Income Tax Appellate Tribunal - Pune
Ador Technologies Ltd. vs Deputy Commissioner Of Income Tax And ... on 28 February, 2007
Equivalent citations: (2007)112TTJ(PUNE)24
ORDER
Ahmad Fareed, A.M.
1. These two appeals by the assessee, directed against the orders of CIT(A) dt. 27th Feb., 2006 for asst. yrs. 2001-02 and 2002-03 were heard together and therefore these are being disposed of by a common order for the sake of convenience.
ITA No. 302/Pn/2006 : Asst. yi. 2001-022. The assessee company was engaged in the business of project engineering and of manufacturing electromechanical assemblies. The return for asst. yr. 2001-02 was filed on 25th Oct., 2001 declaring total loss of Rs. 1,11,15,130. In the assessment order, passed by the AO on 30th March, 2001, the total income was assessed at Rs. 1,20,15,090 as under:
(Rs) (Rs) (Rs)
Net business loss as per return (-)11,115,126
Add:
1. Disallowance under Section 43B 27,233
2. Deduction Under Section 35D 88,064
3. Market survey expenses- 4,62,000
amortized
4. Amounts written off 2,22,04,548
5. EDP software expenses 80,500
Less: Depreciation @ 60 % 48,300 32,200
6. Disallowance out of expenses 94,425
7. Travelling & conveyance 1,00,000
8. Telephone & fax expenses 1,11,748
9. Sales promotion expenses 10,000 2,31,30,218
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Total income 1,20,15,092
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3. The CIT(A) allowed part relief and his order has been challenged by the assessee in the present appeal.
Ground No. 1On the facts and circumstances prevailing in the case and as per provisions of law, it be held that the deduction claimed on account of lead manager fee of Rs. 75,000 and SEBI and PSE registration fee of Rs. 20,000 is allowable expenditure and be allowed in full. Without prejudice it further be held that deduction be allowed and in alternative the deduction be allowed on the basis of decision of the AO, just and proper relief be granted to the appellant in this respect.
4. In para 4 of his order, the AO invoked the provisions of Section 35D in respect of the expenses aggregating to Rs. 1,10,080 as under:
(Rs)
(i) Share transfer expenses 15,080
(ii) Lead manager's fees 75,000
(iii) SEBI & PSE registration fees 20,000
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Total 1,10,080
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5. The CIT(A) allowed the assessee's claim in respect of Rs. 15,080, saying that it was admissible as revenue expenditure. However, about the balance amount of Rs. 95,000 (Rs. 75,000 + 20,000), he directed that the deduction to the extent of l/5th allowed by the AO under Section 35D be withdrawn. In other words, the CIT(A) enhanced the assessment to the extent stated above.
6. Shri. S.K. Lal, the learned Authorised Representative, reiterated the arguments put forward on behalf of the assessee before the AO and the CIT(A). He placed reliance on the decision of Tribunal, Mumbai, in the case of Standard Industries Ltd. v. Jt. CIT, SR-20, Mumbai in ITA No. 5636/Mumbai/1999 for asst. yr. 1995-96, dt. 27th Sept., 2002.
7. Shri. Pradeep Sharma, the learned CIT(A), relied on the orders of the authorities below. He vehemently argued saying that the order of the CIT(A) needed to be upheld.
8. We have considered the rival submissions in the light of material on record and precedents cited. In our opinion, this issue is covered in favour of the assessee by the decision of Tribunal, Mumbai, in the case of Standard Industries Ltd. (supra). It is seen that in the case of Standard Industries Ltd. (supra), the assessee company had incurred expenditure of Rs. 36,90,306 on a proposed GDR issue. Subsequently, the company dropped the proposed GDR issue, wrote off Rs. 36,90,306 and claimed it as revenue expenditure. The Tribunal allowed the assessee's claim, relying on the decision of the Calcutta High Court in the' case of CIT v. Graphite India Ltd. . The facts of the case in the present appeal are identical and therefore, we respectfully follow the precedents and allow the assessee's claim. The ground No. 1 is accordingly allowed.Ground No. 2
On the facts and circumstances prevailing in the case and as per provisions of law, it be held that the write off of Rs. 2,22,04,548 should have been allowed in full. It should further be held that amount written off was provided by the appellant company for the business purpose and out of business expediency and claim is allowable under Section 37 and/or Section 28 of the IT Act. It further be held that amount used by the appellant company for obtaining controlling interest was for business purpose and loss, deficit incurred is in ordinary course of business and is eligible for deduction under the scheme and provisions of IT Act. The claim be allowed in full as per provisions and scheme of the Act.
