TaxTMI 
TaxTMI 
2008 (12) TMI 314
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....bsp; Amount No. ------------------------------------------------------------ 1. P.F. Penal Int. 78,620 ------------------------------------------------------------ 2. ESI Penalty 403 ------------------------------------------------------------ 3. Towards in lieu of damages under s. 14(B) of PF Act-EPFO account No. KN-50071. 2,48,262 ------------------------------------------------------------ 4. Int. payable under s. 70 of the EPF and Miscellaneous Provision Act, 1952 on related ....
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....enalty for financial year 2001-02 96,737 ------------------------------------------------------------ Total 13,54,180 ------------------------------------------------------------ The AO held that penalties and penal interests are levied for contravention of statutory obligations and therefore, these are not allowable. 2.2 The learned CIT(A) directed the AO to allow the above-referred sums as under after 0bserving as under: "According to the appellant, the AO ought to have known that the CIT(A) in IT Appeal 138/CC-1(1)/CIT(A)-VI/2002-03 dt. 28th Aug., 2002 for asst. yr. 1999-2000 in the case of Khoday Breweries Ltd., own sister concern, after detailed verification allowed the claim originally rejected by the AO. In view of the decision of the Supreme Court in the case of Prakash Cotton Mills (P) Ltd. vs. CIT (1993) 111 CTR (SC) 389 : (1993) 201 ITR 684 (SC) and Mahalakshmi Su....
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....which it is imposed and the circumstances under which it has been imposed. The mere nomenclature as interest, penalty or damages in the Act may not be conclusive for the purpose of allowing it as a deduction under the IT Act. Similarly, the circumstance that a fixed rate of interest has to be paid also may not be conclusive. Sec. 14B of the Act provides for levy of damages for delayed payment as a percentage of the amount due upto a prescribed maximum. Such a determination is to be done by the Appropriate Authority after giving an opportunity to the employer. Thus, the levy will be by a speaking order of the authority fixing quantum of damages. As held by the Supreme Court, the said amount comprises of both an element of penal levy as well as compensatory payment. It will be for the authority under the IT Act to decide with reference to the provisions of the Employees' Provident Funds Act and the reasons given in the order imposing and quantifying the damages to determine what proportion should be treated as penal and what proportion as compensatory. The entire sum can neither be considered as mere penalty nor as mere interest." 2.7 The Hon'ble apex Court in the case of CIT vs. ....
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....n the appeal filed by the assessee for the asst. yr. 1997-98 and disallowance was deleted in ITA No. 622/Bang/2001, dt. 22nd Oct., 2002. Since the facts for the assessment year under reference are the same as those of 1997-98 and therefore, the learned CIT(A) allowed the enhanced lease rent. 3.2 Before us, the learned Authorised Representative has submitted that the Tribunal in the case of the assessee for the various assessment years has allowed the enhanced lease rent. It was therefore urged that the issue is covered. 3.3 We have heard both the parties. The issue under reference has been decided by the Tribunal in favour of the assessee for the asst. yrs. 1997-98, 1998-99, 2000-01 and 2002-03. Thus, the issue is covered by the earlier decision of the Tribunal. Hence, we find no infirmity in the order of the learned CIT(A). It is held that the learned CIT(A) was justified in allowing the enhanced lease rent. 4. The third grievance of the Revenue is that the learned CIT(A) has erred in allowing an amount of Rs. 3,24,91,003 as revenue expenditure without appreciating the provisions of s. 35D of the IT Act. 4.1 The AO from the details filed noticed that the assessee has c....
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....CIT vs. Industrial Solvents & Chemicals (P) Ltd. (1979) 8 CTR (Bom) 124 : (1979) 119 ITR 608 (Bom); and (4) CIT vs. Western India Sea Food (P) Ltd. (1992) 107 CTR (Guj) 106 : (1993) 199 ITR 777 (Guj). Under the company law, the expenditure has to be claimed when it is put to use. Hence, in accounts, it was treated as deferred revenue expenditure. In view of the above arguments and considering the fact that there is income of Rs. 1.95 crores relating to business for which the expenditure was incurred, the learned CIT(A) held that the expenditure is allowable. The learned CIT(A) has referred to the decision of Hon'ble apex Court in Ramaraju Surgical Cotton Mills Ltd. 4.3 During the course of proceedings before us, the learned CIT(A), Departmental Representative has filed written submissions on this issue. Our attention was drawn towards the expenses debited under the head 'Rates and taxes'. The assessee paid fees to RAC towards increase of authorized capital and stamp duty amounting to Rs. 16,78,009. In view of the decision of the Hon'ble apex Court in the case of Brooke Bond India Ltd. vs. CIT (1997) 140 CTR (SC) 598 : (1997) 225 ITR 798 (SC) such expenses are not revenue e....
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....include trading of computers, embedded software solutions, software development and other proposed allied activities. From this, the learned Departmental Representative inferred that there was no business of call centre during the year. At p. 34 of the annual report, it is mentioned that deferred revenue expenditure is written off over a period of 5 years from the year of the commencement of commercial production. Schedule 14 to the annual report shows that expenses have not been written off during the year and had indicated that the production has not started during the year. Running of call centre was not a regular business of the assessee during the year under consideration. In view of the above submissions, it was urged that the expenditure is not allowable in view of s. 35D of the IT Act. 4.4 On the other hand, the learned Authorised Representative has filed a paper book containing 86 pages. It was submitted that the list of expenses were furnished to the AO. The call centre was not completed and there was no income derived from such facility during the year, therefore, the expenditure was shown as deferred revenue expenditure. The expenditure was claimed as deduction from ....
