2021 (10) TMI 1209 - HC - Income Tax

Court rules on jurisdiction under IT Act Section 263, share premium, and cost of acquisition as assets.

The court ruled in favor of the assessee regarding the jurisdiction of the Commissioner under Section 263 of the IT Act, stating that revisionary powers ... Revision u/s 263 by CIT - Deduction u/s 35D - assessee had wrongly claimed the deduction as it was not an industrial undertaking within the meaning of such expression as envisaged u/s 35D - HELD THAT:- Considering the fact that in respect of financial year 2006-07 relatable to assessment year 2007-08 the assessee had been granted the benefit of amortization under Section 35D[1] of the Act and no action under Section 147 or 263 of the Act had been taken in relation to the said assessment year. Thus, it has been held that once the claim has been granted by the assessing officer in respect of previous years, such claim cannot be disallowed subsequently without disturbing the decision in the initial year. In that context, it was held that the view adopted by the assessing officer is not a plausible view, it is now well settled that if two views are possible and the assessing officer has adopted one view, the same would not warrant exercise of the powers under Section 263 of the Act. No doubt, in the present case, it is not in dispute that during the first year relating to the assessment year 2007-08, Section 154 proceedings were initiated, subsequent to initiation of revisional proceedings under Section 263, the same would not pass the test of law as enunciated by the Hon'ble Apex Court in Shasun Chemicals and Drugs Ltd.[2016 (9) TMI 1199 - SUPREME COURT] since the same being post revision proceedings and has resulted in giving relief to the assessee on some other ground. Even in terms of Gujarat Narmada Valley Fertilizers Co. Ltd. [2013 (8) TMI 300 - GUJARAT HIGH COURT], the claim which has been granted by the Assessing Officer could not be disallowed subsequently, without disturbing the decision in the initial year. Post action of the Assessing Officer in modifying the original order would not cure the flaw pointed out in Shasun Chemicals and Drugs Ltd. [2016 (9) TMI 1199 - SUPREME COURT] - We answer this issue in favour of the assessee and against the Revenue. Whether share premium collected on the issue of Share Capital by the Appellant cannot be taken as part of the ‘Capital Employed’ for allowing deduction under Section 35D? - HELD THAT: This question of law has been considered by the Hon'ble Apex Court and answered in favour of the Revenue in Berger Paints India Ltd., V/s. Commissioner of Income-tax, Delhi-V, [2017 (3) TMI 1531 - SUPREME COURT] Accordingly, this substantial question of law is answered in favour of the Revenue and against the Assessee. Cost of acquisition of companies cannot be treated as asset for allowing deduction u/s 35D - assessee submitted that the acquisition of 100% subsidiary shares of the two companies has to be construed as cost of project - HELD THAT:- The assessee itself stated before the revisional authority under 263 proceedings with regard to computation of cost of project it had incurred, that expenditure towards issue of Global Depository Receipt and Foreign Currency Convertible Bonds was related to extension of industrial undertaking of the assessee; there being no definition of the word “extension” under the Act, the word “expansion” has to be considered as “extension”. Thus, going by meaning assigned to the word “extension”, quite apart from the horizontal expansion in the industrial undertaking, vertical expansion also stands included within the meaning of the term “extension” of the industrial undertaking. It was further stated that the assessee has incurred expenditure for the purpose of acquisition of Subex Americas Inc., and Subex UK Limited and the same was incurred for the purpose of expansion of the business. As aforementioned, there being vast difference between “expansion” and “extension”, the arguments of the learned counsel for the assessee, placing reliance on the consolidation procedures as per the Accounting Standard [AS-21], cannot be countenanced. - Decided in favour of revenue. Issues Involved:1. Jurisdiction of the Commissioner in exercising revisionary powers under Section 263 of the IT Act.2. Inclusion of share premium in 'Capital Employed' for deduction under Section 35D of the IT Act.3. Treatment of the cost of acquisition of companies as an asset for deduction under Section 35D of the IT Act.Issue-wise Detailed Analysis:1. Jurisdiction of the Commissioner under Section 263 of the IT Act:The assessee argued that no revision proceedings were initiated for the assessment year 2007-08, the first of the five successive years for amortization of preliminary expenses under Section 35D. The counsel cited the Supreme Court's decision in Shasun Chemicals and Drugs Ltd., which held that once a claim under Section 35D is accepted for the first year, it cannot be denied in subsequent years without disturbing the initial year's assessment. The Revenue argued that since Section 154 proceedings were initiated for 2007-08, the Commissioner was justified in exercising revisionary powers for 2008-09. The court, however, found that post-revision actions do not cure the flaw pointed out in Shasun Chemicals and Drugs Ltd., and ruled in favor of the assessee, stating that the revision powers exercised by the Commissioner were unjustifiable without disturbing the initial year's assessment.2. Inclusion of Share Premium in 'Capital Employed':Both parties agreed that this issue had been settled by the Supreme Court in Berger Paints India Ltd., which ruled in favor of the Revenue. Consequently, the court also ruled in favor of the Revenue, stating that the share premium collected on the issue of share capital cannot be included as part of the 'Capital Employed' for the purpose of allowing deduction under Section 35D.3. Treatment of the Cost of Acquisition of Companies as an Asset:The court examined Section 35D(3) and the definition of 'cost of project' and 'capital employed.' The assessee argued that acquiring 100% subsidiary shares should be considered as an extension of the undertaking and thus qualify for deduction. However, the Revenue contended that shareholders are not the owners of the fixed assets, and the acquisition of shares does not equate to acquiring fixed assets. The court referred to various judgments, including CIT v. Shree Synthetics Ltd. and CIT v. Ashok Leyland Ltd., and concluded that the term 'being' in the context of fixed assets is exhaustive and not illustrative. Therefore, the acquisition of companies by acquiring 100% subsidiary shares does not qualify as acquiring fixed assets for the purpose of Section 35D. The court ruled in favor of the Revenue, stating that the cost of acquisition of companies cannot be treated as an asset for allowing deduction under Section 35D.Conclusion:The court answered the first substantial question of law in favor of the assessee, and the second and third substantial questions of law in favor of the Revenue. The appeal was partly allowed as indicated.