9. The facts of the case in brief are as follows : The assessee company, earlier known as Ador Samia Ltd (ASL), was engaged in the business of thermal, combustion and environmental engineering products and projects. An agreement was entered into between ASL and major shareholders of M/s Indocan Engineering systems Ltd (Indocan) on 29th Aug., 1997. This agreement provided for acquisition of 60 per cent of the paid up capital of Indocan by ASL during the financial year 1997-98. The acquisition price was arrived at Rs. 2.99 crores being full value of 60 per cent equity shares of Indocan. The shares held by Shri A. Parmeshwaran and his family representing about 18 per cent of the paid up capital of Indocan were allotted to the assessee-company. The balance of the shares were held by a Canadian company, M/s Peekay Holdings Ltd.
9.1 Further, the assessee company decided to place Rs. 2.22. crores by way of inter-corporate deposits (ICDs) with Indocan, out of which 1 crore was invested from out of the assessee's funds and the balance was paid by way of loan by the group companies of the assessee. The funds made available by the group companies carried interest @ 18 per cent and were returnable within 3 months. The assessee company had given a guarantee that if Indocan defaulted in returning the money to the group of companies, in that case it would be liable to pay the principal amount along with interest.
9.2 The assessee company appointed three directors on the board of Indocan. Subsequently, it was noticed by these directors, who were appointees of the assessee company, that Indocan had accumulated substantial losses and therefore, steps were taken to recover the inter-corporate deposits from Indocan and cases were filed in the Court. In the meeting held on 26th April, 2001, the board of directors of the assessee company decided to write off Rs. 76.68 lakhs representing the value of the shares of Indocan and Rs. 145.36 lakhs representing the irrecoverable inter-corporate deposits.
9.3 In the P&L a/c for the accounting years ending 31st March, 2001 and 31st March, 2002, the assessee wrote off Rs. 2,19,35,000 (2,22,04,000-2,69,000) and Rs. 75,00,000, respectively. In the assessments orders for asst. yrs. 2001-02 and 2002-03 dt. 30th March, 2004 and 31st Jan., 2005, respectively, the AO disallowed the above claims and his action was confirmed by the CIT(A). The orders of the CIT(A), on this point, in both the years, have been challenged by the assessee in these appeals.
10. Shri S.K. Lal, the learned Authorised Representative, reiterated the arguments which were put forward on behalf of the assessee company before the AO and the CIT(A). The submissions made by him are summarized below :
that the claim in respect of the write off of Rs. 2,22,04,548 was made as a business loss under Section 28 of the Act.
that as an alternative, and without prejudice to above, the claim be allowed under Section 37(1) of the Act.
that the assessee company was engaged in the business of thermal, combustion, environmental, engineering products and projects.
that as part of its growth plan the assessee was looking for a strategic alliance by way of financial and technology partnership with another company carrying on similar business.
that Indocan Engineering Systems Ltd. of Pune was one such company, engaged in the business of environmental engineering and erection of turnkey of water treatment and chemical treatment plants.
that Indocan was in need of financial assistance to tide over the liquidity problem faced in execution of its existing business as also for expansion of its business.
that an MOU was signed between the two companies on 6th July, 1997 for strategic alliance/partnership for synergizing their businesses.
that total funds of Rs. 2,99,00,000 were placed at the disposal of Indocan partly by way of purchase of shares and partly by way of ICDs.
that shortly thereafter, sometimes in October, 1997, it was noticed from the balance sheet of Indocan for financial year 1996-97 that it had accumulated substantial losses/liabilities.
that a number of steps were taken to recover the ICDs from Indocan.
that the arbitration award was passed on 18th Oct., 2001 but no recovery could be made.
that the appellant company claimed before the AO and the CIT(A) that the purchase of shares of Indocan and placement of ICDs with Indocan were for the purposes of the business of the assessee company.
that the above loss was allowable as business loss under Section 28 or alternatively as revenue expenditure under Section 37 of the Act.
that reliance was placed on the decisions in the following cases :
(i) CIT v. Invests Industrial Corporation Ltd. ;
(ii) IBM World Trade Corporation v. CIT ;
(iii) CIT v. Anjani Kumar Co. Ltd. ;
(iv) CIT v. Bombay Dyeing & Manufacturing Co. Ltd. (1996) 132 CTR (SC) 217 : (1996) 219 LTR 521 (SC);
(v) Standard Industries Ltd v. JCTT for asst. yr. 1995-96 in ITA No. 5636/Mumbai/1999 dt. 27th Sept., 2002;
(vi) CIT v. Woodcraft Products Ltd. ;
(vii) CIT v. Graphite India Ltd. .
