IT: Where assessee allocated head office expenses on basis of capital cost of each project, Assessing Officer was not right in allocating such expenses in different ratio on estimated basis
IT: Just because income and expenditure was classified as prior period, they need not be excluded or disallowed
IT: Whether subsidy in form of entertainment tax exemption received by multiplex theater was capital receipt or revenue receipt, is to be decided by considering State Government's policy
IT: Depreciation cannot be disallowed on ground that part of areas in mall remained unutilized
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[2013] 39 taxmann.com 120 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'E'
E-City Entertainment (India) (P.) Ltd.
v.
Additional Commissioner of Income-tax*
B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND AMIT SHUKLA, JUDICIAL MEMBER
AND AMIT SHUKLA, JUDICIAL MEMBER
IT APPEAL NOS. 1382 & 1480 (MUM) OF 2012
[ASSESSMENT YEAR 2005-06]
[ASSESSMENT YEAR 2005-06]
MARCH 26, 2013
I. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Head Office expenses] - Assessment year 2005-06 - Assessee-company owned various multiplexes - Some of multiplexes were in operation and some in various stages of construction - During relevant year, head office expenses were allocated at 32 per cent as capital and 68 per cent as revenue - Assessing Officer however estimated 67 per cent of head office expenditure as capital and 33 per cent as revenue - Whether since assessee allocated head office expenditure on basis of cost of project and Assessing Officer did not examine any other method to allocate but estimated at 2/3 rd capital and 1/3 rd as revenue, allocation made by assessee on cost of project basis which was only method on given facts was to be upheld - Held, yes [Para 9] [In favour of assessee]
II. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Prior period expenses] - Assessment year 2005-06 - Whether just because income and expenditure was classified as prior period, they need not be excluded or disallowed - Held, yes - Assessing Officer disallowed prior period expenses on ground that assessee had not given any specific and cogent reason to show how these expenses did crystallize only during relevant year - Assessee claimed that it incurred expenses as well as earned income pertaining to earlier year during previous year as these were crystallized during year and submitted details of same along with nature of expense/income of each and every item - Whether since Assessing Officer had not examined nature of expenditure in spite of giving details, matter was to be remanded back for deciding issue afresh - Held, yes [Para 18] [Matter remanded]
III. Section 4 of the Income-tax Act, 1961 - Income - Chargeable as [Subsidy] - Assessment year 2005-06 - Assessee was engaged in business of screening films in many States - It received subsidy in form of entertainment tax exemption from various State Governments and same was claimed as capital receipt not chargeable to tax - Whether respective State Government policies and orders were required to be examined to see whether such subsidy was capital or revenue receipt and, hence, matter was to be remanded to Assessing Officer to examine same and decide accordingly - Held, yes [Para 21][Matter remanded]
IV. Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance/rate of [User of assets] - Assessment year 2005-06 - Whether once entire project has commenced business operation, just because part of it was not leased out or commercially exploited cannot be a basis for disallowing of depreciation - Held, yes - Assessing Officer disallowed part of depreciation on plant and machinery which was installed on mall on ground that part of areas of mall was not utilized for business purposes - Whether disallowance made by Assessing Officer was devoid of any merit and, hence, same was to be deleted - Held, yes [Para 28] [In favour of assessee]
FACTS-I
| ■ | The assessee owned various multiplexes and was engaged in the business of screening films. Some of the multiplexes were in operation and some of them were in various stages of construction. During relevant year, the assessee had claimed 68 per cent of head office expenditure as revenue expenditure. | |
| ■ | The Assessing Officer having found that the assessee was in the process of construction of commercial complexes in more than four areas and substantial time, resources and other infrastructure was invariably devoted to the newer projects, held that quantum of head office expenses as revenue was higher. He accordingly capitalized 67 per cent of head office expenses and allowed 33 per cent as revenue. | |
| ■ | The Commissioner (Appeals) upheld the order of the Assessing Officer. | |
| ■ | On second appeal: |
HELD-I
| ■ | There is no dispute to the extent of expenditure incurred in head office. The interest expenditure was directly allocated to the project as per the loans obtained. The expenditure other than the interest of head office was allocated on the basis of capital cost of each project. There is no dispute with the fact that three centres are fully in operation and the other centres are under construction and one Andheri gaming was expansion. [Para 8] | |
| ■ | In earlier year the head office expenses were allocated at 93 per cent capital and 7 per cent revenue as only one multiplex was in operation for part of the period. But the basis of allocation is the cost of the project. This year the investment in operational project was at Rs. 124.01 crores whereas other projects was at Rs. 60.63 crores. Therefore, assessee allocated the expenditure at 67.16 per cent revenue and 32.84 per cent capital during the year. There is justification in the claim of assessee as the newly operational projects also require more attention and in some projects there was no activity except purchase of land. In the absence of any details of manpower allocation, time spend on each project, the only rationale method adopted by assessee is capital cost allocation. This cannot be faulted as Assessing Officer did not examine any other method to allocate but estimated at two thirds capital and one third revenue (as against the similar ratio of the assessee in contrary method i.e., 1/3rd : 2/3rd). Bangalore project does not require any allocation as only land was purchased. Even one takes the operational: under construction ratio, it is 3: 3, i.e., 50 per cent capital and 50 per cent revenue. Looking at it either way the allocation made by Assessing Officer has no basis or logic. In view of this, one would concur with the allocation made by assessee on cost of project basis which is the only rationale method on the given facts. Therefore, Assessing Officer is directed to delete the amount so treated. [Para 9] |
CASE REVIEW-IV
CIT v. Sonal Gum Industries [2010] 322 ITR 542 (Guj.), Swati Synthetics Ltd. v. ITO [2010] 38 SOT 208 (Mum.), Unitex Products Ltd. v. ITO[2008] 22 SOT 429 (Mum.), Dy. CIT v. Boskalis Dredging India (P.) Ltd. [2012] 53 SOT 17 (URO)/23 taxmann.com 4 (Mum.) and Asstt. CIT v.SRF Ltd. [2008] 21 SOT 122 (Delhi) (para 28) followed.
