Income Tax Appellate Tribunal - Hyderabad
Bharat Prelam Industries Limited, ... vs Acit, Circle-1(3), Hyderabad, ... on 25 April, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "A", HYDERABAD
BEFORE SHRI D. MANMOHAN, VICE PRESIDENT
AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
ITA No. 894/Hyd/2017
Assessment Year: 2005-06
Bharat Prelam Industries Ltd., vs. Dy. Commissioner of Income-
Hyderabad. tax, Circle - 3(1), Hyderabad.
PAN - AACCB0900H
(Appellant) (Respondent)
Assessee by : Shri Sidharth Toshnival
Revenue by : Shri R. Mohan Reddy
Date of hearing 27/02/2018
Date of pronouncement 25/04/2018
O RDE R
PER S. RIFAUR RAHMAN, A.M.:
This appeal of the assessee is directed against the order dated 24/07/2017 of ld. CIT(A) - 3, Hyderabad relating to AY 2009-10.
2. Briefly the facts of the case are, assessee a company, engaged in the business of manufacturing of ply wood sheets, filed its return of income u/s 139 of the income-tax Act, 1961 (in short 'the Act') admitting a total income of Rs. 5,26,060/- for the AY 2005-06 on 01/11/2007, which was processed u/s 143(1) accepting the return of income. Subsequently, the case was selected for scrutiny and a notice u/s 143(2) was served on the assessee.
2.1 The assessee debited an amount of Rs. 17,54,402/- being 1/5 th of preliminary and preoperative expenses from FY 2002-03 to 2004-
05. According to AO, the entire expenditure was incurred in 2 ITA No. 894 /Hyd/2017 Bharat Prelam Industries Ltd.
connection with increase in the authorized share capital and paid up share capital, therefore, such expenses were capital in nature and cannot be allowed for the following reasons:
"1) In the absence of any disclosure either in the notes to accounts in the balance sheet or at point no. 15 of form no.3CD in the assessment years 2003-04 or 2004-05 the argument can not be accepted that it was related to preliminary expenses u/s 35D.
2) Without showing any proofs of the expenditure, its nature (whether capital or revenue) and seeking its capitalization and asking for the allowance of depreciation is not correct. The depreciation cannot be allowed on any expenditure without creating an asset. Though assessee incurs capital expenditure it can not become automatically a depreciable capital asset.
3) The method of accounting followed by the assessee may be correct as per the commercially accepted practice. But the income tax act provides different method of treatment while allowing the expenditure. Therefore there is an obligation on part of the assessee to follow the provision of the Income Tax Act and compute its total income accordingly.
4) If the assessee had incurred revenue expenditure in any assessment year, no one was stopped from claiming the same in the corresponding A. Y. As already stated, the conventions of the business are different from method of computation of total income prescribed by the I.T. Act. The choice of claiming the particular expenditure as per the provisions of I. T .Act is in the hands of assessee.
5) Till the assessment year 2005-06, assessee case was not selected for the regular scrutiny u/s 143(3) of the IT Act. Hence-
the argument of assessee stating that the income tax department had accepted its method of treatment of preliminary and incidental expenditure is not having any force. Mere receipt of intimation u/s 143(1) is not amounting to acceptance of anything stated in the return of income. The intimation is only corrects computation of taxes for the income returned by the assessee without going in to the allowability or disallowance of any expense or concealment of any income.
6) The consistency in computing the total income wrongly by the assessee does not give any right to the company to follow same method. In the opinion of the undersigned, assessing officer has the jurisdiction to correct the mistakes for any assessment year without considering what method assessee has followed in the previous assessment years by the assessee. Further every 3 ITA No. 894 /Hyd/2017 Bharat Prelam Industries Ltd.
assessment year is independent and the treatment accepted in the earlier years would not deter the assessing officer to compute correct total income.
7) Though the concept of differed revenue expenditure as per the accounting principles and amortization of certain preliminary expenses are similar to some extent but the range of operation of differed revenue expenses is wider and general in nature and can be applied to any expenditure if the management considers that those expenses yields benefits to the business for more than one accounting period. At the same time preliminary expenses stated in the Sec.35D restricted the amortization to the limited purposes and also to certain expenses specifically prescribed in the Ss.(2) of S.35D. So, assessee's method of accounting is not harmonious with the provisions of Income Tax Act.
2.2 In view of the above reasons, the AO did not accept the assessee's contention to claim the expenses of Rs. 17,54,402/- as preliminary expenses and the above amount was added back to the returned income.
3. Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(A).
4. Before the CIT(A) the assessee submitted that since the company started commercial production only in the FY 2004-05, all the expenses incurred till such date should be considered as preliminary expenditure and accordingly 1/5 th of the same should be claimed u/s 35D as the expenditure incurred relate to consultancy, engineering services and other expenses. Further, it was submitted that the claim u/s 35D was allowed in the earlier AYs 2003-04 and 2004-05 by the revenue, therefore, following the principle of consistency, the same should be allowed for present AY.
5. After considering the submissions of the assessee, the CIT(A) confirmed the action of the AO by observing that without proving the genuineness of the expenditure and not producing bills, not providing nature of expenditure, no expenses can be allowed. As regards the principles of consistency, he observed that in this case returns for AY 2003-04 and 2004-05 were processed u/s 143(1) and there was no 4 ITA No. 894 /Hyd/2017 Bharat Prelam Industries Ltd.
scrutiny assessment, hence, principles of consistency cannot be applied in this case.
6. Aggrieved by the order of CIT(A), the assessee is in appeal before us raising the following grounds of appeal:
1. The learned CIT(A) erred in confirming the addition of Rs.17,54,402/- made by Assessing Officer to the Returned Income.
