TaxTMI 
TaxTMI 
2007 (9) TMI 289
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....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 difference allowance of Rs. 15,27,835. (11) T....
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....ee 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 return filed on 31-3-1995 was processed under section 143(1....
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....larly, 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 already been rectified under section 154. The CIT(A)'s observation that....
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....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 money were adopted to be the main objects of the company with effect from 3-4-1993. For....
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....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 investing the funds in shares stocks, bonds etc. The Assessing Officer has alternately argued....
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....ccepted 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 and exclusively for the purposes of business, though CIT(A) has in words held that the asses....
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....so 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 being wholly and exclusively for the purpose of business has not been applied and on surmises and assumption....
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.... ----------- 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 its business activity. There is no allegation that the salaries were paid to relatives. The CIT(A) halfheartedly harboured under the impression that the assessee's main business did not commence and disallowance was made. CIT(A) also has not given any finding that the staff employed was unnecessary. She has merely adopted a yardstick of income ratio with the expenditure. 13. Regarding ground No. 8, brief facts are that the assessee claimed expenses of professional fees of Rs. 9,26,483. Similar expenditure in preceding year was Rs. 87,300. The details were filed....
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....me was for management of funds and not for a joint venture, which has been alleged on the basis of misconception. The assessee wanted to have an agreement for management of funds with 'ZEITGEIST' of United States, which is a reputed investment and finance company. The preamble of the agreement makes it very clear that both parties are investment and finance companies in India and UK respectively and intend to expand their investment and finance business to Asia and more particularly to India. The assessee has the requisite experience as Adviser and Consultant in the field of investment and finance in Indian capital market and has agreed to render services to 'ZEITGEIST'. Investment and finance was regular business of the assessee and was being operated on a higher scale. Involvement of foreign participants in the investment and finance business was the business purpose of the assessee and for such participation agreements and various other formalities were to be executed and all these activities combined are in the normal course of business and the expenses incurred in this behalf are wholly and exclusively for the purpose of business. None of the authorities has bothered to look i....
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....hoc disallowances have been made without going into the details and without assigning any reason. 16. Learned departmental representative on the issue of reopening of assessment contended that pendency of 154 proceedings is no bar against issuing notice of reassessment. Regarding the reasons recorded for reopening, it was contended that the same amounted to escapement of income as the assessee had claimed expenditure as revenue in nature. It was contended that on both the counts initiation of reassessment proceedings was valid. The Assessing Officer had information in possession that the income had escaped assessment. Reassessment proceedings were valid. Order of CIT(A) was relied on. 17. Regarding ground Nos. 3 and 7, the learned DR contended that the alleged change in objects brought about by Board resolution dated 3-4-1993 was clandestine in nature and an afterthought. The assessee had not given any intimation to the income-tax authorities for the change in objects and, therefore, the same is ineffective. The same was brought on record to give the colour of business income to the interest income of the assessee. It was contended that this Board resolution has no effect to chan....
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....tice can be issued on the same ground. There is no express bar to issue this notice in the Act. Both are different statutory functions which can be exercised by the Assessing Officer and cannot be held against each other. At the notice stage, it amounts to invoking the statutory function and not deciding the same. During the pendency of 154 proceedings, it can be said that the Assessing Officer was divested of his powers under sections 147 and 148. Under these circumstances, we are of the view that the Assessing Officer had powers to issue notice under section 148 even though the notice under section 154 was issued. Coming to the second objection of the learned counsel for the assessee, the Assessing Officer has mentioned 'on the basis of the information available on record, I have reasons to believe that the income chargeable to tax to the extent of Rs. 1,51,668 has escaped assessment'. The first aspect to be seen is whether on the basis of information a reasonable belief in terms of section 147 can be formed. Undisputedly, the same information was available before the Assessing Officer at the time of processing with two recourses, one to disallow the same by way of prima facie ad....
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....reassessment proceedings were not initiated validly. The same is bad in law. 22. Before proceeding further, we see a peculiar case where the assessment is reopened for only a capital/revenue expenditure of Rs. 1,51,668 but ultimately a huge amount of expenditure has been disallowed. We find it expedient to consider the merits of the reassessment also in the interest of substantial justice. 23. Coming to ground Nos. 3 and 7, we have heard the rival contentions and perused the material available on record. None of the lower authorities has disputed the fact that the assessee-company's Board of Directors adopted a resolution dated 3-4-1993, which is reproduced above, making clauses 8 and 9 of Part B (ancillary objects) as main objects of the company. The Assessing Officer has nowhere alleged that the resolution is an afterthought or clandestine. In para 6.7 the Assessing Officer has given a finding that without going into the controversy of legal requirement in this regard, even if we accept the assessee's contention in respect of the new business, it goes to show that he has not controverted this Board resolution and has, as an alternate plea, accepted the same. Having held like th....
