TaxTMI 
TaxTMI 
2007 (2) TMI 276
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....ction u/s. 35D 88,064 3. Market survey expenses-amortized 4,62,000 4. Amounts written off 2,22,04,548 5. EDP software expenses 80,500 Less: Depreciation @ 60 % 48,300 32,200 6. Disallowance out of expenses 94,425 7. Travelling & conveyance 1,00,000 8. Telephone & fax expenses 1,11,748 9. Sales promotion expenses 10,000 2,31,30,218 Total income 1,20,15,092 3. The CIT(A) allowed part relief and his order has been challenged by the assessee in the present appeal. Ground No. 1 "On the facts and circumstances prevailing in the case and as per provisions of law, it be held that the deduction claimed on account of lead manager fee of Rs. 75,000 and SEBI and PSE registration fee of Rs. 20,000 is allowable expenditure and be allowed in full. Without prejudice it further be held that deduction be allowed and in alternative the deduction be allowed on the basis of decision of the AO, just and proper relief be granted to the appellant in this respect." 4. In para 4 of his order, the AO invoked the provisions of s. 35D in respect....
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..... 28 of the IT Act. It further be held that amount used by the appellant company for obtaining controlling interest was for business purpose and loss, deficit incurred is in ordinary course of business and is eligible for deduction under the scheme and provisions of IT Act. The claim be allowed in full as per provisions and scheme of the Act." 9. The facts of the case in brief are as follows: The assessee company, earlier known as Ador Samia Ltd. (ASL), was engaged in the business of thermal, combustion and environmental engineering products and projects. An agreement was entered into between ASL and major shareholders of M/s Indocan Engineering systems Ltd (Indocan) on 29th Aug., 1997. This agreement provided for acquisition of 60 per cent of the paid up capital of Indocan by ASL during the financial year 1997-98. The acquisition price was arrived at Rs. 2.99 crores being full value of 60 per cent equity shares of Indocan. The shares held by Shri A. Parmeshwaran and his family representing about 18 per cent of the paid up capital of Indocan were allotted to the assessee-company The balance of the shares were held by a Canadian company, M/s Peekay Holdings Ltd. 9.1 Further, t....
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....rtnership with another company carrying on similar business. - that Indocan Engineering Systems Ltd. of Pune was one such company, engaged in the business of environmental engineering and erection of turnkey of water treatment and chemical treatment plants. - that Indocan was in need of financial assistance to tide over the liquidity problem faced in execution of its existing business as also for expansion of its business. - that an MOU was signed between the two companies on 6th July, 1997 for strategic alliance/partnership for synergizing their businesses. - that total funds of Rs. 2,99,00,000 were placed at the disposal of Indocan partly by way of purchase of shares and partly by way of ICDs. - that shortly thereafter, sometimes in October, 1997, it was noticed from the balance sheet of Indocan for financial year 1996-97 that it had accumulated substantial losses/liabilities. - that a number of steps were taken to recover the ICDs from Indocan. - that the arbitration award was passed on 18th Oct., 2001 but no recovery could be made. - that the appellant company claimed before the AO and the CIT(A) that the p....
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....mount (Rs.) 2001-02 Shares 76,68,000 ICDs 1,45,36,548 Total 2,22,04,948 13. Before proceeding further, we consider it necessary to examine and discuss the legal position, with regard to the above issue, as laid down by Courts in cases which were relied upon by Shri. S.K. Lal, the learned Authorised Representative, and Shri. Pradeep Sharma, the learned CIT(A). 14. One of the decisions relied upon by the learned CIT(A) was of the Delhi High Court in the case of Distillers' Trading Corpn. Ltd. In this case the Delhi High Court placed reliance on the decisions of the Supreme Court in the following three cases: (i) Ramchandar Shivnarayan vs. CIT 1978 CTR (SC) 5 : (1978) 111 ITR 263 (SC); (ii) CIT vs. Mysore Sugar Co. Ltd. (1962) 46 ITR 649 (SC); (iii) CIT vs. Motiram Nandram (1940) 8 ITR 132 (PC). 15. In the case of Ramchandar Shivnarayan, the Supreme Court summed up the principles as under: "The principle applicable in India is more or less the same. If there is a direct and proximate nexus between the business operation and the loss or it is incidental to it, then the loss is deductible, as, with....
