Income Tax Appellate Tribunal - Mumbai
Olive Cafe South Private Limited , ... vs Deputy Commissioner Of Income ... on 5 December, 2018
1
Olive Bar Kitchen Pvt Ltd
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "C", MUMBAI
Before Shri C.N. Prasad (Judicial Member)
AND
Shri G Manjunatha (ACCOUNTANT MEMBER)
ITA No. 5098/Mum/2017
(Assessment year 2013-14)
Olive Bar & Kitchen Pvt Ltd vs Dy.CIT-13(1)(1), Mumbai
Pali Hill Tourist Hotel,
14, Union Park
Khar West, Mumbai-400 052
PAN :AAACO5346O
APPELLANT RESPONDEDNT
ITA No5165/Mum/2017
(Assessment year 2013-14)
Dy.CIT-13(1)(1), Mumbai vs Olive Bar & Kitchen Pvt Ltd
Pali Hill Tourist Hotel,
14, Union Park
Khar West, Mumbai-400 052
PAN :AAACO5346O
APPELLANT RESPONDEDNT
ITA No5164/Mum/2017
(Assessment year 2013-14)
Dy.CIT-13(1), Mumbai vs M/s Olive Cafe South Pvt Ltd
Pali Hill Tourist Hotel,
14, Union Park
Khar West, Mumbai-400 052
PAN :AAACO1454E
APPELLANT RESPONDEDNT
2
Olive Bar Kitchen Pvt Ltd
ITA No5097/Mum/2017
(Assessment year 2013-14)
M/s Olive Cafe South Pvt Ltd vs Dy.CIT-13(1)(1), Mumbai
Pali Hill Tourist Hotel,
14, Union Park
Khar West, Mumbai-400 052
PAN :AAACO1454E
APPELLANT RESPONDEDNT
Assessee by Shri Jitendra Jain
Revenue by Shri Abi Rama Kartikeyan
Date of hearing 15-11-2018
Date of pronouncement 05-12-2018
ORDER
Per G Manjunatha, AM :
This bunch of four appeals, two by the revenue and two by the assessee are filed against separate, but identical orders of the CIT(A)-21, Mumbai dated 02-05-2017 and they pertain to AY 2013-14. Since facts involved in these appeals are identical and issues are also common, for the sake of convenience, these appeals were heard together and are disposed of by this consolidated order.
2. The revenue, has raised more or less common grounds of appeal in both the appeals. For the sake of brevity, grounds of appeal taken in ITA No.5164/Mum/2017 are reproduced hereunder:-
"1. On the facts and the circumstances of the case and in law, the Id. CIT (A) erred in deleting the addition made by the AO in respect of pre operative expenses in the case of assessee's restaurants "Like that Only" (Bangalore) and "Monkey Bar" (Delhi) and confirmed the same 3 Olive Bar Kitchen Pvt Ltd in the case of "Monkey Bar11 (Bangalore) without appreciating the fact that in the books of accounts of the assessee pre-operative expenses amounting to Rs, 1,70,90,906/- were shown under the head of Lease Hold Property/Capital WIP and reflected under Fixed Assets Schedule.
2. On the facts and the circumstances of the case and in law, the Id. CIT (A) erred in deleting the addition made by the AO in respect of pre operative expenses in the case of assessee's restaurants "Like that Only" (Bangalore) and "Monkey Bar" (Delhi) and confirmed the same in the case of "Monkey Bar" (Bangalore) by meting out different treatment to the same expenditure i.e treating it as revenue expenditure for one and as capital expenditure for another. Such expenses are allowable only u/s 35D91)(ii) of the IT Act, 1961 to the extent mentioned therein and Sec 37(1) of the IT Act also does not allow any capital expenditure."
3. The grounds of appeal taken by the assessee are different which are not inter-connected, therefore, the grounds of appeal taken by the assesses are extracted separately:-
ITA No.5098/Mum/2017
"1. (a) The Commissioner of Income Tax(Appeals) - 21, Mumbai [hereinafter 'CIT(A)'] erred in confirming disallowance of Rs.269,162/- u/s 14A of the Act r.w.r 8D of the Income-tax Rules, 1962 ('the Rules') as attributable to investment activity giving rise to the exempt income. The Appellant submits that it has made the strategic investment in shares of its subsidiaries for acquiring controlling interest and not for earning an exempt income. Hence, no disallowance u/s 14A r.w.r 8D is called for.
