TaxTMI 
TaxTMI 
2007 (9) TMI 289
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....llowance of the expenditure of Rs. 1,51,668 incurred on the renovation of furniture. (5) The Commissioner of Income-tax (Appeals) erred in law and on facts in ignoring the objections of the assessee regarding the payment of the expenses of Rs. 1,51,668. (6) The Commissioner of Income-tax (Appeals) erred in allowing only 50 per cent of the expenses claimed in respect of payments made to the employees. (7) The Commissioner of Income-tax (Appeals) erred in holding that the main business did not commence and the business involved in earning interest from its advances. (8) The Commissioner of Income-tax (Appeals) erred on facts and in law in holding that payments of legal expenses to Messrs. Little & Co. was capital expenditure and further erred in confirming disallowance of Rs. 2,89,650 paid to Shri V. Mohan, Internal Auditor. (9) The Commissioner of Income-tax (Appeals) erred in allowing only a part of expenses claimed by the assessee on account of travel, repairs and maintenance, software expenses, telephone and miscellaneous expenses without giving any reasons whatsoever. (10) The Commissioner of Income- tax (Appeals) erred in law and on facts in sustaining the dif....
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.... this issue. 3. The learned counsel for the assessee contended that in the audit report submitted with the return, the auditors in Form No. 3CD at item 4 mentioned a note about the expenditure debited to the profit and loss account at Rs. 1,51,668 (refers to Note-I of Annexure I), which is as under:- "Annexure I, Sl. No. 1, clause 4(i). The company is of the view that the expenditure is incurred on renovation of existing furniture of the occupied building and hence considered as revenue in nature." Both the views of the auditor as well as of the assessee were before the Assessing Officer while processing the return under section 143(1)(a). Since the return was processed without adjustment, it implies that the Assessing Officer accepted the view of the assessee. In any case, it cannot be a mistake apparent from the record as these are two views. The Assessing Officer issued notice under section 154 dated 30-1-1998 and did not pass any order in this behalf. During the pendency of this notice, the Assessing Officer issued notice under section 148 on 28-1-1999 reopening the assessment on following grounds, which were supplied to the assessee on request:- "In this case, the ....
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....e processing the return of income and no objection was raised. Similarly, by issuing notice under section 154 this was held by the assessing Officer to be mistake apparent from the record and not income escaping assessment. In addition, the nature of dispute itself speaks that it is only a change of opinion. The assessee held one view, the auditors held the other view. And the Assessing Officer on these facts initially allowed it and then held the same to be a mistake apparent from record and not escaped income. It is well-settled law that a change of opinion on the similar set of facts and circumstances cannot amount to reason to believe that income has escaped assessment. The ground for reopening being a change of opinion cannot constitute a valid reason to reopen the assessment. 5. It was further contended that the CIT(A)'s observations on this issue are incorrect. The CIT(A) has mentioned that the issue covered under section 154 pertained to giving effect to TDS interest. The issue of section 148 has been done on right lines. The learned counsel contended that in the reason itself it has been mentioned that the issue of TDS certificate credit in favour of the assessee had al....
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....eby given to include and treat the ancilliary objects of the Company as given in sub-clauses (8) and (9) of Part (B) of the clause III of the Memorandum of Association of the Company as the Main Objects of the Company and accordingly, the Board hereby authorizes the commencement of the new business of investing the funds of the Company in shares, stocks, debentures, debenture stocks, bonds, obligations and securities issued or guaranteed by any Company constituted or carrying on business in India or elsewhere or in any debentures, debenture stocks, bonds, obligations and securities issued and/or guaranteed by any Government, Sovereign ruler, Commission, Public body or authority, Supreme, Municipal, local or otherwise, whether at home or abroad and of advancing and lending money either with or without security and generally to such persons and upon such terms and conditions as the Board of Directors of the Company may think fit and also to persons undertaking to build on or improve any property in which the Company is interested and to tenants, builders and contractors." Consequently, the activities of investing surplus funds in debentures, bonds, etc., and advancing and lending ....