CASES REFERRED TO
Dineshkumar Gulabchand Agrawal v. CIT [2004] 267 ITR 768/141 Taxman 62 (Bom.) (para 25), CIT v. Sonal Gum Industries [2010] 322 ITR 542 (Guj.) (para 28), Swati Syntnetics Ltd. v. ITO [2010] 38 SOT 208 (Mum.) (para 28), Unitex Products Ltd. v. ITO [2008] 22 SOT 429 (Mum.)(para 28), Dy. CIT v. Boskalis Dredging India (P.) Ltd. [2012] 53 SOT 17 (URO)/23 taxmann.com 4 (Mum.) (para 28) and Asstt. CIT v. SRF Ltd.[2008] 21 SOT 122 (Delhi) (Para 28).
Vijay Mehta for the Appellant. Girija Dayal for the Respondent.
ORDER
B. Ramakotaiah, Accountant Member - These are cross-appeals by assessee and the Revenue against the order of the Commissioner of Income-tax (Appeals)-16 Mumbai, dated December 1, 2011. We have heard learned counsel and the learned Departmental representative and their arguments were incorporated wherever necessary.
2. Briefly stated, the assessee is in the business of owning multiplexes and screening films. Some of the multiplexes are in operation and some of them are in various stages of construction. Part of the area developed was leased. During the year, the Assessing Officer made addition on various issues including allocation of expenditure, preoperative period expense allocation, proportionate disallowances of depreciation, repairs, etc. The learned Commissioner of Income-tax (Appeals) gave partial relief. Therefore, these cross-appeals.
ITA No. 1382/Mum/2012 :
3. This is an assessee appeal. The assessee raised the following grounds :
"1. Revenue expenses disallowed Rs. 1,69,97,820 :
| (a) | The learned Commissioner of Income-tax (Appeals) erred in law and facts in upholding the order of the Assessing Officer treating further expenses of Rs. 1,69,97,820 as capital in nature and disallowed, in addition to Rs. 1,64,99,361 already capitalised by the assessee. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law. | |
| (b) | The learned Commissioner of Income-tax (Appeals) failed to appreciate that the assessee has capitalised Rs. 1,64,99,361 expenses relating to projects under implementation on scientific basis, (i.e., in the ratio of capital cost of each project) and accepted by auditors and accordingly the balance is debited to profit and loss account and claimed allowable under section 37 of the Act. The disallowance made and upheld by the learned Assessing Officer and the learned Commissioner of Income-tax (Appeals) is arbitrarily done on presumption and against the provisions of law, hence required to be reversed. |
2. Interest income Rs. 3,82,712 :
The learned Commissioner of Income-tax (Appeals) erred in law and on facts in upholding the taxability of interest income of Rs. 3,82,712 arose during the preoperative period instead of preoperative income to be adjusted against project cost. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law.
3. Prior period expenses Rs. 26,09,033 :
The learned Commissioner of Income-tax (Appeals) erred in law and facts in upholding disallowance of revenue expenses of Rs. 26,09,033 being incurred for business and crystallised during the year, treating the same as prior period expenses. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law.
4. Entertainment duty :
| (i) | The learned Commissioner of Income-tax (Appeals) erred in law and facts in not adjudicating the additional ground raised by the appellant related to claim of entertainment tax subsidy/incentives as capital receipt, received by the assessee in accordance with the multiplex policy of the relevant states and judicial pronouncement available on the matter. | |
| (ii) | On merits of the case, the learned Commissioner of Income-tax (Appeals) ought to have held that entertainment tax subsidy is a capital receipt and does not form part of the total income, i.e., the total income of the assessee ought to have been reduced to the extent of entertainment tax subsidy embedded in the revenue, being capital receipt." |
4. Ground No. 1 : During the course of the assessment proceedings, Assessing Officer observed that the assessee has maintained four separate divisions of cost centres :
| (i) | Head office | |
| (ii) | Ahmedabad commercial complex | |
| (iii) | Chandigarh commercial complex | |
| (iv) | Andheri commercial complex |
In addition to these four commercial complexes are under construction at various other locations in the country, the assessee is also in the process of acquisition of various other real estate assets across the country. The expenses other than the three operational commercial complexes are capitalised. However, the expenses towards the corporate office maintained are to be proportionately distributed between the revenue earning sectors and projects under completion. For the assessment year 2004-05, the assessee had capitalised 93 per cent. of the head office expenses thereby claiming only seven per cent. as revenue expenditure for the year. This year the assessee claimed 68 per cent. of head office expenditure as revenue. The Assessing Officer noticed that assessee is in the process of construction of commercial complexes in more than four areas in addition to developing gaming centre at Andheri Complex. Substantial time, resources and devotion of the personnel and other infrastructure in the head office is invariably devoted to the newer projects under implementation. The Assessing Officer further held that it would be incorrect on the part of the assessee to claim 68 per cent. of the total expenditure as revenue expenses. A break up of the head office expenses also indicate a high amount of expenses towards travel and tour, legal and professional fees, interest and finance and communication expenses in addition to employee cost and corporate brand building expenses. The Assessing Officer also held that the time and energy of corporate employees is invested more towards the newer projects rather than towards already running projects. The assessee has also not given any cogent reason as to why 68 per cent. of the head office expenses should be taken as revenue expenses. The Assessing Officer disregarded the proportion given by assessee and taken one third of the expenses as revenue expenses and the balance two-third is capitalised as under :
| (Rs.) | ||
| Total head office expenses | 100% | 5,02,45,769 |
| Revenue | 33.33% | 1,67,48,588 |
| Capitalised | 66.66% | 3,34,97,176 |
The Assessing Officer disallowed excess revenue expenses claimed of Rs. 3,37,46,408 - Rs. 1,67,48,588 = Rs. 1,69,97,820 from being claimed as revenue expenses.
