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2009 (12) TMI 912 - AT - Income TaxDisallowance u/s 35D - fee paid to Registrar of Companies for increasing authorized share capital - HELD THAT - This issue is squarely covered against the assessee by the decision of the Hon ble Apex Court in the case of Punjab State Industrial Development Corporation Ltd. 1996 (12) TMI 6 - SUPREME COURT . In this case it was held that amount paid by the company to ROC as filing for enhancement of capital base of company cannot be allowed as revenue expenditure. Respectfully following the precedent we uphold the order of the ld. CIT(A) on this issue and decide the issue against the assessee. Disallowance of expenditure on acquisition of fire extinguishers - Nature of expenses - CIT(A) confirm the disallowance upholding that the expenditure was capital in nature - HELD THAT - We find that expenditure on fire extinguishers did not bring into existence any asset or an advantage which is enduring benefit of trade so as to be classified in capital field. It is meant to be utilized in the event of accident/occurring of any fire as a preventive measure. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee s trading operations or enabling the management and conduct of the assessee s business to be carried on more effectively or more profitably while leaving the fixed capital untouched the expenditure would be on revenue account even though the advantage may endure for an indefinite future. Examining the present issue on the touchstone of above exposition we do not see any reason why the expenditure should not be allowed as revenue expenditure - Decide the issue in favour of the assessee. Expenditure for club services - CIT(A) upholding that the expenditure for club services as expenditure not for the purpose of business but is of personal nature - HELD THAT - As we are of the opinion that use of club services for the promotion of business in the modern age cannot be denied. Further the expenditure in comparison with the turnover of the assessee is a very miniscule amount. For assessment year 2002-03 ld. CIT(A) himself deleted the half of the disallowance. Furthermore the proposition that these expenditure incurred by the assessee company are personal in nature is not sustainable on the anvil of Sayaji Iron Engg and Company 2001 (7) TMI 70 - GUJARAT HIGH COURT . In this case it was held that when the vehicles belonging to assessee company are used by its directors for personal or other purposes it would be wrong to hold that vehicles are personally used by company because a limited company by its very nature cannot have any personal use of cars by directors. Advertisement and publicity expenses - nature of expenditure that provide benefit of enduring nature and need to be amortised over a period of 5 years and in rejecting the claim of the assessee that it is a revenue expenditure allowable in entirety in the current year itself - HELD THAT - The nature of expenditure does not fall under the ambit of preliminary expenses as envisaged u/s 35D. When the expenditure was incurred and there is nexus between the expenditure and the assessee s business we do not see any reason whey the entire expenditure should not be allowed in full during the concerned year The case law in Salora International 2008 (8) TMI 138 - DELHI HIGH COURT supported the case that when expenditure has actually been incurred and there was direct nexus between the expenditure and assessee business the expenditure has to be allowed in full and not deferred by spreading over certain number of years. Therefore it is clear that it was assessee s claim that certain expenditure on advertisement were actually expenditure u/s 35D. Hence we set aside the orders of authorities below and decide the issue in favour of the assessee. Disallowance on account of commission paid to Direct Selling Agents and stamping fee - Spreading over of expenses - as per AO assessee has been financing the hire purchase of vehicles and homes etc. and the period of such financing is ranging from less than one year to more than one year upto 5 years and in view of the fact that the financing is spread over a period of five years allowed only 1/3rd of this expenditure and disallowed 2/3rd thereof - HELD THAT - Neither of the authorities below have disputed either to nature of services rendered by agents or how the liability to pay the commission is computed. It has also not disputed that how the brokerage is payable and is linked to what. The only case made out by the revenue is that expenditure should be spread over a certain period of time. In our opinion there is no cogency in the case made out by the revenue. It is an accepted position that assessee s treatment in its accounts books is not determinative of the actual nature of the transaction. It is also admitted that there is nexus between the expenditure and the assessee s business. Under such circumstances there is no reason why the expenditure incurred would not be allowed as a whole. Thus we find that expenditure which have been made in the concerned years were paid to the selling agents for sourcing the customers from whom the assessee had generated the income by way of granting of loan finances. The amount paid as commission is not refundable in any circumstances. Undisputedly income in this regard has been accounted for in the current years also - we find that the expenditures on commission and stamping fee have to be allowed in full in the impugned assessment years as deferral of the same over a number of year is not sustainable. Leasehold Improvement expenses - whether allowable revenue expenses? - As per AO in the earlier years also the assessee company has done lease hold improvements but has capitalized the same and claimed 10% deprecation on it - HELD THAT - We find that the ld. CIT(A) has given a categorically finding that the assessee has duly produced all the necessary details and that the assessee has duly identified the capital portion of the expenditure incurred and the amount on the improvements expenses which were of revenue in nature. We also find that it is a settled law that powers and duties of the CIT(A) are co-terminus with that of AO. Hence in our considered opinion there is no need to interfere with the finding of the ld. CIT(A). Accordingly we uphold the same. In the result the appeals filed by the assessee are allowed and appeals filed by the revenue are dismissed.