(b) The CIT(A) erred in confirming disallowance of Rs.269,162/- (0.5% of average of investments) u/s 14A of the Act made by the AO, without considering the suo moto in the computation of Income; hence resulting into to double addition u/s 14Aof the Act r.w.r 8D of the Rules.
(c) The CIT(A) erred in confirming the action of AO in invoking Rule 8D of the Rules for computing disallowance u/s 14A of the IT Act without recording dis-satisfaction with respect to accounts of the Appellant.
2. The CIT(A) erred in confirming the action of AO in increasing the book profit by Rs.269,162/- being expenses relatable to earning of exempt income while calculating book profit u/s 115JB of the Act.4
Olive Bar Kitchen Pvt Ltd
3. The CIT(A) erred in confirming the disallowance of share issue expenses of Rs.497,181/- made by the AO, on the ground that the expenses related to increase in authorized share capital of the company and for the increase in the capital base of the company and hence are capital expenditure not deductible u/s 37(1) of the Act." ITA No. 5097/Mum/2017
"1. The Commissioner of Income Tax (Appeals) - 21, Mumbai erred in confirming the disallowance of pre-operative expenses of Rs. 17, 12,2727- on the ground that the expenses are incurred prior to commencement of business of its first restaurant "Monkey Bar"(Banglore) on 18.05.2012 and; hence are capital expenditure. The Appellant submits that the pre-operative expenses were incurred after setting up of its business and in the course of and for the purpose of carrying on its business activity and hence, the expenses incurred on expansion of its existing business are allowable as revenue expenditure under the Income Tax Act. The Appellant further submits that the expenses have not brought into existence any capital asset or enduring benefit and satisfy all the essential conditions of revenue expense under the Act; hence on the facts and circumstances of the case, disallowance of pre-operative expenses made by the AO shall be deleted."
4. The brief facts of the case extracted from ITA No.5098/Mum/2017 are that the assessee is engaged in the business of running restaurants and related activities, filed its return of income for AY 2013-14 on 26-09-2013 declaring total income of Rs.36,80,710. The case was selected for scrutiny and notices u/s 143(2) & 142(1) of the Act were issued. In response to notices, the authorised representative of the assessee appeared from time to time and filed the details, as called for. The assessment has been completed u/s 143(3) of the I.T. Act, 1961 on 19-03-2016 determining total income at Rs.82,00,864 by making addition towards disallowance of expenditure incurred in relation to 5 Olive Bar Kitchen Pvt Ltd exempt income u/s 14A r.w.r. 8D of I.T.Rules, 1962 for Rs.2,69,162, disallowance of pre-operative expenses capitalised in books of account, but claimed as revenue expenditure in computation of total income u/s 37(1) of the Act for Rs.67,15,968. Similarly, the AO has disallowed ROC charges paid for increase in authorised share capital of the company for Rs.4,97,181.
5. Aggrieved by the assessment order, the assessee preferred appeal before the CIT(A). Before the CIT(A), assessee has filed elaborate written submissions alongwith certain judicial precedents in respect of addition made by the AO towards disallowance of pre-operative expenses to argue that expenditure incurred under the head, 'pre-operative expenses' are purely revenue in nature like salaries and wages, travelling expenses, restaurant rent, repairs and maintenance and like other general administrative expenses which are incurred wholly and exclusively in connection with business. The assessee further argued that it had already commenced its business but the commercial operations were not started. The expenditure incurred under capital expenditure has been capitalised in books of account; however, expenses, which are in the nature of revenue expenditure has been treated as deductible u/s 37(1), even though in books of account the same has been treated as capital work-in-progress. The assessee also filed written submissions on the issue of disallowance of expenditure in relation to exempt income to argue that 6 Olive Bar Kitchen Pvt Ltd it has suo moto disallowed expenses incurred in relation to exempt income which is more than the amount of disallowance quantified by the AO by applying rule 8D(2)(iii), therefore, further disallowance amounts to double taxation which is incorrect. Insofar as disallowance of ROC charges paid for increase in authorised capital, the assessee submitted that it has paid ROC fees for increase in authorised capital for issue of bonus shares, therefore, the question of disallowance of ROC charges by following the decision of Hon'ble Supreme Court in the case of Brooke Bond India Ltd vs CIT 225 ITR 798 (SC) does not arise as the Hon'ble Apex Court in its subsequent decision in case of CIT vs General Insurance Corporation has examined the issue and held that where expenditure incurred in connection with the issue of bonus shares constitute revenue expenditure.
