Income Tax Appellate Tribunal - Chennai
R.R.Industries Limited, Chennai vs Department Of Income Tax on 9 February, 2012
IN THE INCOME-TAX APPELLATE TRIBUNAL
CHENNAI 'A' BENCH, CHENNAI.
Before Shri N.S. Saini, Accountant Member &
Shri George Mathan, Judicial member
I.T.A. No. 1256/Mds/2011
Assessment Year: 2008-09
The Assistant Commissioner of M/s. R.R. Industries Limited,
Income Tax, Company Circle Vs. RR Towers III, Thiru. Vi. Ka Industrial
V(4), Room No. 409, Fourth Floor, Estate, Guindy, Chennai 600 032
Main Building, 121, Mahatma
Gandhi Road, Chennai 600 034. [PAN: AAACR3594H]
(Appellant) (Respondent)
Revenue by : Shri Shaji P. Jacob, Addl. CIT
Assessee by : Shri Sriram Seshadri, C.A.
Date of Hearing : 09.02.2012
Date of pronouncement : 17.02.2012
ORDER
PER N.S. Saini, Accountant Member
This is an appeal filed by the Revenue against the order of the ld.
CIT(A) V, Chennai dated 28.04.2011 passed in ITA No.111/10-11 in assessment year 2008-09. Shri Shaji P. Jacob, Addl. CIT represented on behalf of the Revenue and Shri Sriram Seshadri, C.A. represented on behalf of the assessee.
2. Ground No. 1 and 4 of the appeal of the Revenue are general in nature and hence requires no adjudication by us.
3. The grievance projected in ground No. 2 of the appeal of the Revenue 2 I.T.A. No.12 No.1256 1256/ 56/M/11 M/11 is that the ld. CIT(A) erred in directing the Assessing Officer to treat the income derived from letting out of industrial park buildings as 'income from business' as against the treatment by the Assessing Officer of the same as 'income from house property.
4. At the time of hearing, both the parties have agreed that this issue is covered by the consolidated order of the Tribunal dated 18.11.2011 passed in I.T.A. Nos. 2194 to 2199/Mds/2010 in assessment years 2002-03 to 2007- 08, wherein the Tribunal had restored the matter back to the file of Assessing Officer and following the same, in this year also the issue may be decided accordingly.
5. We have heard the rival submissions, perused the materials available on record. We find that the Tribunal in the assessment years 2002-03 to 2007-08 has held as under:
"12. Before us, the Revenue disputed the findings of the ld. CIT(A) to the extent the ld. CIT(A) held that the rental income derived by the assessee is to be assessed under the head "profit and gains of business". Thus, the only issue, which requires adjudication by us is that the rental income derived by the assessee from letting out is to be assessed under the head "income from House Property" or under the head "Profit and Gains of business or profession".
13. The ld. DR relied upon the order of the Assessing Officer and submitted that the facilities provided by the assessee were provided by any owner of the house property and were incidental to the letting out of the property and therefore, the rental income should be held as assessable under the head "income from house property". The ld. DR also submitted that the deduction of tax at source on the rental income derived by the assessee was made under section 194 I of the Act and therefore, such rental income are to be assessed under the head "house property".
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14. On the other hand, the ld. AR of the assessee supported the order of the ld. CIT(A) and submitted that the decision of the ld. CIT(A) finds support from the decision of the Bangalore Bench of the Tribunal in the case of Global Tech Park (P.) Ltd. v. ACIT 2008-(199)-TTJ-0421-TBAN and in the case of DCIT vs. M/s. Gloflink Software Park P. Ltd. 2011-TIOL-660-ITAT- BANG. He also pointed out that under the scheme of the Income Tax Act, rental income can be assessed as business income as evident from the provisions of section 80IA(4)(iii) of the Act. We find that section 194 I provides for deduction of tax at source when rent as defined in that section is paid by the person specified in that section exceeding the limit prescribed in that section. As per the provisions of section 194 I, the TDS is to be made not only in respect of rent of house property, but also for rent of machinery or equipments, etc. Therefore, we do not find any force in the arguments of the ld. DR that as tax was deducted under section 194 I of the Act on the rental income derived by the assessee and therefore, such rental income must be assessed under the head "income from house property".
