TaxTMI 
TaxTMI 
2020 (8) TMI 125
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....ucing it from the capital cost of construction of roads, as per accepted accounting practices and decision of various authorities including decision of Hon'ble Supreme Court in the case of CIT Vs. Bokaro Steels Ltd. 336 ITR Page 315, as this amount pertains to prior to commercial operation of the road for which the amount was borrowed. 3. That the Ld. Assessing officer and Ld. CIT(Appeals), Ajmer, has further erred in making disallowance of Rs. 1,00,000/- under Section 14A of Income Tax Act, 1961. The appellant prays that considering the facts and that no exempt income has been earned, the determination of the amount at Rs. 1,00,000/-u/s 14A read with rule 8D(2) is not justified and be deleted. 4. That the Ld. Assessing officer and Ld. CIT(Appeals), Ajmer, has further erred in considering Rs. 1,50,35,287/- as Share Issue Expenses instead of Rs. 1,30,88,710/- and accordingly further erred in considering Rs. 97,95,483/- as Professional and Legal fees for IPO instead of Rs. 1,17,42,030/- 5. That the Ld. Assessing officer and Ld. CIT(Appeals), Ajmer, has further erred in disallowing Share Issue Expenses of Rs. 1,50,35,287/- and adding back to the income, ....
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.... in case of Tuticorin Alkali Chemicals & fertilizers Ltd. vs. CIT (1997) 227 ITR 172 and following the position taken in the earlier assessment years, an amount of Rs. 1,05,246/- was brought to tax under the head "income from other sources". On appeal, the same has been confirmed by the ld. CIT(A) and against the said finding, the assessee is in appeal before us. 6. During the course of hearing, the ld. AR submitted that the assessee had entered into a concessionaire agreement for development of different road stretches popularly known as "Mega Highway" connecting various national highways. Earlier seven road stretches were completed and the assessee is in the process of completing the remaining seven stretches during the year. It is submitted that once the appellant commenced commercial operations of a partial road stretch, the interest expenses on relatable borrowings and interest income on linked STR were taken to the Profit & Loss account and offered under the head income from business and profession. In respect of remaining road stretches which were under construction and upto the date of commercial operations, the total expenditure including the interest paid on borrowed f....
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....(HS) (iii) Jhalawar to Jhalawar Road (JJ) (iv) Arjunsar To Pallu (AP) (v) Kapren To Mangrol (KM) (vi) Jhalawar to Ujjain (JU) (vii) Khushkheda To KasoulaChowk (KK) 9. Per contra, the ld. DR has relied on the findings of the lower authorities and submitted that the matter is squarely covered by the decision of the Hon'ble Supreme Court in case of Tuticorin Alkali Chemicals & fertilizers Ltd. vs. CIT and further in absence of any evidence to show that interest was pertaining to the period prior to the period during which commercial production has commenced, the same has rightly been brought to tax by the AO. He accordingly supported the order of the lower authorities. 10. We have considered the rival submissions and perused the material available on record. During the year under consideration, the assessee has shown interest receipt of Rs. 5,06,71,786/- from FDRs place with its banks, out of the same, interest receipt of Rs. 5,05,66,540/- has been offered to tax by the assessee under the head "Other Income", however, an amount of Rs. 1,05,246/- has been capitalized by the assessee thereby reducing the cost of fixed assets. Therefore, it is not a case where the wh....
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....fruitfully. The fruits of such investment will clearly be of the revenue nature. If the capital of a company is fruitfully utilised instead of keeping it idle, the income thus generated will be of the revenue nature and not accretion of capital Whether the company raised the capital by issue of shares or debentures or by borrowing will not make any difference to this principle. If borrowed capital is used for the purpose of earning income, that income will have to be taxed in accordance with law. Income is something which flows from the property. Something received in place of the property will be capital receipt. The amount of interest received by the company flows from its investments and is its income and is clearly taxable even though the interest amount is earned by utilising borrowed capital. It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilising the borrowed funds as its income. The company was at liberty to use the interest income as it liked it was under no obligation to utilise this interest income to reduce its liability....