5. It was contended before the Commissioner of Income-tax (Appeals) that the basis of allocation by the Assessing Officer was purely on the basis of presumption and surmises, that the assessee maintained separate books of account and expenditure is identified on the basis of projects, common expenditure of head office was allocated on the basis of capital employed, the cost centre concept does not allow the managers to allocate costs to other centres and banks have examined the project details and expenditure for sanction of loans and the assessee followed consistent method of allocation of common expenditure. The detailed submissions were in the Commissioner of Income-tax (Appeals) order vide para 4.2.
6. The learned Commissioner of Income-tax (Appeals), however, confirmed the allocation made by the Assessing Officer for the following reasons :
"4.3.1 I have carefully considered the contention of the appellant and also carefully gone through the documents available on record. The learned Assessing Officer had made the addition based on the fact that the appellant in the immediately preceding year had capitalised 97 per cent. of the expenses to the cost of the project for the reason that the projects were at their infancy and no revenue generation was there. In the immediately next year the appellant had reduced the capitalisation to 32 per cent. based on the fact that the projects at Ahmedabad were completed and project at Chandigarh and Andheri become operational in the year 2003. The revenue generation from the three projects started and it was a full year of operation. However, the project at Chembur and Lucknow are under implementation and the project at Bangalore has not yet started except for the purchase of land. I find that the learned authorised representative the appellant submitted that three projects have completed and three new projects were undertaken, naturally, the appellant's claim that the head office expenses were to be apportioned in the ratio 68 per cent. to 32 per cent. (revenue v. capital) does not inspire confidence as according to its own submission in the immediately preceding year the apportion made was of three per cent. to 97 per cent. Therefore, looking to the facts of the appellant's case that three projects were completed and three projects are at various implementation stages the allocation made by the learned Assessing Officer in the ratio of 33.33 per cent. to 66.66 per cent. appears to be in order. There is no infirmity as to the fact that the appellant is actively pursuing the completion of the projects at Lucknow and Chembur as well as Bangalore. Therefore, the head office expenditures are to be incurred/apportioned in the ratio of efforts put in by the head office staff including the directors. The apportionment made by the learned Assessing Officer of revenue capital expenditure is perfectly in order as the appellant failed to give any cogent reason for the allocation made by it. The addition made by the learned Assessing Officer is accordingly upheld. This ground of appeal is thus dismissed."
7. Learned counsel reiterated the submissions and placed on record the table of allocation of expenditure undertaken by the assessee. The learned Commissioner of Income-tax (Departmental representative) supported the order of the Assessing Officer and the Commissioner of Income-tax (Appeals).
8. We have considered the rival contentions. As seen from the facts on record, there is no dispute to the extent of expenditure incurred in the head office. The interest expenditure was directly allocated to the project as per the loans obtained. The expenditure other than the interest of head office was allocated on the basis of capital cost of each project. There is no dispute with the fact that three centres are fully in operation and the other centres are under construction and one Andheri gaming was expansion. The basis for allocating cost as submitted by the assessee is as under :
Revenue expenses of the head office apportioned among the completed EFCs for the year ended on March 31, 2005
| Sl. No. | Projects | Project cost as on (Rs.) | Ratios | Expenses for the year excluding interest (Rs.) |
| Note-1 | Note-3 | |||
| 1 | Agra | — | 0.00% | — |
| 2 | Bangalore | 7,17,14,698.10 | 3.88% | 19,51,461.09 |
| 3 | Game Zone Andheri | 1,93,30,379.57 | 1.05% | 5,26,007.70 |
| 4 | Chembur | 29,87,43,912.74 | 16.18% | 81,29,255.74 |
| 5 | Delhi-West (Natraj) | 2,04,84,226.29 | 1.11% | 5,57,405.55 |
| 6 | Hyderabad | 5,15,300.10 | 0.03% | 14,022.06 |
| 7 | Lucknow | 19,45,99,804.62 | 10.54% | 52,95,343.30 |
| 8 | Chennai | 9,50,569.75 | 10.05% | 25,866.38 |
| Sub total | 60,63,38,891.17 | 32.84% | 1,64,99,361.83 | |
| 1 | Ahmedabad | 47,31,28,529.42 | 25.62% | 1,28,74,514.42 |
| 2 | Andheri | 55,42,05,433.91 | 30.01% | 1,50,80,734.74 |
| 3 | Chandigarh | 21,28,20,642.89 | 11.53% | 57,91,158.78 |
| Sub total | 124,01,54,606.22 | 67.16% | 3,37,46,407.93 | |
| Grand total | 184,64,93,497.39 | 100.00% | 5,02,45,769.76 |
| Date of starting of EFC | Pre-ope days Capex | Post-ope Days revenue | Pre-ope expenses Capex (Rs.) | Post-Ope Expenses revenue | Total (Rs.) |
| 32.84% | 67.16% | 100.00% | |||
| (a) | |||||
| — | — | — | |||
| 19,51,461.09 | — | 19,51,461.09 | |||
| 5,26,007.70 | — | 5,26,007.70 | |||
| 81,29,255.74 | — | 81,29,255.74 | |||
| 5,57,405.55 | — | 5,57,405.55 | |||
| 14,022.06 | — | 14,022.06 | |||
| 52,95,343.30 | — | 52,95,343.30 | |||
| 25,866.38 | — | 25,866.38 | |||
| 1,64,99,361.83 | — | 1,64,99,361.83 | |||
| July 27, 2001 | — | 365 | — | 1,28,74,514.42 | 1,28,74,514.42 |
| August 8, 2003 | 365 | — | 1,50,80,734.74 | 1,50,80,734.74 | |
| November 29, 2003 | 365 | — | 57,91,158.78 | 57,91,158.78 | |
| 3,37,46,407.93 | 3,37,46,407.93 | ||||
| 1,64,99,361.83 | 3,37,46,407.93 | 5,02,45,769.76 |
9. As rightly contended, in the earlier year the head office expenses were allocated at 93 per cent. capital and seven per cent. revenue as only one multiplex was in operation for part of the period. But the basis of allocation is the cost of the project. This year the investment in operational project was at Rs. 124.01 crores whereas other projects was at Rs. 60.63 crores. Therefore, assessee allocated the expenditure at 67.16 per cent. revenue and 32.84 per cent. capital during the year. There is justification in the claim of the assessee as the newly operational projects also require more attention and in some projects there was no activity except purchase of land. In the absence of any details of manpower allocation, time spent on each project, the only rationale method adopted by the assessee is capital cost allocation. This cannot be faulted as the Assessing Officer did not examine any other method to allocate but estimated at two-thirds capital and one third revenue (as against the similar ratio of the assessee in contrary method, i.e., one-third : two-third). Bangalore project does not require any allocation as only land was purchased. Even one takes the operational : under construction ratio, it is 3 : 3, i.e., 50 per cent. capital and 50 per cent. revenue. Looking at it either way the allocation made by the Assessing Officer has no basis or logic. In view of this, we concur with the allocation made by the assessee on cost of project basis which is the only rationale method on the given facts. Therefore, the Assessing Officer is directed to delete the amount so treated. Ground is allowed.