15. We are in agreement with the submissions of the ld. AR of the assessee to the extent that income derived by developing and operating or maintaining an industrial park is assessable under the head Profit and Gains of business or profession as can be inferred from the provisions of section 80IA(4)(iii). However, we find that the ld. CIT(A) has opined that the Government of India, Ministry of Commerce and Industry, Department of Industry Policy & Promotion, Secretariat for Industrial Assistance Investment Promotion and Infrastructure Development Cell dated 1st August, 2001 has held that the assessee is eligible to deduction under section 80IA(4)(iii) on its income derived from letting out of the property in question as the property in question is an industrial park within the meaning of section 80IA(4)(iii) of the Act. We find that the copy of the aforesaid letter dated 01.08.2001 is placed at page 1 to 2 of the paper book filed by the assessee. The said letter reads as under:
No. 15(8)/2001-IP & ID Government of India Ministry of Commerce and Industry Department of Industry Policy & Promotion Secretariat for Industrial Assistance Investment Promotion & and Infrastructure Development Cell Udyog Bhavan, New Delhi - 110 011 Dated: August 01, 2001 To, M/s R.R.lndustries limited, 94-95, Block- VI, 4 I.T.A. No.12 No.1256 1256/ 56/M/11 M/11 THIRU-VI-KA-INDUSTRIAL ESTATE, Guindy, Chennai - 600 032.
Sub: Application for setting up of Industrial Park (SIA Regn No.08/SIA/IP/2001 dated 25.06.2001) under the scheme notified by this Ministry (S.O. No. 1201 (E) dated 01.12.99). Ref: Your application dated 21.06.2001 acknowledged vide SIA Ref. No. No.08/SIA/IP/2001 dated 25.06.2001 and subsequent clarifications vide letters dated 02.07.2001, 12.07.2001 and 16.07.2001. Sir, I am directed to refer to your application on the above mentioned subject and to convey the approval of the Government of India to your proposal for setting up of an Industrial park, in terms of the scheme notified by this Ministry in exercise of the powers under section 80 IA, Sub section 4(iii) of the Income-tax Act, 196/, subject to the following terms and conditions:
1. (i) Name of the Industrial Undertaking : M/s. R.R. Industries Limited
(ii) Proposed location Address : 94-95, Block-VI, Thiru-Vi-Ka-Industrial Estate Guindy, Chennai 600 032, Tamil Nadu.
(iii) Proposed area of Industrial Park : 8593.46 sq.m.
(iv) Proposed activities:
Nature of industrial activity with NIC code NIC Code Description S.No. Section Division Group Class A 8 89 892 - Data processing, Software development and computer consultancy services.
B 8 89 893 - Business and management consultancy activities C 8 89 895 - Technical testing and analysis services D 6 60 609 - Wholesale trade in textiles and textile products.
(v) Percentage of allocable area : 100%
Proposed for industrial use
(vi) Percentage of land ear-marked for : 0%
commercial use
5 I.T.A. No.12
No.1256
1256/
56/M/11
M/11
(vii) Proposed No. of industrial units : 30 Units
(viii) Total investment proposed : `.7.0 Crores
(ix) Investment on built up space for : `.4.0 Crores
Industrial use
(x) Investment on Infrastructure : `.6.5 Crores
Development including investment
on built up space for industrial use
2. Necessary approvals including that for Foreign Direct Investment/Non-
Resident Indian Investment by the Foreign Investment Promotion Board/ Reserve Bank of India, shall be taken separately as per the policy and procedures in force.
3. You shall continue to operate the Industrial park during the period in which the benefits under Sub Section 4(iii) of Section 80 I A of the Income- tax Act are to be availed by you.
4. You shall submit a half-yearly report on the 1st January & 1st July of the year to the undersigned in the IPS-II form enclosed with this letter.
5. The conditions mentioned in para I above, are as per the proposal made by the undertaking and are within the provisions of the scheme notified by this Department vide S.O.No. 1201(E) dated 01.12.1999. The conditions in para I and others included in this letter should be adhered to. The Government may withdraw the above approval in case of failure to comply with any of the conditions.
6. You are requested to confirm acceptance of the above terms & conditions to the undersigned within one months of the issuance of this letter.