6. The Ld.CIT(A), after considering relevant submissions of the assessee and also by following certain judicial precedents, held that although pre-operative expenses have been capitalised in books under the head 'work in progress', but facts remain that the said expenditure claimed in statement of total income as revenue expenditure u/s 37(1), are purely revenue expenditure, which are incurred wholly and exclusively in connection with existing business. The Ld.CIT(A) further observed that the assessee has an existing business. Neither is the fact that expenditure in question is incurred in respect of additional 7 Olive Bar Kitchen Pvt Ltd restaurant set up and which is in the nature of expansion of the existing restaurant business. The management, the control and the funds utilised are common. Therefore, the same cannot be treated as pre-operative expenses, which comes under the provisions of section 35D so as to amortise over a period of years. Insofar as disallowance of expenditure incurred in relation to exempt income, the Ld.CIT(A) held that the AO has rightly disallowed expenses by applying rule 8D(2)(iii) @0.5% of the average value of investment as the assessee made suo moto disallowance in respect of direct expenses u/r 8D(2)(i), but failed to disallow other administrative expenses u/r 8D(2)(iii). Insofar as disallowance of ROC fees paid for increase in authorised capital, the Ld.CIT(A) observed that the assessee has paid fees for increase in authorised capital and the same has been deducted from securities premium account instead of routing through profit & loss account. Thus, the total amount of reserves used up are included in issue of bonus shares, therefore, there is no merit in the contention of the assessee that when bonus shares are issued, expenditure incurred for increase in authorised capital is revenue in nature. Aggrieved by the order of Ld.CIT(A), the assessee as well as the revenue are in appeal before us.
7. The first issue that came up for our consideration from the assessee as well as the revenue appeal is disallowance of preoperative expenses treated as 8 Olive Bar Kitchen Pvt Ltd capital in books of account, but claimed as revenue in statement of total income u/s 37(1) of the Act. The Ld.AR for the assessee submitted that the assessee has incurred various revenue expenses like salaries and wages to staff, travelling expenses, repairs and maintenance, restaurant rent and other like expenses in connection with expansion of its existing business by running restaurants in three different places and treated the same as capital expenditure in its books of account under the head 'work in progress'. The Ld.AR further submitted that since all expenses incurred are in the nature of revenue, the assessee has claimed deduction in statement of total income u/s 37(1) of the Act. The Ld.AR further submitted that the expenditure incurred by the assessee are wholly and exclusively in connection with the existing business for expansion purpose. These expenses have not brought into existence any capital asset or enduring benefits. None of the expenses involve construction of structure or renovation, extension or improvement of the asset. The expenses incurred during the year are purely revenue in nature and are not permitted to be deferred under the relevant provisions of the Act. The Ld.AR further referring to details of expenditure, submitted that wherever expenditure incurred are in the nature of capital expenditure was already treated under the head 'work in progress'; but expenses in the nature of revenue are claimed as deduction u/s 37(1) of the Act, because the said 9 Olive Bar Kitchen Pvt Ltd expenditure cannot be claimed in subsequent years. In this connection, he relied upon various judicial precedents, including the decision of Hon'ble Bombay High Court in the case of CIT vs Reliance Supply Chain Solutions Ltd in Income-tax Appeal No.892 of 2014.