11. Shri Shri Pradeep Sharma, the learned CIT(A), relied on the orders of the authorities below. He vehemently argued saying that the order of the CIT(A) needed to be upheld. He placed reliance on the decisions in the following cases :
(i) Distillers' Trading Corpn. Ltd. v. CIT ;
(ii) CIT v. Abdullabhai Abdulkadar ;
(iii) Binodiram Balchand & Co. v. CTT ;
(iv) B.D. Bharucha v. CIT ;
(v) Travancore Tea Estates Co. Ltd. v. CIT ;
(vi) CIT v. Sembi Traders ;
(vii) Indequip Ltd. v. CIT ;
(viii) Narang Industries Ltd. v. CIT (1967) 66 LTR 316 (Del);
(ix) CIT v. H. Hoick Larsen .
12. We have considered the rival submissions in the light of material on record and the precedents cited. The assessee wrote off Rs. 2,22,04,548 in asst. yr. 2001-02 and claimed it as a 'business loss. The alternative claim is that it be allowed as revenue expenditure under Section 37(1) of the Act. The details of Rs. 2,22,04,548 are as under:
Asst. yr. Particulars Amount (Rs.)
2001-02 Shares 76,68,000
ICDs 1,45,36,548
----------------
Total 2,22,04,548
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13. Before proceeding further, we consider it necessary to examine and discuss the legal position, with regard to the above issue, as laid down by Courts in cases which were relied upon by Shri. S.K. Lal, the learned Authorised Representative, and Shri. Pradeep Sharma, the learned CIT(A).
14. One of the decisions relied upon by the learned CIT(A) was of the Delhi High Court in the case of Distillers' Trading Corpn. Ltd.(supra). In this case the Delhi High Court placed reliance on the decisions of the Supreme Court in the following three cases :
(i) Ramchandar Shivnarayan v. CIT ;
(ii) CIT v. Mysore Sugar Co. Ltd. ;
(iii) CIT v. Motiram Nandram (1940) 8 ITR 132 (PC).
15. In the case of Ramchandar Shivnarayan (supra), the Supreme Court summed up the principles as under (p. 269):
The principle applicable in India is more or less the same. If there is a direct and proximate nexus between the business operation and the loss or it is incidental to it, then the loss is deductible, as, without the business operation and doing all that is incidental to it, no profit can be earned. It is in that sense that from a commercial standard such a loss is considered to be a trading one and becomes deductible from the total income, although in terms neither in the 1922 Act nor in the 1961 Act, there is a provision like Section 51(1) of the Australian Act.
16. In the case of Mysore Sugar Co. Ltd. (supra), the Supreme Court laid down the test (p. 653) as under:
To find out whether an expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is apt to consider a loss as amounting to a loss of capital. But, this is not true of all losses, because losses in the running of the business cannot be said to be of capital. The questions to consider in this connection are for what was the money laid out ? Was it to acquire an asset of an enduring nature for the benefit of the business, or was it an outgoing in the doing of the business ? If money be lost in the first circumstance, it is a loss of capital, but if lost in the second circumstance, it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses.
17. In the case of CIT v. Nainital Bank Ltd. , the Supreme Court observed that under Section 10(1) of the 1922 Act, the trading loss of a business was deductible for computing the profit earned by the business. But, every loss was not so deductible unless it was incurred in carrying out the operations of the business and was incidental to the operation. Whether a loss is incidental to the operations of a business was a question of fact to be decided on the facts of each case, having regard to the nature of the operations carried on, and the nature of the risk involved in carrying them out. The degree of the risk or its frequency was not of much relevance but its nexus to the nature of the business was material.
18. In the case of Badndas Daga v. CIT (1958) 34 TTR 10 (SC), the Supreme Court observed that when a claim was made for a deduction for which there was no specific provision in Section 10(2) of the 1922 Act, whether it was admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it could be said to arise out of the carrying on of the business and to be incidental to it. The loss for which a deduction is claimed must be one that springs directly from the carrying on of the business and is incidental to it and not any loss sustained by the assessee even if it has some connection with his business. If that is established, then the deduction must be allowed, provided, of course, there is no prohibition against it, express or implied, in the Act.
19. In the case of Ramchandar Shivnarayan (supra), the assessee, a registered firm, carried on business in gold, silver and gunnies at Rajahmundry. It also derived income from the investment in Government securities. In years, both preceding and succeeding the relevant accounting year, the assessee had sold some Government securities and bonds. A sum of Rs. 50,000 borrowed from a creditor for the purpose of purchasing Government securities, was brought in cash to Rajahmundry by its employee and was handed over to its cashier. At a time when the cashier had turned his back to take out some books, a stranger suddenly arrived at the place of the appellant's business and committed theft of Rs. 30,000. In spite of logding a compliant with the police the amount could not be recovered. The appellant claimed deduction of Rs. 30,000 as a business loss in computing its profits and the Tribunal allowed the claim on the ground that the loss was incidental to the carrying on of its business. On a reference at the instance of the CIT, the High Court held that the loss was not allowable as a deduction as the loss was not incidental to the appellant's business.
