assessee shall produce the evidence in support of the claim and A.O. shall proceed in accordance with law. Relevant ground is allowed for statistical purposes.
12. Next issue raised by the assessee is regarding disallowance of bad debts of Rs.3,47,419/-. There is a clear finding by the CIT(A) that a sum of Rs. 5,13,212.95 was claimed by the assessee as bad debts relatable to one M/s.Thiru Arooran Sugar, Kollumangudi. CIT(A) after verification of the ledger, found that the amount due from the said party was Rs. 1,65,794/- only. He therefore, allowed the claim to that extent only. Nothing was brought before us by the Ld. A.R to show that there was anything more than Rs. 1,65,794/- due from Thiru Aooran Sugar as at the end of the relevant previous year. Assessee could not have written off as bad debt an amount more than what was due to it. We do not find any reason to interfere in the order of the CIT(A) in this regard. Related grounds of the assessee stand dismissed.
13. Last issue raised is regarding levy of interest under section 234D.
14. Assessment order in the given case was passed by the Assessing Officer on 21.12.2006. Section 234D of the Act was brought into statutory by Finance Act, 2003 with effect from 01.06.03. Since the assessment was completed after the said date, levy of interest under section 234D was justified. We do not find any reason to interfere in the orders of the lower authorities. Relevant grounds of the assessee stand dismissed.
15. In the result, the appeal of assessee is partly allowed for statistical purposes.
As addition was deleted by CIT(A) and confirmed By ITAT, there are bright chances that interest u/s 220(2) would not have been charged by Department. So, check for 220(2) interest point.
IT : Where assessee claimed deduction of godown rent, in view of fact that recipient of rent was neither owner nor in possession of godowns at time of entering into rent agreement or at any time thereafter, assessee's claim was to be rejected
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[2013] 32 taxmann.com 119 (Gujarat)
HIGH COURT OF GUJARAT
Gujarat Ambuja Protiens Ltd.
v.
Assistant Commissioner of Income-tax*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
TAX APPEAL NO. 409 OF 2012†
JANUARY 15, 2013
Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Rent] - Assessment year 1992-93 - Assessee was engaged in manufacturing and exporting soya deoiled cake - It entered into agreement with CRL in terms of which CRL agreed to provide godown space at four places - As per said agreement, assessee was obliged to pay godown rent irrespective of whether such godowns were utilised or not - Assessee filed its return claiming deduction of godown rent - Assessing Officer finding that CRL was neither owner nor in possession of those godowns when rent agreement was made or at any time thereafter, rejected assessee's claim - Tribunal confirmed order of Assessing Officer - Whether on facts, impugned order of Tribunal did not require any interference - Held, yes [Para 11] [In favour of revenue]
FACTS
| ■ | The assessee was in the business of manufacturing and also exporting certain items including soya deoiled cake. The assessee's case was that it had received contracts for exporting a total of 7500 metric tonnes of such product for which the assessee required to procure and store soyabeen before the same was processed and deoil cake was prepared. | |
| ■ | For such purpose the assessee entered into an agreement with CRL in terms of which CRL agreed to provide a total of 3,25,000 sq.ft of godown space at four places. The assessee agreed to pay service charges at the rate of Rs. 4 per sq.ft. per month. | |
| ■ | The terms of agreement further provided that the assessee company was obliged to make payment for godown space which it committed to hire from CRL irrespective of whether such godowns were utilized by the assessee or not. | |
| ■ | During the relevant period, the assessee paid a sum of Rs. 72.48 lakhs to the CRL which was claimed as revenue expenditure. | |
| ■ | The Assessing Officer noted that the CRL was neither the owner nor in possession of these godowns, when the agreement was made or at any time thereafter. | |
| ■ | In such circumstances, Assessing Officer opined that the payment in question was not a genuine expenditure and, thus, assessee's claim in respect of same could not be allowed. | |
| ■ | The Tribunal confirmed the order of Assessing Officer. | |
| ■ | On appeal: |
HELD
| ■ | The Assessing Officer as well as the Tribunal, viewed the entire expenditure not from the angle of prudence but from the question of genuineness thereof. It is true that such genuineness was examined on the basis of normal conduct of a businessman and in such context the Tribunal did make some observations with respect to what in the opinion of the Tribunal a prudent businessman would do. However, such observations cannot be seen in isolation losing the background in which same were made. Surely, the Tribunal never questioned the prudence of expenditure but the very genuineness thereof. [Para 9] | |
| ■ | The Tribunal also noted that assessee was to execute its export contracts latest by 15-2-1992. Assessee however, rented the godown for more than a full year thereafter, till 31-3-1993. [Para 10] | |
| ■ | The observations and conclusions of the Tribunal being purely factual in nature and also otherwise supported by documents and other evidence on record, there is no reason to interfere. No question of law arises. Tax appeal is therefore, dismissed. [Para 11] |
B.S. Soparkar for the Appellant.
