2013 (7) TMI 451 - HC - Income Tax

Court allows deduction for NSDL payment & traffic signals under Section 37(1) as business expenditure. No double deduction under Section 80G.

THE COMMISSIONER OF INCOME TAX, BANGALOR & OTH. Versus M/s INFOSYS TECHNOLOGIES LTD

The court determined that the payment to NSDL for custody charges constituted a revenue expenditure, deductible under Section 37(1). The expenditure on ... Deduction u/s 37(1) - Custody charges paid to NSDL - Whether contribution to NSDL amount as revenue expenditure or capital expenditure - Held that:- if the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring the benefit of the business it is properly attributable to capital and is of the nature of capital expenditure - Without such payment, after the Act came into force, the assessee shall not make public or rights issue or other for sale of securities - The expenditure has helped in reducing the cost of handling physical share certificates - Even if certain benefits go to the shareholders, consequently, the assessee has gained good will - Therefore this expenses incurred squarely falls within the phrase “laid out or expended wholly and exclusively for the purpose of business” and therefore it shall be deducted in computing the income chargeable under the head of profits or gain of business or profession - Following decidion of EMPIRE JUTE CO. LTD Vs. COMMISSIONER OF INCOME TAX [1980 (5) TMI 1 - SUPREME Court] - Decided against the Revenue. Deduction u/s 80G - Exemption also granted u/s 10A - Double deduction - Donation made to Keonics Unit - Held that:- It is not in dispute that the assessee is entitled to the benefit of deduction under Section 80G - As the entire income from the Keonics Unit is exempted from payment of tax, the debiting of donation in the first instance and adding it back subsequently makes no difference - Therefore the deduction under Section 80G is claimed from the total income excluding the income of Kenoics Unit and in law, the assessee is entitled to the said benefit - Decided against the Revenue. Deduction u/s 37(1) - Installation of traffic signal - A.O. held deduction can only claimed u/s 80G - Held that:- If the contribution by an assessee is in the form of donations of the category specified under section 80G, but if it could also be termed as an expenditure of the category falling under section 37(1), then the right of the assessee to claim the whole of it as allowance under section 37(1) cannot be denied - But such money must be 'laid out or expended wholly and exclusively for the purpose of business' - If the expenditure has been incurred by the assessee voluntarily, even without necessity, but if it is for promoting the business, the deduction would be permissible under section 37(1) of the Act - It is something which is gone irretrievably, but should not be in respect of an unascertained liability of the future - assessee is having their establishment at Bannerghata Circle. Nearly about 500 employees are working in the said Unit. There was severe traffic congestion. Employees had to wait for longer time to reach the office. It seriously affected the business of the assessee, resulting in delay in completing the project. In order to facilitate its employees to reach their establishment safely and early, the assessee has installed traffic signals at Bannerghata Circle - The assesee also has corporate social responsibility - In this background, in order to discharge their corporate social responsibility which also facilitates their business if the employees were to reach the place early, they thought of incurring the expenditure for installing the traffic signal - Following decisions of COMMISSIONER OF INCOME TAX & ANR Vs. INFOSYS TECNOLOGIES LTD. [2013 (2) TMI 305 - Karnataka High Court] and Season J. David and Co. P. Ltd. v. CIT [1979 (5) TMI 3 - SUPREME Court] - Decided against the Revenue. Deduction on account of warranty provision - Post sales expenses - Held that:- company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The warranty provisions for the products should be based on the estimate at year end of future warranty expenses. Such estimates needs reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount - Assessee has not maintained separate account - He is not able to state what is the total amount spent towards this post sale expenses - Matter remitted back. Issues Involved:1. Whether the payment to NSDL constitutes a capital expenditure or a revenue expenditure.2. Whether the expenditure on installing traffic signals constitutes business expenditure under Section 37(1) of the Act.3. Whether claiming a deduction under Section 80G from gross total income amounts to claiming double deduction for a single outgo.4. Whether the assessee is entitled to 2% of sale price towards warranty charges and consequently entitled to claim deductions.5. Whether the assessee is entitled to the benefit of deduction under Section 80HHE for the specified amount treated as expenditure incurred for providing technical services outside India.Detailed Analysis:First Substantial Question of Law:The court examined whether the payment of Rs. 44.43 Lakhs to NSDL for one-time custody charges constitutes a capital expenditure or a revenue expenditure. The court noted that the Depositories Act, 1996, mandates companies to dematerialize their securities, which led the assessee to incur this expense. The court referenced the principles laid out in the cases of Assam Bengal Cement Co. Ltd. and Empire Jute Co. Ltd., which distinguish between capital and revenue expenditures based on the nature and purpose of the expenditure. It concluded that the expenditure was made to facilitate the efficient functioning of the business without creating a new asset or enduring benefit in the capital field. Thus, it was deemed a revenue expenditure allowable under Section 37(1) of the Act.Second Substantial Question of Law:The court addressed whether the expenditure of Rs. 7,37,720/- for installing traffic signals at Bannerghatta Circle qualifies as business expenditure under Section 37(1). The court referred to the case of Mysore Kirloskar Ltd., which clarified that voluntary expenditures made for promoting business, even if they benefit others, can be deductible under Section 37(1). The court distinguished this case from others where payments were deemed illegal or donations. It concluded that the expenditure was incurred to facilitate the timely arrival of employees, thereby promoting business efficiency. Thus, it was considered allowable as business expenditure under Section 37(1).Third Substantial Question of Law:The court examined whether claiming a deduction under Section 80G from gross total income, excluding the income of the 10A unit, amounts to claiming double deduction. The court clarified that Section 10A provides an exemption, whereas Section 80G provides a deduction. The assessee added back the donation amount to the income of the 10A unit before claiming the deduction under Section 80G, ensuring no double deduction. The court upheld the Tribunal's decision that the deduction under Section 80G was correctly claimed and allowed.Fourth Substantial Question of Law:The court evaluated whether the provision for warranty charges at 2% of the sale price is allowable as a deduction. It referenced the Supreme Court's decision in Rotork Controls India (P) Ltd., which allows such provisions if based on sound accounting principles and reliable estimates. The court found that the assessee failed to maintain separate accounts and provide specific details of actual expenses incurred. Consequently, the court set aside the Tribunal's finding and remanded the matter to the Assessing Authority for fresh consideration, allowing the assessee to provide the necessary information.Fifth Substantial Question of Law:The court addressed the benefit of deduction under Section 80HHE for Rs. 31,93,41,102/-, treated as expenditure for providing technical services outside India. The Tribunal had granted relief based on its earlier order, which was subsequently set aside. The court followed the previous judgment, remanding the matter back to the Assessing Authority for fresh consideration in accordance with the law.Conclusion:The appeal was allowed in part. The findings on the provision for warranty and deduction under Section 80HHE were set aside and remanded to the Assessing Authority. The Tribunal's decisions on other issues were affirmed. Each party was ordered to bear its own costs.