Yours faithfully, Signed/-
(Ashish Sharma) Desk officer Tel: No: 011- 3018356 Fax: No: 011- 301 1770 Copy to:
I. Joint Secretary (TPL-II). C.B.D.T., Ministry of Finance, Department of 6 I.T.A. No.12 No.1256 1256/ 56/M/11 M/11 Revenue, North Block, New Delhi (2 copies), along with a copy of the original application dated 21.06.2001 and subsequent letters as detailed on page I.
2. Chief Secretary. Govt. of Tamil Nadu. Fort St. George, Chennai - 600009.
3. Guard File.
Signed/-
(Ashish Sharma) Desk officer
16. Thus, a perusal of the above shows that the assessee was only granted approval for setting up of an industrial park. From the above letter it cannot be held that the establishment or infrastructure created by the assessee was actually held as an industrial park within the meaning of section 80IA(4)(iii) of the Act by the Government of India, Ministry of Commerce and Industry, Department of Industry Policy & Promotion, Secretariat for Industrial Assistance Investment Promotion and Infrastructure Development Cell. The above letter also does not provide that the assessee is eligible for deduction under section 80IA(4)(iii) of the Act and the said letter merely conveys its approval of the proposal of the assessee to set up an industrial park.
17. Further, we find that Rule 18C of the Income Tax Rules provides that the undertaking and the industrial park shall be notified by the Central Government under the Industrial Park Scheme 2008 and the undertaking shall continue to fulfill the conditions envisaged in the Industrial Park Scheme 2008. Thus, in our considered opinion, merely on the basis of the above approval letter, it cannot be concluded as to whether the assessee's premises was an industrial park within the meaning of section 80IA(4)(iii) or not.
18. We find that in the case of DCIT vs. M/s. Golflink Software Park P Ltd. (supra), the Tribunal found that the tax payer was not only letting out its building for rent, but also carried on a complex commercial activity of setting up of software technology park in which various amenities had been provided. The Tribunal has held as under:
"9.1 It is an undisputed fact that the assessee had developed a technology park wherein a number of elite I.T. companies have been housed. It was also a fact that the assessee had not merely let-out its buildings for rent, but also carried on a complex commercial activity of setting up a software technology park in which various amenities and fit-outs have been provided.7 I.T.A. No.12
No.1256 1256/ 56/M/11 M/11 9.2. In this connection we recall the ruling of the highest judiciary of the land in distinguishing V the significance of merely letting out a bare building and a building braced up with various amenities in the case of CIT, Bombay City 1 v. National Storage Pvt. Ltd. reported in 66 ITR 596 (SC) wherein after analyzing the issue at length, the Hon'ble Court had visualized that -
"In our view, the High Court was right in holding that the assessee was carrying on an adventure or concern in the nature of trade. The assessee not only constructed vaults of special design and special doors and electric fittings, but it also rendered other services to the vault-holders. It installed fire alarm and was incurring expenditure for the maintenance of fire alarm by paying charges to the municipality. Two railway booking offices were opened in the premises for the dispatch and receipt of film parcels. This, it appears to us, is a valuable service. It also maintained a regular staff consisting of a secretary, a peon, a watchman and a sweeper, and apart from that it paid for the entire staff of the Indian Motion Picture Distributors' Association an amount of Rs. 800 per month for services rendered to the licensees. These vaults could only be used for the specific purpose of storing of films and other activities connected with the examination, repairs, cleaning, waxing and rewinding of the films."
9.2.1. Further, an identical issue to that of the present one had cropped up before the earlier Hon'ble Bangalore Bench in the case of Global Tech Park (P) Ltd. v. ACIT - reported in (2008) 119 IT) (Bang) 421 - wherein it was observed that -
"The assessee having been incorporated with the sole intention of developing Technology Park for which it obtained leasehold land from KIDC and also obtained loan from bank for constructing superstructure thereon, it could not be considered as having made investment in a property for earning rental income only. The lease of the property was shown as part of the business activity, thus, the income received there from cannot be said as income received as a land owner but as a trader............ The activity was done by the assessee as a business venture and was in accordance with the main object of the company. The 8 I.T.A. No.12 No.1256 1256/ 56/M/11 M/11 intention of any prudent businessman is to earn; profit at a maximum level and investment made in the business never lost its main intention for which it was incorporated.............The assessee is providing ward and watch, maintenance of common area, maintenance of light in the common area, supply of water, providing lift, installation of electric transformer, power to the lessees, providing generator, over-head water tanks, maintenance of drainage etc., This clearly establishes that the entire activity is in organized manner to earn profit out of investment made by the assessee as a commercial venture. In view thereof, the AO is directed to assess the rental income as from business ....."