ORDER
Akil Kureshi, J. - The assessee is in appeal against the judgement of the Income Tax Appellate Tribunal ("the Tribunal for short) dated 25.1.2012. For the assessment year 1992-1993, the following questions have been presented for our consideration :
| "(i) | Whether, in the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in law in reversing the order passed by the CIT(A) and thereby confirming disallowance of rent of Rs. 72,48,000/- paid to M/s. Coastal Roadway as revenue expenditure? | |
| (ii) | Whether in the facts and circumstances of the case the order passed by the ITAT was not illegal and perverse inasmuch as : |
| (a) | it has not considered the reasons which weighed with the CIT(A) while allowing the appeal; | |
| (b) | it does not consider the evidences led by the appellant in support of its claim; and | |
| (c) | it is contrary to facts on record?" |
2. Only one issue is involved in this appeal namely, that of disallowing of rent amount of Rs.72.48 lakhs allegedly expended by the assessee for the purpose of hiring godown from one M/s. Coastal Roadways Ltd. Assessee is in the business of manufacturing and also exporting certain items including Soya Deoiled cake. Case of the assessee was that the assessee had received contracts for exporting a total of 7500 metric tonnes of such product for which the assessee required to procure and store soyabean before the same was processed and deoil cake was prepared. For such purpose the assessee entered into an agreement with said M/s. Coastal Roadways Ltd on 13.9.1991. As per such agreement M/s. Coastal Roadways Ltd. agreed to provide a total of of 3,25,000 sq. ft. of godown space at Ahmedabad, Junagadh, Jamnagar and Gandhidham for a period of six months between 1.9.1991 to 31.3.1993. The assessee agreed to pay service charge at the rate of Rs.4 per sq. ft. per month. Assessee for the said period paid a sum of Rs.72.48 lakhs as per the bills raised by M/s. Coastal Roadways Pvt. Ltd. and claimed such payment as revenue expenditure. The claim was however, rejected by the Assessing Officer on various grounds. The Assessing Officer questioned the very expenditure. He examined various factors emerging from the record and disallowed the claim on following grounds :
| "i. | Coastal Roadways Ltd., was neither the owner nor in position of these godowns, when the agreement was made or at any time thereafter. | |
| ii. | The assessee has neither seen nor taken possession of these godowns at any point of time. | |
| iii. | The assessee did not write nor gave any advertisement in the paper for hiring of godown but instead only after on telephonic talk by one of its employees with the Regional Manager of Coastal Roadways Ltd.(CRL) entered into agreement in a hurry. | |
| iv. | One of the agreement has been prepared on stamp paper purchased by sister concerns of the assessee Gujarat Ambuja Vita Pharma. The stamp paper were not even purchased for the purpose of this agreement. | |
| v. | Mr. Parikh, Regional Manager of CRL had not seen the Director of the assessee company Mr. Manish Gupta who has signed this agreement. From the statement of Mr. Parikh, it is seen that he has signed one of the agreement in Bombay whereas in the agreement, the place mentioned is Ahmedabad. | |
| vi. | The CRL was never in the business of hiring/letting of godowns in the past but is engaged only in the business of transportation. Thus the agreement is made with party not doing the regular business of hiring of godowns. | |
| vii. | It is a normal business practice that the bills/invoices are prepared and checked by the employees of the company and then signed by the executive/officer of the concern. In the present case all the bills for the godown rent are signed by Mr. Parikh, the Regional Manager of CRL who has signed the agreement. There are no signature by the person who prepared and checked these bills. | |
| viii. | There are no services rendered whatsoever in pursuance of these agreement and no such evidence was found even in the file found and stamped during the course of survey in the office of the assessee company. | |
| ix. | All the vouchers prepared by the one and the same person in which the narration of the voucher in the godown rent account. There is no mention about other services being rendered. In some of the bills prepared by the CRL the year mentioned is 1993 which has been subsequently corrected as 1991. | |
| x. | Though the assessee was required to make the payment in April, 1993 i.e. after a period of six months, the CRL no such payments were made. Supportingly, the CRL also did not write any letter till No.93. The return of income was also filed by Nov'93, though the return was due in December'92. The first payment for the godown rent was made by cheque only in September'93. | |
| xi. | Though the assessee had tried to show that in anticipate of export/business in Soyabin DOC it wanted to hire this godowns but the fact remains for the contract of export of only about 7,500 metric tonnes but assessee hired godowns at 4 different places in Gujarat admeasuring 3,25,000 sq. ft. though a payment of rent of about 72 lacs for six months alone and surprisingly he never executed the export orders. | |
| xii. | The assessee's sister concerns already has godowns admeasuring 25000 sq. ft. some of which were not even utilized. The godown charges paid by the assessee for the past years and the subsequent years and show that expenditure on amount is very nominal say below Rs. 10,000/- | |
| In view of the above discussion, the entire transactions of hiring of godowns etc., is treated as afterthought and the expenditure has to be disallowed. Even otherwise no services have been rendered and expenditure shown is totally out of proportion and therefore in view of the High Court decision discussed and cited above, the expenditure cannot be allowed u/s37 of the I.T. Act, and accordingly the same is disallowed." |
3. Assessee carried the matter in appeal. CIT(Appeals) reversed the decision of Assessing Officer. Several factors recorded by the Assessing Officer and noted above were viewed differently. CIT(Appeals) was of the view that expenditure was actually made during the course of business and was therefore, allowable.
4. Revenue carried the matter in appeal. The Tribunal reversed the decision of the CIT(Appeals) and restored the order of Assessing Officer making following observations :
"4. We have heard the rival contentions on this issue. The Ld.A.R. carried us through the agreements and various documents in support of the said claim. He submitted that, as per the agreement entered with M/s. CRL, the said company is required to provide the Godown space as and when required. Hence, the assessee did not bother about verifying the availability of Godown space with the said company. He submitted that the requirement of Godown space is proved by the export orders received by the assessee. Since the exports could not materialize, the assessee was not able to use the Godown space that was agreed to be provided by M/s. Coastal Roadways Ltd. He further submitted that the necessity of incurring expenditure cannot be questioned by the Income tax authorities as they are required to see only whether an expenditure is incurred "Wholly and Exclusively" for the purpose of business. In this regard, he relied upon the decision of Hon'ble Apex Court in the case of S.A. Builders (288 ITR 1) and another decision reported in 233 ITR 101. He further submitted that the Ld CIT(A) has relied upon the decision rendered in the case of United Agency of India (P) Ltd v. CIT reported in 108 CTR 390 to grant relief and the said decision squarely applies to the facts of the instant case. On the other hand the Ld DR strongly relied upon the assessment order and the written submissions filed by the Department.
5. We have heard the rival contentions and carefully perused the record. On a careful consideration of the arguments of the counsel and the record, we are of the view that the dispute is with regard to the genuineness of the impugned expenditure claim and not about the "necessity of incurring the impugned expenditure. As per the main finding of the A.O. on the impugned issue, which are extracted in para 2 supra, M/s. Coastal Roadways Ltd was neither the owner nor in possession of the godowns, which he has offered to provide to the assessee. We are unable to understand how a person could offer any thing, which he does not possess at all. We are also doubtful, whether a prudent businessman would enter into an agreement for a non-existent Godown and also agree to make payment of Rs.72.48 lakhs as Godown rent to a person, who does not have the required infrastructure facility. The Ld. A.R. has relied upon various documents in support of the said claim of expenditure. In our view, those documents are self serving and much reliance could not be placed upon them. The assessee placed reliance on the copies of export orders to substantiate the requirement of Godown space. However, on a careful perusal of the copies of export orders, we notice that the exports are required to be completed between 15th January and 15th February. However, the assessee has accounted for rent for the period from September, 1991 to March 1992. Under these facts, the question that would arise is whether any business man would pay the rent for the month of March, when there is no requirement of Godown space at all. The necessity of Godown space arises only when the product is procured. The assessee has not brought in any material to show the procurement plans, the places from where the products shall be procured, the storage period, volume to be procured at a time, the quantity to be shipped at a time etc. In our view, a prudent business man would have analysed these kind of details before determining the requirement of Godown space. Unfortunately, the assessee has failed to bring these documents on record to substantiate the genuineness of the claim. More particularly, the observation of the Assessing Officer that M/s. Coastal Roadways Ltd did not have Godown space has not been disputed and the said fact places doubt of shadow on the impugned expenditure claim. The Ld A.R. placed heavy reliance on the decision in the case of United Agency of India(P) Ltd., supra. However, in our view, the said decision is not applicable to facts of the instant case for the reason that, in the case of United Agency of India(P) Ltd, the assessee therein took on hire two motor vessels and also took possession thereof, where as in the instant case, the assessee has not taken possession of any Godown and further the hirer did not have possession of any such godown. In view of the above discussions, we are of the view that the assessee has failed to establish the genuineness of the impugned expenditure and we are in agreement with the view of the Assessing Officer in this regard. Accordingly, we set aside the order of Ld CIT(A) on this issue."