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.... by the assessee by various other grounds. 8. Aggrieved, the assessee preferred first appeal. The assessee, in its statement of facts and grounds of appeal, reiterated the facts and contentions as raised before Assessing Officer. It was emphasized that the assessee by a newly adopted resolution of Board of Directors dated 3-4-1993, had adopted to make the above ancillary objects as the main objects of the assessee-company. The finding of the Assessing Officer that the assessee has not started business activity was challenged. Since the business was started, no expenditure should have been disallowed by the Assessing Officer. The CIT(A) in his order in para 2.5 has referred to the Board resolution and in para 2.6 has referred to the contention of the assessee that the income does not relate to pre-commencement of business but from the objects, which are authorised by the Board of Directors to be the main objects of the assessee, i.e., business of investment and financing, for which all the expenses should be allowed as business expenses. At para 2.7, the CIT(A) has given a finding as under:- "The Assessing Officer has not taken into cognizance the inclusion of the object of in....
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.... Directors was produced before the Assessing Officer. The Assessing Officer has, in effect, accepted the argument by observing that 'without going into the legal requirement in this regard, even if we accept the assessee's contention in respect of the new business of investing the funds of the company and earning interest income on that...' This goes to show that, in principle, Assessing Officer does not controvert the resolution and claim of the assessee but when it comes to disallowance of the expenditure, the same is disallowed on the footing that it was not the main business of the assessee. In the order also the Assessing Officer while computing this income has not applied the head 'Income from Other Sources' but assessed 'Gross total income as per computation of income', which is on the basis of Income from Business or Profession, the return also has been filed accordingly. The CIT(A) also though gives a finding that the Assessing Officer has failed to consider the inclusion of these objects but when it came to disallowance of the expenditure the CIT(A) allows part of it. The CIT(A) has failed to take into consideration that the expenditure was incurred by the assessee wholly....
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.... earning profits'. Its range is wide; it may take in not only the day-to-day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of the business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory." The learned counsel contended that the CIT(A) has, in fact, accepted the business activity of the assessee in minced words. However having accepted so, the test of expenses b....
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....706,189.00 Profession Tax 11,297.00 Bonus 56,900.00 Medical Expenses 5,270.65 Staff Welfare 64,507.98 ----------- Total 844,164.63" ----------- Month-wise details in respect of all the details were furnished. The assessee was engaged in full-fledged business operations of investment in stock, bonds, advances etc. The activities included joint ventures in Euro market, dealings with big investment and financial companies like Kotak Mahindra, Citi Bank, etc. In this type of corporate culture, the assessee cannot run an office without proper staff and qualified Managers and Executives. The assessee's business operations were on a higher scale. It is the assessee's domain to decide as to how many employees will be recruited and deployed for the purpose of i....
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.... 926,483.25 ---------- It was contended that the CIT(A) though given a finding that the Assessing Officer disallowed the expenditure on ad hoc basis, has retained part disallowances on similar ad hoc basis. Shri Hiten Talati whose expenses have been allowed, was Internal Auditor till June 1993. Thereafter Shri V. Mohan was appointed as Internal Auditor and the payment to this concern is on account of these services for the rest of the period. For similar services, CIT(A) has allowed the expenditure till June 1993 but for the balance period the same has been disallowed holding that the same 'does not appear to relate to this business of earning interest and is an expenditure to be capitalised'. The expenses were incurred for internal audit, w....
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....bsp; Officer Travel Rs. 50,000 Rs. 1,00,000 Repairs & Maintenance Rs. 20,000 Rs. 50,000 Software expenses Rs. 10,000 Rs. 25,000 Telephone expenses Rs. 50,000 Rs. 1,00,000 Licence & Registration Nil - Miscellaneous expenses Rs. 90,000 Rs. 1,50,000" The learned counsel for the assessee contended that complete details in this behalf were filed before both the authoritie....