10. Ground No. 2 is on taxing the interest income of Rs. 3,82,712 arose during the preoperative period. During the course of the assessment proceedings the Assessing Officer observed that the assessee has credited interest income of Rs. 3,82,712 to the capex account of projects under completion. The assessee has not given any specific reason as to why this amount of Rs. 3,82,712 should be allowed as interest capitalised. The Assessing Officer therefore, treated this amount of Rs. 3,82,712 as revenue receipt and brought it to tax.
11. It was the contention that the interest was linked to the project under implementation and hence this was capitalised. The Commissioner of Income-tax (Appeals) did not agree and discussed the assessee contention by stating as under :
"8.3.1 I have carefully considered the contention of the appellant and also carefully gone through the documents available on record. I find that the appellant earned an interest of Rs. 3,82,712 which was given to it by the head office. The said income is an income which cannot be capitalised and has to be treated as income from other sources. The Assessing Officer therefore, has rightly treated the income as income from other sources. This ground of appeal is therefore, dismissed".
12. After considering the rival contentions, we do not see any reason to disturb the findings of the Assessing Officer and the Commissioner of Income-tax (Appeals). The interest was rightly treated as income of the year. The ground is dismissed.
13. Ground No. 3 is on prior period expenses. During the course of the assessment proceedings, the Assessing Officer observed that the assessee has debited a prior period expenditure of Rs. 26,09,033. The Assessing Officer held that the assessee has not given any specific and cogent reason as to how these expenses did crystallise only during the assessment year 2005-06. The Assessing Officer further held that any prior period expenses cannot be debited to the profit and loss account unless the assessee brings conclusive proof that these expenses only crystallised during the year. It was also held by the Assessing Officer that assessee has also option of revising returns for the earlier years and claiming these expenses incurred in the subsequent period. The assessee neither filed revised return nor has given any cogent reasons as to how these expenses crystallised during the current assessment year. The Assessing Officer therefore, disallowed an amount of Rs. 26,09,033.
14. The assessee contended before the Commissioner of Income-tax (Appeals) during the appellate proceedings and submitted the details of prior period income as under :
| As per A.O. (Rs.) | Actual (Rs.) | Depreciation (Rs.) | Net (Rs.) | |
| Income | 35,51,055 | 35,96,528 | 13,12,695 | 22,83,833 |
| Expenses | 26,09,033 | 26,61,879 | 4,21,109 | 22,40,770 |
| Income shown in financial statements | 9,42,022 | 9,34,649 | 8,91,586 | 43,063 |
15. The assessee further submitted that it has shown net prior period income of Rs. 9,34,649 in its profit and loss account. The assessee incurred expenses as well as earned income pertaining to the earlier year during the previous year as these were crystallised during the year and submitted details of the same along with nature of expense/income of each and every item. The assessee further submitted that it claimed these expenses/income as incurred during the year as the same were crystallised during the year but shown as prior period (income)/expenses in the financial statements. The assessee further submitted that this also includes Rs. 1,27,125 of Ahmedabad and Rs. 2,93,984 of Andheri being difference on account of short provision of depreciation computed as per the Companies Act in the earlier years, also included was depreciation written back as per the Companies Act of Rs. 13,12,695. It was the submission of the assessee that the net amount of Rs. 8,91,586 was reduced from the total income in the computation as these were only notional entries to rectify depreciation wrongly calculated in the earlier years as per the Companies Act. These entries have no tax implication as these are added/deducted from profit as per books for computation of income. Hence the balance credit amount of Rs. 43,063 (Rs. 9,34,649 - Rs. 8,91,586) was offered for tax by assessee. However, the Assessing Officer only considered the debit balances out of prior period expenses and disallowed the same including depreciation of Rs. 4,21,109 (Rs. 1,27,125 + Rs. 2,93,984). The assessee further submitted that the Assessing Officer observed that any prior period expenses cannot be debited to the profit and loss account unless the assessee brings conclusive proof that these expenses only crystallised during the subsequent year. However, he has not applied the same reasoning for prior period income offered by the assessee and disallowed only the expense part of prior-period income offered by the assessee and disallowed only the expense part of prior period items. Without prejudice to the above the assessee further submitted that the expenses are allowable in the year under assessment but even if the Assessing Officer's order is sustained, income of Rs. 22,83,833 can be taxed and expenses of Rs. 22,40,770 can be disallowed. The assessee further submitted that during the assessment proceedings the assessee explained that prior period expenses are actually expenses of the year. Professional fees of Rs. 6,99,000 and travelling expenses of Rs. 4,19,080 were transferred by VSD Confin Ltd. with whom the assessee was having a joint development agreement for Chandigarh project. These expenses were transferred by VSD on termination of his agreement. They are provided and/or paid during the year since the liability thereof crystallised during the year. The expenses are relatable to previous year/s but the liability thereof crystallised or the information thereof was received as to its existence during the year hence have been charged to the profit and loss account during the year, though they are pertaining to previous year/s. As per the AS-5, the expenses/income though crystallised or become payable during the year, pertaining to previous year/s, the same are required to be classified as prior period expenses/incomes hence the said AS-5 had been followed as required under the Companies Act, 1956.