5. Learned senior counsel Shri S.N. Soparkar for the appellant vehemently contended that the Tribunal committed a grave error in going into the question of advisability or prudence for booking the godown space and making payments for the same even though the export orders did not materialise. He submitted that there was voluminous evidence before the Assessing Officer to show that the assessee actually had certain export obligations. However, on account of high cost of raw materials, same could not be executed. Arbitration proceedings have commenced for failure on part of the assessee to complete the export obligations. CIT(Appeals) had correctly examined and appreciated the evidence on record. The Assessing Officer as well as the the Tribunal both put undue importance on payment being made without availing the facility of storage. Counsel submitted that export turnover was likely to touch Rs.20 crore. Expenditure incurred was thus reasonable and genuineness thereof was established through documents on record.
6. From the record however, we notice that the agreement between the assessee and M/s. Coastal Roadways Ltd. recorded that M/s. Coastal Roadways Ltd. claimed to be the owner/hirer of certain godowns or warehouses at Ahmedabad Junagadh, Jamnagar and Gandhidham. Agreement also recorded that the list of such godowns/warehouses is attached as Schedule-A showing the area of the said warehouses and exact location. Admittedly, however, the agreement dated 13.9.1991 did not contain any such schedule. It has also come on record that M/s. Coastal Roadways Ltd. did not own or possess any godown at any of the above- mentioned places.
7. Thus a very important claim made by M/s. Coastal Roadways Ltd was proved to be completely false. The authorities particularly, the Assessing Officer and the Tribunal found it difficult to believe that the assessee did not verify whether service provider had in fact any godown in his possession as owner or hirer. Further one Mr. M.L. Pareek, Regional Manager of M/s. Coastal Roadways Ltd. in his statement before the Assessing Officer stated that company had never rented any godown to any party since last five years. In the said statement he further stated that the company did not own or possess any godowns at the four above-named locations. He in fact went on to add that during the period between 1.9.1991 to 31.3.1992, the company had also not hired godowns of anyone else.
8. It is true that as per the agreement dated 13.9.1991, the assessee company was obliged to make payment for godown space which the assessee committed to hire from M/s. Coastal Roadways Ltd irrespective of whether such godowns utilised by the assessee or not. However, it is a matter of considerable importance that M/s. Coastal Roadways Ltd. never owned or possessed such godowns though so falsely claimed in the agreement dated 13.9.1991. More importantly during the entire period between 1.9.1991 to 31.3.1992, M/s. Coastal Roadways ltd. had not even hired the godown from any other source. Meaning thereby during the entire period of agreement, M/s. Coastal Roadways ltd. made no arrangement whatsoever for making even storage space available. Surely M/s. Coastal Roadways Ltd could not have foreseen that the assessee company would not require such storage space because of the company running into some kind of financial difficulty in executing its export obligations. M/s. Coastal Roadways ltd made a false representation in the agreement to the assessee of owning or possessing godowns at four different locations for which it went on charging the assessee company full rent for the entire period of six months totaling to Rs.72.48 lakhs without even having acquired such space for a single day during the entire period of six months. We wonder what would have been the position of M/s. Coastal Roadways ltd if suddenly the assessee had landed up with its goods which it required to store at any of the four locations for which month after month the assessee was making periodical payments without using the storage space.
9. In our view the Assessing Officer as well as the Tribunal viewed the entire expenditure not from the angle of prudence but from the question of genuineness thereof. It is true that such genuineness was examined on the basis of normal conduct of a business man and in such context the Tribunal did make some observations with respect to what in the opinion of the Tribunal a prudent business man would do. However, such observations cannot be seen in isolation losing the background in which same was made. Surely, the Tribunal never questioned the prudence of expenditure but the very genuineness thereof.
10. Tribunal also noted that assessee was to execute its export contracts latest by 15.2.1992. Assessee however, rented the godown for more than a full month thereafter till 31.3.1993.
11. The observations and conclusions of the Tribunal being purely factual in nature and also otherwise supported by documents and other evidence on record, we do not see any reason to interfere. No question of law arises. Tax Appeal is therefore, dismissed.
SUNIL IT : Approval granted by Director of STPI is sufficient for purpose of section 10A
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[2013] 32 taxmann.com 290 (Delhi)
HIGH COURT OF DELHI
Commissioner of Income-tax
v.
Technovate E Solutions (P.) Ltd.*
BADAR DURREZ AHMED AND R.V. EASWAR, JJ.