9.2.2. As the issue before the earlier Bench was similar to that of the present case wherein the Hon'ble Bench took cognizance of the fact that "The assessee is providing ward and watch, maintenance of common area, maintenance of light in the common area, supply of water, providing lift, installation of electric transformer, power to the lessees, providing generator, over-head water tanks, maintenance of drainage etc., This clearly establishes that the entire activity is in organized manner to earn profit out of investment made by the assessee as a commercial venture' and, accordingly, arrived at a conclusion that the rental receipts of the assessee is to be assessed as 'business income'. In conformity with the finding of the earlier Bench as well as ruling of the Hon'ble Apex Court cited supra, we are of the considered view that the Ld. CIT (A) was justified in arriving at such a conclusion. It is ordered accordingly.
9.2.3. Before parting with the issue, we would like to emphasis that we have duly perused the case laws on which the Revenue had placed its strong reliance, chiefly, in the case of CIT v. Bhoopalam Commercial Complex and industries Pvt. Ltd. [262 ITR 517 (Kar)]. In that case, the issue, in brief, was that the assessee was a Private Limited Company and one of its directors had taken certain extent of lands situated at Bangalore on a long term lease of 36 years under a registered lease-deed and executed a registered deed of transfer In favour of the assessee-company transferring his leasehold rights. Subsequently, the assessee- company built a commercial complex on the said land and allotted the same to various parties and earned income there-from.
9 I.T.A. No.12No.1256 1256/ 56/M/11 M/11 For the year 1985-86 and 86-87, the assessee filed its returns of income showing losses for which the AO completed the assessments making minor adjustments in computing the losses. The CIT initiated suo motto proceedings u/s 263 and after such proceedings directed the AO to make fresh assessments computing the income from rentals received from the commercial complex under the head "Income 'from house property."
On an appeal by the assessee, the Tribunal held that the income derived by the assessee could have been assessed only as income from business and not under the head "Income from house property". According to the Tribunal, since the land over which the property had been built is a leasehold land, the assessee cannot be treated as the owner of the land which is a condition precedent for treating the income as income from house property under section 22 of the Act.
The Hon'ble Court, taking cue from the ruling of the Hon'ble Supreme court in the case of CIT v. Podar Cement (P.) Ltd. [1997J 226 ITR 625 = (2002-TIOL-445-SC-IT), had held that the income derived by the company from shops and stalls Is income received from property and falls under the specific head described in section 9.
9.2.4. We would like to point out that the case law relied on by the Revenue is clearly distinguishable to the facts of the issue on hand in the sense that the present assessee, apart from providing bare building, had also provided various amenities such as fit-outs, central air conditioning, generator back ups, street lights, roads, drainage facilities, garden, security, water facilities, sewerage and water treatment plant, sub-station for electricity, water treatment plant etc., which were not made available to the tenants In the case Bhoopalam Commercial Complex case cited supra.
9.3. In the case of Shambhu Investment P. Ltd. v. CIT reported in (2003) 263 ITR 143 (SC), the issue, in brief, was that the assessee owned an immovable property, a portion of which was in Its possession and let out the rest to be used as 'table space' to occupants with furniture and fixtures and lights and air conditioners. The assessee provided services like watch and ward staff, electricity, water and other common amenities. The monthly rent payable was inclusive of all charges. The assessee had also recovered by way of security from the occupants. The Hon'ble High 10 I.T.A. No.12 No.1256 1256/ 56/M/11 M/11 Court of Calcutta [249 ITR 47 (Cal)] held that the Income from the property was assessable in the hands of the assessee as Income from house property. When the issue came up on appeal before the Hon'ble Highest Judiciary of the land, the appeal was dismissed, holding that there was no reason to Interfere with the conclusion arrived at by the High Court.