16. The learned Commissioner of Income-tax (Appeals) did not agree. His order is as under :
"9.3.1. I have carefully considered the contention of the appellant and also carefully gone through the documents available on record. I find that the expenses claimed by the appellant under the head 'prior period expenses' are actually not a prior period expenses but these are the payment made by the appellant to M/s. VSD Confin Ltd. with whom the appellant was having a joint development agreement for Chandigarh project. After determination of the Chandigarh projects various payments were made to M/s. VSD Confin as a part of the final payment made to M/s. VSD Confin. Therefore, by no stretch of imagination it can be said that these expenses were crystallised in the year under consideration. Further, it is also not clear as to what is the modalities of the treatment given by the appellant as well as Confin Ltd. to the payment/receipt of the amounts. From the submission given it can be inferred that the payment is made to M/s. VSD Confin and not to the concerned person. Further, the allowability of the payment made to M/s. VSD Confin is a part of agreement wherein a lump sum payments have been given for the termination of the contract which obviously is a capital receipt in the hand of Confin and the segregation of the same as revenue is entirely the appellant's own version and is not supported by any evidence on record. The expenses even otherwise need to be capitalised to the cost of Chandigarh project. Therefore, the allowability of these expenditures as revenue expenditure is also in question. The failure on the part of the appellant to submit any details in this regard is also to be taken into account. Looking to the entirety of the circumstances and the facts of the appellant case, it can be held that these expenses are not allowable to the appellant. Therefore, the addition made by the learned Assessing Officer is accordingly confirmed".
17. Drawing attention to the statement extracted in the Commissioner of Income-tax (Appeals) order, learned counsel submitted (a) that the depreciation of Rs. 4,21,109 was duly disallowed by the assessee, so further disallowance does not arise. (b) The assessee has both income as well as expenditure classified as prior period under the company law but the same is income and expenditure of the year as they crystallised during the year. (c) The Commissioner of Income-tax (Appeals) erred in considering the expenditure to VMD as capital and if they were to be treated as capital, then the expenditure up to the date of operation of Chandigarh multiplex has to be capitalised. It was also explained that the expenditure was in the nature of reimbursement of joint venture expenditure. The learned Departmental representative supported the order of the Assessing Officer and the Commissioner of Income-tax (Appeals).
18. We have considered the rival contentions. As seen from the order of the Assessing Officer, the Assessing Officer has not examined the nature of expenditure in spite of giving the details. Otherwise, he would not have disallowed the depreciation which was actually disallowed by the assessee in computation. Just because the income and expenditure was classified as prior period, they need not be excluded or disallowed. The Assessing Officer has to examine whether the expenditure crystallised during the year or not. Moreover, there may be some capital expenditure as noted by the Commissioner of Income-tax (Appeals), but the same was not examined or adjusted to the project. These aspects require examination. Therefore, the issue in this ground is restored to the Assessing Officer for detailed examination and to consider the contention of the assessee. The Assessing Officer is directed to give due opportunity to the assessee and if any expenditure is in capital nature, to examine whether they can be capitalised to the project. Consequential allowance of depreciation. etc., also to be examined. With these directions, the issue of prior period income/expenditure was restored to the Assessing Officer. Ground is allowed for statistical purposes.