IT APPEAL NO. 100 OF 2012†
FEBRUARY 26, 2013
Section 10A of the Income-tax Act, 1961 - Free trade zone [Condition precedent] - Assessment year 2003-04 - Whether approval granted by Director of STPI is sufficient approval so as to satisfy conditions relating to approvals under section 10A - Held, yes [Para 5] [In favour of assessee]
Circulars and Notifications : Instruction No. 1/06, dated 31-3-2006
FACTS
| ■ | The assessee had furnished a registration issued by the Software Technology Parks of India (STPI) in support of, its claim under section 10A of the Income-tax Act, 1961. | |
| ■ | The Assessing Officer had rejected the claim on the ground that the approval by a Director of STPI was not a valid approval from a specified authority. The view taken by the Assessing Officer was that only the inter-ministerial standing committee was competent to grant approval to units functioning within STPI. | |
| ■ | The Tribunal held the issue in favour of assessee. | |
| ■ | On appeal : |
HELD
| ■ | It is apparent from the CBDT Instruction No. 1/06, dated 31-3-2006 that it had been decided by the Board that the claim of deduction under section 10A of the said Act should not be denied to the Software Technology Park units only on the ground that the approval/registration to such units had been granted by Directors of the Software Technology Parks. A reference may also be made to the inter-ministerial communication dated 23-3-2006 issued by the Secretary, Ministry of Communications and Technologies. | |
| ■ | The above communication makes it clear that the approvals issued by the Director of the Software Technology Parks of India have the authority of the Inter-Ministerial standing Committee and that all approvals granted by the STPI directors are therefore, deemed to be valid. The position is also clear from a letter dated 6-5-2009 issued by the Central Board of Direct Taxes to the Joint Secretary, Ministry of Commerce and Industry wherein a distinction has been drawn between the provisions of section 10A and 10B of the Income-tax Act, 1961 and in which it has been clarified that a unit approved by the Director under the Software Technology Parks Scheme will be allowed exemption only under section 10A as a STPI unit and not under section 10B as a 100 per cent Export Oriented Unit. It is, therefore, clear from the above instruction and communications that the view of the CBDT is that approval granted by the Directors of Software Technology Parks of India would be deemed to be valid in as much as the said directors were functioning under the delegated authority of the Inter-Ministerial Standing Committee. [Para 4] | |
| ■ | Therefore, it is clear that the respondent-assessee would be entitled to the deduction claimed under section 10A in as much as approval granted by a director of the Software Technology Parks of India would be a deemed approval of the inter-ministerial standing committee and, therefore, the condition stipulated under section 10A(2) would stand complied with. [Para 5] |
CASE REVIEW
CIT v. Regency Creations Ltd. [2012] 27 taxmann.com 322/211 Taxman 152 (Delhi)(Mag.) (para 6) distinguished.
CASES REFERRED TO
CIT v. G.E. Capital Services Ltd. [2008] 300 ITR 420 (Delhi) (para 2) and CIT v. Regency Creations Ltd. [2012] 27 taxmann.com 322/211 Taxman 152 (Delhi) (Mag.) (para 6).
Rohit Madan for the Appellant. Salil Kapoor and Vikas Jain for the Respondent.
JUDGMENT
Badar Durrez Ahmed, J. - The revenue is aggrieved by the order dated 20.06.2011 passed by the Income Tax Appellate Tribunal in ITA 135/Del/2011 in respect of the assessment year 2003-04. The revenue has proposed the following questions as substantial questions of law: -
| (A) | Whether the Tribunal erred in law in coming to the conclusion that the approval granted by the Director of STPI was sufficient approval so as to satisfy the conditions relating to approvals under section 10A of the Act? | |
| (B) | Whether the Tribunal erred in law in concluding that the software expenses incurred by the assessee was revenue in nature? | |
| (C) | Whether Tribunal failed to appreciate that as regards the software it was a case of a sale of copyrighted article and hence the expenditure could not be treated as revenue in nature? |
2. Insofar as proposed questions B and C are concerned, the learned counsel for the respondent-assessee points out that the issues are covered by the decision of this Court in CIT v. G.E. Capital Services Ltd. [2008] 300 ITR 420 (Delhi). The learned counsel for the appellant agrees that the issues of software expenses stand covered by that decision of this Court.
3. The issue involved in proposed question A is whether the approval granted by the Director of the Software Parks of India was sufficient approval so as to satisfy the conditions stipulated in Section 10A of the Income Tax Act, 1961. Sub-section (2) of section 10A prescribes the conditions which an undertaking must fulfill in order to get the benefit of Section 10A(1). The said sub-section (2) of Section 10A reads as under :-
(2) This section applies to any undertaking which fulfils all the following conditions, namely :-
| (i) | it has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year— |
| (a) | commencing on or after the 1st day of April, 1981, in any free trade zone; or | |
| (b) | commencing on or after the 1st day of April, 1994, in any electronic hardware technology park, or, as the case may be, software technology park; | |
| (c) | commencing on or after the 1st day of April, 2001 in any special economic zone; |
| (ii) | it is not formed by the splitting up, or the reconstruction, of a business already in existence : | |
| | Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re- establishment, reconstruction or revival by the assessee of the business of any such undertakings as is referred to in section 33B, in the circumstances and within the period specified in that section; | |
| (iii) | it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. |
From section 10A(2)(i)(b) it is apparent that one of the conditions is that the respondent-assessee should have started manufacture or production of articles or things or computer software in any electronic hardware technology park or as the case may be a software technology park if the said manufacture commenced after 1.4.1994. The expression "Software Technology Park" has been defined in clause (vii) of Explanation 2 of section 10A as: -
"software technology park" means any park set up in accordance with the Software Technology Park Scheme notified by the Government of India in the Ministry of Commerce and Industry;"
4. In this backdrop it would be necessary to note that the respondent- assessee had furnished a registration issued by the Software Technology Parks of India (STPI) in support of its claim under section 10A amounting to Rs. 1,18,05,695/-. The assessing officer had rejected the claim under Section 10A of the said Act on the ground that the approval by a Director of STPI was not a valid approval from a specified authority. The view taken by the assessing officer was that only the inter-ministerial standing committee was competent to grant approval to units functioning within the Software Technology Park for the purposes of deduction under Section 10A of the said Act. However, this issue was considered by the Central Board of Direct Taxes and an instruction (Instruction No.1/06 dated 31.3.2006) was issued clarifying the position with regard to the deduction under Section 10A. The relevant portion of the said instruction is given below:-
"5. Instances have been brought to the notice of the Board that a large number of units registered/approved by the Directors of the STPI are claiming deduction under section 10A whereas the STP scheme requires approval by the Inter- Ministerial Standing Committee of the Department of Electronics. Accordingly, the cases of such claimants have been reopened by the authorities.
6. The matter has been examined in consultation with the officers of the Department of Information Technology (earlier, Department of Electronics). In view of the ambiguity in the legal status of the approval by Director of STPs, the Inter-Ministerial Standing Committee will meet to consider the approvals by Director of STPs issued in the past. Therefore, with a view to avoid infructuous demand raised in assessment and reassessment of assessees claiming deduction under section 10A, it has been decided that the claim of deduction under section 10A, shall not be denied to STP units only on the ground that the approval/registration to such units has been granted by the Directors of Software Technology Parks. However, it has to be ensured that all other conditions specified in section 10A are fully satisfied before allowing any such claim.
