TaxTMI 
TaxTMI 
2019 (3) TMI 137
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....s.1667 and 1668/Bang/2016: These appeals are preferred by the assessee against the respective orders of the CIT(A) on common grounds. For the sake of reference, we extract the grounds raised in appeal No. 1667/Bang/2016 as under: 1. That the order of the Ld. Commissioner of Income Tax (Appeals) -4, Bangalore, [CIT(A)], confirming some of the additions/disallowances as made by the Ld. Assessing Officer [AO] is uncalled for and hence liable to be deleted. 2. That on the facts and in the circumstances of the case of the appellant, without prejudice to the action of the Ld. CIT(A) in capitalizing u/s 43A of the Act, the net amount of Rs. 18,27,377/- being the loss in lieu of foreign exchange fluctuation and directing the ld. A.O. to allow the consequential adjustment of depreciation on the same, it is the contention of the appellant that the ld. CIT(A) erred in confirming the action of the ld. A.O that the same was not revenue in nature. 3. That on the facts and in the circumstances of the case of the appellant, the Ld. CIT(A) erred in confirming the disallowance of Rs. 66,54,726/- made by the Ld. A.O. u/s 40A(2) of the Act to the extent of 1/3rd of the Service Charges paid t....
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....rds notified by the Institute of Chartered Accountants of India as well as section 211(3)(c) of the Companies Act. He has also placed reliance upon the notification issued by Ministry of Corporate Affairs. It was further contended that the appellant has opted for accounting standard 11 (revised) and accordingly debited to its profit and loss account an exchange loss of Rs. 70 lakhs. This contention was examined by the CIT(A). Being not convinced with the contention of the assessee, the CIT(A) confirmed the disallowances. The relevant observation of the CIT(A) is extracted hereunder for the sake of reference: "The rival contentions have been considered, in light of the available judicial precedents on the subject. Having considered the relevant facts & circumstances, I am in agreement with the AO's stand. In the case of Sultlej Cotton Mills Ltd., it was settled that the Loss arising to the Assessee on account of Depreciation in the value of Foreign Currency held by it on Conversion into another currency, such Loss would ordinarily be Trading Loss if the Currency is held by the Assessee on Revenue Account or as a Trading Asset or as a part of circulating Capital embarked in the....
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....fore disallowed." 5. Aggrieved, the assessee preferred an appeal before the Tribunal and reiterated its contentions as raised before the CIT(A). During the course of hearing, similar ground was also raised in the assessment year 2009-10 in ITA No.1667/Bang/2016 wherein the assessee has opted not to press the ground. But in this appeal, assessee intend to argue the ground but once the finding on the similar issue by the CIT(A) is confirmed, a contrary view cannot be taken in subsequent appeals for subsequent year, following the rule of consistency. We, however, carefully examined the submissions raised by the assessee recorded in the order of CIT(A) and we find that CIT(A) has properly adjudicated the issue and no interference therein is called for. In assessment year 2009- 10 in ITA No.1677/Bang/2016, the ground No. 2 raised in this regard is not pressed and we accordingly dismiss the same being not pressed. Accordingly, ground No. 2 in both the appeals are dismissed. 6. Ground No.3 in both the appeals relate to the confirmation of disallowance of Rs. 71,30,121/- in assessment year 2010-11 and Rs. 66,54,726/- in assessment year 2009-10 made by the AO under section 40A(2) of the ....
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....h excess / continued payment would be made, for similar services, to third party in an independent business environment. Taking into account all the relevant facts the CIT(A) confirmed disallowance made by the AO to the extent of 1/3rd of the total claim raised by the assessee. 8. Now the assessee has preferred an appeal before the Tribunal and reiterated its contentions as raised before the CIT(A). Whereas the learned DR has contended that this transaction was undertaken with the related parties and onus is upon the assessee to demonstrate that the payment made by the assessee to its holding company is at arm's length. 9. Having carefully examined the orders of lower authority in the light of rival submissions we find that this service agreement was executed on 1.4.2009, according to which assessee was required to pay 0.5 % of the total turnover as fees for the services rendered by the holding company MEMG International India Pvt. Ltd. The services envisaged in this agreement are as under: Fund management and financial services Accounting and Auditing services Treasury operations (Direct and Indirect) Advisory Services Management and Advisory Services Secretariat a....