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....val 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. 25. Coming to ground No. 6, we have heard the rival submissions and perused the material available on record. We have already given a finding that the assessee's main business had commenced. Consequently, the expenditure is to be viewed from this angle. Coming to the reasonability of the expenses, it is clear that the assessee was engaged in investment and finance activity of higher category having business transactions with big financial and investment organizations and the business acumen and prudence will prevail in deciding the number and quality of employees to be deployed for the purpose of assessee's business operations. The case laws relied on by the learned counsel above are applicable to assessee's case. The CIT(A) has not pointed out th....
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....pose of business. The professional fees paid by the assessee is allowed as a business expenditure. Ground No. 8 is accordingly allowed in favour of the assessee. 27. Ground Nos. 9, 10 and 11 pertain to part disallowance of expenses by CIT(A) on account of travel, repairs and maintenance, software expenses, telephone and miscellaneous expenses. Looking at the business dealing of the assessee in investment and finance of higher segment, maintenance of proper software is an essential feature, without which such business cannot be carried on an efficient basis. Similarly, as far as the travel is concerned, the assessee has furnished complete details, which are placed on the paper book which include all the details. The purposes are clearly spelt out, which are undisputedly in connection with the assessee's business of investment and finance. Coming to other expenses, there is no allegation that they were used for personal purposes. The disallowance was made only on ad hoc basis on a cryptic finding that the expenses incurred are not commensurate with the income of the assessee. We have already held that the assessee's business had commenced. Drawing the same analogy as held for the ab....
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.... section 147 w.e.f. 1-4-1989. After the amendment if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment, he can issue notice under section 148. As per clause(c) of Explanation 2 to section 147, in following cases the income chargeable to tax shall be deemed to have escaped assessment:- "(c) Where an assessment has been made but- (i) income chargeable to tax has been under-assessed; or (ii) such income has been assessed at too low a rate; or (iii) such income has been made the subject of excessive relief under this Act; or (iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed." The necessity of insertion of this deeming clause was considered in view of the new scheme of assessment. Under the new scheme of assessment introduced by the Amendment Act, 1987, returns filed are accepted as such and passing of assessment order is not necessary. Therefore, there is no application of mind by the Assessing Officer after the returns are filed unless the case is taken up for scrutiny and regular order is passed under section 143(3). Therefore, the deeming provisions have been incorporated as ....
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....caped assessment. The words 'reason to believe' only mean that he forms a belief from the examination he makes or from any information that he receives. That income has escaped assessment. If he discovers or finds or satisfies himself that the taxable income has escaped assessment, it would amount to saying that he has reason to believe that such income had escaped assessment. His reasoning may be the result of official information or his own investigation or may come from any source that he considers reliable. In the present case, the cause or justification for forming the belief that the income had escaped assessment is the auditors opinion contained in the Tax Audit Report. In the Tax Audit Report the auditors had classified this amount under clause 4(ii) Paper book page I(11) and had also incorporated the views of the company in regard to this expenditure in the notes forming part of Form 3CD, which are reproduced hereunder:- "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." 'Thus, as far as the auditors were concerned, they had treated this item as capital expe....
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....ed and explained by the Hon'ble Bombay High Court in Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151 wherein it has been held that there is clear distinction between a person commencing the business and the persons setting up a business and that for the purposes of the Income-tax Act, it is the setting up of the business that has to be considered and not the commencement. It is only when the business is set up that the previous year for that business commences and expenses incurred prior to the setting up are not a permissible deduction. It has further been held in the decision that when the business is established and is ready to commence the business, it can be said that the business is set up. Before the assessee is ready to commence the business, the business is not set up. It has, however, been recognized by the decision that there may be an interval between the setting up of the business and commencement thereof and all expenses incurred during the interval would be permissible deduction. Thus, merely by adoption of the ancillary object as its main object, it cannot be said that the business has been set up. The assessee has to take various steps before it is r....
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....n the backdrop of assessee's only income during the year from interest receipts, quantum of which remained almost the same as in the last year. However, in spite of the specific requirement, as per the questionnaire, the Assessing Officer observed that neither any justification nor any evidence was filed in respect of the said claim. He had only allowed a sum of Rs. 44,164 out of Rs. 8,44,164 claimed by the assessee and disallowed the balance of Rs. 8,00,000. The learned CIT(A) noted that the income was mainly earned from tax-free bonds, inter-corporate deposits and advances to three individuals. He noted that there were 20 employees working in the company and the appellant had to maintain an office. Taking into consideration the overall activities of the assessee he allowed 50 per cent of the expenses claimed by the assessee. I am of the opinion that no interference is called for with the order of the learned CIT(A) as the assessee had not furnished any justification in respect of the claim before the Assessing Officer. As the assessee failed to substantiate its claim ad hoc disallowance made by the lower revenue authorities was fully justified. 38. Ground No. 8 is in respect of ....