7. In cases where assessments/reassessments have already been completed, and the claim under section 10A has been disallowed only on the ground that the approval to the STP has not been granted by the Inter-Ministerial Standing Committee in accordance with the Scheme, the demand so arising should be kept in abeyance until further orders." (Emphasis supplied)
It is apparent from the above instruction that it had been decided by the Board that the claim of deduction under Section 10A of the said Act should not be denied to the Software Technology Park units only on the ground that the approval/registration to such units had been granted by Directors of the Software Technology Parks. A reference may also be made to the inter-ministerial communication dated 23.3.2006 issued by the Secretary, Ministry of Communications and Technologies to the following effect:-
| "1. | Software Technology Park of India (STPI) is a society owned and administered by the Govt. of India and therefore is state under Article 12 of the Constitution of India. | |
| 2. | The STPI Directors are duly authorized and fully empowered to issue approvals as 100% EOUs to the unit under the STP Scheme under delegated powers granted as per para 9.36 of the Handbook of Procedures (Vol.1) 1997-2002. | |
| 3. | All the approvals issued by the STPI Directors have the authority of Inter Ministerial Standing Committee (IMSC). The IMSC has periodically reviewed the various approvals granted by the STPI Directors in accordance with the Govt. of India guidelines/notifications. All the current approvals granted by the STPI Directors are therefore, deemed to be valid." (Emphasis supplied) |
The above communication makes it clear that the approvals issued by the Directors of the Software Technology Parks of India have the authority of the Inter-Ministerial Standing Committee and that all approvals granted by the STPI Directors are therefore deemed to be valid. The position is also clear from a letter dated 6.5.2009 issued by the Central Board of Direct Taxes to the Joint Secretary, Ministry of Commerce and Industry wherein a distinction has been drawn between the provisions of section 10A and 10B of the Income Tax Act, 1961 and in which it has been clarified that a unit approved by the Director under the Software Technology Parks scheme will be allowed exemption only under Section 10A as a STPI unit and not under 10B as a 100% export oriented unit. It is therefore, clear from the above instruction and communications that the view of the Central Board of Direct Taxes is that approvals granted by the Directors of Software Technology Parks of India would be deemed to be valid inasmuch as the said directors were functioning under the delegated authority of the Inter-Ministerial Standing Committee.
5. In this view of the matter, question A which has been proposed by the learned counsel for the revenue does not raise any substantial issue of law. The same has been covered by the CBDT's instruction and correspondence. It is therefore, clear that the respondent-assessee would be entitled to the deduction claimed under Section 10A inasmuch as approval granted by a director of the Software Technology Parks of India would be a deemed approval of the Inter-Ministerial Standing Committee and, therefore, the condition stipulated under Section 10A(2) of the said Act would stand complied with.
6. The learned counsel for the appellant sought to raise an argument on the basis of the decision of this Court in CIT v. Regency Creations Ltd.[2012] 27 taxmann.com 322/211 Taxman 152 (Delhi)(Mag.) and other connected appeals which was decided on 17.9.2012, however, we feel that the said decision would be of no use to the appellant inasmuch as that decision was concerned specifically with the provisions of Section 10B which stand on an entirely different footing than the provisions of Section 10A.
7. For the following reasons we find that there is no substantial question of law in this appeal which requires determination by this Court. The appeal is dismissed.
SB IT : Payment made to stock exchange for violation of byelaws of stock exchange is allowable as business expenditure
IT : Disallowance made by Assessing Officer under section 14A at 5 per cent of dividend income was restricted to Rs. 2 lakhs following decisions of Tribunal in subsequent years on identical facts
IT : Where amounts receivable from debtors were taken into account as income in earlier years and were written off as irrecoverable, such amount was allowable as bad debt
IT : Where no asset had been created by paying license fees for utilization of software, expenditure was allowable as revenue expenditure
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[2013] 32 taxmann.com 328 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'F'
HSBC Securities & Capital Markets (India) (P.) Ltd.
v.
Assistant Commissioner of Income-tax, Circle-4(1)*
I.P. BANSAL, JUDICIAL MEMBER
AND B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND B. RAMAKOTAIAH, ACCOUNTANT MEMBER
IT APPEAL NOS. 6762 & 7135 (MUM.) OF 2005
C.O. NO. 186 (MUM.) OF 2006
[ASSESSMENT YEAR 2002-03]
C.O. NO. 186 (MUM.) OF 2006
[ASSESSMENT YEAR 2002-03]
OCTOBER 31, 2012
I. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Penalty] - Assessment year 2002-03 - Whether payment made to stock exchange for violation of bye-laws of stock exchange cannot be considered as payment prohibited by law or in connection with an offence and is allowable as business expenditure - Held, yes [Para 23] [In favour of assessee]
II. Section 14A of the Income-tax Act, 1961 - Expenditure in relation to income not includible in total income [Dividend] - Assessment year 2002-03 - Assessee had shown dividend income which was claimed as exempt under section 10(33) - Assessing Officer, by invoking section 14A, disallowed five per cent of dividend income - Whether since in subsequent assessment years, Tribunal, on identical facts, had estimated disallowance at Rs. 2 lakhs, for relevant assessment year also, disallowance was to be restricted to Rs. 2 lakhs - Held, yes [Para 7] [In favour of assessee]
III. Section 36(1)(vii) of the Income-tax Act, 1961 - Bad debt [Conditions precedent] - Assessment year 2002-03 - Whether consequent to amendment to provisions of section 36(1)(vii), assessee is not required to establish that debt has become bad; it is enough if bad debt is written off as irrecoverable in accounts of assessee - Held, yes - Whether where amounts receivable from debtors were taken into account as income in earlier years and were written off as irrecoverable, such amount would be allowed as bad debt - Held, yes - Whether in stock broking business amounts payable to clients is also considered as taken into account under provisions of section 36(2) and any non-recovery can be claimed as bad debt - Held, yes [Para 11] [In favour of assessee]
IV. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Software expenses] - Assessment year 2002-03 - Assessee spent certain amount towards various license fees paid for acquiring software for running its computers and claimed same as revenue expenditure - Whether since no asset had been created by paying license fees for utilization of software, expenditure was allowable as revenue expenditure - Held, yes [Para 13] [In favour of assessee]
CASE REVIEW
CIT v. Angel Capital & Debit Market Ltd. [IT Appeal No. 475 of 2011, dated 28-7-2011] (para 22) followed.