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.... the work of the contractor, the assessee permitted the contractor to use the premises of the assessee for housing its staff and workers engaged in the construction activity of the assessee's plant. This was clearly to facilitate the work of construction. Had this facility not been provided by the assessee, the contractors would have had to make their own arrangements and this would have been reflected in the charges of the contractors for the construction work. Instead, the assessee had provided these facilities. The same was true of the hire charges for plant and machinery which was given by the assessee to the contractor for the assessee's construction work. The receipts in this connection also went to compensate the assessee for the wear and tear on the machinery. The advances which the assessee made to the contractor to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitches as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts were arrangements which were intrinsi....
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....r mind is that if income is earned, whether by way of interest or in any other manner on funds which are otherwise 'inextricably linked' to the setting up of the plant, such income is required to be capitalized to be set off against pre-operative expenses. 5.1 The test, therefore, to our mind is whether the activity which is taken up for setting up of the business and the funds which are garnered are inextricably connected to the setting up of the plant. The clue is perhaps available in section 3 of the Act which states that for newly set-up business the previous year shall be the period beginning with the date of setting up of the business. Therefore, as per the provision of section 4 of the Act which is the charging section income which arises to an assessee from the date of setting of the business but prior to commencement is chargeable to tax depending on whether it is of a revenue nature or capital receipt. The income of a newly set-up business, post the date of its setting up can be taxed if it is of a revenue nature under any of the heads provided under section 14 in Chapter IV of the Act. For an income to be classified as income under the head "profit and g....
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....ra) where the assessee had earned interest on advance paid to contractors during pre-commencement period was found to be 'inextricably linked' to the setting up of the plant of the assessee and hence was held to be a capital receipt which was permitted to be set off against pre-operative expenses. 6. There is another perspective from which the present issue can be examined. Under section 208 of the Companies Act, 1956 a company can pay interest on share capital which is issued for a specific purpose to defray expenses for construction of any work and which cannot be made profitable for a long period subject to certain restrictions contained in subsections (2) to (7) of section 208. This section was specifically noted by the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. 6.1 In our view the situation in the instant case is quite similar except here instead of paying interest on funds brought in for specific purpose interest is earned on funds brought in by way of share capital for a specific purpose. Could it be said that in the former situation interest could have been capitalized and in the later situation it cannot be capitalized. To ....
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....received on unutilized commitment advances cannot be taxed as revenue income and interest paid on commitment advance treated as a capital expense. This will be contradictory. The entire expenditure for inviting bids etc. and even documentation was paid to PFC. The amounts received from the prospective bidders on account of sale of tender documents was also transferred to PFC. As noticed above, Revenue has not challenged and has accepted the order of the tribunal deleting addition of Rs. 1,35,81,234/-paid by the respondent-assessee to PFC for preparation of tender documents. In view of the factual matrix, the tribunal has rightly followed the ratio in Indian Oil Panipat power Consortium Ltd.'s case (supra)." 11. Thereafter, the aforesaid decision of the Coordinate Bench was followed in subsequent decision in assessee's own case by the Coordinate Bench in ITA No. 963/JP/12 & 282/JP/15 dated 19.12.2016 wherein the relevant findings read as under: "4. We have heard the rival contentions and perused the material available on record. The issue under consideration for the both the years relate to treatment of the interest received prior to commencement of commercial operat....
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....for the specific purpose of execution of the mega road projects and as per the loan agreement executed between the consortium of bankers and the assessee dated 23.11.2005, all the disbursements shall be deposited in the trust and retention account which shall be subject to strict control and verification by the Senior lenders and all disbursements shall be utilised solely for the purposes of implementation of the project and no other purpose. The funds are thus inextricably linked to the setting up of the mega road projects and interest earned on such borrowed funds infused in the business could not be classified as income from other sources. We also note a distinguishing feature in the instant case that the assessee is not at liberty to use the interest so earned as per its will and discretion unlike the case in Tuticorin Alkali Chemicals & Fertilizers (supra) and the interest has to be used solely for the purposes of implementation of the specified projects only. The impunged interest receipt of Rs. 35,39,479/- on such borrowed funds relates to the mega road projects/stretches which were under construction and the completed road projects/stretches upto the date of commencement of....