9.3.1. We would like to point out that the Issue before the Hon'ble High Court was that the occupants were allowed to use a portion of property as 'table space' with furniture and fixtures, lights, air- conditioners etc., and the monthly rent payable was Inclusive of all charges whereas the Issue on hand is entirely on different footing, namely, the assessee had developed about 4.7 million square foot of a technology park in a sprawling area of more than 55 acres by providing various amenities such as roads, street lights, drainage facilities, gardens, high connectivity facilities such as telecommunication towers, sewerage and water treatment tanks, water treatment plants to attain the status of a Soft-ware Technology Park whereas in the case of Shambhu Investment P. Ltd., the immovable was a tiny property and the so called amenities provided to the occupants only as against the amenities provided In a STP to feed a special purpose. Letting out of a building In a STP is incidental whereas the fact in the case of Sambhu Investment was rather predominant and, thus, Sambhu Investment case cannot, at any stretch of Imagination, be equated with that of the present assessee.
9.4. Taking into account the facts and circumstances of the issue, we are, therefore, of the firm view that the case laws on which the Revenue placed reliance cannot come to its rescue."
19. Thus, from the reading of the aforesaid decisions, we find that the decision of the Hon'ble Supreme Court in the case of Shambhu Investments P. Ltd. (supra) was found distinguishable from the facts before the Tribunal in the above cases in as much as in the case of M/s. Shambhu Investment letting out was found to be predominant and in the case before the Tribunal letting out of a building in an I T Park was only incidental. It was found that the assessee developed 4.7 million sq.ft. of IT Park in a sprawling area of more than 55 acres by providing various amenities such as roads, streets, lights, etc. On the above facts, the Tribunal held that the letting out of building along with such amenities amounted complex commercial venture of the tax payer and had to be taxed under head "Profit and Gains of business or profession".
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20. Thus, reading of the aforesaid decisions shows that when various amenities provided by an industrial park or software technology park is predominant in letting out of the housing unit, then the rental income is to be assessed under the head "profit and gains of business or profession" and in a case where letting out of building is predominant and the other amenities are merely incidental to such letting out then the rental income is to be assessed under the head "income from house property".
21. Coming to the facts of the present case, we find that both the parties have not brought any material before us to show that the facilities developed by the assessee after completion of the development was treated as an industrial park by any authority. From the records before us, it is not clear whether the alleged industrial park was so notified by the Central Government or not. Further, from the facts available on record, it is not clear that whether the letting out of the building was predominant in the transaction between the assessee and the tenants or whether predominant was of the industrial park comprised of various amenities and letting out of a building, as such park was merely incidental. In the above circumstances, in our considered opinion, it shall be fair and in the interest of justice to restore this issue back to the file of the Assessing Officer for proper verification in the light of the discussion made hereinabove and to readjudicate the issue afresh as per law. We order accordingly. Needless to mention that proper opportunity of hearing shall be allowed to the assessee before readjudicating the issue afresh.
22. In the result, all the appeals of the Revenue are allowed for statistical purposes."
6. We respectfully following the decision of this Tribunal quoted above, set aside the order of the ld. CIT(A) and remit the issue back to the file of the Assessing Officer for the assessment year 2008-09 also for readjudication afresh as per the directions of the Tribunal given in the above quoted order after allowing sufficient opportunity of hearing to the assessee. Thus, this ground of appeal of the Revenue is allowed for statistical purpose.
7. In ground No. 3 of the appeal, the grievance of the Revenue is that the 12 I.T.A. No.12 No.1256 1256/ 56/M/11 M/11 ld. CIT(A) erred in directing the Assessing Officer to allow the expenses claimed by the assessee towards valuation of real estate portfolio and towards issue of Initial Public Offer, holding them as revenue expenditure.
8. The brief facts of the case are that the Assessing Officer was of the view that the expenditure towards payment of consultation fee of `.24,71,920/- for valuation of the real estate portfolio for new project and consultancy charges paid to a merchant banker for an IPO of `.10,13,840/-
are capital in nature and accordingly disallowed the same while assessing the income of the assessee. The Assessing Officer relied on the decision in the case of CIT vs. J.K. Chemicals Ltd. 207 ITR 985 (Bom).
9. Before the ld. CIT(A), the ld. AR of the assessee argued that the facts in the case of CIT v. J.K. Chemicals are totally different. It was submitted that in that case, the company was engaged in the business of manufacturing fertilizer, incurred expenditure to obtain a project report and a market survey to set up a new unit of same kind for more refined fertilizers.