Issues Involved:
1. Disallowance of claim under section 35D of the IT Act for fee paid to Registrar of Companies. 2. Classification of expenditure on fire extinguishers as capital or revenue expenditure. 3. Disallowance of club service expenses as personal expenditure. 4. Amortization of advertisement and publicity expenses over a period of five years. 5. Disallowance of commission paid to Direct Selling Agents and stamping fee. 6. Treatment of leasehold improvement expenses as revenue or capital expenditure. Issue-wise Detailed Analysis: 1. Disallowance of claim under section 35D of the IT Act for fee paid to Registrar of Companies: The assessee's claim under section 35D for fees paid to the Registrar of Companies for increasing authorized share capital was disallowed. The decision was based on the precedent set by the Hon'ble Apex Court in the case of Punjab State Industrial Development Corporation Ltd., which held that such fees cannot be allowed as revenue expenditure. The Tribunal upheld the CIT(A)'s order, deciding the issue against the assessee. 2. Classification of expenditure on fire extinguishers as capital or revenue expenditure: The expenditure on fire extinguishers was initially disallowed by the AO, who classified it as capital expenditure. The CIT(A) upheld this decision, stating that fire extinguishers are not consumed in day-to-day business and have lasting value. However, the Tribunal found that the expenditure did not bring into existence any asset or advantage of enduring benefit and should be classified as revenue expenditure. This decision was supported by the Hon'ble Apex Court's exposition in the case of Empire Jute Company Ltd. vs. CIT. The Tribunal set aside the CIT(A)'s order and decided the issue in favor of the assessee. 3. Disallowance of club service expenses as personal expenditure: The AO disallowed club service expenses, considering them personal in nature. The CIT(A) affirmed the disallowance for the assessment year 2001-02 but allowed 50% of the expenses for the assessment year 2002-03. The Tribunal, however, opined that the use of club services for business promotion cannot be denied and that the expenses were minuscule compared to the assessee's turnover. Citing the Hon'ble Gujarat High Court's decision in Sayaji Iron Engg. and Company vs. CIT, the Tribunal concluded that the disallowance was not sustainable and deleted the addition. 4. Amortization of advertisement and publicity expenses over a period of five years: The AO amortized advertisement and publicity expenses over five years, allowing only 1/5th of the expenditure in the current assessment year. The CIT(A) upheld this decision, referencing the case of Madras Fertilizers Ltd. vs. ACIT. However, the Tribunal found that the advertisement expenses incurred during the year did not fall under preliminary expenses as per section 35D. Citing the jurisdictional High Court's decision in CIT vs. Salora International Ltd., the Tribunal allowed the entire expenditure in the current year, setting aside the orders of the CIT(A) and AO. 5. Disallowance of commission paid to Direct Selling Agents and stamping fee: The AO spread the commission paid to Direct Selling Agents and stamping fee over three years, disallowing 2/3rd of the expenditure. The CIT(A) confirmed this decision. The Tribunal, however, found that the commission expenses were incurred during the impugned financial year and were not linked to the period of loan disbursement. The Tribunal cited various case laws, including the Hon'ble Apex Court's decision in Calcutta Co. Ltd. vs. CIT, and concluded that the expenditures should be allowed in full in the impugned assessment years. The Tribunal set aside the orders of the CIT(A) and allowed the assessee's appeal. 6. Treatment of leasehold improvement expenses as revenue or capital expenditure: The AO treated leasehold improvement expenses as capital expenditure and allowed 10% depreciation. The CIT(A) found that the assessee had bifurcated the expenditure into capital and revenue and allowed the expenses as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, noting that the CIT(A) had duly considered the details and found the expenses to be of revenue nature. The Tribunal found no need to interfere with the CIT(A)'s findings. Conclusion: The Tribunal allowed the appeals filed by the assessee and dismissed the appeals filed by the revenue, providing detailed reasoning and citing relevant case laws to support its decisions. The order was pronounced in the Open Court on 18/12/2009.
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