8. On the other hand, the Ld.DR submitted that the Ld.CIT(A) was erred in deleting addition made by the AO towards pre-operative expenses without appreciating the fact that in the books of account, the assessee has shown said expenditure under the head 'work in progress' but in statement of total income, the same has been treated as revenue in nature to be deductible u/s 37(1). The Ld.DR further submitted that the Ld.CIT(A) did not appreciate the fact that pre-operative expenses are allowable only u/s 35D(1)(ii) of Income-tax Act, 1961 to the extent mentioned therein and section 37(1) of the I.T. Act does not allow any capital expenditure to be deducted. The Ld.DR further submitted that a particular expenditure cannot have two natures, i.e. one of capital expenditure for preparation of books of account and revenue expenditure for the purpose of computation of income. The assessee has rightly treated pre- operative expenses as capital in its books of account, but when it comes to computation of income, claimed the same as revenue expenditure without any basis.
10
Olive Bar Kitchen Pvt Ltd
9. We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The fact with regard to the commencement of business by the assessee is not disputed by the lower authorities. The assessee is into the business of running restaurants and had commenced its business activities. During the year under consideration the assessee has expanded its existing business by opening three more restaurants at different places. The assessee has treated expenditure incurred in connection with the establishment of restaurants under the head 'capital work in progress' in its books of account. But, when it comes to computation of total income, the expenses in the nature of revenue are treated as revenue expenditure and claimed as such. The AO disallowed pre-operative expenses on the ground that a particular expense cannot have two treatments, i.e. one in the books of account and the other in computation of total income. According to the AO, pre-operative expenses can be deducted as per the provisions of section 35D(1)(ii) to the extent as indicated therein. It is the contention of the assessee that it is in the business of running restaurants and it has commenced its business during the year under consideration. Though, the commercial operations has not been taken place in respect of three new restaurants, the commencement of its business activities is not in doubt. The assessee further contended that all expenditure incurred in connection with setting up of new 11 Olive Bar Kitchen Pvt Ltd units which are in the nature of capital expenditure has been debited to capital work in progress. Even revenue expenditure incurred in connection with a particular unit has been treated as capital work in progress in its books of account. But, when it comes to computation of total income revenue 0065penditure has been climed as deduction u/s 37(1) of the Act, because the assessee has commenced business activities.
10. Having heard both the sides, we find that there is no dispute with regard to the nature of expenditure claimed by the assessee as revenue expenses in its statement of total income. The assessee has incurred various revenue expenditures like salaries and wages, PF and ESI contribution, travelling expenses, repairs and maintenance, staff room expenses and like other general administrative expenses. It is also not in dispute that the assessee had not commenced commercial operations of the particular new units established during the year under consideration. Therefore, once particular expenditure is revenue in nature, for the purpose of determination of income, what is relevant is - whether a particular expenditure has been incurred wholly and exclusively in connection with business and such expenditure has been incurred for the business in the relevant period or not. It is not relevant as to how the assessee shows a particular income or expenditure in the books of account. Separate computation of income and expenditure would be justified only when 12 Olive Bar Kitchen Pvt Ltd several distinct business are carried on and not when the separate business activities were carried out by same person and one set of account is maintained for all set of activities. In this case, it is not in dispute that the assessee has maintained one set of books of account for its business activity even though it has separate units in different places. Further, it is also not in doubt that pre-operative expenses claimed in statement of total income are in the nature of revenue expenses. Therefore, we are of the considered view that when the assessee has commenced its business activity in the relevant previous year and also incurs certain expenses which are revenue in nature, there is no reason for the AO to treat said expenditure as capital expenditure merely for the reason that the assessee has given different treatment for such expenditure in its books of account and statement of total income.
11. Coming to the case laws relied upon by the assessee. The assessee has relied upon plethora of judgements, including the decision of Hon'ble Bombay High Court in the case of CIT vs Reliance Supply Chain Solutions Ltd (supra). The Hon'ble jurisdictional High Court, under similar circumstances held that when assessee has incurred expenditure for expansion of its existing business, expenditure incurred in the nature of revenue expenditure could not be disallowed. The relevant observations of the Hon'ble Court are as under:-
"6] We have considered the submissions canvassed by the learned counsel for the respective parties.