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.... required to be set off against the pre-operative expenditure capitalized under the head "Capital work in progress" and the same cannot be brought to tax under the head "income from other sources." The said issue has been examined at great length by the Coordinate Bench in its decision referred supra and therein the decision of the Hon'ble Supreme Court in case of Tuticorin Alkali Chemicals and Fertilizers (227 ITR 172) as well as decision in case of Bokaro steel Ltd (236 ITR 316) has been duly considered. The relevant findings of the Coordinate Bench in assessee's own case in ITA No. 628/JP/2014 for A.Y. 2009-10 dated 11.08.2016 are reproduced as under: "2.18 From the above, it is evident that there are two sets of judgements of Hon'ble Supreme Court, proceedings on different lines of reasonings. The Hon'ble Delhi High court in case of Indian Oil Panipat Consortium Ltd. (supra) has considered and interpreted the decisions of Hon'ble Supreme Court in case of Tuticorin Alkali Chemicals & Fertilizers (supra) as well as Bokaro Steel Ld. (supra). After analyzing both the decisions of Hon'ble Supreme court, it held that "the test which premeates through the judgement of the Sup....
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....t off against the pre-operative expenditure capitalized under the head "Capital work in progress" and the same cannot be brought to tax under the head "income from other sources". Hence, ground no. 1 of the assessee is allowed." 5. Undisputedly, there are no changes in the facts and circumstances of the case. No contrary authority has been brought to our notice subsequent to above decision of the Coordinate Bench or the fact that said decision of the Coordinate Bench has been stayed by the Hon'ble High Court. In view of the similar facts and circumstances of the case and respectfully following the decision of Coordinate Bench in assessee's own case (supra), we hold that the interest received prior to commencement of commercial operations of the specified mega road projects will be in the nature of capital receipt and will be required to be set off against the pre-operative expenditure capitalized under the head "Capital work in progress" and the same cannot be brought to tax under the head "income from other sources". 4. However, Mr. Mathur has taken us to the order of the AO wherein the assessing officer while considering the income as observed as under:- ....
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....e Act and he accordingly made a disallowance of Rs. 1,00,000/- U/s 14A of the Act r.w. Rule 8D, which on appeal has been confirmed by the ld. CIT(A). 16. During the course of hearing, the ld. AR submitted that the assessee has made investment in its subsidiary out of its own share capital, there is no borrowed funds which has been invested while subscribing to the share capital of the subsidiary company. Further, referring to the provisions of Section 14A of the Act which talks about disallowance in relation to income which does not part of the total income, it was submitted that the assessee has not earned any tax free income during the year and therefore, the question of disallowance of any expenditure U/s 14A of the Act. In support reliance was placed on the decision of Hon'ble Delhi High Court in case of CIT vs. Holcim India Pvt. Limited and also the decision of Coordinate Bench in case of M/s Rajasthan land Holding Ltd. dated 25.09.2019 which has followed the decision of Hon'ble Delhi High Court in case of Cheminvest Ltd. vs. CIT (2015) 387 ITR 33 and decision of Hon'ble Supreme Court in case of Maxopp Investment Ltd. vs CIT 402 ITR 640. It was accordingly submitted that th....
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.... a direction to verify as to whether the assessee has earned exempt income during the year under consideration or not and in the case, AO comes to the conclusion that no exempt income was earned by the assessee during the year under consideration then in that eventuality no disallowance u/s 14A of the Act is warranted. With these directions, we allow the ground of appeal for statistical purposes." 19. In the result, the matter is decided in favour of the assessee and against the Revenue and the ground of appeal is thus allowed. 20. In ground No. 4, the assessee has contended that the Assessing Officer as well as ld. CIT(A) has erred in considering an amount of Rs. 1,50,35,287/- as share issue expenses instead of Rs. 1,30,88,710/- and similarly has erred in considering professional and legal fees for IPO amounting to Rs. 97,95,483/- instead of Rs. 1,17,42,030/-. It was submitted that the necessary details were submitted before the lower authorities however, the same has not been considered. The details of expenses incurred in this regard are as under:- S. No. Particulars FY 2008-09 FY 2009-10 Total I IPO Related expenses : 1,17,42,06....