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....carefully examined the orders of the authority below in the light of these judicial pronouncements and the arguments advanced by the parties, we find that AO has not doubted the payment made by the assessee to MEMGIIPL on account of services rendered by them. But he has made the disallowance of its part without assigning any reason. He has not brought any comparable case to demonstrate that the payment made by the appellant is in excessive. Therefore, we are of the view that without bringing any cogent material on record to demonstrate that the payment made by the appellant is in excessive no disallowance can be made; more so in the light of the fact that both the companies are assessed to Income tax at maximum marginal rate. In the light of these facts, we are of the view that the disallowance made by the AO is not proper and accordingly we set aside the order of the CIT(A) and delete the additions in this regard. 12. The next ground relates to disallowance made under section 14A of the Act. In both the appeals, the facts borne out from the record in this regard are that during the course of assessment proceedings, the AO has noted that assessee has received dividend income of Rs....
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..... There are specifically no indirect costs which can be categorized as revenue and direct costs which can be categorized as capital, all costs that have gone into the development of any capital asset should be treated as capital in nature. Income tax envisages that even interests cost that have been incurred in the process of acquisition or setting up of a capital asset also should be tagged to the capital asset and capitalized. 4. Even by entering into a termination agreement with Guru Harikishan Medical Trust (GHKMT) the respondent is not eligible to write off any capital expenditure i.e. there is no provision or eligibility to write off an expenditure on abortive capital expenditure as revenue expenditure, (reliance is placed on the gist of the judgement in the case of CIT Vs. Bazpur Co-operative Sugar Factory Ltd., 1983 (14 ITR 1 (All) and Kanoria Chemicals and Industries Ltd., Vs. CIT (1995) (Calcuta High court). 5. The termination agreement speaks that the above amounts are recoverable and actually there is no loss to the respondent company. It also speaks that GHMT will make all out efforts to see that the interests of the respondent company will be met first before en....
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..... It was also agreed between the parties to write off the rent paid and other pre-operating expenditures incurred and GHMT is no way liable to pay the said amount to MHSPL. It was also agreed that if the GHMT enters into arrangement with future collaborator, the future collaborator undertakes to pay to the assessee an amount mutually acceptable among the three parties to the said agreement towards reimbursement of the amount of expenditure incurred by MHSPL in relation to proposed hospital. The trust (GHMT) reaffirms its intention to facilitate the recovery by MHSPL of all sums invested by the assessee on the date of this agreement. In view of the above, it was claimed by the assessee that GHMT only agreed to help in recovering the amount spent on the project by the assessee. There was no certainty that amounts would be recovered by the assessee. Similarly, both parties have agreed to waive off the rent and the pre-operating expenditure incurred i.e., Rs. 3,95,19,4258/- as on 31.03.2009 as per the termination release agreement. Thus, the assessee has made a provision for bad debts to the tune of Rs. 3,94,19,428/-. 18. The AO treated the above amount written off as in eligible expe....
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.... directed the AO to spread the claim over 5 years and allow 1/5th of total claim of Rs. 3,95,19,429/- which comes to Rs. 70,03,885/- during the year under consideration. The balance of Rs. 3,25,15,544/- is disallowed during the assessment year 2009-10 under consideration. The relevant observation of the CIT(A) is extracted hereunder for the sake of reference: "Having examined the position, in light of the available facts. I am of the considered view that, the project-expenditure cannot be held to be capital in nature, for the following reasons: (1) The Assessee being a Reputed Medical Entrepreneurship Group-entity in the area of running Hospital-establishments (and related activities in Health-care) sector) across India, there is no doubt that, establishing / running of Hospitals is its routine businessactivity. The mere act of entering into certain collaboration and subsequent termination of such agreement therefore does not in itself alter the basic business-character of the Appellant. It is obvious that, most of the Hospital projects in itself happen to be Longterm projects, which involve substantial gestation-periods in setting up and final functional operability. This in ....
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....s entitled to only the remaining revenues earned from the Hospital activity, after paying the trust its operational minimum guaranteed amounts or percentage share as stipulated therein. It is clear therefore that, the business-agreement between the respective parties does not partake the nature of a capital expenditure but, rather that of revenue expenditure. Upon the termination of the said agreement, the character of the same remains that of revenue nature. 5.4. The next Question that, arises for consideration is whether in the context of the collaboration agreement and its subsequent termination, the Assessee is entitled to claim the amount of Rs. 3,95,19,429/- as project-cost write-off entirely during the current year under consideration. To this contention of the Appellant the answer has to be in the negative. Even though the impugned expenditure is held to be of revenue nature. yet the Assessee's plea for allowing the ser-off during 1 year is not acceptable, for the following reasons: * The claim of total write-off of Rs. 3,95,19,429/- within the current AY: 2009-10, is not acceptable primarily on basis of the fact that, the termination agreement dated 16/10/2009....