However, in the case of the assessee, the expenditure incurred by it was not in respect of a new project. The company has engaged the services of M/s.
Jones Land Laselle Meghraj Property Consultant Pvt. Ltd. for valuation of its own real estate portfolio. The aim of this expenditure cannot be treated as capital in nature. The expenditure was incurred to internally assess the value of the company's own project for evaluating the probable rise of the shares of the assessee company in the open market. No advantage of enduring 13 I.T.A. No.12 No.1256 1256/ 56/M/11 M/11 nature has been obtained by the assessee by incurring the expenditure. The consultancy charges paid to the merchant banker were misunderstood by the Assessing Officer as expenditure incurred for starting a new project. The decision of the Hon'ble Madras High Court in the case of EID Parry Ltd.
relied on by the Assessing Officer was not applicable to the facts of the assessee's case. The assessee has neither contemplated starting a new project nor abandoned it subsequently and therefore, the decision in the case of EID Parry Ltd. relied on by the Assessing Officer is not at all applicable. The ld. AR of the assessee, further submitted that even such expenses have been held to be allowable by the Hon'ble Punjab & Haryana High Court in a subsequent decision rendered in the case of CIT v.
Vardaman Spinning & General Mills Ltd. In the case of the assessee, the consultancy fee was for an internal valuation and payment to merchant banker was for the proposed IPO and therefore, it had nothing to do with the new project consultancy by the assessee as contended by the Assessing Officer. It was further submitted that the question whether the expenditure was capital or revenue should be decided from the practical and business view points and in accordance with sound accountancy principles. It was the argument that the Special Bench of the Tribunal in the case of Amway India vs. DCIT prescribed three tests to decide the nature of expenditure, which are tests of enduring benefit, ownership test and the functional test. By applying these tests, it would emerge that the expenditure incurred on 14 I.T.A. No.12 No.1256 1256/ 56/M/11 M/11 valuation and consultancy charges paid to merchant bankers do not bring about an asset of an enduring nature giving benefits to the assessee in the years to come.
10. The ld. CIT(A), after taking into consideration the above arguments of the assessee, deleted the additions made on both the counts by observing as follows:
"6. I have considered the arguments of the learned Authorised Representative. It appears that the assessing officer was under the mistaken impression that these expenditure incurred by the appellant for a new project of the appellant company. However the facts demonstrated by the learned Authorised Representative show that it is not so. I agree with the contentions of the learned Authorised Representative that these expenses were incurred on revenue account only. The assessing officer has not disputed the incurring of the expenditure by the appellant in the course of its business. As long as the expenditure is incurred during the course of the business and for the purpose of its business no disallowance could be made in respect of such expenditure. The facts and circumstances relating to the incurring of such expenditure do not show that they are either capital in nature or personal in character. I have therefore no hesitation in coming to the conclusion that these are expenses to be allowed in computing the income from business of the appellant company and accordingly the disallowance of `.2471920/- being the payment made for valuation of real estate portfolio and `.1013840/- being the consultancy charges paid to merchant banker are hereby deleted. ......"
11. Before us, the ld. DR argued and supported the order of the Assessing Officer. He pointed out from the statement of facts filed before the ld. CIT(A) and submitted that the assessee has stated as under:
"3. The assessee company was planning an Initial Public Offer to raise funds for expansion and new projects. There were expenditure incurred during the year for valuation of its assets and consultancy 15 I.T.A. No.12 No.1256 1256/ 56/M/11 M/11 charges paid to Valuers and Merchant Bankers, the company had to shelve the idea of exploring the markets to raise funds because of the global recession, especially in the reality sector. The expenditures were hence treated as business expenditure. The Learned Assessing Officer has erred in not allowing all the expenditure claimed by the Appellant as related to its business."
He also referred to page 2 of the assessment order and pointed out that the Assessing Officer has observed as under:
"The assessee has made payments of `. 24,71,920/- on 1.3.2008 to M/s Jones Lang Laselle Meghraj Property Consultants P.Ltd for valuation of real estate portfolio for new projects and has claimed as a business expenditure. As the aim and object of this expenditure is capital in nature, it is to be disallowed.