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.... off expenditure incurred towards professional and other charges for public offer of shares and out of which expenditure of Rs. 1,50,34,747/-related to increase in authorized share capital. As per Assessing Officer, the law is well settled that the expenditure directly related to ROC/stamping fees paid for increase in capital base of company is held to be capital expenditure by the Hon'ble Supreme Court in case of Brooke Bond India Ltd. vs. CIT 225 ITR 798 and in case of Punjab State Industrial Development Corporation ltd. vs. CIT (1997) taxman 5. It was further held by the Assessing Officer that the decision of Hon'ble Madras High Court in case of CIT vs. Kisen Chand Chellaram (India) (P.) Ltd. 5 taxman 58 has since been overruled in the Apex Court verdict in the case of M/s Brooke Bond India Ltd. It was further observed by the Assessing Officer that in spite of the IPO being aborted, as a result of expenditure, it was authorized capital which has increased thereby providing an enduring benefit to the assessee, therefore, the expenditure to the extent of Rs. 1,50,35,287/- related to increase in authorized share capital was disallowed being capital in nature and added to the taxabl....
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....essee company could not go to public but have used the various reports prepared by the various consultants to convince the existing shareholders i.e. GoR/IL&FS to further subscribe to the share capital and have got seven more road stretches for construction, which is direct evidence of extension of existing business, which is covered as per definition of Section 35D. The Authorized Share Capital of the company was increased from Rs. 50 crores in FY 2007-08 to Rs. 200 crores in FY 2008-09 and paid up capital increased by Rs. 50 crores in FY 2008-09 to Rs. 100 crores. In view of this, the amount incurred will also fall within the definition of Section 35-D and is eligible for amortization in 5 equal installments, if the same is not allowed as a revenue expenditure. 29. It was further submitted that the Learned Assessing Officer has held the same to be capital in nature and disallowed the same with special emphasis on the case of Brooke Bond India Ltd Vs CIT, 225 ITR 798 (SC). In this connection it is submitted that Section 35D was introduced in the statute book w.e.f. 01-4-1971 and the decision of the Hon'ble Supreme Court in the case of Brooke Bond India Ltd Vs CIT related to ass....
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....t be contained in the record sufficient to enable the Income-tax Officer to consider whether the relief should be granted under section 84. In the absence of such material, ITA No.7010/2010 no fault can be found with the Income-tax Officer for not making an order under section 84 favouring the assessee." That in view of the above factual and legal position, the Appellant prays to the Hon'ble Bench to either allow this expenditure as revenue expenditure or direct the Ld. Assessing Officer to consider this claim as per provisions of Section 35D of the Income Tax Act, 1961. 31. The ld DR submitted that it is now a settled legal proposition that the expenses incurred on increase in the authorized share capital which results in increase in the capital base of the assessee company is an expenditure on capital account and the matter has long been settled by the Hon'ble Supreme Court in case of Brooke Bond India and subsequent decisions relied upon by the AO. He accordingly supported the findings of the lower authorities and submitted that there is no infirmity in the said findings and the same may be confirmed. 32. We have considered the rival submissions and perused the material....
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....CIT [1966] 60 ITR 52 . The decision of the Madras High Court was followed by the Karnataka High Court in Hindustan Machine Tools Ltd. (No. 3)v. CIT [1989] 175 ITR 220 . In its view as well, the expenditure incurred by way of remitting filing fee to the Registrar of Companies in respect of enhancement of the authorised share capital of the company was allowable as a revenue expenditure. As already stated above, the Rajasthan High Court has taken a different, view in the case of Aditya Mills [1990] 181 ITR 195. Learned counsel for the assessee urged for making reference of the aforesaid question to a larger Bench. We do not, however, consider it necessary to do so. The Rajasthan High Court decision in the case of Aditya Mills [1990] 181 ITR 195 is clear and explicit on the point and we are bound by the same. We, consequently, answer the first question in the negative by saying that the fee paid to the Registrar of Companies for raising the authorised capital was not allowable as revenue expenditure." 34. The decision of the Hon'ble Rajasthan High Court has subsequently been affirmed by the Hon'ble Supreme Court in case of Punjab State Industrial Development Corpo....
