TaxTMI 
TaxTMI 
2013 (7) TMI 451
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....d by the assessee, the assessment was finalized. 3. Assessee paid a sum of Rs.44.43 lakhs to National Security Depository Limited (NSDL) as one time custody charges for 80,08,600 shares. Consequent to introduction of Demat, all share holders have to deposit their shares with depositories. The assessee company had taken over the liability of payment of Rs.44.43 lakhs as one time custody charges. The assessing officer has held that the assessee has paid the said amount as a goodwill measure and therefore the same is not allowable as deduction under Section 37(1) of the Act. He further held that it cannot be allowed as a revenue expenditure as the assessee derives an enduring benefit from one time payment of custody charges and is capital nature. Therefore, Rs.44.43 lakhs was disallowed. 4. The assessee made donations amounting to Rs. 52.34 lakhs and entire amount was debited to Keonics Unit. In the computation of income, entire donations paid were added back to income of Keonics unit and exemption under Section10A was claimed on the entire income of Keonics unit. The assessing authority observed that the entire gross total income of Rs.30,24,58,224/- is the income relatable to ....
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....ees of assessee would have been benefited from installation of traffic signals will be very remote. Hence, benefit from installation of traffic signals derived by assessee being very remote, the expenditure cannot be allowed under Section 37(1) of the Act. In fact, what assessee has done is to donate these traffic signals to State Government which is not allowable as deduction, as donation in kind is not eligible for deduction under Section 80G. Therefore, the said amount was added back as the income of the Keonics Unit. 6. A sum of Rs.1,23,09,815/- is debited towards provision for post-sales customers support. In the unit-wise Profit and Loss Account enclosed to return of income, Rs.76,32,363/- has been debited to Keonics (10A Unit) and Rs.46,77,452/- to others. As could be seen from assessee's letter dated 20.2.2001, the above provision is made at 2% of amount billed till year end in respect of outstanding fixed price projects as at the year end. In the subsequent year, the provision is written back to the income statement and fresh provision is created. On being asked, what is the amount of actual expenditure debited in provision account in financial years 1997-98 and 1998-99....
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....grieved by the said order of the Appellate Authority, the assessee preferred an appeal to the Tribunal. The Tribunal on re-appreciation of the entire evidence on record and taking note of the various judgments relied upon by the parties held that, the charges paid to NSDL having not brought into existence any capital asset and is for the purpose of efficient functioning of the business, it was held as business revenue expenses and allowable as such under Section 37(1) of the Act. After referring to the several judgments including the judgment of a Division Bench of this Court the Tribunal held that, the installation of traffic signals at their cost was prompted solely with a view to benefit its employees who were getting repeatedly involved in traffic jams and other hazards, as such they were a distressed lot and therefore the said expenditure incurred is laid out wholly and exclusively for the purposes of business and therefore allowable as deduction under Section 37(1) of the Act. Similarly, the Tribunal held Section 10A is an exemption Section whereas Section 80G is a deduction Section and therefore there would be no double deduction of the same item, even if a benefit under bot....
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....orldwide and in the wake of the increasing trading volume on the local bourses, there emerged the need to replace the existing settlement and clearing system with "Depository System" or a Scripless Trading System. India has the largest number of listed companies in the world today. It also boasts of a very large investor population and substantial volumes of trade. The present system of settlement based on physical delivery of paper certificates was probably adequate in the past when there was just a handful of investors participating in the transactions of the capital market. The old trading system was plagued by various problems such as, unwarranted delay in transfer of shares, duplicate/fake/forged shares, bad deliveries, Court injunction cases, loss in transit/theft/mutilation, disputes on Corporate actions, huge transaction cost, longer settlement cycles, poor infrastructure, large paper volumes. All these factors served as barriers to the entry of an investor into the market. This failure gave the idea of setting up of an electronic system with scripless trading and quick settlement cycles. National Securities Depository Limited (NSDL) was inaugurated as the first depository ....
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....sting shareholders; and (b) the company gives an option to subscribers/shareholders/investors to receive the security certificates or hold securities in dematerialized form with a depository. 15. Therefore, after coming into force of the Act, an obligation is cast on each company to enter into an agreement with a depository for de-materialisation of security already issued or proposed to be issued. Therefore, the assessee herein by virtue of the said obligation imposed under law approached the NSDL vide the letter dated 21.7.1997. In reply to the said letter, the NSDL by their letter dated 22.7.1997 informed them that the total one time custody charges on 80,80,600 shares work to Rs.44.43 Lakhs and on payment of the said amount they would inform all the depository participants about the arrangement by way of circular on receipt of the first installment. It is thereafter, the assessee paid Rs.44.43 Lakhs for de-materialisation of securities already issued. It was a one time payment and therefore as the said expenditure was laid down or expended wholly or exclusively for the purpose of its business the said amount was claimed as expenditure ....
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.... of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would be of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations. One has therefore got to apply these criteria, one after the other from the business point of view and come to the con....