20. The Supreme Court, reversing the decision of the High Court, held that the loss of Rs. 30,000 was directly connected with the business operation and was incidental to the carrying on of the business of purchase of Government securities to earn profit, and in such a situation it was part of the trading loss and deductible as such in arriving at the true profits of the appellant : it was immaterial whether Government securities were purchased with the remaining sum of Rs. 20,000 or not. The Court observed that if there was a direct and proximate nexus between the business operation and the loss or if it was incidental to it, then the loss was deductible.
21. It is to be remembered, the Court noted, that the direct and proximate connection and nexus must be between the business operation and the loss. It "goes without saying that a businessman has to keep money either when he gets it as business expenses or for purchasing stock-in-trade and if he loses such money in the ordinary course of business, the loss is a deductible trading loss. It is immaterial whether the money is a part of the stock-in-trade, such as, of a banking company or a money-lender, or is directly connected with the other business operations. The risk is inherent in the carrying on of the business and is either directly connected with it. or incidental to it.
22. In the written submission filed by the learned Authorised Representative during the hearing before us, the first case relied upon is of the Bombay High Court in the case of Investa Industrial Corporation Ltd. (supra). In this case the assessee company was doing business as managing agents and became managing agent of Palanpur Vegetable Products Ltd. in 1946. It was noted by the Court that it was an ordinary practice for the managing agents to finance the company of which they were such agents. The loan given by the assessee company to Palanpur Co. was Rs. 1,86,000 as on 31st March, 1951. The financial position of Palanpur Co. deteriorated and the above loan became irrecoverable. The assessee company accordingly claimed deduction of Rs. 1,86,000. The Tribunal recorded a finding that the finances made by the assessee company to Palanpur Co. were part of or incidental to the carrying on of the business by the assessee company as managing agents. The Court held that the advances aggregating to Rs. 1,86,000 originated in carrying on the business of the assessee as managing agents and therefore, the assessee's claim was allowed as trading loss.
23. The other decision relied upon by the learned Authorised Representative at S. No. (d), (p. 8) of his written submission, is of the Supreme Court in the case of Bombay Dyeing and Manufacturing Co. Ltd. (supra). In that case an amount of Rs. 2,25,000 was contributed by the assessee to the Maharashtra Housing Board towards construction of tenements for the company's workers. The tenements remained the property and the assets of the housing board. The Tribunal gave a finding that the expenditure was incurred merely with a view to carrying on the business of the assessee company more efficiently by having a contended labour force. In the light of the findings recorded by the Tribunal, the Court held that the amount constituted revenue expenditure.
24. The learned CIT(A) in his written submission has placed reliance, inter aha, on the decision of Bombay High Court in the case of Indequip Ltd. (supra). In this case the assessee company carried on the business as dealers and suppliers of mill gin stores and clothes. In the course of its business the assessee used to sell coal, glue products, Burmashell wires and allied products to various textile mills including one M/s Manikchowk and Ahmedabad Manufacturing Co. Ltd. of Ahmedabad. It was one of biggest purchasers of the products supplied by the assessee company. From the year 1962 onwards, the aforesaid textile mill was in financial difficulties and the assessee company started advancing monies to it from time to time. The debit balance in the loan account swelled upto Rs. 18,38,837 at the end of the previous year relevant to asst. yr. 1970-71. In view of the unsatisfactory financial condition of the textile company, the assessee wrote off the entire amount as bad debt. The Tribunal, while disallowing the assessee's claim held that the loan written off by the assessee was a capital loss and that it had nothing to do with the business of the assessee. The Bombay High Court, following the principles laid down by the Supreme Court in the case of Badndas Daga (supra), held that the loan was not incidental to the carrying on of the business of supply of goods by the assessee and confirmed the order of the Tribunal.
25. The principles laid down by the Supreme Courts in the abovementioned cases can be summarized as under:
(i) A loss is deductible as a 'business loss, only if the loss is incurred in the carrying out the operations of the business;
(ii) A loss of money is a revenue loss only if it is lost in the doing of the business of the assessee;
(iii) A loss is deductible as a 'business loss' only if there is a direct and proximate nexus between the business operations and the loss;
(iv) A loss deductible as a 'business loss' must be one that springs directly from the carrying on of the business of the assessee and not any loss sustained by the assessee even if it has some connection with his business;
(v) Whether a loss was incurred in the carrying out of the operations of the business, or it was incidental to the carrying out of the operations of the business, or it had a direct and a proximate nexus with the operations of the business,, or it directly springs from the carrying on of the operations of the business, is a question of fact which has to be decided on the facts of each case.