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....4] 207 ITR 553 (Cal.) and so also the Gujarat High Court has affirmed its earlier view in Alembic Glass Industries Ltd. v. CIT [1993] 202 ITR 214 (Guj.). 4. We may also indicate that this court laid down the test for determining whether a particular expenditure is revenue or capital expenditure in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69 (SC). In that decision, this court surveyed the law on the subject in considerable detail and observed as under : "The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave, L.C. in Atherton v. British Insulated & Helsby Cables Lt....
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.... that the expenditure incurred by the assessee was an item of revenue expenditure. This line of reasoning has not found favour with the other High Courts which have taken a contrary view. The Calcutta High Court in Brooke Bond India Ltd.'s case (supra) held that where the object of incurring an expenditure is to affect the capital structure as a result of which certain incidental advantage flows, the expenditure will be of capital nature. It is not the acquisition of a right of a permanent character alone, the creation of which is a condition for the carrying on of the business, that could be rightly treated as an expenditure on the capital account. Capital expenditure can be incurred after a company is floated or it started business, if it resulted in bringing about capital advantage. The Andhra Pradesh High Court had in Warner Hindustan Ltd.'s case (supra), following the decision of the Madras High Court in Kisenchand Chellaram ( India)( P.) Ltd.'s case (supra) , held that the expenditure incurred was connected with the functioning and financing of the assessee's business and, hence, the fees paid could not be treated as on capital account. However, this line of r....
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....nly help in the business of the company and may also help in profit-making, it still retains the character of a capital expenditure since the expenditure was directly related to the expansion of the capital base of the company. We are, therefore, of the opinion that the view taken by the different High Courts in favour of the revenue in this behalf is the preferable view as compared to the view based on the decision of the Madras High Court in Kisenchand Chellaram (India) (P.) Ltd.'s case (supra) . We, therefore, answer the question raised for our determination in the affirmative, i.e., in favour of the revenue and against the assessee. 35. In light of aforesaid discussions and respectfully following the decision of Hon'ble Rajasthan High Court and Hon'ble Supreme Court referred supra, we are of the considered view that the expenditure incurred towards increase in the authorized and paid up capital which has resulted in increase in capital base of the assessee company has rightly been treated by the Assessing officer as a capital expenditure and the contention advanced by the assessee company to treat the same as revenue expenditure therefore cannot be accepted. 36. Now, ....
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.... submission, that the expenditure incurred by way of enhancement of capital would be covered by the same. To us, it appears that even if the provision of sub-section (2)(c )(iii) of section 35D is not applicable, the language of sub-section (2)(c)( iv) of section 35D is wide in nature and would include the deductibility of fee paid by the assessee to the Registrar for enhancement of capital. Therefore, the said provision was rightly applied to the present case by the Income-tax Appellate Tribunal. Under these provisions, deduction of expenditure incurred for registration is to be spread over a period of ten years and is not allowable in the year in which the expenses are incurred. To uphold the submission of the Revenue that expenditure incurred for obtaining registration would not be allowable either under sub-section (2)(c)( iii) or sub-section (2)(c)( iv) of section 35D would defeat the obvious intention of the Legislature and would produce a wholly unreasonable result To achieve the obvious intention and produce a reasonable result, we have to hold that under subsection (2)(c)(iv ) of section 35D, the expenditure incurred for obtaining registration wo....
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....incurred on public issue for the purpose of expansion of the company is a capital expenditure. However, in spite of the argument raised to the effect that the aforesaid judgment was rendered when Section 35D was not on the statute book and this provision had altered the legal position, the High Court still chose to follow the said judgment. It is here where the High Court went wrong as the instant case is to be decided keeping in view the provisions of Section 35D of the Act. In any case, it warrants repetition that in the instant case under the very same provisions benefit is allowed for the first two Assessment Years and, therefore, it could not have been denied in the subsequent block period. We, thus, answer question No. 1 in favour of the assessee holding that the assessee was entitled to the benefit of Section 35D for the Assessments Years in question." 39. Therefore, respectfully following the decisions of Hon'ble Rajasthan High Court and Hon'ble Supreme Court referred supra, the assessee is held eligible for amortization of the expenses incurred in terms of fees paid to Registrar of companies towards the increase in authorized and paid up capital as per the provisions of....
