2011 (3) TMI 679 - HC - Income Tax

Court Upholds ITAT Decision on Preliminary Expenses Amortization

The court upheld the decision of the Income Tax Appellate Tribunal (ITAT) regarding the amortization of preliminary expenses under Section 35D for the ... Disallowed - Amortization of the preliminary expenses - Deduction under Section 35D - Held that:- there is no reason to disallow the same as it is clear that the Revenue had accepted to amortize the aforesaid expense over a period of ten years and, therefore, for all these ten years, the expenditure is eligible for deduction under Section 35D of the Act. No question of law arises. whether there was excess consumption of sugar - s to the ITAT against the aforesaid order. Insofar as the Revenue is concerned, it was aggrieved against the relief given by the CIT(A). The ITAT rejected the appeal of the Revenue and rightly so. As already pointed out above, even if we proceed on the assumption that there was excess consumption of sugar, there was no rational basis for presuming that the respondent would have manufactured more soft drinks and the production of these soft drinks were suppressed. It is an admitted case that the Assessee was maintaining the regular books of accounts and no discrepancy in the books of accounts was found. Assessee is also maintaining the records of stocks. The product of the assessee is also excisable. - Excess consumption is due to excess wastage - decided in favor of assessee. Issues:1. Amortization of preliminary expenses under Section 35D2. Alleged excess consumption of sugar3. Depreciation under Explanation 5 to Section 32(i) of Income Tax Act4. MODVAT credit in valuation of closing stockIssue 1: Amortization of preliminary expenses under Section 35D:The appeal concerned the assessment year 1998-99 and the allowance of amortization of preliminary expenses under Section 35D of the Income-Tax Act. The Assessing Officer disallowed the amortization of expenses of Rs. 8,02,000, assuming it was a fee payable on account of an increase in share capital. However, it was found that the expenses were incurred on the registration of the company before the commencement of business operations. The Income Tax Appellate Tribunal (ITAT) allowed the expenses to be amortized over ten years, and the expenditure was claimed for the relevant year. The ITAT's decision was upheld as the expenses were eligible for deduction under Section 35D for all ten years, and no question of law arose.Issue 2: Alleged excess consumption of sugar:The Assessing Officer observed an alleged excess consumption of sugar in the production of soft drinks, leading to a discrepancy in the reported figures. The CIT(A) disagreed with the Assessing Officer's approach, acknowledging the excess consumption of sugar but calculating it at 1259 tonnes based on detailed assessments. The ITAT rejected the Revenue's appeal, emphasizing that the alleged excess consumption was based on presumptions without concrete evidence. The Tribunal's factual finding was that there was no excess consumption of sugar, and the addition made by the CIT(A) was rightly deleted.Issue 3: Depreciation under Explanation 5 to Section 32(i) of Income Tax Act:The contention regarding depreciation under Explanation 5 to Section 32(i) of the Income Tax Act was raised by the Revenue. It was argued that the Assessing Officer rightly disallowed the depreciation as the explanation was clarificatory. However, it was noted that the Assessee had not claimed depreciation in previous years, making the question raised by the Revenue academic and not relevant for consideration.Issue 4: MODVAT credit in valuation of closing stock:The judgment referenced a previous case law (261 ITR 275, CIT v. Indo Nippon) to conclude the issue of MODVAT credit in the valuation of closing stock against the Revenue. The appeal was dismissed based on the findings and conclusions regarding the various issues raised in the case.