CASES REFERRED TO
TRF Ltd. v. CIT [2010] 323 ITR 397/190 Taxman 391 (SC) (para 11), Dy. CIT v. Shreyas S. Morakhia [2010] 40 SOT 432 (Mum.) (SB) (para 11), CIT v. Shreyas S. Morakhia [2012] 206 Taxman 32/19 taxmann.com 64 (Bom.) (para 11), CIT v. Arawalli Construction Co. (P.) Ltd. [2003] 259 ITR 30/124 Taxman 146 (Raj.) (para 12), CIT v. Varinder Agro Chemical Ltd. [2009] 309 ITR 272 (Punj. & Har.) (para 12), CIT v. Asahi India Safety Glass Ltd. [2011] 15 taxmann.com 382/203 Taxman 277 (Delhi) (para 12), CIT v. Raychem RPG Ltd .[2012] 21 taxmann.com 507 (Bom.) (para 12), Dy. CIT v. Mahindra Reality & Infr. Developers [IT Appeal No.1160(Mum.) of 2010] (para 12), Diageo India (P.) Ltd v. Dy. CIT [2013] 13 taxmann.com 62/47 SOT 252 (Mum.) (para 12), Amway India Enterprises v. Dy. CIT [2008] 111 ITD 112/21 SOT 1(Delhi) (SB)(para 12), CIT v. Angel Capital & Debit Market Ltd . [IT Appeal No. 475 of 2011 dated 28-7-2011] (para 22) and CIT v. Stock and Bond Trading Company [IT Appeal No.4117 of 2010 dated 14-10-2011] (para 22).
Yogesh Thar for the Appellant. Rupinder Brar for the Respondent.
ORDER
B. Ramakotaiah, Accountant Member - These are cross appeals for the assessment year 2002-03 against the orders of the CIT (A)-IV, Mumbai dated 5.10.2005 and the cross objection on one of the issue by assessee.
2. We have heard the learned Counsel and the learned DR in detail and the learned Counsel also placed on record paper book and a chart indicating the grounds and the decisions relied upon by assessee including the Coordinate Bench orders in assessee's own case.
ITA No. 6762/Mum/2005
3. In this appeal assessee has raised six grounds.
4. Ground No.1 pertains to the disallowance under section 14A. Assessee has shown dividend income of Rs. 3,53,85,721/- which was claimed as exempt under section 10(33). AO estimated 5% of the dividend income as expenditure attributable to earning such tax free dividend income considering both direct and indirect expenses incurred by assessee. Accordingly he arrived at the disallowance of Rs. 16,69,286/- being 5% of the dividend income. The same was confirmed by the CIT (A) differing from the orders of his predecessor in A Y 2001-02.
5. The learned Counsel submitted that the ITAT in A Y 2004-05 and 2005-06 has determined the reasonable amount at a lump sum amount of about Rs. 2 lakhs and accordingly he has no objection if proportionate amount was disallowed but not at the ratio adopted by AO.
6. The learned DR however, submitted that by the order of the ITAT in 2001-02, amount of 5% has been confirmed.
7. We have examined the issue and the details placed on record. In A Y 2001-02, the dividend income was only Rs. 4,91,884/- and an amount of Rs. 24,594/- was disallowed and was confirmed by the ITAT. However, in the later years based on the fact that amount of dividend was earned from only one company to an extent of Rs. 3.30 crores, coordinate Bench considered that it was reasonable estimate disallowance at Rs. 2.00 lakhs as assessee has not borrowed any funds, nor there is any finding that any interest is attributable to earning the dividend income. Facts are similar in this year and large amount of Dividend was earned from one company alone. In view of this, respectfully following the decision of the Coordinate Benches in assessment years 2004-05 and 2005-06, the disallowance is restricted to an amount of Rs. 2.00 lakhs. Ground is partly allowed.
8. Ground Nos.2 & 3 pertain to the claim of bad debts/loss, the claims which have been made without prejudice to one another.
9. AO in the assessment order disallowed the amount stating that a debt unless it has become bad, cannot be allowed under section 36(1)(vii) and no loss can be allowed unless the same has crystallized applying the principles and depending on the decision of the ITAT in the case of Thermite Corporation disallowed entire amount of Rs. 3,36,147/-. The CIT (A) after considering the submissions of assessee, however, allowed an amount of Rs. 71,942/-being the amount written off given as advance to one of the employees which could not be recovered and with reference to the balance amount, he confirmed AO's action.
10. The facts relating to the bad debts are that assessee had the following amounts written off in the books of account:
| S. No | Name of the party | Amount (Rs.) |
| 1 | Team Asia Greaves Semi-conductor Ltd | 2,33,70,000 |
| 2 | Williamson Tea Holdings PLC | 15,01,569 |
| 3 | Bad delivery debtors | 87,02,430 |
| Total | 3,35,73,999 |
| (A) | With reference to Team Asia Semiconductor Ltd, it was the submission that assessee was retained by the client as an Advisor to assist in raising private equity for expansion. Assessee was to be paid 4% of the investment proceeds received from private equity investors by the client, subject to a maximum success fee of USD 6,50,000 which was inclusive of upfront fee and out of pocket and other expenses. Assessee billed a total of Rs. 3,03,70,000/- upto 31st March,2002 out of which only an amount of Rs. 70,00,000/- were received during the year ended on 31.3.2002. As the balance amount was not received and the client expressed his inability to pay the amount being a sick company, assessee wrote off the balance amount. There is no dispute with reference to the write off of the amount in the Profit & Loss A/c. | |
| (B) | With reference to the Williamsons Tea Holdings Plc. assessee was mandated as an exclusive advisor to protect the interest of Williamson Tea Holdings in India in the Williamson Magor group in response to business interest by Khaitan family in India. In consideration for the services assessee was entitled to a monthly retainer fee of USD 50,000 subject to a minimum of USD 2,50,000. All out of pocket expenses are to be reimbursed. In the course of service assessee paid professional fees to various legal advisors on behalf of the client totaling to Rs. 13,99,689/-. Further travel expenses and other miscellaneous expenses were also claimed to an extent of Rs. 15,01,569/-. Since the client was not satisfied with the services rendered by assessee, it refused to reimburse the said expenses. Therefore, assessee wrote off the amount. | |
| (C) | With reference to the bad delivery debtors, assessee being a stock broker claimed bad delivery debtors amounting to Rs. 87,02,430/- as bad debts. These amounts are due from the brokers of the selling parties for claims of the clients on account of dividend or bonus shares receivable from the sellers. As these claims are not honoured by the said brokers, assessee had to pay all its clients to settle their due and wrote off the amount due from selling parties brokers by charging them to the Profit & Loss A/c. It was the claim of assessee that such write off is in the regular course of the business. |
11. After considering the above facts and perusing the orders of AO and the CIT (A), we are of the opinion that the amounts are to be allowed as bad debts. Consequent to the amendment to the provisions of section 36(1)(vii), it is not required to establish that the debt has become bad. This issue was decided by the Hon'ble Supreme Court in the case of TRF Ltd. v. CIT [2010] 323 ITR 397/190 Taxman 391 wherein it was held that after 1.4.1989 it is not necessary for assessee to establish that the debt in fact has become irrecoverable. It is enough if bad debt is written off as irrecoverable in accounts of assessee. Following the above principles, there is no dispute with reference to the amounts receivable from the Team Asia Semiconductor Ltd and Williamsons Tea Holdings PLC that these amounts were taken into account as income in earlier years and was written off as irrecoverable. With reference to the third item of bad delivery debtors, assessee being a stock broker, the amounts payable to the clients in the business is also considered as "taken into account" under the provisions of section 36(2) and any non-recovery can be claimed as bad debt. This issue was considered by the Special Bench of the ITAT in the case of Dy. CIT v. Shreyas S. Morakhia [2010] 40 SOT 432 (Mum.) which was upheld by the Hon'ble Bombay High Court in the case of CIT v. Shreyas S. Morakhia [2012] 206 Taxman 32/19 taxmann.com 64 in Appeal No.89 of 2011. In view of this we direct AO to allow the amounts as bad debts as claimed. Grounds are considered allowed.