26. We, now proceed to examine the facts of the present case in the light of the legal position enumerated above. It is seen that the business activities of the assessee company comprised of project engineering and manufacturing of electromechanical assemblies. The project engineering activity comprised of designing, procuring, erecting, and commissioning of projects of different types and sizes of combustion and thermal engineering products such as flare systems, burners, furnaces, industrial/hospital waste incinerators, crematoriums, laddie heating systems, etc., The manufacturing of electromechanical assemblies is done as per the technical specification given by the customers.
27. The MOU dt. 6th July, 1997 entered into between the assessee company and Indocan stated, inter alia, as under:
that a strategic alliance between the two organizations would be of mutual interest.
that ASL (the assessee company) was interested to acquire a controlling interest upto 60 per cent of equity of Indocan during the year 1997-98.
that after such an equity transfer the management control of Indocan will shift to ASL.
28. The paid up share capital of Indocan as on 31st March, 1997 was Rs. 1,72,50,000, consisting of 1,72,500 equity shares of Rs. 100 each, out of which 70 per cent equity shares were held by M/s Peekay Holdings Ltd., a company incorporated in Canada and 12 per cent equity shares were held by Shri A. Parameshwaran and his family. Shri Paul Khurana (an inhabitant of Canada) was in control of M/s Peekay Holdings Ltd.
29. An agreement was entered into on 29th Aug., 1997 between M/s Peekay Holdings Ltd. and Mr. A. Parameshwaran and family of the one part (the vendors) and the assessee company of the other part (the purchasers) agreeing inter alia as under:
that the vendors shall sell and the purchasers shall purchase 1,03,500 equity shares.
that the consideration for the sale of the said shares shall be Rs. 270 per share aggregating to Rs. 2,79,45,000.
that upon acquisition of 60 per cent of the equity shares the purchaser-company shall be renamed as 'Ador Indocan Limited'.
30. The details of payments made by the assessee company and its associates to Indocan are as under:
-----------------------------------------------------------------------
Payments made by Cheque date Amount (Rs.)
Shares ICDs
-----------------------------------------------------------------------
Ador Samia Limited 03.09.1997 - 40,00,000
--------------------------------------------
03.09.1997 - 10,00,000
--------------------------------------------
12.09.1997 5,13,000 -
--------------------------------------------
12.09.1997 2,83,500 -
--------------------------------------------
12.09.1997 42,79,500 -
-----------------------------------------------------------------------
Ador Thermal Engg. Limited 03.09.1997 - 50,00,000
--------------------------------------------
10.09.1997 15,12,000 -
--------------------------------------------
10.09.1997 10,80,000 -
-----------------------------------------------------------------------
Ador Finance Limited 05.09.1997 - 9,00,000
--------------------------------------------
05.09.1997 - 6,00,000
--------------------------------------------
05.09.1997 - 25,00,000
-----------------------------------------------------------------------
Advani Oerlikon Limited 04.09.1997 - 25,00,000
--------------------------------------------
05.09.1997 - 25,00,000
--------------------------------------------
05.09.1997 - 25,00,000
-----------------------------------------------------------------------
Total 2,15,00,000
-----------------------------------------------------------------------
Interest on ICDs of Ador - 5,36,548 Finance Limited
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Total 76,68,000 2,20,36,548
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31. The details of the total claim made by the assessee, in respect of the write off, in asst. yrs. 2001-02 and 2002-03, are as under:
Asst. yr. Particulars Amount (Rs.)
2001-02 Shares 76,68,000
ICDs 1,45,36,548
Total 2,22,04,548
2002-03 ICDs 75,00,000
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Total 2,97,04,548
--------------
32. The claim of Rs. 2,22,04,548 made in asst. yr. 2001-02 has two components. One component of Rs. 1,45,36,548 represents ICDs placed with Indocan by the assessee company and its associates, and interest thereon. The other component of Rs. 76,68,000 represents payments made to the shareholders of Indocan for purchase of equity shares as under:
S. No. Number of shares Name of shareholder (transferor)
1. 1,500 Ms. Rekha Parameshwaran
5,600
2. 1,900 Mr. A. Parameshwaran
2,000
3. 15,850 Mrs. P. Rajalakshmi
2,000
Total 28,400
Rs. 76,68,000 Consideration at Rs. 270 per share
33. It appears that the shareholders of Indocan filed an arbitration petition (No. 288 of 1998) on 15th May, 1998 before the Bombay High Court. Also, the assessee filed a Writ Petition (No. 2770 of 1999) before the Bombay High Court which was disposed of on 29th Sept., 1999, by consent, and Mr. Justice M.L. Pendse (Retd) was appointed as Sole Arbitrator for adjudication of the disputes between the parties. The salient features of the arbitration award dt. 18th Oct., 2001, were as under :
that Shri A. Parameshwaran and Smt. Rajalakshmi Parameshwaran shall pay to the assessee company a sum of Rs. 76,68,000 towards payment of share price with interest @ 15 per cent from the date of award till payment.
