2010 (10) TMI 764 - AT - Income Tax

Disallowance - amortization of the premium paid on the purchase of investments - Section 44 of the Income Tax Act, 1961, makes provision for the computation of the profits and gains of any business of insurance - It was only the compulsion of law that required the assessee to invest its funds in specified securities so that there is sufficient cushion to cover the insurance liability - It was further contended that there is no specific provision in the Profit and Loss Account permitting amortization claim, including the instructions of the IRDA - Expenditure, which is deductible for income tax purposes, is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure - In General Insurance Corporation of India vs. CIT (1999 -TMI - 5762 - SUPREME Court), the Supreme Court held that even if an item of debit is considered as an expenditure, it should further be such an expenditure contemplated in sections 30 to 43A and, therefore, unless there was a specific prohibition for such an allowance, the departmental authorities would not be justified in adding back the amount under rule 5(a) - Decided in favor of the assessee Regarding amortization of the pre-operative expenses - The brief facts in this connection are that the assessee company was incorporated on 24th August 2000 and the certificate of commencement of business was issued on 3rd January 2001 - There is no dispute that the expenditure was incurred between the date of incorporation and the date on which the license to carry on the business was obtained from the Regulatory Authority. Thus it is clear that the expenses were incurred before the actual carrying on of the business - Only capital expenditure can be amortized under section 35D and that is a special allowance for capital expenditure, which is not otherwise allowed as a deduction - An assessee can correct any mistake or omission in the original return by filing a revised return, the validity of which has not been challenged - Decided in favor of the assessee

Issues Involved:
1. Disallowance of the assessee's claim for amortization of the premium paid on the purchase of investments.
2. Disallowance of the assessee's claim for amortization of pre-operative expenses.
3. Reduction of the assessee's claim for preliminary expenses by Rs.53,000/-.
4. Taxability of profit on the sale of investments.
5. Allowing of software expenses as revenue expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of the assessee's claim for amortization of the premium paid on the purchase of investments:
The assessee, a general insurance company, claimed amortization of Rs.1,91,33,945/- for premium paid on investments. The Assessing Officer (AO) disallowed this, adding it back to the profits, stating that such investments were not stock-in-trade and the amortization was not an allowable expense under sections 30 to 43B of the Income Tax Act. The Tribunal held that the amortization claim could not be considered as an expenditure or allowance under rule 5(a) of the First Schedule, referencing Supreme Court judgments in Indian Molasses Co. and General Insurance Corporation of India. The Tribunal concluded that there was no specific prohibition against allowing such expenditure under sections 30 to 43B, thus deleting the addition and allowing the assessee's claim.

2. Disallowance of the assessee's claim for amortization of pre-operative expenses:
The assessee incurred pre-operative expenses amounting to Rs.7,03,38,000/- before commencing business and claimed Rs.1,40,30,352/- as amortization for the year under appeal. The AO disallowed this, stating no provision in the Act allowed such expenses. The Tribunal, referencing the Delhi High Court judgment in Shriram Refrigeration Industries Ltd., held that revenue expenditure incurred before business commencement could be allowed in the year the business started. The Tribunal allowed the assessee's claim, stating that such expenses were not capital in nature and could not be disallowed under section 35D.

3. Reduction of the assessee's claim for preliminary expenses by Rs.53,000/-:
The AO reduced the assessee's claim for preliminary expenses by Rs.53,000/-, which included municipal registration fees and IRDA registration fees. The Tribunal noted that the assessee had not claimed a deduction for these expenses and thus, there was no basis for the reduction. The Tribunal deleted the disallowance, allowing the assessee's claim.

4. Taxability of profit on the sale of investments:
The assessee credited Rs.47,45,699/- profit from the sale of investments to the Profit and Loss Account but claimed it should be exempt under rule 5(b) of the First Schedule and CBDT Circular No.528. The AO added the profit back, stating the Circular was not applicable post-omission of rule 5(b). The Tribunal, referencing decisions by the Pune and Mumbai Benches, held that post-omission, such profits were not taxable. The Tribunal directed the AO to exclude the profit from the assessment, allowing the assessee's claim.

5. Allowing of software expenses as revenue expenditure:
The Department's appeal contested the allowance of Rs.49,30,679/- for software expenses as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, noting that the software expenses, such as for virus prevention and MS Office, did not provide an enduring benefit and were thus revenue in nature. The Tribunal referenced the Delhi High Court's decision in CIT vs. G E Capital Services Ltd., confirming the expenses as revenue expenditure and dismissing the Department's appeal.

Conclusion:
The Tribunal allowed the assessee's appeal on all grounds, deleting the disallowances and additions made by the AO. The Department's appeal was dismissed, confirming the allowance of software expenses as revenue expenditure. The judgment emphasized the application of relevant rules and judicial precedents in determining the allowability of various claims.

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