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....contended that this Board resolution has no effect to change the interest income into business income. Since the assessee's business had not commenced, the interest income becomes income of the pre-commencement period and has to be treated under the head 'Income from Other Sources' as per Supreme Court judgment in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. The Assessing Officer was perfectly justified in applying this judgment. 18. For ground Nos. 4, 5, 6, 8 and 9-11, reliance was placed on CIT(A)'s order. 19. The learned counsel for the assessee in rejoinder on these grounds contended that there is no requirement to intimate the Assessing Officer to any change of making ancillary objects as main objects of a private limited company. As per section 149(2A)(7) of the Companies Act, in case of private limited company a simple resolution is sufficient to make ancillary objects as main objects and enables the assessee to carryon such business. The lower authorities have put no such challenge to this resolution being an afterthought or c1ahdestine. The resolution is dated 3-4-1993, i.e., beginning of the accounting year. No allegation in this behalf can be made at thi....
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....h two recourses, one to disallow the same by way of prima facie adjustment and the other to issue section 143(2) notice. At the time of processing return under section 143(1)(a), the Assessing Officer is under statutory obligation to exercise his powers enabling in this behalf. At that time also he has to decide the disallowable items if he finds that any loss, exemption, deduction, allowance or relief shown in the return is inadmissible and serve the notice under section 143(2) on the assessee. The words used in section 147 are 'has reason to believe', the same are not reasons to suspect. It cannot be presumed that the Assessing Officer while deciding statutory function is oblivious of the powers conferred on him by other provisions. There is no claim by the Assessing Officer that some other material came in his possession so as to convert his earlier decision into a belief of escapement of income. What the Assessing Officer has before him are the same reasons, which existed at the time of processing return under section 143(1)(a). Therefore, there is no change in reason to believe as existed at the time of processing return under section 143(1)(a) and at the time of issuing reass....
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.... and has, as an alternate plea, accepted the same. Having held like this, he has proceeded to hold that the expenditure, which does not relate to assessee's business activity during the year, can never be allowed. In effect the Assessing Officer accepted the proposition of the assessee that it had business activity during the year but on expenditure issue he draws a line between expenditure relatable to the business and not relatable to business. Similarly, the CIT(A) in para 2.7 holds that the Assessing Officer has not taken cognizance of the inclusion of object of investing the funds in shares/bonds etc. The Assessing Officer has alternatively argued that even if the assessee's contention is accepted, the expenses, which do not relate to assessee's business activity during the year, can never be allowed against the interest income earned by the assessee on investment of its funds. Here also the CIT(A)'s finding is clear that the Assessing Officer has not properly considered the issue of Board resolution. The Assessing Officer before CIT(A) has, as an alternative plea, accepted that the assessee's business activity is there and the expenses not relatable thereto should not be allo....
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....above are applicable to assessee's case. The CIT(A) has not pointed out that the payment was made to relatives. There is no allegation that the expenses were not incurred wholly and exclusively for the purpose of the business. In the absence of such allegations and with a finding that the assessee's business had commenced, we are inclined to hold that the expenses were incurred by the assessee wholly and exclusively for the purpose of business. Respectfully following the above authorities of Hon'ble Supreme Court and Bombay High Court, we allow salary expenses as claimed in this ground. This ground of the assessee is allowed. 26. On ground No. 8, we have heard the rival submissions and perused the material available on record. As far as the expenses to Little & Co. are concerned, we find that what existed between assessee and ZEITGEIST was an agreement for management of funds, which is evident from the preamble and clauses of the agreement. The assessee was in investment and finance management business and such type of fund management agreements are executed in the normal course of the assessee's business. The Assessing Officer has referred the same as joint venture as a separat....