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....O to spread the claim to 5 years, and to allow 1/5th of Rs. 3,95,19,429/- which comes to Rs. 70,03,885/-, during year under consideration. The balance of Rs. 3,25,15,544/-/- is disallowed for set-off during the AY: 2009-10 under consideration. The same issue was subject matter of appeal, which was decided by the undersigned (for AY:2011-12) in ITA No: 14/DCIT-4(1)(2)/CIT(A)-4/12-13 dated 291h June,2016, wherein similar direction have been passed in respect of the write-off claim. It is also to place on records that, it remains legally obligatory on part of the appellant, to write-back any recoveries made / receipts accruing (in the subsequent years) in respect of this head of expenditures claimed. AO is accordingly directed to give necessary appeal effect in this regard, after verifying the total write-off claim in AY: 2011-12, so as to avoid duplicationof relief, on this account." 22. Aggrieved, the Revenue is in appeal before the Tribunal. Besides placing heavy reliance upon the assessment order, the learned DR Dr. Pradeep Kumar strongly contended that the main purpose of the collaboration agreement was to develop/construct full-fledged 250 bedded multispeciality Hospital in De....
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....: * CIT Vs. Madras Auto Serivce (P.) Ltd., [1998] 233 ITR 468 (SC) * Assam Bengal Cement Co. Ltd., Vs. CIT [1995] 27 ITR 34 (SC). * Atherton Vs. British Insulated & Helsby Cables Ltd., [1925] to Tax cases 155 (SC). * Mother Hospital (P.) Ltd., Vs. CIT, Trichur. [2017] 392 ITR 628 (SC) * CIT & another Vs. Shri. Rupesh Anand in ITA Nos. 254 - 257/2015 dated 21.09.2016. * ACIT, Circle 2(1), Vijayawada Vs. Efftronics Systems (P.) Ltd., [2011] 15 taxmann.com 345 (Vishakapatnam). * ABT Ltd., Vs. ACIT, Co. Circle - 1(2), Coimbatore (2013) 30 taxmann.com 11 (Chennai-Trib) * Continental Enterprise Vs. ITO, (2017) 87 taxmann.com 257 (Chennai - Trib.) * ACIT Vs. SRF Ltd., [2008] 21 SOT 122 (Delhi). 23. The learned Counsel for the assessee besides placing reliance upon the order of the CIT(A) has contended that undisputedly assessee company has entered into a tripartite collaboration agreement dated 23.11.2007 with Guru Harikrishan Medical Trust (GHKMT) and Delhi Sikh Gurudwara Management Committee (DSGMC) for expansion of existing GHKH and operation, management and provision for care services from the said Hospital. It is also an undisputed fact that assessee compa....
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....ceed further with the contract on account of factors beyond its control. The parties therefore agreed to terminate the contract and discharged each other's obligations under previous agreement. As such, although substantial expenditure is incurred by the appellant under the interim collaboration agreement but no Capital Asset or advantage of enduring benefit came into existence for the appellant company pursuant to such abandoned project. Therefore, the expenditure incurred in expanding its business is a revenue expenditure and not a capital in nature. In support of this proposition, the learned Counsel for the assessee has placed a reliance upon the following judgments in which it has been held that if expenditures incurred on setting up a new unit which has inextricable linkage with the existing business of the assessee and such new unit is subsequently abandoned, such expenditure is treated as revenue in nature as no new industrial assets comes into existence: * CIT Vs. Priya Village Road Shows Ltd. (332 ITR 594) (Delhi) (pages 212-217 of the PB) * Indo Rama Synthetics (I) Ltd. Vs. CIT (2011) 333 ITR 18 (Del) * Idea Cellular Ltd., Vs. Addiitonal CIT, (2014) 65 SOT 15....
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....the project on account of business exigencies, financial considerations and commercial prudence according to the assessee. Consequently, the appellant entered into a termination release agreement dated 16.10.2009 with GHMT where the appellant expressed its inability to proceed further with contract on account of factors beyond its control. Thereafter, the parties have agreed to terminate the contract and discharged each other's of all obligations under the provisions of the agreement. These facts were not disputed by the revenue. Therefore, now the question arises as to whether the expenditure incurred in expansion of its business is in the nature of revenue or capital. Besides, it is also to be examined as to whether on abandonment of the project the expenditure incurred can be claimed to be the revenue expenditure. In this regard, our attention was invited to various judicial pronouncements. In the case of CIT Vs. Malwa Vanaspati & Chemical Co. Ltd. (supra), the Hon'ble High Court of Madhya Pradesh have observed that where the facts go to indicate that the setting up of the new project was only expansion of an existing business of the assessee company and it cannot be created as ....