12. Ground No.4 pertains to claim of software expenses. Assessee spent an amount of Rs. 21,59,151/- towards various license fees paid for acquiring software for running its computers. Assessee claimed the same as revenue expenditure. AO was of the view that the software expenses gave an enduring benefit; therefore, they are capital in nature. Accordingly he allowed 25% depreciation by capitalizing the said amount and making addition of difference of Rs. 16,19,363/-. The CIT (A) upheld part of the amount relying on the decision of the Hon'ble Rajasthan High Court in the case of CIT v. Arawalli Construction Co. (P.) Ltd.[2003] 259 ITR 30/124 Taxman 146. It was the contention that assessee has not obtained any enduring benefit and only paid license fee for utilizing the same in existing computers. Accordingly the expenditure is revenue in nature. Assessee relied on the following decisions:
| (i) | CIT v. Varinder Agro Chemical Ltd. [2009] 309 ITR 272 (Punj. & Har.) | |
| (ii) | CIT v. Asahi India Safety Glass Ltd. [2011] 15 taxmann.com 382/203 Taxman 277 (Delhi). | |
| (iii) | CIT v. Raychem RPG Ltd .[2012] 21 taxmann.com 507 (Bom.) | |
| (iv) | Dy. CIT v. Mahindra Reality & Infr. Developers (ITA No.1160/Mum/2010) | |
| (v) | Diageo India (P.) Ltd v. Dy. CIT [2013] 13 taxmann.com 62/47 SOT 252 (Mum.) | |
| (vi) | Amway India Enterprises v. Dy. CIT [2008] 111 ITD 112/21 SOT 1(Delhi) (SB). |
13. Considering the nature of the expenditure as seen from annexure-A to the submissions before the CIT (A), even though the expenditure may give an enduring benefit, since no asset has been created by paying license fees for utilization of the software, we are of the opinion that the expenditure is allowable as revenue expenditure. The principles laid down in the above cases relied on by assessee supports the above contentions. Accordingly AO is directed to allow the claim of license fee on software expenditure claim of Rs. 21,51,151/- as revenue expenditure and consequently withdraw the depreciation allowed on the said amount. Ground is considered allowed.
14. Ground No.5 pertains to the issue of software expense amounting to Rs. 40,60,000/-. Assessee did not press the ground as assessee itself claimed it as capital expenditure in the return of income and the issue whether depreciation will be allowed at 60% or 25% was contested separately. Therefore, this ground is treated as withdrawn.
15. Ground No.6 pertains to interest under section 234B, 234C and 234D. AO is directed to recalculate the interest while giving effect to this order and also keeping in mind the amendments made to the provisions of section 234B by the Finance Act, 2012. With these directions the appeal is considered partly allowed.
16. In the result appeal No.6762/Mum/2005 is partly allowed.
ITA No.7135/Mum/2005
17. This is a Revenue appeal in which the Revenue has contested three issues in the grounds of appeal.
18. Ground No.1 pertains to the issue of disallowance of interest made under section 36(1)(iii) on the interest free advances out of interest bearing funds to the group companies. AO in the order has stated that though assessee has claimed financial charges of Rs. 3,55,60,000/-, it has not charged interest on the following advances/investments.
| Particulars | Balance as on 31.3.2002(Rs.) |
| HSBC Investment bank PLC | 3,22,000/- |
| HSBC Securities (Delhi) Ltd. | 3,22,000/- |
| HSBC Asset Management (I) Ltd. | 8,32,000/- |
| Total | 14,76,000/- |
On the reason that the amounts were advanced out of the borrowed funds on which assessee paid 15.8% interest, AO worked out the disallowance at Rs. 26,77,452/- under section 36(1)(iii). The CIT (A) deleted the same holding that assessee has more capital and reserves than what was advanced to the sister concerns and following his order in A Y 2001-02 he deleted the said disallowance. Revenue is aggrieved.
19. It was fairly admitted that in AY 2001-02 the issue was restored to the file of AO for examination afresh as directed in Para 17 of the order in ITA No.6894/Mum/2004:
"17. We have heard the rival submissions and perused the material on record. AO has categorically found that interest free advances to assessee's related concerns are out of interest bearing HSBC overdraft account, on which assessee had claimed deduction of interest in its Profit & Loss A/c. This finding of AO has not been dislodged by the learned CIT (A). On the other hand, he held that AO has failed to establish the nexus between interest bearing funds and interest free advances. We find from the orders of authorities below that the issue has not been considered from the point of commercial expediency which is the proposition laid down by the decision of the Hon'ble Supreme Court in the case of S.A. Builders reported in288 ITR 1 (SC). The Hon'ble Supreme Court held as under:
"In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the income-tax authorities have approached the matter from an erroneous angle. In the present case, assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) as interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency".