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....assessee's business had commenced. Drawing the same analogy as held for the above expenses, we hold that the expenditures as claimed in ground Nos. 9, 10 and 11 are incurred wholly and exclusively for the purpose of business. The same are allowed. These grounds of the assessee succeed. 28. Consequently, on merits also the assessee's ground Nos. 3 to 11 are allowed. 29. Ground Nos. 12 and 13 were not pressed due to retrospective amendment in this behalf. Hence they are dismissed. 30. In the result, assessee's appeal stands partly allowed. Per S.V. Mehrotra, Accountant Member: 31. I have gone through the order of the learned Judicial Member and with respect unable to agree with various issues as discussed hereinafter. 32. In Ground Nos. 1 and 2, the assessee challenged the reopening of the assessment under section 147/148 of the Income-tax Act, 1961. The learned Judicial Member has succinctly stated the relevant facts in regard to this issue and, therefore, I do not consider it necessary to repeat the same again. The assessee has challenged the reassessment proceedings on two grounds-One is that no notice under section 148 can be issued, if the proceedings under sec....
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....lar order is passed under section 143(3). Therefore, the deeming provisions have been incorporated as noted above by insertion of Explanation 2 to section 147. The object of reassessment is to assess the correct income and is a matter of procedure. With the merging of clauses (a) and (b) of section 147 (operative up to 31-3-1989) significant changes have been made in regard to the fulfilment of certain preliminary requirements which were mandatory conditions under pre-1989 section 147. Under the post-1989 section 147, the power to reopen the assessment is much wider and can be exercised even if an assessee had disclosed fully and truly all material facts. Thus, unless the case is covered by a proviso to post-1989 section 147, the failure of the assessee to disclose fully and truly all material facts necessary for his assessment is not relevant. The assumption of jurisdiction under section 147 is based on existence of materials before the authority and, if, the same is there and if, on that basis, the Assessing Officer forms a belief that the income has escaped assessment, then the reassessment proceedings cannot be annulled. The expression 'escaped assessment' clearly connotes a ve....
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....ue in nature." 'Thus, as far as the auditors were concerned, they had treated this item as capital expenditure in spite of contrary view being held by the company and, therefore, this expenditure was clearly disallowable, which adjustment was not carried out under section 143(1)(a).' Merely because the auditors incorporated the views of the company, it would not follow that the Assessing Officer had applied his mind and then did not accept the view of the auditors but accepted the view point of the assessee-company. Had the Assessing Officer applied his mind, he would have issued notice under section 143(2) before accepting the view of the company, this being, in any view of the matter, a debatable issue. As no notice under section 143(2) was issued, it clearly shows that this issue had completely escaped the attention of the Assessing Officer while issuing intimation. This, in my opinion, is not a case of change of opinion, but of finding erroneous nature of earlier assessment, by detection of a mistake on an issue which was not earlier considered by the Assessing Officer. 33. In this view of the matter, I hold that the reopening of the assessment by the Assessing Officer wa....
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....n object, it cannot be said that the business has been set up. The assessee has to take various steps before it is ready for commencement of business. Therefore, all the expenses incurred between the set up of business and the commencement of business are pre-commencement expenses. The business can be said to have been set up when the assessee adopted the ancillary object as its main object and commenced when the assessee entered into the Memorandum of Understanding with M/s. ZITGEIST, United States. Whatever happened before that day were only steps in pursuance of the commencement of the business of investment and financing. This is also evident from the fact that prior to the adoption of the Board Resolution and after the adoption of Board Resolution the composition of income was almost identical. The income before adoption of Board Resolution as well as after the adoption of Board Resolution was earned mainly from inter-corporate deposits and bank fixed deposits. The only addition in the income after the adoption of Board Resolution was of Rs. 3,20,445 from loans to 3 parties and of Rs. 30,62,500 from tax-free bonds. Therefore, in my opinion, the decision of the Hon'ble Supreme ....