that Shri A. Parameshwaran and Smt. Rajalakshmi Parameshwaran shall pay to M/s Ador Powertron Ltd. a sum of Rs. 7,15,500 with interest @ 18 per cent from the date of award till payment.
that Indocan shall pay to the assessee company a sum of Rs. 1 crore with interest @ 18 per cent per annum from 3rd Sept., 1997 till realization.
that Indocan shall pay to M/s Adavni Oerlikon Ltd. a sum of Rs. 75,00,000 with interest @ 18 per cent per annum from 4th Sept., 1997 till realization.
that Indocan shall pay to M/s Ador Finance Ltd. a sum of Rs. 40,00,000 with interest @ 18 per cent per annum from 5th Sept., 1997 till realization.
34. In terms of the above award dt. 18th Oct., 2001, the promoters and the shareholders of Indocan were directed to return the entire money comprising investment in shares and inter-corporate deposits along with interest to the assessee company. It is pertinent to note here that the award was given on 18th Oct., 2001, whereas the assessee wrote off the above amounts as irrecoverable during the year ending 31st March, 2001 itself.
35. The first component of the assessee's claim as a 'business loss' or alternatively, as a revenue expenditure under Section 37(1), is for Rs. 76,68,000, as mentioned in paras 30 and 31 above, which represents the payments made to the shareholders for acquiring the shares of Indocan. We fail to see the rationale behind this claim. Manifestly, it cannot be said that this payment had any direct and proximate nexus with, or that it was incidental to, the carrying on of the operations of the business of the assessee company as mentioned in para 26 above. We fail to comprehend as to how the payments made to the promoters for buying the shares of Indocan could be claimed as a revenue expenditure under Section 37(1). We, therefore, hold that the claim can neither be allowed as a 'business loss' nor as a revenue expenditure under Section 37(1) of the Act.
36. The other component of the assessee's claim as a 'business loss', or alternatively, as a revenue expenditure under Section 37(1), as mentioned in paras 30 and 31 above, is for Rs. 2,20,36,548 out of which Rs. 1,45,36,548 were claimed in asst. yr. 2001-02 'and Rs. 75,00,000 were claimed in asst. yr. 2002-03. It represents payments made by the assessee company and its associates to Indocan as ICDs because Indocan was in financial difficulties. The operations of the business of the assessee company are mentioned in para 26 above. Therefore, we have to hold that the payments of ICDs to Indocan had neither a direct and proximate nexus with, nor was it incidental to, the carrying on of the operations of the business of the assessee company as mentioned in para 26 above. Admittedly, it is not the business of the assessee company to make deposits as ICDs. We, therefore, hold that the claim of Rs. 2,20,36,548 can neither be allowed as a 'business loss' nor as a revenue expenditure under Section 37(1) of the Act.
37. The expressions used by the Supreme Court in the cases mentioned in the above paras are : 'carrying on of the operations of the business' and 'direct and proximate nexus'. The difference between the expressions 'carrying on of the operations of the business' and merely 'business' needs to be noted. In other words, the existence of 'some remote nexus' between the expenses and the 'business' is not enough. The nexus must be 'direct and proximate' and it should be with the 'carrying on of the operations of the business'. In the present case such a 'direct and proximate nexus' between the impugned payments aggregating to Rs. 2,97,04,548 and the 'carrying on the operations of the business' of the assessee company is totally absent as can be seen from the discussions in the above paras.
38. The facts of the cases relied upon by the learned Authorised Representative are distinguishable and therefore, they do not apply to the present case.
39. The decision given by us in the paras 36 and 37 above is based on the principles laid down by the Supreme Court in the cases of Ramchandai Shivnamyan (supra), Badridas Daga (supra), Nainital Bank Ltd (supra) and Mysore Sugar Co. Ltd. (supra). The ground No. 2 is accordingly rejected.
Ground No. 3On the facts and circumstances prevailing in the case and as per provisions of law, it be held that the expenses incurred on EDP software amounting to Rs. 80,5000 are eligible for deduction while computing the income in case of appellant under the provisions of IT Act. The appellant be granted just and proper relief in this respect.