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....that installing new plant or machinery for expansion of existing business, though sometimes loosely referred as setting up of a new unit, does not attract s. 35D, If the expenses have been incurred in connection with the expansion of the existing unit, then the entire expenditure is allowable and s. 35D is not attracted. 4.6 We have heard both the parties. Before proceeding further, it will be useful to reproduce s. 35D of the IT Act: "35D (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-s. (2)- (i) before the commencement of his business, or (ii) after the commencement of his business, in connection with the extension of his (industrial) undertaking or in connection with his setting up a new (industrial) unit, the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the ex....
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....aws (Amendment) Act, 1970. Paras 42 and 43 of the circular are reproduced as under: "42. See. 8 of the Amending Act has introduced two new ss. 35D and 35E w.e.f. 1st April, 1971. New s. 35D provides for the amortisation of certain preliminary expenses incurred by an Indian company or a resident assessee other than a company before the commencement of business or in connection with the extension of an industrial undertaking or the setting up of a new industrial unit. The amortisation will be allowed against the profits of the company or other taxpayer in 10 equal instalments over a period of 10 years beginning with the previous year in which the business commences or as the case may be, the previous year in which the extension of the industrial undertaking is completed or the new industrial unit commences production or operation. Such amortisation will be allowed only in respect of expenditure incurred after 31st March, 1970 under specified heads. The heads of qualifying expenditure specified for this purpose are the following: 1. Expenditure in connection with: (i) preparation of feasibility report; (ii) preparation of project report; (iii) conducting market surveyor any othe....
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....erence to expenditure incurred in connection with the extension of an existing industrial undertaking or in connection with the setting up of a new industrial unit, the 'cost of the project' is defined to mean the actual cost of the fixed assets as stated above which are shown in the books of the assessee as on the last day of the previous year in which the extension of the industrial undertaking is completed or, as the case may be, the new industrial unit commences production or operation insofar as such fixed assets have been acquired or developed in connection with the extension of the industrial undertaking or setting up of the new industrial unit of the assessee." From the language of the section as well as from the circular, it is clear that the expenses which are falling under s. 35(2) are to be considered for amortization under s. 35D, In a case where the business is already in existence, then the revenue expenses cannot be disallowed on the ground that business has not commenced. It is not the case of the Revenue that business was not in existence. The details filed by the learned Authorised Representative show that the company has shown receipts under the head 'System ....
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....'for the purpose of earning profits'. Its range is wide: it may take in not only the day-to-day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business." 4.10 For the purposes of Companies Act, the assessee has treated the expenditure as deferred revenue expenditure because no receipts were obtained from the call centre which was being set up. However, the business of call centre was already there and the assessee has shown receipts from them. One has to see the allowability of expenditure as per the provisions of the IT Act. The expenses debited are mainly of revenue nature and it is not necessary that these expenses will be allowable only when there are receipts. If the expenses are incurred for the purposes of business, then these are to be al....
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.... expansion is generally meant to be the expansion of its present installed capacities. The capacity may be expanded either at the same location or at a different location. But the legislature has not used the word 'expansion' and that is with a purpose. If there is merely an expansion, then it may not be necessary for the assessee to incur the type of expenditure envisaged in s. 35D. On the other hand, if there is extension or where altogether a new industrial unit is set up, such extension or setting up of a new unit may be preceded with the preparation of a feasibility report or a project report or conducting market survey and so on. These preliminary expenses are envisaged in s. 35D for the reason that the extension or setting up of a new unit presupposes that the assessee is entering into altogether a new line of activity or is setting up an undertaking which is independent of the present undertaking. With the background, let us consider the facts of the present case. 7. The assessee company is in manufacture of state or art packaging systems. It manufactures several products like steel strapping; sealing tools, industrial packaging machines, stretch wrapping and packing sys....
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....ing the year is too insignificant to be considered. Thus, considering the overall facts of the case, we do not see any reason to apply the provisions of s. 35D. The AO is directed to allow full deduction of the expenditure as claimed by the assessee." 4.12 The Hon'ble Bombay High Court in the case of CIT vs. Mahindra Ugine & Steel Co. Ltd. (2001) 169 CTR (Bom) 191 : (2001) 250 ITR 84 (Bom) observed that s. 35D is applicable only in respect of expenditure, which is otherwise not allowable under law, for example, capital expenditure. Hence, s. 35D will not be applicable if the expenditure is of revenue in nature. 4.13 The Hon'ble Calcutta High Court in the case of CIT vs. East India Hotels Ltd. (2001) 171 CTR (Cal) 614 : (2001) 252 ITR 860 (Cal) had an occasion to consider the applicability of s. 35D in respect of amortisation of preliminary expenses. The headnote is reproduced as under: "Sec. 35D of the IT Act, 1961, has been introduced to give benefit to assessees in cases of capital expenses. Capital expenses cannot be allowed as deduction in computing income, but under s. 35D capital expenses can be allowed as deduction in a ten year span i.e., 1/10 in each year. The Boa....
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....eciation 4,24,570.00 -------------------------------------------------- Miscellaneous expenses 59,436.00 -------------------------------------------------- Office equipment hire charges 2,52,500.00 -------------------------------------------------- Office maintenance charges 2,14,776.00 -------------------------------------------------- Rates and taxes 16,78,009.00 -------------------------------------------------- Rent 4,55,000.00 -----....
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....ing and stationery 2,63,030.54 -------------------------------------------------- Conveyance 4,12,802.52 -------------------------------------------------- Telephone charges 6,14,321.00 -------------------------------------------------- Boarding and lodging expenses 20,67,019.00 -------------------------------------------------- Staff food expenses 3,99,530.00 -------------------------------------------------- Travelling expenses Foreign Air fare 40,03.660.00 -------------------------------------------------- Employer's contribution to ESI 82,840....