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.... of the nature of expenditure incurred in such circumstances and has held "if expenditure incurred is in respect of the same business which is already carried on by the assessee, even if it is for the expansion of the business, namely, to start new unit which is same as earlier business and there is unity of control and a common fund, then such expenditure is to be treated as business expenditure. In such a case whether new business or asset comes into existence or not would become an irrelevant factor". If there is no creation of new asset, then the expenditure incurred would be revenue expenditure. However, if the new asset comes into existence which is of enduring benefit, then such expenditure would be of capital in nature. In that case, the expenditure was incurred in respect of the same business which is carried on by the assessee in two projects which were undertaken by the expansion of same business, namely, one for taking over S.Cinema for conversion into Multiplex and operation management thereof and other for conversion of P.Cinema into four multiplexes. Payments were made to the consultants for preparing feasibility reports in respect of both the projects. However, ulti....
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....et the contractual requirements requiring investment of not less than 125 crores according to assessee, the said collaboration agreement was terminated vide termination release agreement dated 16.10.2009. Therefore, carrying out expansion of existing hospital property of the trust for the purpose of running and operating of the same on a revenue share basis was part of the routine business activity of the appellant and therefore incurring the impugned expenses under the contract was incidental to such business. Though it was agreed in termination release agreement that the said expenditure was endeavoured to be reimbursed to the appellant by the trust from third parties but nothing was materialized and the appellant wrote off the said amount in the books of account. 31. The CIT(A) re-examined the claim of the assessee in the light of assessee's contentions and having agreed to the contentions of the assessee, the CIT(A) has concluded the expenditure to be allowable as a revenue expenditure but he was of the view that the entire expenditure can be spread over 5 years and accordingly he directed the AO to spread entire claim of Rs. 3,95,19,429/- for 5 years and allow 1/5th of total ....
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....red in not allowing complete write off of the same during the current year under consideration i.e. A.Y 2011-12. (3a) That the Ld. CIT(A) erred in upholding the AO's action of adding to the returned income a sum of Rs. 52,39,220/- as adjustment made under section 40A(2) as deemed income, being 50% of the service charges paid to Holding Company MEMG International Pvt. Ltd. amounting to Rs. 1,04,78,440/-. (3b) That the Ld. CIT(A) failed to understand that payments of service charges were made against services in the form of financial advisory services, royalty payment for usage of "MANIPAL" Iogo etc. rendered by the holding company and as such, no disallowance was warranted under section 40A(2) of the Act. (3c) That the Ld. CIT(A) erred in not appreciating that the service charges paid to holding company is also taxed at the same rate in their hands and as such, there is no tax evasion or avoidance. (4a) That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in upholding the disallowance of Rs. 97,0000/- made by the A.0 under section 14A read with Rule 8D as expenditure pertaining to exempt income. (4b) That the Ld. CIT(A) failed to appreciate....
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....e Act, cannot be taxed any further on the impugned transfer. 3a. That, without prejudice to the above, the Revenue Authorities erred in not realizing that even if the 'net-worth' of the transferred 'undertaking' (if at all an 'undertaking') is deemed at a negative figure, such 'undertaking' with a negative net-worth cannot be treated as 'capital asset' for the purpose of creating a charge under Chapter IV-E of the Act. 3b. That the Revenue Authorities fell in error in not appreciating that the capital receipts arising on the impugned transfer falling outside the purview of Chapter IV-E of the Act, cannot be brought to tax under the provisions of the Income-tax Act, 1961. 35. Grounds of appeal in ITA No.1209/Bang/2017 1. The order of the CIT(A) is opposed to law and facts of the case. 2. On the facts and circumstances of the case and in law, the Id.CIT(A) has erred in treating the addition to the tune of Rs. 25,34,10,284/- made by the AO, as revenue expenditure without giving any rationale and appreciating the fact the expenditure incurred for developing a capital asset is not at all eligible for claim as revenue expenditure. 3. On the facts and ....
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....ot keep idle such a big asset. 8. For the A.Y 2009-10 and A.Y 2010-11 the respondent claimed a write off of Rs. 3.95 crores and Rs. 0.94 crores respectively as they are indirect costs and not writing off the balance as they are direct costs. For A.Y 2010-11 the respondent claimed the write off of Rs. 0.9 crores after adding back the same while computing the gross total income. Thus, the respondent is taking different stands to take undue benefit by making undue classification. 9. The appellant craves leave to add, alter or amend in the ground of appeal either before or at the time of hearing. 36. Since the additional grounds raised in ITA No.1552/Bang/2016 are legal ground and goes to the merit of the case, we admit the same and adjudicate it along with the grounds raised on merit. The soul ground in Revenue's appeal and ground number 2 in assessee's appeal are almost similar. Therefore, Revenues appeal will be disposed of along with the ground number 2 in assessee's appeal. 37. Apropos Ground No.1 in the assessee's appeal, the facts in brief borne out from the record are that the appellant entered into a Business Transfer Agreement (BTA) on 20.08.2010 with effect from 01.....