13
Olive Bar Kitchen Pvt Ltd
7] It is not relevant as to how the Assessee shows a
particular income or expenditure in the books of account. In the present case, the Commissioner (Appeals) and the Tribunal has specifically on appreciation of factual matrix arrived at a conclusion that the expenditure are directly identifiable with the operations and maintenance of the existing stocks i.e. with regard to the payment of salary, travelling and conveyance allowance, telephone expenses, professional fees paid, audit fee and other miscellaneous expenses. 8] In view of the specific finding of fact arrived at by the Commissioner (Appeals) and the Tribunal, the Tribunal have held he expenditure to be revenue expenditure. In case of Kothari Auto Parts Manufacturers Pvt. Ltd. (supra), this Court had specifically observed that separate computation of income and expenditure would be justified only when several distinct business are carried on, and not when the separate business activities were carried out by some person and when one set of account is maintained for all set of activities.
9] In the present case also, one set of account is maintained for the business activity by the Assessee. The Assessee had incurred expenditure on account of expansion of business and the Assessee had commenced the business as per the findings of the Commissioner (Appeals) and the Tribunal. The said findings are findings of the fact."
12. The assessee has also relied upon the decision of Hon'ble Bombay High Court in the case of CIT vs Evergrowth Telecom Ltd (2013) 29 taxmann.com 273 (Bom). The Hon'ble jurisdictional High Court, while considering the issue of expenditure incurred after setting up of business and before commencement of business held that the said expenditure is allowable as a deduction u/s 37(1) of the Income-tax Act, 1961. The relevant observations of the Court are as under:-
"Any expenditure incurred after setting up of a business and before the commencement of business is allowable as a deduction under section 37(1).14
Olive Bar Kitchen Pvt Ltd The issue whether the expenditure has been incurred for purposes of business is an issue of fact and two authorities under the Act have rendered a finding of fact that expenses incurred on account of PSTN charges and dealer's commission are incurred for purposes of business and allowable under section 37(1).
In view of the above, no substantial question of law arises with regard to issue in question. [Para 5]"
13. The assessee has also relied upon the decision of Hon'ble Madras High Court in the case of CIT vs Shakti Sugars Ltd 339 ITR 400 (Mad). The Hon'ble High Court, while considering the issue of deductibility of pre-operative expenses held that expenditure on setting up of new unit by way of expansion of existing business is revenue expenditure. The relevant observations of the Court are as under:-
"Held, dismissing the appeal, that the Commissioner (Appeals) as well as the Tribunal were fully justified in accepting the case of the assessee in respect of the expenses claimed by the assessee as revenue expenditure. The expenses in respect of the B unit were incurred towards salaries, wages, bonus, contribution to provident fund, workmen welfare expenses, power, fuel and water, manufacturing expenses, rent for office buildings, insurance premium, repairs and maintenance for machinery and building, motor vehicle, office equipment, etc., interest on bills cleared, freight and transport, cane development expenses, travelling expenses, other administrative expenses and financial and bank charges. In respect of the D unit, the expenses incurred by way of pre-operative expenses for the year 1991-92 were towards cane development expenses, travelling expenses, administrative and other expenses, legal and professional charges, electricity charges, rates and taxes, insurance premium, repairs and maintenance charges for building and machinery and motor vehicle and other office equipment maintenance, financial and bank charges, freight and transport, salaries, wages, bonus, etc., workmen welfare expenses, interest charges and depreciation. The various kinds of expenditure were incurred in the relevant years for the purpose of manufacture of sugar in the respective factories with a view to earn profits and, therefore, they were nothing but revenue expenditure."15
Olive Bar Kitchen Pvt Ltd
14. In this view of the matter and respectfully following the case laws discussed hereinabove, we are of the considered view that the AO was erred in disallowing deduction claimed towards pre-operative expenses in statement of total income u/s 37(1) of the Income-tax Act, 1961 even though the said expenditure has been treated as capital expenditure in books of account. The Ld. CIT(A), after considering relevant facts has rightly deleted addition made by the AO. Therefore, we are of the considered view that there is no error in the findings of the Ld.CIT(A) and hence, we are inclined to uphold the findings of the Ld.CIT(A) and dismiss appeal filed by the revenue.
