2010 (11) TMI 706 - AT - Income Tax

Adjustment to deferred tax liability - Book profit u/s 115JB - Deduction u/s 35D - Tribunal in assessee s own case decided the issue in favour of Revenue by virtue of the amendment made in section 115JB through insertion of clause (h) in the Explanation thereto with retrospective effect from 01.04.2001 by the Finance Act 2008 - Decided against the assessee Regarding consultancy charges - Capital or revenue expenditure - The land was ultimately not acquired due to some legal intricacies. It was not due to scrapping of any new project that we did not acquire the land - Applying the Test of enduring benefit as laid down in many judicial pronouncements for determining the nature of expenditure it can be regarded that the expenditure is not a capital expenditure in absence of any enduring benefit from the same - it is a settled law that profits should be computed after deducting the losses and expenditure incurred for the purpose of business unless the losses and expenditure ore expressly or by necessary implication disallowed by the Act - It is well settled law that capital expenditure is not allowable while computing the income under the head profit and gains of business and profession - Assessing Officer will examine the same and ascertain the true nature of payment if required may make cross verification from M/s. Vital Link Associate and re-adjudicate this addition afresh in accordance with law It is pertinent to note that the expenses amounting to Rs.1, 10, 000/- was incurred for the purpose of business and no personal benefit is derived by the assessee-company - his social function was organized to promote the business of the assessee-company. In these circumstances we are of the view that the Learned Commissioner of Income Tax (Appeals) should have taken a lenient view and allow the entire expenses of Rs.1, 10, 000 - Decided in favour of the assessee Regarding deduction u/s 35D - The company is operational and expenses were incurred for increasing the capital and not for raising the initial capital or for registering the Company with Registrar of Companies - High Court in the case of CIT vs. Hindustan Insecticides Ltd. (2001 -TMI - 14155 - DELHI High Court) wherein it is held that under section 35D(2)(c)(iii) of the Act only fees paid for registration of a company is deductible. Fees paid for increase in share capital is not fees for registration of the company and hence is not amortizable under this provision - Decided against the assessee

Issues Involved:
1. Adjustment to book profit on account of deferred tax liability.
2. Disallowance of claim under Section 35D.
3. Disallowance of consultancy charges related to land acquisition.
4. Disallowance of expenses for non-business purposes.

Issue-wise Detailed Analysis:

1. Adjustment to Book Profit on Account of Deferred Tax Liability
The assessee contested the adjustment of Rs. 15,83,20,881/- towards deferred tax liability while computing book profit under Section 115JB of the Income Tax Act. The Tribunal referred to its own decision dated 14.08.2008 in the assessee's case for the assessment year 2005-06, where it decided in favor of the Revenue due to the amendment in Section 115JB through the insertion of clause (h) in the Explanation with retrospective effect from 01.04.2001. Consequently, the Tribunal upheld the adjustment, rejecting the assessee's appeal on this ground.

2. Disallowance of Claim Under Section 35D
The Assessing Officer disallowed the claim of Rs. 15,11,500/- under Section 35D, asserting that the expenditure was for increasing share capital and not for setting up or extending an industrial undertaking. The Commissioner of Income Tax (Appeals) allowed the claim, stating that the expenses were justified under Section 35D(2)(c)(ii). However, the Tribunal, relying on the Delhi High Court's decision in Hindustan Insecticides Ltd. and the Supreme Court's rulings in Punjab State Industrial Development Corporation Ltd. and Brooke Bond India Ltd., concluded that the assessee was not entitled to the deduction under Section 35D for expenses related to increasing authorized share capital. Thus, the Tribunal restored the disallowance made by the Assessing Officer.

3. Disallowance of Consultancy Charges Related to Land Acquisition
The Assessing Officer disallowed Rs. 21,80,505/- claimed as consultancy charges for land acquisition, considering it capital in nature. The Commissioner of Income Tax (Appeals) allowed Rs. 14,92,800/- but disallowed Rs. 6,87,704/- as contingent liability. The Tribunal noted the absence of supporting documents like bills or agreements with M/s. Vital Link Associates and remanded the matter to the Assessing Officer for re-examination. The Tribunal directed the assessee to furnish the necessary documents to ascertain the true nature of the payment and re-adjudicate the issue accordingly.

4. Disallowance of Expenses for Non-Business Purposes
The Assessing Officer disallowed Rs. 1,10,000/- incurred on various festivals and events, considering them non-business expenses. The Commissioner of Income Tax (Appeals) deleted Rs. 85,000/- but confirmed Rs. 25,000/- for the International Kite Festival. The Tribunal, considering the expenses as business promotion for a State Government Undertaking, allowed the entire amount of Rs. 1,10,000/-. Thus, the Tribunal dismissed the Revenue's appeal on this ground and allowed the assessee's appeal.

Conclusion:
Both appeals were partly allowed for statistical purposes, with the Tribunal providing detailed directions for re-examination and adjudication of certain issues. The Tribunal upheld the adjustment for deferred tax liability, disallowed the claim under Section 35D, remanded the consultancy charges issue for further examination, and allowed the entire amount of expenses incurred for business promotion.

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