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....fit to the assessee. It was further held by the Assessing Officer that the assessee itself has treated the expenditure as capital expenditure and therefore, merely because the IPO got aborted, the assessee is changing the nature of expense from capital to revenue nature. 41. Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) who has confirmed the findings of the Assessing Officer and against said findings, the assessee company is in appeal before us. 42. During the course of hearing, the ld. AR submitted that the assessee company had applied for IPO to raise the resources to meet the capital requirements in the form of debentures/preferential shares and for that company had appointed consultants and incurred expenditure. Unfortunately, the scenario of the financial market more particularly infrastructure project fell down drastically and the management had to abandon the proposed IPO and accordingly this expenditure was charged off to the Profit & Loss account and claimed in the return of income. The ld. AR relied on the decision of the Hon'ble Delhi High Court in case of Priya Village Roadshows Ltd. v. CIT [2009] 185 TAXMAN 44 (DELHI) wherein it....
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....cordingly submitted that the addition in respect of IPO expenses as a revenue expenditure in current year may be deleted as the decision for not to go for public issue was taken in the current year and due to which this expenditure falls within ambit of the revenue expenditure of the current year. In addition to above, we would also like to mention that the Hon'ble Supreme Court in the case of CIT Vs. Excel Industries Limited has held that when the tax rate in two years are same, the Income Tax Department should not make it an issue and should not increase the litigation. Alternatively, without prejudice to our above submission, it is submitted that Rs. 97,95,483/- as Professional and Legal fees for IPO are well covered u/s 35D of the Income Tax Act. From the details submitted, it is clear that the nature of expenses like due diligence, payment to merchant bankers, professional fees paid to other professionals like auditors to comply with the requirement of Companies Act, 1956 falls within the definition of section 35D. The important fact is that it should be either before start of commercial operation or for extension of business. Our case squarely covered the second limb of....
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.... Company, Chartered Accountants (consultants for preparing the financial information), M/s Amarchand Mangaldas (consultants to the Book running lead manager) and M/s Eman Securities Pvt. Ltd.(book running lead manager) and has incurred certain expenses towards their professional, legal/due diligence and relates services amounting to Rs. 1,17,42,060/- and one of the reports/end products of such an exercise is the red herring prospectus which got prepared which is required to be submitted to SEBI for its approval before the announcement of the IPO. It is also a fact that the IPO got aborted due to unfavourable financial conditions. Therefore, the precise question which arise for consideration is whether the professional and legal expenses incurred in connection with raising of funds through an IPO which got aborted can be allowed as a revenue expenditure or not. The Coordinate Bench in case of Nimbus Communications Ltd vs ACIT (ITA No. 2361(Mum) of 2007 dated 28.01.2010) had examined the matter in similar factual background of aborted IPO expenses and has held as under: "On a careful consideration of the facts and circumstances of the case, as incurring of the expenditure in....
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....e is no dispute that these expenses have been incurred by the assessee company in connection with the IPO which ultimately got aborted due to unfavourable market conditions which is beyond its control. By incurring such expenditure, no new asset has come into existence or any enduring benefit has accrued to the assessee company. As far as red hearing prospectus is concerned, we find that it is a document which is prepared and submitted to SEBI for its approval seeking permission to raise funds through an IPO and is thus a regulatory requirement which would be required to be submitted every time the company wishes to raise the funds in future and requires to contain latest data, statistics and declarations about the company, its promoters, past filings and financials and utilization of the proceeds of the IPO and therefore, it cannot be said that once such a document is prepared, it can be used subsequently for any future IPO. Therefore, the stand of the Assessing officer that such a document will provide an enduring benefit to the assessee company cannot be accepted. In light of aforesaid discussions and respectfully following the decision of the Hon'ble Bombay High Court in cas....