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....consideration is liable to be capital gain tax. The CIT(A) re-examined the claim of the assessee. Being not convinced with explanations of the assessee, he confirmed the computation of capital gain done by the AO. 39. Aggrieved, the assessee preferred an appeal before the Tribunal with the submission that Lands and Buildings forming the core of the hospital business were not transferred under this business transfer agreement. Therefore, the transfer of the business cannot be treated to be slump-sale under section 2(42C) r.w.Expl. 1 to section 2(19AA) of the Act. Hence, the gain, if any, are not assessable to tax under section 50B r.w.s. 45 of the Act. Without prejudice to this argument, the learned Counsel for assessee has contended that even if it is assumed without considering that provisions of section 50B are attracted in the instant case, the value of land and building forming the core of the hospital undertaking, although not transferred, is required to be included in the calculation of net worth leading to long term capital loss under section 50B r.w.s. 48 of the Act. It was further contended without prejudice to the above arguments that assuming that the value of the land ....
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.... the transferred capital asset comprised in the composite sale under section 45 of the Act. Accordingly, the transfer of such Capital asset in the instant case will fall outside the purview of the charging section contained under section 45. Therefore, it will not be possible to ascertain the cost of acquisition and cost of improvement of such dismembered business for the purpose of computing capital gain under section 48. It was further contended that since the said case is not being that of slump-sale, the deeming fiction contained under section 50B(1) of the Act determining the nature of capital asset ( long term/short term) will not be attracted. Accordingly, it will not be possible to determine the period of holding of the dismembered hospital business if at all viewed as a capital asset (as a whole). The computation provided under section 45 will fail and accordingly the charging section provided under section 45 will not be applicable. Hence, the sale consideration of Rs. 10 lakhs will be capital receipt not exigible to capital gain tax under section 45 of the Act. 42. The Learned Counsel for the assessee further contended that since the composite sale in the instant case f....
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....that this objection was raised for the first time before the Tribunal. He further placed reliance upon the following judgements in support of his contention that where the transferee is in a position to carry on business without any interruption then such sale should be a slumpsale even if certain assets and liabilities are retained by the transferrer: * DCIT Vs. Max India Ltd., 112 TTJ 726, * CCB Chemicon Pvt. Ltd., Vs. CIT 371 ITR 78 (Kar), * CCIB Dy. CIT Vs. Mahalasa Gases and Chemicals Pvt. Ltd., 142 Taxman 92. 44. Having carefully examined the orders of lower authority is in the light of rival submissions, materials placed on record and the judgement referred to by the parties we find that as per this business transfer agreement appearing at page Nos. 52 to 92 of the compilation, the appellant has agreed to transfer the hospital business as a going concern basis on the closing date in accordance with subject to and upon the fulfilment of the terms and conditions contained in the agreement with effect from 1.9.2010 for a lump sum consideration payable by the buyer as slump-sale consideration for purchase of the hospital business of Rs. 10 lakh payable on the closing d....
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....ction 41(2) do not arise where whole business is transferred as a going concern on a slump price along with Assets and liabilities. 46. In the case of Weikfield Products Co. (I)(P) Ltd., Vs. DCIT (supra), the Pune Bench of the Tribunal has held that the transfer of going concern means transfer by lock stock and barrel where nothing is left with the vendor. It includes not only the transfer of each asset, tangible or intangible, but also the transfer of each debt and liability including any obligation. It was further held that according to definition, Slump-sale means "transfer of one or more undertaking as a result of the sale for a lump sum consideration without values being assigned to the individual asset and liabilities in such sale". It was further held that definition talks of both the assets and liabilities. It includes not only the transfer of each asset, tangible or intangible but also transfer of each debt and liabilities including any obligation. It was further observed that where current asset and liabilities were retained by the assessee, it could not be considered as transfer of going concern and did not fall within the definition of slump sale as provided under sect....
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.... not a depreciable asset, hence the consideration attributable to land will give rise to long-term capital gains under s. 45 and the consideration attributable to the depreciable assets will give rise to deemed short-term capital gains under s. 50(2). Only the consideration attributable to intangibles i.e., self-generated assets having no cost cannot be taxed." 47. Again, in the case of Harrisons Malayalam Ltd., Vs. Asstt. CIT (supra) the Cochin Bench of the Tribunal has held where the assessee company has not transferred the estate with all assets and liabilities and of the financial assets available to the assessee up to date of transaction have been retained by the assessee company, the transfer was not a slump sale. Relevant observation of the Tribunal is extracted hereunder for the sake of reference: "In the present case, the rubber estate has been sold by the assessee excluding cash in hard, stock in hand receivables, finance, assets and liabilities. it was notes-case of sale by lock, stock and barrel. The assessee company has made conscious exclusions. The assets sold by the assessee have been listed out in different schedules and Annexure. The consideration has been spe....