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....e its claim ad hoc disallowance made by the lower revenue authorities was fully justified. 38. Ground No. 8 is in respect of legal expenses paid to M/s. Little & Co. which was treated as capital in nature and also in regard to the disallowance of Rs. 2,89,650 paid to Shri V. Mohan, Internal Auditor. The assessee had paid legal and professional fees aggregating to Rs. 9,26,483 as under:- "Legal & Professional Fees: (1) Hiten Talati (Internal Auditor Rs. 15,583.00 up to June 1993) (2) Little & Co. (Expenses, Rs. 6,21,250.25 incurred towards Joint venture) (3) V. Mohan (Internal Auditor) Rs. 2,89,650.00 --------------- &nbs....
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.... projects subsequently. He treated these expenses as prior period expenses. He has rightly pointed out that the assessee-company was about to commence its main project subsequently which fact was clear from the legal fees paid by it. Therefore, these expenses were also in the capital field. The details of these expenses are contained at page 9 of the paper book which clearly show that the expenses were mainly for negotiation with various agencies. This expenditure was, therefore, incurred as a preliminary expenditure before undertaking full pledged business activity as per the object clause of the company. Hence, its allowability is to be considered as per provisions contained under section 35D. 41. The assessee had also claimed the following expenses: Items Claim by the Allowed by the Assessee Assessing Officer Repairs & Maintenance  ....
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....n ITA No. 4348/MUM/2001 in the case of Sujay Trading (P.) Ltd. v. JCIT, SR-30, Mumbai, involving assessment year 199495, we are of the opinion that the following points of difference are required to be referred to the Third Member and for the purpose we direct that the file be put up to the Hon'ble President. Points of difference:- (1) Whether on the facts and in the circumstances of the case, the reopening of assessment in the case of the assessee for assessment year 1994-95 is proper or not. (2) Whether on the facts and in the circumstances of the case, it can be held or not that the investment and financing business of the assessee had commenced in the assessment year in question. (3) Whether on the facts and in the circumstances of the case, amount of Rs. 1,51,668 incurred on renovation of furniture is allowable as revenue expenditure or not. (4) Whether on the facts and in the circumstances of the case, disallowance of 50 per cent of expenses claimed in respect of payments made to employees is justified or not. (5) Whether on the facts and in the circumstances of the case, sum of Rs. 6,21,250 paid to Little & Co. as legal expenses is allowable as business expend....
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....ed why the income should not be taxed under the head 'Income from other sources' as the business has not commenced. Assessee was also directed to explain why the expenses, which mainly are in the nature of pre-commencement expenses for exploring the business, should not be disallowed, as the same need to be capitalized as pre-commencement expenses. Assessee stated, the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd., is distinguishable. Considering that the assessee has not commenced the business as per the main object quoted hereinabove, Assessing Officer disallowed the claim of the assessee. Assessee approached the first appellate authority. 3. It was contended before the CIT(A) that there was a Resolution passed by the Board on 3-4-1993 to treat ancillary objects as the main objects of the assessee-company, which is quoted by the learned JM at page 6 of his order. It reads as under:- "RESOLVED THAT the consent of the Board of Directors of the Company be and is hereby given to include and treat the ancillary objects of the Company as given in sub-clauses (8) and (9) of Part (B) of the clause ill of the Memorandum of Associa....
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....uthorities disputed the fact that the assessee-company's Board of Directors adopted the Resolution dated 3-4-1993, making clauses (8) and (9) of Part (B) (ancillary objects) as main objects of the assessee. Learned JM further noted, in effect the Assessing Officer accepted the proposition that assessee had business activity during the year under consideration but coming to expenditure, he draws a line between expenditure relatable to business and not relatable to business. Learned JM held, since the assessee was entitled to convert the ancillary objects into main objects and having done so, the income earned will have to be treated as income from business and not otherwise. This is because the assessee complied with the Company Law regulation in this regard. 7. On the other hand, learned AM held, there is a clear distinction between setting up of business and commencement of business and this has been made clear by the jurisdictional High Court in the case of Western India Vegetable Products Ltd. He held, by merely making above ancillary object as assessee's main object, it cannot be said that the business has been set up. Assessee has to take various steps before it is ready fo....