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.... CIT(Appeals), Ajmer has wrongly considered Rs. 1,19,49,426/- as Income from Other Sources rather than reducing it from the capital cost of construction of roads, as per accepted accounting practices and decision of various authorities including decision of Hon'ble Supreme Court in the case of CIT Vs. Bokaro Steels Ltd. 336 ITR Page 315, as this amount pertains to prior to commercial operation of the road for which the amount was borrowed. 3. That the Ld. Assessing officer and Ld. CIT(Appeals), Ajmer, has further erred in law as well as in facts by disallowing the expense claimed of Rs. 15,72,414/- (1/5th expense incurred Rs. 78,62,069/-) by the Company for increase in authorized capital as decided by the Rajasthan High Court [Commissioner of Income Tax v. Multi Metals Ltd. reported in 188 ITR 151]. 4. That the Ld. Assessing officer and Ld. CIT(Appeals), Ajmer, has further erred in making disallowance of Rs. 1,00,000/- under Section 14A of Income Tax Act, 1961. The appellant prays that considering the facts and that no exempt income has been earned, the determination of the amount at Rs. 1,00,000/-u/s 14A read with rule 8D(2) is not justified and be deleted. ....
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....cio-economic expense of Rs. 50,23,041/- under section 37 of Income Tax Act, 1961 and adding back to income, though these expenses are directly connected and incidental to the business of the company, no personal benefit has been derived there from and further such expenditure incurred will not result in any capital asset on long term enduring benefit to the company. 55. Both the parties fairly submitted that except for ground no. 3 and 6, the facts and circumstances of the present appeal are identical to facts and circumstances in ITA No. 668/JP/19 and thus, similar contentions as raised in aforesaid matter may be considered. Therefore, considering that there are no changes in facts and circumstances as so submitted by both the parties, our findings and directions contained in ITA No. 668/JP/19 shall mutatis mutandis to the present appeal and the grounds of appeal (except for ground of appeal no. 3 & 6) are disposed off accordingly. 56. Now, coming to ground no. 3 wherein the assessee has challenged the disallowance of depreciation of Rs. 1,17,59,016/- claimed by the assessee. 57. In this regard, the ld AR submitted that in respect of disallowance of depreciation of Rs. 1,....
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....epreciation on Toll Buildings amounting to Rs. 1,17,59,016/- has been wrongly disallowed by the Assessing officer which may be allowed. It has also been stated by the ld AR that the amortization in respect of Toll roads over the life of the road projects and depreciation in respect of Toll Building calculated at the rate of 10% is the consistent position adopted by the Revenue in the earlier years. In light of the fact that such Toll building is part of the "building" block of the assets and in the earlier years, the depreciation on such building block including Toll building has been allowed by the Revenue, the Assessing officer is hereby directed to allow the depreciation on Toll building after due verification. In the result, the ground of appeal is allowed. 60. In ground no. 6, the assessee company has challenged the disallowance of socio-economic expense of Rs. 50,23,041/- under Section 37 of Income tax Act, 1961. 61. In this regard, we refer to the relevant findings of the AO which read as under: "7.1 Amount of Rs. 5023041/- has been debited in P&L under the head "other expenses" as expenses on 'Socio Economic'. Vide letter dated 11-11-2016 the assessee was ....
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....hall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Based on above submissions it is to be noted that all the socio economic (R&R) expenses incurred are directly connected and incidental to the business of the company, there is no personal benefit of either of the director or the stakeholder of the company and further and expenditure incurred under this category will not result in any capital asset or long term enduring benefit to the company. Hence, the same is fully covered as per Section 37 of the Income-tax Act, 1961 and shall be allowed fully. 7.2 Reply given by the assessee has been examined but found to be not acceptable for the reason that the provision of section 37(1) requires that any expenditure which has been exclusively incurred for the purposes of business of the assessee, not in the nature of personal expenses and not in the nature of capital expenses is only allowable U/s 37(1) as business expenses. Prima facie the expenses claimed are evidently of the nature of application of income/donations. The assessee has claimed these expenses on the basis of social cause or general publi....
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....The expenditure incurred is not with a view to bring profits or monetary advantage to the assessee Company. Accordingly the said Socio Economic Expenses of Rs. 5023041/- is disallowed and added to the total income of the assessee." 62. Being aggrieved, the assessee carried the matter in appeal before the ld CIT(A) who has upheld the disallowance so made by the AO and against the said findings, the assessee is in appeal before us. 63. In this regard, the ld AR submitted that according to section 37(1) of the Income Tax Act, 1961, any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee or incurred by an assessee for any purpose which is an offence or which is prohibited by law), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession. 64. Under section 37(1), expenses which are not specifically disallowed as deduction, can be claimed as deduction provided certain conditions are fulfilled. For example expenditure incu....