19. Ground No. 4. The issue in ground No. 4 was raised as additional ground before the Commissioner of Income-tax (Appeals). The contention of the assessee is as under :
"During the course of appellate proceedings, the assessee submitted that the activity of film exhibition is liable to entertainment duty by the State Governments as per the rates fixed by them which range between 20 per cent. and 100 per cent. These entertainment duties are part of the ticket prices and are collected from the viewers and paid to the respective State Governments. However, due to lack of proper facilities in theatre-cinemas and easy entertainment on cable television, occupancy in theatre-cinemas has fallen considerably. The State Governments lost revenue in a big way. Due to lack of proper facilities and infrastructure, there has been a decline and stagnation in theatre cinema business and some theatre cinemas have even closed down. Theatre-cinema involves huge capital investment and long gestation period and hence economically not viable and there was no incentive for the organised sector to make investment in these ventures. Further, as a result of the onslaught of cable television and advancement in the field of information technology, the average occupancy in cinema theatre has fallen considerably as public at large these days prefer to see movies at home and hardly any new theatres have been started in the recent past. The assessee further submitted that keeping in view this scenario, a concept of complete family entertainment, more popularly known as 'multiplex theatre complex', has emerged. The multiplex theatre complexes offer various entertainment facilities for the entire family under a single roof. However, these complexes are highly capital intensive, their gestation period is also quite longer, and therefore, incentive schemes were formulated by various State Governments which provided incentive in entertainment tax. The State Governments in order to give boost to tourism sector by attracting higher investments in the areas with tourism potential and to generate employment opportunities introduced various schemes of incentives. In line with these schemes the assessee-company got exemption from the entertainment tax. The amount of entertainment tax collected against the value of ticket for admission to such multiplexes theatre complex was allowed to be retained by way of subsidy for certain initial years of operation of multiplex theatre complex. The entertainment tax amount retained depends on policies of respective States. In some States it is allowed for certain years from the date of commencement. Whereas in some states it depends on the amount of investment made for the purpose of making multiplex. The appellant further submitted that the appellant claims that the "subsidy in the form of entertainment tax exemption" does not form part of total income to the extent of Rs. 7,86,04,884 being grant received in the form of exemption from payment of entertainment tax for promotion of construction of multiplex theatres is a capital receipt not liable to tax. During the assessment year 2005-06, the company collected total entertainment tax in respect of its various multiplexes. Out of the same, the company has got subsidy from the various State Governments by way of exemption from payment of entertainment tax to the extent of Rs. 7,86,04,884. The assessee further submitted that it has been granted exemption from payment of entertainment tax in respect of multiplexes at Ahmedabad, Andheri (Mumbai), and Chandigarh. These exemptions have been granted in pursuance of the entertainment tax exemption policy of the respective State Governments. The entire amount of entertainment tax collected by the company has been included in the schedule 15 of the profit and loss account 'sales and operating income' and entertainment tax incentive/subsidy has been wrongly offered to tax. The company, however, submits that above subsidy received in the form of exemption from payment of entertainment tax for promotion of construction of multiplex theatres in Maharashtra is a capital receipt not chargeable to tax. The assessee further placed reliance on the following decision :-
| • | CIT v. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC) ; | |
| • | Sadichha Chitra v. CIT [1991] 189 ITR 774 (Bom) ; | |
| • | Kalpana Palace v. CIT [2005] 275 ITR 365 (All) ; | |
| • | Ramakrishna Cine Studio v. CIT [1998] 233 ITR 277 (AP) ; | |
| • | Lachit Films v. CIT [1992] 195 ITR 402 (Gauhati) ; | |
| • | CIT v. Gogte Minerals [1996] 222 ITR 245 (Karn) ; | |
| • | Asst. CIT v. Steel Strips Ltd. [2007] 108 ITD 720 (Chandigarh) ; | |
| • | Deputy CIT v. Reliance Industries Ltd. [2005] 273 ITR (AT) 16 (Mum) [SB] ; and | |
| • | CIT v. Chaphalkar Brothers [2013] 351 ITR 309 (Bom)." |
20. The Commissioner of Income-tax (Appeals) rejected the additional ground as under :
"15.2.1. The appellant has raised additional ground stating, inter alia, that the learned Assessing Officer erred in law and facts in treating the entertainment tax in respect of multiplexes at Ahmedabad, Andheri (Mumbai), and Chandigarh which was exempted as revenue receipt as against capital. However, I find that the said issue doesn't emanate from the order of the learned Assessing Officer. In fact, the order is silent on the issue. On a perusal of the record it appears that the appellant offered to tax the entertainment in respect of multiplexes at Ahmedabad, Andheri (Mumbai), and Chandigarh on its own. The entire amount of entertainment tax collected by the company has been included in the Schedule 15 of the profit and loss account 'sales and operating income' and entertainment tax was offered to tax. Since the issue has not been deliberated upon by the learned Assessing Officer, it cannot be adjudicated upon. This ground of appeal is accordingly dismissed".
21. After considering the rival contentions, we are of the opinion that the issue requires examination by the Assessing Officer. The respective State Government Policies and the orders are required to be examined to see whether the contentions of the assessee is correct or not. For examination of the facts and deciding the case after afresh keeping in mind the nature of subsidy and judicial precedents on the issue, the matter is restored to the file of the Assessing Officer for adjudication. Needless to say that the assessee should be given due opportunity. The Assessing Officer can call for details, make necessary enquiries to analyse the issues. Ground is allowed for statistical purposes.