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....t was held that transfer of industrial undertaking and business with all assets, property rights and benefits including goodwill cannot be said to be the slump sale where land and building could not be transferred on account of certain dificulties. The relevant observation of the Tribunal is extracted hereunder for the sake of reference: "The lands and buildings (as also the tenancy/occupancy rights) were not an insignificant part of the undertaking transferred. They reflected the core of the undertaking. The book value of the lands and buildings as on 28th Feb., 1971 stood at Rs. 94,63,924.15. There was a liability of Rs. 45,22,410 against the properties as unpaid purchase price. Thus the assets and the liabilities not transferred with the rest of the undertaking were by no means insignificant. And how do you carry on a business without the lands and buildings forming part of it? The-vendee was put in possession no doubt. But no rent was charged at all as it was not fully an arm's length transaction. It was a domestic arrangement between a holding company and its subsidiary. It did not show the indicia of a transfer of immovable property as understood in law. It was contende....
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....the case, we find that undisputedly the appellant is engaged in the hospital business and lands and buildings of the hospital is a significant asset of the hospital business. Without lands and buildings, it is not possible to run a hospital business. Undisputedly, in the instant case, through business transfer agreement the appellant has transferred the hospital business to MHEPL as a going concern for a sum of Rs. 10 lakh. The other assets and liabilities, tangibles or intangible, movable properties were also transferred but the question arise in the absence of transfer land and building of the hospital; can the transfer of business be called to be a slump sale as envisaged under section 2(42C) of the Act? The facts of the instant cases are almost similar to the facts of the case in the case of Swastik Household and Industrial Products Vs. ITO (supra). Therefore, the transfer of hospital business to MHEPL cannot be called to be the slump sale as a going concern. Thus, the capital gain cannot be computed as per provisions of section 50B of the Act. Since we have held that it is not a slump sale of a going concern, we find no justification to deal with the other issues with regard t....
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....s raising funds to further develop the project was becoming difficult and GHMT and MHSPL agreed to terminate that contract. The CIT(A) examined the claim of the assessee. Being convinced with it, he treated the expenditure to be of revenue in nature but spread over the entire expenditure over 5 years and allowed 1/5th of the total expenditure which comes to Rs. 5,06,82,057/-during the year under consideration. The balance of Rs. 20,27,28,227/- was disallowed for set off during the assessment year 2011-12 under consideration. The assessee objected the spread over of the entire expenditure over a period of 5 years. It claimed that it should be allowed in the impugned assessment year once it is held to be revenue expenditure, as the project was aborted in the impugned assessment year. The learned DR on the other hand has placed a reliance upon the order of the CIT(A). 54. Having carefully examined the order of lower authorities in the light of rival submissions we find that identical issue was examined by us in foregoing appeals where certain expenditures incurred in expansion of business was considered to be revenue expenditure by the CIT(A) but it was spread over for a period of....
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.... the appellant and MEMG International India Private Limited envisages provisions of various services by MEMG International India Pvt. Ltd., to the appellant which includes financial advisory services, royalty payment for usage of 'Manipal' logo etc. It was further stated that the appellant company was incorporated on 01.02.1999 whereas the Manipal group is in existence for more than 50 years. Thus, a loss-making company which represents established group which is in existence for more than 50 years attracts more clients/customers than new company which is relatively new and incurring losses. Hence the intangible benefits of using 'Manipal' logo cannot be quantified in revenue terms. It was further contended that that assessee has paid 0.5% i.e., Rs. 1,04,78,440/- MEMG International India Pvt. Ltd., which is at arm's length rate and there is no basis with the AO to disallow 50% of the expenditure under section 40A(2) of the Income Tax Act. The learned Counsel for the assessee further contented that AO has not brought out any comparable case to demonstrate that assessee has made an excess payment to MEMG International India Private Limited. It was further contended that earlier y....
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....mpanies. He further invited our attention that in assessment year 2008-09 the similar claim of Rs. 1.44 crore paid to MEMGIPL was allowed by the AO. Therefore, disallowance was made on the basis of suspicion. The learned DR placed heavy reliance upon the order of the CIT(A). 58. The identical issue has been examined by us in foregoing paras where we have examined the issue in detail and concluded that no disallowance can be made without establishing that claim raised by the assessee is excessive against the fair market rate. Since we have taken a view on similar set of facts, we find no justification to adjudicate the issue again in this appeal. Accordingly, we set aside the order of the CIT(A) and direct the AO to allow the claim of the assessee. 59. Apropos ground No. 4 it is noticed that assessee has received these dividend incomes at Rs. 2,17,681/- on investment to the tune of Rs. 2.3 crores in its subsidiaries. Besides, the assessee has also made the investment by way of acquiring long term unquoted trade and also current non-trade shares. In response to the AO's query with regard to allocation/ disallowance of proportionate expenditures in relation to exempted income, the a....