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....ed by the learned JM vide para 24 of his proposed order, observing as under:- "24. Coming to Ground Nos. 4 and 5, we have heard the rival submissions and perused the material available on record. It has not been controverted by the lower authorities that the expenditure in question was incurred for renovation of furniture. We have verified the details also, which are supported by vouchers. Since no new asset came into existence, the amount in question cannot be called capital expenditure and has to be allowed as revenue expenditure. The assessee succeeds on this issue." 12. The issue has been discussed by the learned AM vide para 36 of his order. He held that by renovation of furniture, assessee has obtained an enduring benefit and, therefore, the auditors had rightly classified this expenditure as capital in nature. Hence, he confirmed the view of the revenue authorities. 13. Considering the facts and after going through Paper Book pages 115 to 117, i. e., details of repairs and maintenance, I uphold the view taken by the learned JM. Repairing of furniture is difficult to hold as bringing new asset of enduring benefit. Hence, I agree with the learned JM on this point. ....
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....ce Company Ltd., etc. As such, the claim of the assessee is to be allowed. Details regarding payment of salaries are also evidenced at Paper Book pages 50 to 71. Hence, I agree with the learned JM on this point. 20. The fifth point of difference referred for my opinion is as to whether the claim of legal expenses paid to Little & Co. of Rs. 6,21,250 is allowable as business expenditure or as per provisions of section 35D? 21. Assessee claimed legal and professional fees of Rs. 9,26,483 against previous year's claim of Rs. 87,300. Assessee was asked to give justification for the enhanced payment. Assessing Officer records that assessee could not link it with its activity of earning only interest income. As such he allowed the expenditure equal to previous year's claim and the balance was disallowed. When the matter was carried before the CIT(A), he held that the payment made to Little & Co. was expenditure incurred towards joint venture, which needs to be capitalized. 22. Learned JM vide para 26 of his proposed order records that the assessee was in investment and finance management business and such fund management agreements were executed always in the normal course of as....
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....s business and further considering that most of these expenses were for negotiation with various agencies, learned AM held, these are to be amortized under section 35D of the Act. 28. Learned counsel brought my attention to Paper Book Page 89, which is travelling expenses. Counsel submitted that the expenses are incurred by the assessee for travelling abroad. The revenue authorities had mistaken that the assessee went for negotiations to set up its own business. For example, travel to London for meeting with Barclays, the assessee was only acting as an agent and the assessee was not trying to settle its business. Counsel submitted, this is the same with other foreign trips, where assessee negotiated with Standard Chartered Bank or other financial institutions and banks. Counsel further submitted, this claim of the assessee is to be allowed under section 37(3) subject to rules framed thereunder. In support of the claim, learned counsel relied upon the decision of the jurisdictional High Court in the case of Bralco Metal Industries (P.) Ltd. 29. Considering the fact that the assessee was acting as an agent and was negotiating on others behalf, and also considering that the asse....
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....gular Bench for deciding the appeal in accordance with the opinion of the majority. ORDER Per D.K. Srivastava, Accountant Member.- The assessee has filed the present appeal against the order passed by the ld. CIT(A) on 14-3-2001. The appeal was heard. However, there was a difference of opinion between the Members constituting the Bench and therefore, following questions were referred to the Hon'ble Third Member for his opinion under section 255(4) of the Income-tax Act. "1. Whether on the facts and in the circumstances of the case, the reopening of assessment in the case of the assessee for assessment year 1994-95 is proper or not? 2. Whether on the facts and in the circumstances of the case, it can be held or not that the investment and financing business of the assessee had commenced in the assessment year in question? 3. Whether on the facts and in the circumstances of the case, amount of Rs. 1,51,668 incurred on renovation of furniture is allowable as revenue expenditure or not? 4. Whether on the facts and in the circumstances of the case, disallowance of 50 per cent of expenses claimed in respect of payments made to employees is justified or not? 5. Whethe....