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....trading principles, it could be said to arise out of the carrying on of the business and to be incidental to it. The loss for which a deduction is claimed must be one that springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee even if it has some connection with his business. If that is established, then the deduction must be allowed, provided, of course, there is no prohibition against it, express or implied, in the Act. 19. In the case of Ramchandar Shivnarayan, the assessee, a registered firm, carried on business in gold, silver and gunnies at Rajahmundry. It also derived income from the investment in Government securities. In years, both preceding and succeeding the relevant accounting year, the assessee had sold some Government securities and bonds. A sum of Rs. 50,000 borrowed from a creditor for the purpose of purchasing Government securities, was brought in cash to Rajahmundry by its employee and was handed over to its cashier. At a time when the cashier had turned his back to take out some books, a stranger suddenly arrived at the place of the appellant's business and committed theft of Rs. 30,000. In....
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....1951. The financial position of Palanpur Co. deteriorated and the above loan became irrecoverable. The assessee company accordingly claimed deduction of Rs. 1,86,000. The Tribunal recorded a finding that the finances made by the assessee company to Palanpur Co. were part of or incidental to the carrying on of the business by the assessee company as managing agents. The Court held that the advances aggregating to Rs. 1,86,000 originated in carrying on the business of the assessee as managing agents and therefore, the assessee's claim was allowed as trading loss. 23. The other decision relied upon by the learned Authorised Representative at S. No. (d), of his written submission, is of the Supreme Court in the case of Bombay Dyeing and Manufacturing Co. Ltd. In that case an amount of Rs. 2,25,000 was contributed by the assessee to the Maharashtra Housing Board towards construction of tenements for the company's workers. The tenements remained the property and the assets of the housing board. The Tribunal gave a finding that the expenditure was incurred merely with a view to carrying on the business of the assessee company more efficiently by having a contended labour force.....
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....e business, or it was incidental to the carrying out of the operations of the business, or it had a direct and a proximate nexus with the operations of the business., or it directly springs from the carrying on of the operations of the business, is a question of fact which has to be decided on the facts of each case. 26. We, now proceed to examine the facts of the present case in the light of the legal position enumerated above. It is seen that the business activities of the assessee company comprised of project engineering and manufacturing of electromechanical assemblies. The project engineering activity comprised of designing, procuring, erecting, and commissioning of projects of different types and sizes of combustion and thermal engineering products such as flare systems, burners, furnaces, industrial/hospital waste incinerators, crematoriums, laddle heating systems, etc., The manufacturing of electromechanical assemblies is done as per the technical specification given by the customers. 27. The MOU dt. 6th July, 1997 entered into between the assessee company and Indocan stated, inter alia, as under: - that a strategic alliance between the two organizations woul....
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....unt (Rs.) 2001-02 Shares 76,68,000 ICDs 1,45,36,548 Total 2,22,04,548 2002-03 ICDs 75,00,000 Total 2,97,04,548 32. The claim of Rs. 2,22,04,548 made in asst. yr. 2001-02 has two components. One component of Rs. 1,45,36,548 represents ICDs placed with Indocan by the assessee company and its associates, and interest thereon. The. other component of Rs. 76,68,000 represents payments made to the shareholders of Indocan for purchase of equity shares as under: S. No. Number of shares Name of shareholder (transferor) 1 1,500 Ms. Rekha Parameshwaran 5,600 2. 1,900 Mr. A. Parameshwaran 2,000 3. 15,850 Mrs. P. Rajalakshmi 2,000 Total: 28,400 Rs. 76,68,000 Consideration at Rs. 270 per share 33. It appears that the shareholders of Indocan filed an arbitration petition (No. 288 of 1998) on 15th May, 1998 before the Bombay High Court. Also, the assessee filed a Writ Petition (No. 2770 of 1999) before the Bombay High Court which was disposed of on 29th Sept., 1999, by consent, and Mr. Justice M.L. Pendse (Retd) was appointed as ....