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....ion to six months and, moreover, the additional working hours per week transferred to the assessee have to be utilised during the week. and cannot be carried forward to the next week. It is, therefore, not possible to say that any advantage of enduring benefit in the capital field was acquired by the assessee in purchasing loom hours and the test of enduring benefit cannot help the Revenue." 17. From the aforesaid two judgments of the Apex Court, it is clear 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. If on the other hand, it is made not for the purpose of bringing into existence any such asset advantage but for running the business or working it with a view to produce the profits it is a revenue advantage. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim ....
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....the shares in demat form has benefited the company in getting the periodic information, for example, FII holding, promoter holding, holding that trigger acquisition of substantial holding for purpose of application takeover code of SEBI, etc., at a much faster pace with less administrative hassles and with a lesser cost. The expenditure has been incurred in the normal course of business. Thus the dematerilization has helped significantly in reducing the administrative costs. 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. This is precisely what the Tribunal has held. Therefore we do not find any infirmity in the said order passed by the Tribunal. Therefore the said substantial question of law is answered in favour of the assessee and against the Revenue. SECOND SUBSTANTIAL QUESTION OF LAW 19. As is clear from the assessment order, the assessee installed traffic....
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....y 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". The word "wholly" refers to the quantum of expenditure and the word "exclusive" refers to the move, object or purpose of the expenditure. There is yet one more thing to be remembered while applying section 37(1). The expenditure claimed therein need not be "necessarily" spent by the assessee. It might be incurred "voluntarily" and without any "necessity", but it must for promoting the business. In other words, 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. In Season J. David and Co. P. Ltd. v. CIT [1979] 118 ITR 261, the Supreme Court observed (at page 275 and 276) : "It is relevant to refer at this ....
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....the Supreme Court in Indian Molasses Co. (Private) Ltd. v. CIT [1959] 37 ITR 66, wherein it has been observed (at pages 75 and 76) : "The income-tax law does not allow as expense all the deductions a prudent trader would make in computing his profits. The money may be expended on grounds of commercial expediency but not of necessity. The test of necessity is whether the intention was to earn trading receipts or to avoid future recurring payment of a revenue character. Expenditure in this sense is equal to disbursement which, to use a homely phrase, means something which comes out of the trader's pocket. Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the income-tax law does not take every such allowance as legitimate for purposes of tax. A distinction is made between an actual liability in present and a liability in present and a liability de futuro which, for the time being, is only contingent. The Former is deductible but not the latter". 22. Yet another Division ....
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....ny payment is made to the police or rowdies to keep them away from the business premises, which payment is ex facie illegal and illegal payment cannot be an allowable deduction under Section 37(1) of the Act. Secondly, the judgment of the Division Bench in the aforesaid Mysore Kirloskar Ltd case, was not brought to the notice of the coordinate Bench which dealt with the case of the assessee. More over, in the said judgment, the question was, a sum of Rs.6.93 lakhs was contributed towards traffic regulation. It was not an expenditure incurred by the assessee. It was not in the nature of donation made to the police towards traffic regulation. Therefore, in that context, it was held relying on the judgment of Swaminathan's case, it does not qualify as deduction under Section 37 of the Act. 24. As is clear from the case of Mysore Kirloskar Ltd, the expenditure claimed need not be necessarily spent by the assessee. It might be incurred voluntarily and without any necessity, but it must be for promoting the business. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under S....
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....isely what the Tribunal has held. The said finding is in accordance with law and based of legal evidence. Therefore no case for interference is made out. Hence the said substantial question of law is answered in favour of the assessee and against the Revenue. THIRD SUBSTANTIAL QUESTION OF LAW 26. The donation of Rs.15 lakhs is paid out of Keonics Unit, the profit of which is exempted under Section 10A of the Act. While computing the profit of Keonics Unit, donation paid is added back, as the same is not allowed to be deducted while computing the profit under Section 10A of the Act. Thus the disallowance in computing the income of Keonic Unit is per the statutory provisions of the Act, the donation being not considered as expenditure incurred wholly and exclusively for the purpose of business. Therefore it cannot be said that the donation paid has been allowed as deduction under the Act. The reason being the entire income incurred from the Keonics was exempted from payment of tax under Section 10A of the Act. There is no stipulation under Section 80G to the extent that donation is to be paid only out of taxable income of the year. Section 10A is an exemption Section whereas, S....
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.... assessment year 1997-98 and 98-99 towards post sales customer support, the assessee stated that such expenditure gets accounted under normal head and there is no specific debit to warranty provision in any year. In the subsequent year, the provision is written back on the first day of the accounting year and actual expenses incurred towards post sales customer support are debited to respective heads. The assessee states that it is not possible to give the details called for. This aspect has been completely missed by the Tribunal. It proceeds on the assumption that figures given for warranty is based on sound accounting principle. In fact, in the aforesaid judgment of the Apex Court before the assessee could be granted the benefit, he has to establish: (a) an enterprise has a present obligation as a result of a past event, (b) it is probable that an outflow of resources will be required to settle the obligation and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized. For determining an appropriate historical trend, it is important that the company has a proper accounting system for capturing the relati....