15. The next issue that came up for our consideration from assessee's appeal in ITA No.5098/Mum/2017 is disallowance of expenses incurred in relation to exempt income u/s 14A r.w.r. 8(D)(2) of IT Rules, 1962. The AO has disallowed expenditure incurred in relation to exempt income by invoking rule 8D(2)(iii) @0.5% of average value of investments. According to the AO, though the assessee has disallowed direct expenses u/r 8D(2)(i), but expenses coming under the provisions of Rule 8D(2)(iii) has not been considered; therefore, he opined that disallowance is necessary u/r 8D(2)(iii) @0.5% of average value of investments. It is the contention of the assessee that it has already suo moto disallowed expenses incurred in relation to exempt income like 50% salary of 16 Olive Bar Kitchen Pvt Ltd Dipak Kadam, conveyance and other expenses. However, further disallowance by invoking rule 8D(2)(iii) amounts to double disallowance which is incorrect.
16. Having heard both the sides, we find that although the AO has accepted the fact that the assessee has made suo moto disallowance of Rs.2,75,214, without verifying whether disallowance made by the assessee are direct expenses or other expenses which falls under the provisions of Rule 8D(2)(iii), made further disallowance of Rs.2,69,162 by applying 0.5% of average value of investments. The assessee has filed details of expenses disallowed as per which, the expenses disallowed by the assessee are coming under the purview of rule 8D(2)(iii). Therefore, we are of the considered view that further disallowance of expenses by applying rule 8D(2)(iii) @0.5% amounts to double disallowance which is not permissible under the law. Therefore, we direct the AO to delete addition made u/s 14A r.w.r. 8D(2)(iii) of I.T. Rules, 1962.
17. The next issue that came up for our consideration is disallowance of ROC charges paid for increase in authorised capital. The AO has disallowed a sum of Rs.4,97,181 on the ground that fees paid for increase in authorised capital is capital in nature which cannot be allowed as deduction u/s 37(1) of the Act. The AO has taken support from the decision of Hon'ble Supreme Court in the case of Brooke Bond India Ltd vs CIT 225 ITR 798 (SC) where it was clearly held 17 Olive Bar Kitchen Pvt Ltd that mount paid for increase in authorised share capital is in the nature of capital expenditure which cannot be allowed as deduction u/s 37(1) of the Act. It is the contention of the assessee that although the Hon'ble Supreme Court has considered it as capital in Brooke Bond India Ltd vs CIT (supra), but the Apex Court in its subsequent judgement in the case of CIT vs General Insurance Corporation (2006) 286 ITR 232 (SC) considered the issue and held that when ROC fees is paid for increase in authorised capital for issuance of bonus shares, the said expenditure constitute revenue expenditure.
18. We have heard both the parties and perused the material available on record. The AO has disallowed fees paid for increase in authorised capital by following the ratio laid down by Hon'ble Supreme Court in the case of Brooke Bond India Ltd vs CIT (supra) where it was categorically held that ROC fees paid for increase in capital is capital expenditure in nature. But, the Hon'ble Supreme Court, in its subsequent judgement in the case of CIT vs General Insurance Corporation Ltd (supra) has considered similar issue and after considering the ratio of its earlier decision in Brooke Bond India Ltd vs CIT (supra) had given a categorical finding that if expenditure is incurred in connection with the issuance of bonus shares, then the said expenditure constitute revenue expenditure . The assessee has filed necessary details to prove that it has paid ROC fees for increase in authorised capital for issuance of 18 Olive Bar Kitchen Pvt Ltd bonus shares. But, we are not aware whether the said particulars are part of assessment proceedings before the AO or not. Therefore, we are of the considered view that the issue needs to be re-examined by the AO in the light of the decision of Hon'ble Supreme Court in the case of CIT vs General Insurance Corporation Ltd (supra). Hence, we set aside the issue to the file of the AO and direct him to consider the issue on the basis of working furnished by the assessee.
19. In the result, the appeal filed by the assessee in ITA No.5098/Mum/2017 is partly allowed; both the appeals filed by the revenue in ITA Nos 5164 & 5165/Mum/2017 are dismissed and appeal filed by the assessee in ITA No.5097/Mum/2017 is allowed.
Order pronounced in the open court on 05-12-2018.
Sd/- sd/-
(C.N. Prasad) (G Manjunatha)
Judicial Member ACCOUNTANT MEMBER
Mumbai, Dt : 05th December, 2018
Pk/-
Copy to :
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR
/True copy/ By order
Asstt. Registrar, ITAT, Mumbai