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....s of the Apex Court in the case of Godrej and Boyce Manufacturing Co. Ltd., Vs. DCIT 151 DTR 89 (SC). 61. The learned Counsel for the assessee further contented that as per clause iii of Rule 8D (2), half percent of the average of the value of investment, income from which it does not form part of total income is required to be taken into consideration. The AO, in the instant case has however considered the average of total investments including investments in subsidiary companies, joint venture/group companies/other companies which have not received any exempted income/dividends during the year under consideration. This has resulted in abnormal increase in the figure of disallowance under section 14A of the Act. It was further contended that where the investments which yield taxable income, investment have not yielded any tax-free income investment which made for business or strategic reasons need to be excluded from the working of the average value of investments under Rule 8D(2)(iii) of the Rules. In support of this preposition, he placed reliance upon the various judgments: i. CIT vs. M/s. Delite Enterprises (Bom HC) ITA No. 110 of 2009 ii. REI Agro Ltd. Vs. DCIT 144 ITD ....
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.... details, the AO invoked the provisions of section 14A of the Act and computed disallowance as per Rule 8D(2)(iii) of the Rules at Rs. 97,000/-. Even before the CIT(A), it was not specifically stated by the assessee has to how much investment was made in earning dividend income or in subsidiaries in order to acquire the controlling interest. We have also carefully perused the judgement of the Apex Court in the case of Godrej and Boyce Manufacturing Co. Ltd., Vs. DCIT (supra), and we find that the assessee is required to furnish the details of expenses incurred. If he does not furnish the details, AO is required to invoke the provisions of section 14A read with Rule 8D of the Rules in order to compute the disallowance of expenditures incurred on earning the exempted income. Undisputedly, sub section 2 and 3 of section 14A read with Rule 8D merely prescribes formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act as held by the Apex Court in the case of Godrej and Boyce Manufacturing Co. Ltd., (supra) but where the AO is not satisfied that the claim of the assessee that there was no expenditure was incurred to....
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....findings of the CIT(A) for the assessment year 2011-12. Now we have already disposed off the assessee's appeal for the assessment year 2011-12 and we therefore are of the view that AO is required to pass a consequential order with regard to set off of brought forward losses keeping in mind the outcome of the appeal for the assessment year 2011- 12. Therefore, we find no infirmity in the direction of the CIT(A). Accordingly, this appeal of the assessee stands dismissed. 66. ITA Nos. 1557, 1076 and 1558/2016 These appeals are preferred by the assessee against the respective order of the CIT(A) pertaining to assessment years 2011-12, 2012-13 and 2013-14 on common grounds. Therefore, these appeals were heard together and are being disposed off through this consolidated order. 67. Ground No. 1 in ITA Nos. 1557, 1558 and ground No. 2 in ITA No. 1076/2017 relate to the disallowance made under section 14A r.w.r. 8D of the Rule. The facts in brief borne out in this regard are that assessee has received exempted income to the tune of Rs. 3,57,10,000/- in assessment year 2011-12, Rs. 30,28,00,500/- in assessment year 2012-13 and Rs. 41,89,405/- in assessment year 2013-14. The AO invok....
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....ed the disallowance invoking the provisions of section 14A r.w.r. 8D of the Rules. While doing so, the AO did not examine the nature of investment whether the investment was made with the intention to earn dividend income or to make strategic investment in subsidiaries to have control over it. With regard assessment year 2011-12, we find that average of investment is to be taken. In that year, opening investment was Nil, therefore, the investment made in that year cannot be called to be the average investment. We however find force in the contention of the assessee that average investment should be Rs. 55.33 crores but it requires a proper adjudication. We accordingly set aside the order of CIT(A) in all assessment years and restore the issue to the file of the AO to re-examine the claim of the assessee in the light of nature of investments and also the opening and closing balance of investments. 72. Ground No. 2 in ITA No. 1557 relate to the disallowance of payments made to Allegro Corporate Finance Advisors Pvt. Ltd., amounting to Rs. 3,31,00,000/- and treating the same as capital expenditure. The facts in brief borne out from the record in this regard are that during the course....