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....r the entire Project Period conferring on RIDCOR the right to demand, collect, retain and appropriate User Fee from the Users of the Project Road; 2. Subject to 2.2(1) above, RIDCOR hereby agrees and acknowledges, without qualification as part of this Partnership and Development Agreement, to undertake the following obligations during the Project Period: (a) commence, within 90 days of this Agreement, the Improvement Works which may however not include that for landscaping, wayside amenities, user services or such other items as may be decided by RIDCOR; (b) arrange and procure firm commitments for Financing from Lenders/ Investors and achieve Financial Close within 180 days from the date of signing this Agreement; (c) undertake to achieve Substantial Completion not later than 24 months from the Improvement Works Commencement Date in accordance with the provisions of Article 4.3 of this Agreement; (d) organise the supervision, monitoring and control of the Improvement Works and operate, manage and maintain the Facility in accordance with this Agreement; (e) appoint suitable Persons by entering into appropriate contracts for fulf....
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....ovisions of the laws of GoR/GoI including rules regulations made thereunder as applicable to the Project including laws relating to environmental and ecological protection and road safety during the Project Period; and (p) Due observance of the provisions of this Agreement, the Financing Agreements and all other Project Contracts entered into for the purpose of implementation of the Project during the Project Period." 66. It was submitted that it was observed that lot of drivers on the highway were found driving their vehicles with heavy drinks and most of them when checked were found suffering from HIV/AIDS and their further physical activity in the affected area is taking lot of casualties as various people have also got infected by such diseases due to such activity and as a safety measure, the assessee company is running awareness programmes contacting the people, drivers, male/female labourers etc. about its prevention, their treatment and precautions etc. All other activities like putting the Caution Boards not to drink and drive, avoid sex with more than one partner and educating them through plays etc. to stop the increasing tendency of people getting affected b....
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....itigate the aforesaid evil consequences and consequences of a like nature, subject to its being genuine and within reasonable limits. Yes B. Negative Tests: If the expenditure is incurred: Whether Company fulfills tests 1 for a mere altruistic consideration; No. 2 mainly in order to satisfy his philanthropic urges; No. 3 mainly in order to win applause or public appreciation; No. 4 for illegal, immoral or corrupt purposes or by any such means or for any such reasons; No. 5 mainly in order to oblige a relative or an official; No. 6 to earn the goodwill of a political party or a politician; No. 7 to show off or impress others with his affluence or for ostentatious purposes. No. 8 apparently for a factor listed as a positive factor but in reality for one No. 9 of the obnoxious purpose listed as a negative factor; No. 10 on a nebulous plea or pretext but really for one or the other of the purposes listed as negative tests; No. 11 it must not be a bogus, fictitious or sham transaction; No. 12 is must not be unreasonable and out of proportion; No. 13 it must....
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.... income may be allowable deduction if they are related to the efficient carriage of the business even indirectly (Indian Steel & Wire Products Ltd. Vs. CIT (supra). Also the Calcutta High Court in CIT Vs. Shree KrishanGyanoday Sugar Mills Ltd. (1990) 186 ITR 541 (Cal) has observed the business expediency may not require that all the expenses be incurred for earning immediate profits. 70. Further in respect of applicability of Explanation 2 to S. 37(1) of the Income Tax Act, 1961, it is submitted that the Raipur Bench of Income Tax Tribunal recently held in case of Jindal Power Ltd. [ACIT Vs. Jindal Power Ltd. I.T.A. No.99/BLPR/2012, Assessment year: 2008-09, order dated June 2016] that: "The amendment in the scheme of Section 37(1), which has been introduced with effect from 1st April 2015, cannot be construed as to disadvantage to the appellant in the period prior to this amendment. This disabling provision, as set out in Explanation 2 to Section 37(1), refers only to such corporate social responsibility expenses as under Section 135 of the Companies Act, 2013, and as such, it cannot have any application for the period not covered by this statutory provision w....