2. That the learned CIT(A) erred in holding that Appellant's claim for deduction of preoperative expenses of Rs.16,88,945/-
cannot be allowed as no evidence was submitted in assessment proceedings despite the fact that the Appellant had submitted all the required information and details in the assessment proceedings as would be evident from the remark of Assessing Officer (at page 2 of the Assessment Order) that questionnaires were issued and information was collected from AR Mr. G Sridhar ITP.
3. That the learned CIT(Appeals) erred in holding that claim of deduction of Rs.65,457/- u/s. 35D for expenditure incurred towards fee paid to Registrar of Companies for enhancement of Authorized Capital cannot be allowed.
4. That the assessee has maintained complete and correct books of accounts and employed regular method of accounting, and method is such from which true profits can be deduced and further accounts are subject to Company audit as well as Income-tax audit in terms of sec.44AB and in that Audit Report no discrepancy or any default being found, the learned CIT(A) should have taken note of this factor and should have not confirmed the disallowance as made by A.O.
5. The reasons assigned by the learned CIT(A) are wrong, insufficient and illegal.
6. Any other ground that may arise at the time of hearing of the appeal."
7. Ld. AR relied on the decision of the Hon'ble Supreme Court in the case of Madras Investment Corporation Ltd. Vs. CIT, 225 ITR 802 (SC). He also relied on the Board's Circular No. 387, dated 06/07/1984.
8. Ld. DR relied on the orders of revenue authorities.
5 ITA No. 894 /Hyd/2017Bharat Prelam Industries Ltd.
9. Considered the rival submissions and perused the material on record. With regard to Ground No. 2, we noticed from the submission that the assessee has incurred certain revenue expenditure prior to commencement of commercial production and post-setup. But by mistake it has claimed the same u/s 35D. As far as expenditures are concerned, these were incurred post-setup and assessee has submitted the details of claiming 1/5 th of deferred revenue expenditure but assessee has not submitted any evidence for incurring such expenditure before lower authorities. AO has disallowed the claim of the assessee since these expenses are not allowable u/s 35D or u/s 37 of the Act and also no evidence was submitted before him for incurring such expenditure except financial statements and details of claiming such expenditure. Ld. CIT(A) has dismissed the appeal only on the ground that the assessee has not submitted the details for incurring the expenditure whether the expenses are capital or revenue in nature. Basically, assessee has not submitted any proof for incurring the expenditure in AY 2003-04 and 2004-05. Instead of submission of such proof, it had contended only on the point that these expenses are allowable due to following consistent method of accounting, It was pointed out that in earlier AY, the revenue accepted the return of income filed and hence assessee is allowed to defer the expenditure. We find that the AO & CIT(A) has dismissed the contention of the assessee on two counts i.e. no proof for such expenditure and concept of deferment of expenditure is not available in the IT Act. The assessee has failed to substantiate the claim of genuineness of expenditure and only contested the second issue of deferment of expenditure before the appellate authorities. We notice from ground No. 2 that assessee has claimed to have filed the relevant information before the AO. However, from the information submitted before us, it has submitted only the financial statement of last two years and details of claiming 1/5 th of the preliminary expenses. Even before us, it has filed ground only on the allowability 6 ITA No. 894 /Hyd/2017 Bharat Prelam Industries Ltd.
of the deferred revenue expenditure and not about the submission of proof of incurring expenditure and nature of such expenditure.
9.1 Since, assessee has raised ground on deferment expenditure, in our considered view, the post set-up revenue expenditure is allowed as revenue expenditure as per the case law below:
1. CIT Vs. Relaxo Footwears Ltd., 293 ITR 231 (Delhi.)
2. Carefour WC & C India Pvt. Ltd., ITA No. 42/2014, dated 22/09/14 (Delhi HC) 9.2 With regard to deferment of expenses, we find that a company can defer the revenue expenditure provided the benefit out of the revenue expenditure is spread over to subsequent years, otherwise, the post set-up expenditure can be allowed as expenditure in the year in which commercial production commences. For this proposition, reliance is placed on the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. Vs. CIT, 225 ITR 802.
9.3 From the above discussion, it is clear that the assessee is eligible to claim post set-up expenditure in the year of commercial production. In this case, assessee has commenced the commercial production in the FY 2003-04 i.e. AY 2004-05. Therefore, assessee is eligible to claim the post set-up expenses only in AY 2004-05Now, the assessee has claimed 1/5 th of the expenditure in AY 2005-06, which is not allowable as deduction in the AY 2005-06. Even otherwise, assessee has not submitted any proof for incurring the expenditure in AY 2002-03 & 2003-04. Considering both the counts, ground raised by the assessee is dismissed.
10. With regard to ground No. 3, these expenses incurred towards fee for enhancement of share capital to ROC is capital expenditure and, hence, this ground is dismissed.7 ITA No. 894 /Hyd/2017
Bharat Prelam Industries Ltd.
11. Ground No. 4 becomes infructous as issue is already addressed and adjudicated in para No. 9 (supra) and therefore, the same is dismissed. Ground Nos. 5 & 6 are general in nature.
12. In the result, appeal of the assessee is dismissed.
Pronounced in the open Court on 25 th April, 2018.
Sd/- Sd/-
(D. MANMOHAN) (S. RIFAUR RAHMAN)
VICE PRESIDENT ACCOUNTANT MEMBER
Hyderabad, Dated: 25 th April, 2018
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Copy to:-
1) Bharat Prelam Industries Ltd., C/o NV Chalapati Rao, 5-3-362, Laxmi Nagar, Near Narayan Girls Junior College, Kukatpally, Hyderabad - 500 072
2) ACIT, Circle - 1(3), Hyd.
3) CIT(A) - 3, Hyderabad
4) Pr. CIT - 1, Hyd.
5) The Departmental Representative, I.T.A.T., Hyderabad.
6)) Guard File