In the case of CIT vs J.K. Chemicals Ltd., (1995) 80 Taxman 19 (Bom.). It was held that the assessee company, which was engaged in business of manufacturing fertilizers, contemplated to set up a new unit of same kind. The assessee obtained a project report and a market survey in connection with aforesaid project and incurred certain expenditure. Whether, as project report expenditure incurred by assessee was in order to decide whether to acquire some profit- making asset for purpose of its business, which would be of enduring nature, it could be said that expenditure was capital in nature. Held, yes.
As the above mentioned case law is squarely applicable here, the said expenditure towards consultancy charges requires to be disallowed.
The assessee has incurred Miscellaneous Expenditure of `.10,13,840. This amount relates to consultancy charges paid to a Merchant Banker, M/s. Collins Stewart INGA for the purpose of starting a new project and planned for an IPO to raise funds. The assessee has dropped the project and treated the expenditure as revenue and has written it off. Following the rationale of the decision in M/s. EID Parry Ltd of Madras High Court in 257 ITR 253, the same is required 16 I.T.A. No.12 No.1256 1256/ 56/M/11 M/11 to be disallowed."
He also relied on the decision of the Hon'ble Bombay High Court in the case of CIT vs. J.K. Chemicals Ltd. 207 ITR 985 (Bom.). He further argued that the expenditure has been claimed by the assessee under section 37 of the Income Tax Act. His argument was that under this section, expenditure incurred wholly for the purposes of the business of the assessee was allowable deduction to the assessee. The assessee has not shown how the expenditure incurred in question was wholly for the purposes of the business of the assessee. He also relied on the decision of the Hon'ble Madras High Court in the case of EID Parry (India) Ltd. vs. CIT 257 ITR 253 (Mad) and the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Ambika Mills Limited 236 ITR 921 (Guj.) and submitted that the Hon'ble High Court has held that the expenditure incurred by the assessee for getting feasibility report for setting up a new steel plant, which project did not materialize and that the project, which the assessee want to set up was quite different from its existing business of manufacturing steel tubes, the expenditure incurred for getting the feasibility report was, therefore capital in nature. He also relied on the decision of the Hon'ble Supreme Court in the case of Hasimara Industries Ltd. vs. CIT 230 ITR 927 (SC), wherein it was held that the deposit was made for the purpose of acquiring a profit making asset to carry on the business in cotton and loss suffered was on capital account and could not be deducted. He further relied on the decision of the Hon'ble Gujarat 17 I.T.A. No.12 No.1256 1256/ 56/M/11 M/11 High Court in the case of Shree Digvijay Woollen Mills Ltd. v. CIT 204 ITR 398 (Guj.), where it was held that even though the tube well became useless in the sense that water obtained there from was not found suitable, it could not be said that the expenditure incurred in that behalf should not be regarded as capital in nature.
12. The ld. AR for the assessee reiterated the submissions as made before the ld. CIT(A), which have been extensively quoted above by us and further relied on the order of the ld. CIT(A).
13. We have heard the rival submissions, perused the orders of lower authorities and materials available on record. In the instant case, the assessee is engaged in the business of letting out of industrial park building.
During the year under consideration, it incurred expenditure of `.24,71,920/-
on valuation of property and `.10,13,840/- on consultancy charges for IPO.
The genuineness of the expenditure is not in doubt. The claim of the assessee for deduction of the above expenditure was negated by the Assessing Officer on the ground that these were incurred for a new project, which was abandoned and therefore capital in nature.
14. On appeal, the ld. CIT(A) deleted the above disallowance and held them as revenue in nature and finding that the same were not incurred for any new project.
15. The ld. DR contended that as the said expenditures were incurred for a new project and therefore, the ld. CIT(A) was not justified in deleting the 18 I.T.A. No.12 No.1256 1256/ 56/M/11 M/11 same.
16. However, the ld. DR could not give any detail of the alleged new project. He could not state what was the new project, which was envisaged to be undertaken by the assessee. The ld. DR also could not point out how the expenditure resulted in any enduring benefit to the assessee so as to fall under the capital field.
17. Further, no material could be brought before us to show that the aforesaid expenditures were incurred for any non-business purposes.
18. On the other hand, the ld. AR of the assessee, submitted that valuation report was obtained for the purpose of bank loan, which was availed by the assessee for its business purposes. Further, the IPO was also considered for the existing business only. As the expenditures in question were incurred out of commercial expediency and were not for acquiring any capital asset of enduring nature, the ld. CIT(A) was fully justified in allowing the deduction for the same.