40. During assessment proceeding, it was noticed by the AO that the assessee had debited in the P&L a/c Rs. 80,500 as EDP software expenses. It was explained on behalf of the assessee that this expenditure was incurred for a software package developed by M/s Avam Soft for financial accounting, material accounting as well as payroll. It was contended by the learned Authorised Representative that the expenditure was incurred in the ordinary course of the assessee's business and was allowable as revenue expenditure. The AO treated it as capital expenditure and his action was confirmed by the CIT(A).
41. We find that the Rajasthan High Court in the case of CIT v. Arawali Constructions Co. (P) Ltd. held that the expenditure on acquiring computer software was to be treated as expenditure of capital nature. The Court observed as under:
The facts on record are that the payment of Rs. 1,38,360 was not paid for consultancy fee to Hindustan Computers Ltd., in fact, the payment was made for outright sale of 'computer software' which is used as technique in mining operations. The finding of the CIT(A) is that the acquisition of software cannot be treated to be an asset of endurable nature. If the programme is used in one mining to another mining operation why it should not be treated as a capital asset and expenditure on that is capital expenditure. Considering these facts and the decision of their Lordships and a later decision of the Bombay High Court, in our view, the acquisition of technical know-how is capital expenditure, therefore, the AO has rightly treated the expenditure on acquiring the computer software as expenditure of capital nature and rightly allowed depreciation as per rules.
42. A similar view was taken by the Tribunal, Pune, in the case of Kinetic Engineering Ltd. in ITA No. 1159/Pn/2003, dt. 29th Dec, 2006. We respectfully follow the precedents and reject the ground No. 3.
Ground No. 4On the facts and circumstances prevailing in the case and as per provisions of law, it be held that the ad hoc disallowance on sundry expenses, hotel expenses, gift articles and employee welfare expenses of Rs. 50,000 substained by the first appellate authority is unjust and improper. The claim be allowed in full. Just and proper relief be granted to the appellant in this respect.
43. In the P&L a/c, the assessee had debited expenses aggregating to Rs. 9,44,250 as under:
S. No. Particulars (Rs)
1 Sundry expenses 1,92,521
2 Hotel expenses 2,72,829
3 Gift articles 21,591
4 Employees welfare expenses 4,57,309
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Total 9,44,250
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44. The AO disallowed 10 per cent of the above expenses amounting to Rs. 94,425 on the ground that full verification of these expenses was not possible and that personal and non-business element could not be ruled out.
45. The CIT(A) noted in para 9.2 of his order that the AO had not specified the instances of expenses which he considered suspect, that even the sundry expenses mostly consisted of out-of-pocket expenses incurred by the employees for payment of octroi, purchase of articles for gardening, etc. which had to be treated as business expenses, that certain disallowance could justifiably be made with reference to the year end transfers of roundsome amounts of Rs. 20,000 and Rs. 10,000. He accordingly sustained a disallowance of Rs. 50,000 on estimate basis.
46. We have considered the matter and in our opinion the disallowance made by the lower authorities was based on mere conjectures and surmises. Further, the assessee is a company and therefore, there could be no justification for an ad hoc disallowance on the ground of personal or non-business component in the expenses claimed. In taking this view we are fortified by the decision of the Gujarat High Court in the case of Sayaii Iron & Engg. Co. v. CIT . The Court observed as under:
- The assessee which is a private limited company is a distinct assessable entity as per the definition of 'person' under Section 2(31) of the Act. Therefore, it cannot be stated that when the vehicles are used by the directors, 'even if they are personally used by the directors' the vehicles are used by the 'personal use'. The limited company is an inanimate person and there cannot be anything personal about such an entity. The view that we are adopting is supported by the provision of Section 40(c) and Section 40A(5) of the Act.
47. We, respectfully, follow the precedent and allow the ground No. 4. GwundNo. 5 On the facts and circumstances prevailing in the case and as per provisions of law, it be held that the ad hoc disallowance on telephone and fax expenses of Rs. 50,000 sustained by the first appellate authority are unjust and improper. The claim be allowed in full. The appellant be granted just and proper relief in this respect.
48. The assessee had debited in the P&L a/c Rs. 7,44,989 under the head 'Communication Expenses' relating to telephone and fax. The AO made a disallowance at 15 per cent amounting to Rs. 1,11,748 on the ground of personal element. The CIT(A) restricted this disallowance to Rs. 50,000 on estimate basis in para 11.2 of his order. The assessee is a company and therefore such an ad hoc disallowance could not be made on the ground of personal/non-business user of the telephones/fax. In taking this view we are fortified by the decision of the Gujarat High Court in the case of Sayaii Iron and Engg. Co. (supra). The ground No. 5 is accordingly allowed.