22. In the result, the appeal in ITA No. 1382/Mum/2012 is partly allowed.
ITA No. 1480/Mum/2012 :
23. The Revenue has raised the following two grounds :
| "1. | On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in deleting the proportionate disallowance of depreciation of Rs. 1,62,87,723 on the assets which are not put to use during the relevant financial year ignoring the decision of the jurisdictional High Court in the case of Dineshkumar Gulabchand Agrawal v. CIT [2004] 267 ITR 768 (Bom.) wherein the hon'ble court held that the language of section 32 of the Act is such that depreciation is admissible only if asset has been actually used in the business. | |
| 2. | On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in deleting the proportionate disallowance of Rs. 11,47,169 out of repairs and maintenance and housekeeping expenses related to the area which was not put to use without appreciating that such expenses were not allowable as they were not incurred wholly and exclusively for the purpose of business under section 30/31/37(2) read with section 38(2) of the Act." |
24. Briefly stated, during the course of the assessment proceedings, the Assessing Officer observed that the assessee has claimed an area of 25,000 sft. area utilised for storage. This is in addition to parking space, storage areas and other services specific areas created by the assessee in the commercial complexes constructed. The learned Assessing Officer has not accepted the assessee's ad hoc claim of 25,000 sq. of area utilised for storage. The unutilised area is computed at 14,787 sft. for Ahmedabad mall complex, 5,000 sft. for Chandigarh Mall complex and 33,802 sft. for Andheri mall complex. The total unutilised area is computed at 53,589 sft. This unutilised area is not inclusive of parking space, service area and other storage spaces left by the assessee. The Assessing Officer further held that the assessee has admitted rentals for open spaces and rentals for services provided under "common amenities". The specific rentals for amenities includes rent calculated for electrical, lifts, escalators and a host of other building rentable area specific amenities. Considering this, the learned Assessing Officer worked out an area of 53,589 sft. to 14.53 per cent. of the total built up area of 3,68,749 sft. corresponding percentage of depreciation claimed of plant and machinery and disallowed the same as under :
| Building | Rs. 4,82,91,028 | 14.53% | Rs. 70,16,686 |
| Plant and machinery | Rs. 6,38,06,174 | 14.53% | Rs. 92,71,037 |
| Rs. 1,62,87,726 |
25. The Assessing Officer further held that the total amount of depreciation claimed of Rs. 1,62,87,723 pertains to the unutilised area of the commercial complex constructed in the three locations. As this area is not put to business use as per the claim of assessee, the Assessing Officer disallowed the depreciation thereon. In this regard, the Assessing Officer placed reliance on the decision of the hon'ble High Court in the case of Dineshkumar Gulabchand Agrawal v. CIT [2004] 267 ITR 768/141 Taxman 62 (Bom.). This amount of Rs. 1,62,87,723 disallowed by the learned Assessing Officer from being claimed as business expenses. The Assessing Officer further observed that the assessee has claimed repairs and maintenance of Rs. 28,91,495 on building and house keeping charges of Rs. 50,03,682. The Assessing Officer held 14.53 per cent. of this total of Rs. 78,95,177 amounting to Rs. 11,47,169 towards the unutilised portion of the commercial complex and disallowed from being claimed as revenue expenses. The learned Assessing Officer held decapitation of Rs. 1,62,87,723 and expenses of Rs. 11,47,169 amounting to Rs. 1,74,29,892 as proportionate expenses ascribed towards the unused portion of the commercial complex.
26. Before the Commissioner of Income-tax (Appeals) the assessee submitted that the entire commercial space was put to use but only part of it was sold/leased and income earned but that does not mean the unutilised area was used for non-business purposes or personal purposes and that the assessee was owner of the entire building and plant and machinery and they have entered the block so the depreciation cannot be disallowed. Regarding repairs and maintenance, it was submitted that these expenses were incurred for regular upkeep of premises of the common business. It also relied on various case law. The detailed submissions are in the order of the Commissioner of Income-tax (Appeals) at para 3.2
27. After considering the submissions, the Commissioner of Income-tax (Appeals) has allowed the claim of the assessee. His order in para 3.3 is as under :
"3.3.1 I have carefully considered the contention of the appellant and also carefully gone through the documents available on record. Section 32(1) lays downs the following aspects for eligibility to claim depreciation :
| • | Depreciation is allowable on certain kinds of assets only. As rightly observed by the Calcutta High Court in Oil India Ltd. v. CIT (Central)[1978] 114 ITR 323 (Cal) 'It is not that depreciation on every type of assets owned by an assessee is an allowable deduction under the Income-tax Acts. Section 32 of the Income-tax Act, 1961, allows depreciation only on buildings, machinery, plant or furniture owned by an assessee and used by him during the relevant year for the purposes of his business or profession'. | |
| • | Such an asset should be owned by the assessee. | |
| • | It should be used for the purposes of the business or profession. | |
| • | The deduction is subject to the provisions of section 34. |
3.3.2 One of the conditions for allowance for depreciation is that the asset must be used for the purposes of the business or profession carried on by the assessee. Condition as to user of the asset was there in section 32 even prior to amendment of section 32 by the Taxation Laws (Amendment and miscellaneous Provisions) Act, 1986. This 1986 Act, amended section 32 with effect from April 1, 1988 so as provide that the depreciation on assets owned and used by the assessee for the purposes of his business or profession shall be allowed according to system of block of assets. The issue which arises for consideration is as to whether the condition as to user will be applicable on the block of assets as a whole or by reference to individual assets comprised in the block. The Central Board of Direct Taxes in its Circular No. 469, dated September 23, 1986 ([1986] 162 ITR (St.) 21) has explained the amended provisions as under :-
'6.3 As mentioned by the Economic Administration Reforms Commission (Report No. 12, para 20), the existing system in this regard requires the calculation of depreciation in respect of each capital asset separately and not in respect of block of assets. This requires elaborate book-keeping and the process of checking by the Assessing Officer is time consuming. The greater differentiation in rates, according to the date of purchase, the type of asset, the intensity of use, etc., the more disaggregated has to be the record keeping. Moreover, the practice of granting the terminal allowance as per section 32(1)(iii) or taxing the balancing charge as per section 41(2) of the Income-tax Act necessitate the keeping of records of depreciation already availed of by each asset eligible for depreciation. In order to simplify the existing cumbersome provisions, the Amending Act has introduced a system of allowing depreciation on block of assets. This will mean the calculation of lump sum amount of depreciation for the entire block of depreciable assets in each of the four classes of assets, namely, buildings, machinery, plant and furniture.'