19. He also relied upon the decision of the Hon'ble Kerala High Court in the case of CIT, Kerala vs. Commonwealth Trust Ltd. 120 ITR 491 and the decision of the Mumbai Bench of ITAT in the case of Nimbus Communications Ltd. vs. ACIT 132 TTJ 351.
20. The ld. DR placed reliance upon the decision in the case of CIT v. J.K. Chemicals Ltd. (supra) and also in the case of EID Parry (India) Ltd. (supra).
21. We find that in the case of EID Parry (India) Ltd. (supra), it was 19 I.T.A. No.12 No.1256 1256/ 56/M/11 M/11 observed by the Hon'ble Madras High Court that the expenditure for which deduction was claimed by the assessee was, in fact incurred in earlier years and treated as capital expenditure in those years only because of the abandonment of the project for which expenditures were incurred in earlier years were claimed as deduction in the year in question. On the above facts, the Hon'ble High Court has held that such expenditure was not allowable in the year in question. Thus, we find that the facts of the above case are clearly distinguishable from the facts of the instant case. In the instant case, it is not in dispute that the expenditure was incurred during the previous year relevant to the assessment year under appeal and no material has been brought on record to show that the expenditure was for a different new project.
22. Similarly, the decision of J.K. Chemicals Ltd. (supra), we find it to be distinguishable on facts. In that case, the assessee was engaged in the manufacturing of fertilizers and the assessee incurred expenditure to obtain project report and market survey to set up new fertilizer unit for manufacturing more refined fertilizers, whereas, in the instant case, the ld.
AR made a statement at bar that the expenditures, in question was not for any new project. In the case of Commonwealth Trust Ltd. (supra), the Hon'ble Kerala High Court in respect of expenditure incurred for valuation of business assets held that "........ We agree with the Tribunal that the claim falls under s. 37(1) 20 I.T.A. No.12 No.1256 1256/ 56/M/11 M/11 of the Act, and that the amount can well be regarded as having been laid out or expended wholly and exclusively for the purposes of the business. We think that the Tribunal was right in regarding the amount as having been expended on considerations of commercial expediency and sound business principles. It was in accordance with sound commercial practice to see that the buildings and machinery of the assessee were kept and maintained in a good state of efficiency for their work and functioning and valuation of these, done by the assessee, in the circumstances, must be regarded as expenses incurred wholly and exclusively for the purpose of the business. We uphold the Tribunal's order allowing this head of claim for deduction."
23. Further, the Mumbai Bench of ITAT in the case of Nimbus Communications Ltd. (supra) held as under:
"11. On a careful consideration of the facts and circumstances of the case, as incurring of the expenditure in question was for the purpose of rising capital by way of public issue and as the public issue got aborted, we are of the humble opinion that the expenditure is in the revenue field. For an expenditure to be considered for amortisation under section 35D, it should be in the capital field. An expenditure which is incurred in the revenue field is allowable under section 37 of the Act. The Assessing Officer at para 6 of the assessment order has not come to a conclusion that the expenditure in question has not been incurred. After collecting the details from the assessee, he concluded that there being no change in the subscribed share capital and as the expenditure was not incurred prior to incorporation and as it could not be substantiated that the issue is in connection with the extension of business or setting up of new industrial undertaking, the assessee is not eligible for claim under section 35D. The nature of expenses are listed out at para 6 of the assessment order. As there is no controversy on the issue whether the assessee has incurred this expenditure or not and as the nature of expenditure reflect that they are revenue in nature and as the assessee has not got any enduring benefit, we uphold the contention of the assessee and hold that the expenditure is allowable under section
37."
24. In view of the above, we find no good reason to interfere with the order of the ld. CIT(A). It is confirmed and the ground of appeal of the Revenue is dismissed.
21 I.T.A. No.12No.1256 1256/ 56/M/11 M/11
25. No other point has been urged by the Revenue except the above point.
26. In the result, the appeal of the Revenue is partly allowed for statistical purpose.
Order pronounced in the open Court on 17.02.2012.
Sd/- Sd/- (GEORGE MATHAN) (N.S.SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER Chennai, Dated, the 17.02.2012 Vm/- To: The assessee//A.O./CIT(A)/CIT/D.R.