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....s Pvt. Ltd., agreed to assess the appellant company in providing corporate advisory services in connection with expending its existing business in terms of new beds and services and aid in raising equity funds of approximately 100 crores from interested investors to finance its expansion plan. The scope of services provided by Allegro Corporate Finance Advisors Pvt. Ltd., as per terms and conditions of the agreement was mentioned in the agreement according to which they have to perform different kinds of services at different stages. 74. It was further contended that the expenses were incurred in the ordinary course of business with a view to expand the existing business, hence allowable as revenue expenditure. He has also invited our attention to the various judicial pronouncements in which it was held that improvisation in the process and technology in some areas of enterprises was supplemental to the existing business. Therefore, the expenditure incurred are of revenue in nature. Reliance was placed upon the following judgments: Alembic chemicals work co ltd vs cit 177 itr 377 * CIT vs. Priya Village Road Shows Ltd., 332 I.T.R. 594(Del.) * Woodcraft Products Ltd., Vs. CIT ....
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.... investors for the equity fund raising; * Assisting in presenting the opportunity and the Company's future strategies to identified investors; * Inviting expressions of interest from identified investors; * Shortlisting investor(s) for negotiations and further discussions; * Coordinating management discussions, hospital visits etc with shortlisted investor(s); * Negotiating structure and terms of the fund raising with shortlisted investor(s); * Assisting in final negotiation with identified investor(s). * Project managing the activities of other professional advisors, where required, and * Assisting in completion of documentation required to achieve financial closure. 76. It is also an undisputed fact that the project was completed and the appellant has paid services fees of Rs. 3,30,90,000/- to Allegro Corporate Finance Advisors Pvt. Ltd. The appellant claimed it to be revenue expenditure under the head legal and professional charges but treated it to be a capital expenditure. The quantum of expenditure incurred by the appellant in obtaining services from Allegro Corporate Finance Advisors Pvt. Ltd., was not disputed by the Revenue. The dispute before....
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....en such expenditure is to be treated as business expenditure. A similar view was expressed by the Calcutta High Court in the case of Wood Craft Products Ltd., Vs. CIT (supra) wherein their Lordship has observed that travelling expenses were incurred in connection with the expansion scheme of the assessee company to set up a new plywood factory at Kenya under same management with common administrative control. Therefore, the expenditure has to be accepted as revenue expenditure because the expenditure has direct nexus with the existing business carried on by the assessee. Similarly, in the case of CIT Vs. Aluminium Industries Ltd., (supra) the Hon'ble Kerala High Court has held that there is no merit in the contention raised on behalf of the Revenue that the amount spent by the assessee in connection with the inaugural function of its new project is in the nature of capital expenditure as it was incurred not after the commissioning of the new unit. The assessee was already having manufacturing units, and the "relay" project which is inaugurated in January, 1982, was one in expansion of its existing business. Therefore, merely because the expenditure was incurred not after the commis....
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....d added back to the returned income of the assessee as adjustments made under section 40A(2) of the Act, having observed that the assessee company is having separate and sound set up for audit and financial works/requirements of the assessee and is duly incurring and also debited huge costs under these heads. 82. The assessee preferred an appeal before the CIT(A) but did not find favour with him. Now the assessee is before the Tribunal with the submission that the assessee company was facing difficulties in raising loans from banks at reasonable market rates whereas the MEMG, the holding company, represents the entire group and when it negotiates with the various banks and when large volumes of loans/business is assured to the banks with group corporate guarantee, banks are more comfortable to lend money to an individual company even though the company is relatively new. It was further contended that loan syndication fee that is generally paid in the market is around 2% to 5% of the loan disbursed whereas the MEMGIIPL is charging only 0.5% of the total turnover for a host of services including inter alia facilitation of bank loans which is not excessive or unreasonable. Besides, h....
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....e appellant in identifying new areas of growth in identifying properties that were purchased or taken on lease in order to expand business of the appellant and in view of this appellant would pay to MHSPL total amount of Rs. 14,97,50,000/- for the financial years 2010-11 to 2014-15 and during the impugned assessment year, he has paid Rs. 5 crores as a part of it. It was further contended that since the expenditure was incurred in the course of the business of the appellant, it should be allowed as a revenue expenditure. The CIT(A) re-examined the issue but was not convinced with it and he confirmed the disallowance. While doing so, the CIT(A) has observed that there is no tangible proof or details regarding any specific project or activities undertaken by the MHSPL for the proposed objectives of the assessee during the period under consideration. The CIT(A) further observed that there is no indication of any concrete or visible benefit which has accrued to the appellant in view of such an expenditure. Moreover, the assessee has not provided sufficient evidence or details to prove that internal arrangement was based on crucial business exigencies, commercial prudence and that the qu....