3.3.4 In CIT v. Bharat Aluminium Co. Ltd. [2010] 187 Taxman 111 (Delhi), question arose for allowability of depreciation on asset entering to block of assets. The Delhi High Court held that prior to the introduction of new concept of block of assets with effect from April 1, 1988, the depreciation used to be claimed separately on each asset. The Legislature found that this was a cumbersome procedure leading to various difficulties. This necessitated introduction of the concept of block of assets and allowability of depreciation on such a block. The rationale and purpose for which the concept of block asset was introduced by the amendment in the provisions of the Act, as reflected in the Circular dated September 23, 1988 of the Central Board of Direct Taxes. The intention behind these provisions is apparent. Once the various assets are clubbed together and become block asset within the meaning of section 2(11), for the purpose of depreciation, it is one asset. Every time, a new asset is acquired, it is to be thrown into the common hotchpotch, i.e., block asset on meeting the requirement of depreciation allowable at the same rate. The value of the block asset increases and the depreciation is to be given on the aforesaid value, which is to be treated as written down value. The individual assets lose their identity from that very moment it becomes inseparable part of block asset in so far as calculation of depreciation is concerned. Fusion of various assets into the block asset gets disturbed only when eventuality contained in clause (iii) of section 32 takes place, viz., when a particular asset is sold, discarded or destroyed in the previous year (other than the previous year in which it was first brought in use). Even in that event, the amount by which the moneys payable in respect of that particular building, machinery, etc., together with the amount of scrap value is to be deducted from total written down value of the block asset. Once one understands and appreciates this scheme contained in the aforesaid provisions, it is not possible to accept the contention of the Revenue that unless a particular asset is used for the purpose of business or provision, depreciation is not allowed. No doubt as per section 32(1), in order to be entitled to claim depreciation, the asset is to be owned by the assessee and it is also to be used for the purpose of business or profession. However, the expression 'used for the purpose of business I, when applied to block asset, would mean use of block asset and not any specific building, machinery, plant or furniture in the said block asset as individual assets have lost their identity after becoming inseparable part of the block asset.
3.3.5 Section 38(2) contains the provisions as to proportional depreciation in case the asset is partly used by the assessee for the purposes of business or profession and partly for any other purpose. It is provided that where any building, machinery, plant or furniture is not used by the assessee exclusively for the purposes of business or profession carried on by him then the deduction under section 32(1)(ii) shall be restricted to a fair proportionate part thereof as may be determined by the Assessing Officer having regard to the user of such building, plant, machinery or furniture for the purposes of business or profession. It is to be noted that section 38(2) does not refer to intangible assets, hence the same will not be applicable in case of such assets. Prior to amendment of section 32, section 38(2) referred to reduction of deduction admissible in respect of depreciation, additional depreciation and terminal allowance but after the amendments by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, section 38(2) was also amended and hence now it refers only to allowance under section
3.3.6 Therefore, after the amendment by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, with effect from April 1, 1988, the individual assets have lost their identity and for the purpose of allowing of depreciation, only the block of assets has to be considered. It has to be seen whether the particular block of assets is owned by the assessee and used for the purpose of business. If a block of assets is owned by the assessee and used for the purpose of business, depreciation will be allowed. Therefore, the test of user has to be applied upon the block as a whole instead of upon an individual asset. Therefore, the observation of the learned Assessing Officer that the depreciation on building and plant and machinery will be allowed to the extent of the area which is used for business purposes vis-a-vis for non business purposes is devoid of any merit. Once it is proved that block of asset is used for the purposes of appellant business and there is no finding as to whether the block of assets or for that matter any asset falling in the block of asset is used for other business purposes proportionate disallowances of depreciation is not warranted. Therefore, the learned Assessing Officer's action in disallowing the proportionate depreciation on the pretext that the area to the extent of 14.53 per cent. was not used or remained unutilised is not sustainable. Accordingly, the addition made by the learned Assessing Officer is deleted. Similarly, the learned Assessing Officer had also disallowed the revenue expenditure on account of repair and maintenance and on account of housekeeping expenses on the same logic as was done in respect of depreciation, i.e., the 14.53 per cent. in respect of the unutilised area, the additions made by the learned Assessing Officer cannot be sustained in view of the facts that the revenue expenditure were incurred by the appellant for the housekeeping and repair and maintenance was undertaken to maintain the area, the mall as such is a composite property and cannot be isolated. Therefore, the entire area is to be seen as such, the appellant has to keep the entire area ready for use failing which nothing works in the mall. Therefore, the addition made by the learned Assessing Officer is not sustainable as far as repair and maintenance and housekeeping expenses are concerned. These additions are also accordingly deleted".
28. After considering the rival contentions, we agree with the learned Commissioner of Income-tax (Appeals). First of all there is no basis for working out the utilised and unutilised areas as was done by the Assessing Officer when the entire multiplex was put to use. The assessee has started operation in only three places and balance of projects are under various stages of construction. Therefore, what the assessee claimed was depreciation of projects under operation and repairs and maintenances of the same. Once the entire project has commenced the business operation, just because part of it was not leased out or commercially exploited cannot be a basis for disallowing of depreciation and expenditure. Following the concept of block assets of an asset has entered into "block of assets" and depreciation has been granted on it, the claim of depreciation cannot be denied in subsequent years, the following cases support the above contention :
| 1. | CIT v. Sonal Gum Industries [2010] 322 ITR 542 (Guj) ; | |
| 2. | Swati Synthetics Ltd. v. ITO [2010] 38 SOT 208 (Mum) ; | |
| 3. | Unitex Products Ltd. v. ITO [2008] 22 SOT 429 (Mum) ; | |
| 4. | Dy. CIT v. Boskalis Dredging India (P.) Ltd. [2012] 53 SOT 17 (URO)/23 taxmann.com 4 (Mum.) ; and | |
| 5. | Asstt. CIT v. SRF Ltd. [2008] 21 SOT 122 (Delhi), 130-131. |
Likewise, the claim of revenue expenditure on repairs and maintenance. There is no merit in action of the Assessing Officer in disallowing the amounts. The order of the learned Commissioner of Income-tax (Appeals) is upheld. Grounds are rejected.
29. The Revenue's appeal in ITA No. 1480/Mum/2012 is dismissed.
30. In the result, the assessee's appeal in ITA No. 1382/Mum/2012 is partly allowed and the Revenue's appeal in ITA No. 1480/Mum/2012 is dismissed.
Regards
Prarthana Jalan
__._,_.___
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