Ground No. 6On the facts and circumstances prevailing in the case and as per provisions of law, it be held that disallowance of Rs. 25,000 sustained by the first appellate authority out of travelling and conveyance is unjust and improper. The claim be allowed in full. Just and proper relief be granted to the appellant in this respect.
49. The assessee had debited in the P&L a/c Rs. 26,54,505 under the head travelling and conveyance. The AO made a disallowance of Rs. 1,00,000 on the ground of non-verifiability and personal element. The CIT(A) restricted the disallowance to Rs. 25,000 on estimate basis. The assessee is a company and therefore there could be no justification for an ad hoc disallowance on the ground of personal or non-business component in the expenses claimed. In our considered opinion, the disallowance made by the lower authorities is based on conjectures and surmises and could not be sustained. In taking this view we are fortified by the decision of the Gujarat High Court in the case of Sayaji Iron and Engg. Co. (supra). The ground No. 6 is accordingly allowed.
Ground No. 7On the facts and circumstances prevailing in the case and as per provisions of law, it be held that no interest is leviable in case of appellant company in terms of provisions of Sections 234A, 234B and 234C of the Act. The interest charged by the AO and ground not adjudicated by the first appellate authority be deleted as per provisions of law and scheme of the Act. The appellant be granted just and proper relief in this respect.
50. It was submitted by the learned Authorised Representative that this issue was raised before the CIT(A) through an additional ground as mentioned by the CIT(A) in para 4 of his order, but the CIT(A) omitted to decide it. In the circumstances, therefore, we remit this matter back to the file of CIT(A) with a direction that he should decide this issue after giving adequate opportunity of being heard to the assessee. The ground No. 7 is decided accordingly.
51. In the result, the appeal filed by the assessee for asst. yr. 2001-02 is partly allowed.
ITA No. 588 /Pn/2006: Asst. yr. 2002-03 Ground No. 1 On facts and circumstances prevailing in the case and as per provisions of law, it be held that the write off of Rs. 75,00,000 should have been allowed in full. It should further be held that amount written off was provided by the appellant company for the business purpose and out of business expediency and claim is allowable under Section 37 and/or Section 28 of the IT Act. Just and proper relief be granted to the appellant in this respect.
52. The total claim made by the assessee, in respect of the write off, in asst. yrs. 2001-02 and 2002-03, was as under:
Asst. yr. Particulars Amount (Rs.)
2001-02 Shares 76,68,000
ICDs 1,45,36,548
Total 2,22,04,548
2002-03 ICDs 75,00,000
Total 2,97,04,548
53. The claim of Rs. 1,45,36,548 made in asst. yr. 2001-02 has been rejected by us for the reasons discussed in paras 12 to 39 above. The facts in respect of the claim of Rs. 75,00,000 made in asst. yr. 2002-03 are identical and therefore we uphold the order of the CIT(A) and reject the ground No. 1.
Ground Nos. 2 and 32. On facts and circumstances prevailing in the case and as per provisions of law, it be held that the ad hoc disallowance on telephone and fax expenses made by the AO and partly sustained by the first appellate authority is contrary to the provisions of the Act. It further beheld that the claim is allowable in full. The appellant be granted just and proper relief in this respect.
3. On facts and circumstances prevailing in the case and as per provisions of law, it beheld that the adhoc disallowance out of sundry expenses made by the AO and partly sustained by the first appellate authority is unwarranted, unjustified and is contrary to the provisions of law and facts prevailing in the case. The disallowance be deleted in full. The appellant be granted just and proper relief in this respect.
54. A similar disallowance made in asst. yr. 2001-02 was deleted by us for the reasons given in para 46 above. The facts in asst. yr. 2002-03 are identical and therefore we delete the impugned addition and allow the ground Nos. 2 and 3.
Giound No. 4On facts and circumstances prevailing in the case and as per provisions of law, it beheld that no interest is leviable in case of appellant company in terms of provisions of Sections 234A, 234B and 234C of the Act. The interest charged by the AO is unwarranted, unjustified and in contrary to the provisions of law and facts prevailing in the case. It beheld that there was no advance tax payable by the appellant justifying charge of any interest in terms of provisions of Sections 234B and 234C of the Act. The appellant be granted just and proper relief in this respect.
55. A similar ground was raised in asst. yr. 2001-02, which was decided in para 50 above. The facts in asst. yr. 2002-03 are identical and therefore the matter is restored back to the CIT(A) with the same directions as given for asst. yr. 2001-02 in para 50 above. The CIT(A) will decide this issue after giving an opportunity of being heard to the assessee. The ground No. 4 is decided accordingly.
56. In the result, the appeal filed by the assessee for asst. yr. 2002-03 is partly allowed.