18. Since authorities below have not considered the question of commercial expediency in advancing the loan to the subsidiary concern necessarily in the light of the decision of the Hon'ble Supreme Court cited supra, we deem it appropriate to remit this issue back to the file of the AO to decide the matter afresh in the light of the dictum laid down by the Hon'ble Supreme Court in the case of S.A. Builders (Supra). Therefore, this ground of the revenue is allowed for statistical purposes"
20. Respectfully following the above since the CIT (A) also followed the order for the A Y 2001-02 while giving relief, in the interest of justice we restore the issue to the file of AO to examine the facts afresh. AO is also directed to examine the amount of advance as the amounts stated in the assessment order as advances to sister concern was only an amount of Rs. 14,76,000/-, whereas the interest on the above amount at 15.8% was worked out at Rs. 26,77,452/-. AO is directed to state the correct amount advanced to sister concern and give the working in case the amounts are indeed advanced out of the borrowed funds. The findings in A Y 2001-02 will have a bearing on this issue. Therefore, AO is directed to keep this also in mind. Assessee should be given due opportunity to support its contentions. With these directions the issue in Ground No.1 is restored to the file of AO for fresh consideration.
21. Ground No.2 is on the issue of penalty levied by the Stock Exchange. The claim is an amount of Rs. 1,15,663/- on account of payment made to the stock exchange for violation of byelaws of the Stock Exchange. Assessee submitted that the Stock Exchanges are not statutory authorities and therefore, violation of their byelaws could not be considered as violation of law and is only a breach of contractual obligation and therefore, claim is allowable as a deduction. AO however, was of the opinion that the penalty paid violates the provisions of section 37(1) and therefore, the same cannot be allowed as business deduction. The CIT (A) allowed the amount stating that the Stock Exchanges are not government or semi-government bodies and the payments are only for technical violation of regulations which cannot be considered as payment prohibited by law or in connection with an offence. The Revenue is aggrieved by this.
22. Similar issue was considered in favour of assessee in A Ys 2003-04 and 2005-06 by the Coordinate Bench of the ITAT copies of which were placed on record. This issue is now directly covered by the decision of the Hon'ble Bombay High Court in the case of CIT v. Angel Capital & Debit Market Ltd. in ITA No.475 of 2011 dated 28th July, 2011 wherein the Hon'ble High Court held that the amount paid as penalty to stock exchanges was on account of irregularities committed by assessee clients and such payments were not on account of infraction of law and hence allowable as business expenditure. Hon'ble High Court upheld the ITAT finding on this issue in the case of CIT v. Stock and Bond Trading Company in ITA No.4117 of 2010 dated 14th October, 2011, and held as under:
"3. As regards the second question is concerned, the finding of fact recorded by the CIT (A) and upheld by the ITAT is that the payments made by assessee to the Stock Exchange for violation of their regulation are not an account of an offence or which is prohibited by law. Hence, the invocation of explanation to section 37 of the Income Tax Act 1961 is not justified. In our opinion, in the facts and circumstances of the present case, no fault can be found with the decision of the ITAT. Accordingly, the second question cannot be entertained".
23. In view of this, we do not see any reason to disturb the findings of the CIT (A) and reject the ground of the Revenue.
24. Ground No.3 pertains to the issue of allowance of an amount of Rs. 4,34,400/- paid as software expenditure as revenue expenditure.
25. This issue was discussed in Ground No.4 of assessee's appeal above. Out of the total amount of Rs. 21,51,151/-, the CIT (A) considered an amount of Rs. 17,24,751/- as capital in nature while allowing Rs. 4,34,400/- as revenue in nature. The Revenue is contesting the above findings of the CIT (A). Since we have already decided that the entire expenditure for software licenses is revenue in nature, there is no need for disturbing the findings of the CIT (A) who correctly allowed the amount of Rs. 4,34,400/- as revenue expenditure. Accordingly the ground is rejected.
26. In the result, Revenue appeal No.7135/Mum/2005 is partly allowed for statistical purposes.
C.O.No.186/Mum/2006 (Arising from ITA No.7135/Mum/2005)
27. Assessee claimed in the C.O. the issue of depreciation on computer software at 60% as against 25% allowed by AO. Assessee claimed an amount of Rs. 40,60,000/- as capital expenditure and claimed depreciation at 60% thereon in the computation of income. AO however, was of the view that assessee has purchased specific software license for use of Ritechoice Spectrum-2000 which is only a license and accordingly treating it as 'intangible asset' allowed depreciation at 25% as per depreciation schedule. Further he was of the view that since assessee did not utilize for the full period to claim deduction at 25%, he allowed 50% thereof as assessee capitalized w.e.f. 31.12.2001 and accordingly added back an amount of Rs. 35,62,650/- being excess depreciation claim on software purchase. Assessee being aggrieved along with the disallowance of software expenses (Ground 4 in assessee appeal) contested before the CIT (A) that the entire amount of Rs. 40,60,000/-was allowable as revenue expenditure. There is no dispute before the CIT (A) with reference to the rate of depreciation. The CIT (A) noted that assessee had acquired a software known as Ritechoice Spectrum 2000 from Ritechoice for Rs. 40,60,000/- comprising the basic price of Rs. 24,25,000/-, customization of Rs. 7,35,000/- and implementation of Rs. 4,00,000/-. He further noted that this software is used for back office accounting and settlements by HSBC for handling stock broking. The CIT (A) however, considering the issue whether the said expenditure is revenue or capital in nature upheld AO's opinion that purchase of this software cannot be considered as revenue in nature. In the present cross objection assessee is contesting the action of AO stating that the correct depreciation is to be allowed at 60%.
28. We have heard the learned Counsel and the learned DR. We notice from the depreciation schedule applicable for A Y 2002-03 that there is no specific heading for software expenses as part of computer. The schedule in Part-A (III)(2B) contains only computers at 60%. With effect from AY 2003-04 onwards Part III (5) was modified as under:
"(5) Computers including computer software 60%
(see Note 7 below Table) ".
Note 7 states that the computer software means any computer programme recorded on any disk, tape or any other information storage device. As seen from the facts of the case, assessee has purchased specific software which was not supplied along with the computer. Therefore, the purchase of specific software for use in the business cannot be included as part of computers and since there is no specific item of computer software in the depreciation schedule for the impugned A Y 2002-03, we are of the opinion that AO is correct in treating the computer software as a license and allowing depreciation at 25%. As stated earlier, assessee also has not contested the issue before the CIT (A) with reference to the rate of depreciation. In view of this, we are of the opinion that AO has correctly determined the rate of depreciation at 25% for this year. The reliance by assessee on the depreciation schedule in the later year cannot help its case as the said 60% on computer software has become part of the depreciation schedule from A Y 2003-04 onwards.
29. In the result cross objection No.186/Mum/2006 filed by assessee is dismissed. Assessee's Appeal in ITA No. 6762/Mum/2005 is partly allowed and Revenue Appeal in ITA No. 7135/Mum/2005 is partly allowed for statistical purposes.
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
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