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....'s claim as a 'business loss', or alternatively, as a revenue expenditure under s. 37(1), as mentioned in paras 30 and 31 above, is for Rs. 2,20,36,548 out of which Rs. 1,45,36,548 were claimed in asst. yr. 2001-02 and Rs. 75,00,000 were claimed in asst. yr. 2002-03. It represents payments made by the assessee company and its associates to Indocan as ICDs because Indocan was in financial difficulties. The operations of the business of the assessee company are mentioned in para 26 above. Therefore, we have to hold that the payments of ICDs to Indocan had neither a direct and proximate nexus with, nor was it incidental to, the carrying on of the operations of the business of the assessee company as mentioned in para 26 above. Admittedly, it is not the business of the assessee company to make deposits as ICDs. We, therefore, hold that the claim of Rs. 2,20,36,548 can neither be allowed as a 'business loss' nor as a revenue expenditure under s. 37(1) of the Act. 37. The expressions used by the Supreme Court in the cases mentioned in the above paras are: 'carrying on of the operations of the business' and 'direct and proximate nexus'. The differenc....
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....ment of Rs. 1,38,360 was not paid for consultancy fee to Hindustan Computers Ltd., in fact, the payment was made for outright sale of 'computer software' which is used as technique in mining operations. The finding of the CIT(A) is that the acquisition of software cannot be treated to be an asset of endurable nature. If the programme is used in one mining to another mining operation why it should not be treated as a capital asset and expenditure on that is capital expenditure. Considering these facts and the decision of their Lordships and a later decision of the Bombay High Court, in our view, the acquisition of technical know-how is capital expenditure, therefore, the AO has rightly treated the expenditure on acquiring the computer software as expenditure of capital nature and rightly allowed depreciation as per rules." 42. A similar view was taken by the Tribunal, Pune, in the case of Kinetic Engineering Ltd. in ITA No. 1159/Pn/2003, dt. 29th Dec., 2006. We respectfully follow the precedents and reject the ground no. 3. Ground No. 4 "On the facts and circumstances prevailing in the case and as per provisions of law, it be held that the ad hoc disallowance ....
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....orted by the provision of s. 40(c) and s. 40A(5) of the Act." 47. We, respectfully, follow the precedent and allow the ground No. 4. Ground No. 5 "On the facts and circumstances prevailing in the case and as per provisions of law, it be held that the ad hoc disallowance on telephone and fax expenses of Rs. 50,000 sustained by the first appellate authority are unjust and improper. The claim be allowed in full. The appellant be granted just and proper relief in this respect." 48. The assessee had debited in the P&L a/c Rs. 7,44,989 under the head 'Communication Expenses' relating to telephone and fax. The AO made a disallowance at 15 per cent amounting to Rs. 1,11,748 on the ground of personal element. The CIT(A) restricted this disallowance to Rs. 50,000 on estimate basis in para 11.2 of his order. The assessee is a company and therefore such an ad hoc disallowance could not be made on the ground of personal/non-business user of the telephones/fax. In taking this view we are fortified by the decision of the Gujarat High Court in the case of Sayaji Iron and Engg. Co. The ground No. 5 is accordingly allowed. Ground No. 6 "On the facts and circumst....
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....ness purpose and out of business expediency and claim is allowable under s. 37 and/or s. 28 of the IT Act. Just and proper relief be granted to the appellant in this respect." 52. The total claim made by the assessee, in respect of the write off, in asst. yrs. 2001-02 and 2002-03, was as under: Asst. yr. Particulars Amount (Rs.) 2001-02 Shares 76,68,000 ICDs 1,45,36,548 Total 2,22,04,548 2002-03 ICDs 75,00,000 Total 2,97,04,548 53. The claim of Rs. 1,45,36,548 made in asst. yr. 2001-02 has been rejected by us for the reasons discussed in paras 12 to 39 above. The facts in respect of the claim of Rs. 75,00,000 made in asst. yr. 2002-03 are identical and therefore we uphold the order of the CIT(A) and reject the ground No. 1. Ground Nos. 2 and 3 "2. On facts and circumstances prevailing in the case and as per provisions of law, it be held that the ad hoc disallowance on telephone and fax expenses made by the AO and partly sustained by the first appellate authority is contrary to the provisions of the Act. It further be held that the claim is allowable in full. The appellant be granted just and proper re....