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....on before the Assessing Officer. Therefore, he estimated an amount of Rs. 50,000 and disallowed a sum of Rs. 13,98,467. The learned CIT(A) examined the expenses and noted that the assessee-company was about to commence its main 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 2,48,408 20,000 Software expenses 1,90,348 10,000 Telephone expenses 8,76,195 50,000 License & registration 18,120 Nil Misc.....
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....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 expenditure or as per provisions of section 35D. (6) Whether on the facts and in the circumstances of the case, the amount of Rs. 13,98,467 out of travelling expenses incurred by the assessee is allowable as business expenditure or is to be considered as per provisions of section 35D. (7) Whether on the facts and in the circumstances of the case, the following expenditure incurred by the assessee shall be allowed as business expenditure or shall be restored back to the file of Assessing Officer for consideration afresh: Telephone expenses Rs. 8,76,195 Miscellaneous expenses Rs. 3,64,762 Note:- The learned AM while framing this question agreed that by his separate order dated 27-3-2003 in para 43 he has agreed with learned JM that expenses in regard to repairs & maintenance, software expenses and licence & registration are to be allowed. Therefore, they are not referred for consideration of Third Member. THIRD MEMBER ORDER Per K.P.T. Than....
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....s 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 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, Commissioner, 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 building on or improve any property in which the Company is interested and to tenants, builders and contractors." 4. It was contended that the assessee had investment business and invested in ....
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....e 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 for commencement of business. Therefore, all the expenses incurred between set up of business and commencement of business are pre-commencement expenses. Learned AM further held, 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 Memorandum of Understanding (MOU) with M/s. ZITGEIST, United States. Whatever happened before that date were only steps in pursuance of commencement of business of investment and financing. He held, after the adoption of Board Resolution, the composition of income was identical. The income before adoption of Board Resolution as well after Board Resolution was earned mainly from inter-corporate deposits and fixed deposits with bank. The only addition in the income after adoption of Board Resolution was Rs. 3,20,445 from loans to three parties and Rs. 30,62,500 from tax-free bonds. Hence, he held, the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals ....
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....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. 14. The fourth point of difference of opinion is as to whether the disallowance of 50 per cent of expenses claimed in respect of payments made to employees is justified or not. 15. Assessee claimed Rs. 8,44,164 as payments to employees against Rs. 31,100 paid in the preceding year. Though the assessee filed salary details, in spite of specific requirement, could not furnish any details or evidence with regard to enhanced payment. Assessee's only receipt during the year under consideration was interest on loans and advances. No business was commenced as per the main objective of the assessee. Further, Assessing Officer allowed the claim to the extent of Rs. 44,164 on estimate basis keeping in view the inflation factor. Balance Rs. 8,00,000 was disallowed. 16. Considering that there were 20 employees working and the income earned was mainly from tax-free bonds, inter-corporate deposits and advances, CIT(A) allowed the claim only to the extent of 50 per cent. Assessee carried the matter before the Tribunal. 17. It wa....
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.... that the assessee was in investment and finance management business and such fund management agreements were executed always in the normal course of assessee's business; whereas Assessing Officer has referred the same as only joint venture as a separate and distinct business activity. It was further the case of the assessee that other expenses paid to Little & Co. were incurred for power of attorney, stamp duty, notary charges for work in connection with Citi Bank and Kotak Mahindra, etc. Hence, learned JM held, this expenditure is to be allowed. 23. On the other hand, learned AM held that the expenses incurred were preliminary expenses and should have been capitalized because the expenditure has been incurred for entering into an agreement. Legal expenses were incurred for entering into MOU with ZITGEIST, USA, which was the first step towards carrying out full-fledged business activity. Hence, he held that the expenditure is of capital nature and definitely section 35D applies. 24. Learned counsel submitted that the assessee has already commenced the business. The expenditure was not for commencement of business and it has nothing to do with the setting up of business as such. ....
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....29. Considering the fact that the assessee was acting as an agent and was negotiating on others behalf, and also considering that the assessee had commenced its business, I am of the opinion that the view taken by the learned JM is in accordance with law. Hence, I agree with the learned JM on this point. 30. The last point of difference referred for my opinion is as to whether telephone expenses Rs. 8,76,195 and miscellaneous expenses Rs. 3,64,762 incurred by the assessee should be allowed as business expenditure or shall be restored back to the file of Assessing Officer for consideration afresh. 31. Assessee claimed Rs. 8,76,195 telephone expenses and Rs. 3,64,764 miscellaneous expenses. Assessing Officer allowed estimated Rs. 50,000 and Rs. 90,000 towards telephone expenses and miscellaneous expenses respectively and the balance was disallowed. When the matter was carried before the CIT(A), he allowed the claim to the extent of Rs. 1,00,000 telephone expenses and Rs. 1,50,000 miscellaneous expenses on estimate basis. 32. Learned JM held, assessee is undisputedly in the business of investment and finance and the business has commenced. The disallowances were made on ad hoc basi....