2012 (9) TMI 524 - HC - Income Tax

Expenditure on Joint Venture for Insurance business and other expenses - market research expense on life insurance business in India - ITAT allowed it as deductible expenditure in the hands of assessee - Held that - the mere circumstance that common funding of the (proposed) business existed, and there was a management which conceived the start of the new business activity, did not make the proposed joint venture business an existing business for the expenditure to qualify as revenue expenditure - These expense are pre-start up expenses in respect of an aborted activity - against assessee. Deduction towards provision for salary, Provident Fund, Monesana Wage Board - Held that - The character of the amounts in this case is pure and simple arrears of wages, which were directed to be paid as a result of wage revision exercise mandated by an award. - the Tribunal was justified in holding that the liabilities arising out of the Monesana Wage Board award were justifiably deductible as expenditure, and not covered by Section 43-B - As the Tribunal itself did not grant relief in respect of contributions to Provident funds, and allowed only such portions as were actually paid - against revenue.

Issues Involved:
1. Deduction towards provision for salary, Provident Fund, etc., not actually paid during the assessment year.
2. Deductibility of Rs. 43,01,632/- paid by the assessee as its share of the joint venture towards business capital and drafting expenses.
3. Deductibility of Rs. 5,76,975/- paid to IMRB for market research on life insurance business in India.

Detailed Analysis:

Issue 1: Deduction Towards Provision for Salary, Provident Fund, etc., Not Actually Paid
The Tribunal allowed the deduction for wage arrears liability amounting to Rs. 60,03,453/-, holding that the liability accrued in the assessment year under consideration since the award was made in that year, despite the mode and manner of payment being deferred. The Tribunal relied on the Andhra Pradesh High Court decision in S. Subba Rao & Co. v. Union of India and the Special Bench ruling in Dy. CIT v. Glaxo Smith Kline Consumer Healthcare Ltd. The Revenue argued that Section 43B mandates that such expenses are deductible only on actual payment. The Court held that the nature of the expenses, i.e., arrears of salary and other benefits payable to employees, is not covered by Section 43-B as they are not contributions to provident fund, superannuation, or any other fund. The Court upheld the Tribunal's decision that the liabilities arising out of the Monesana Wage Board award were deductible as expenditure.

Issue 2: Deductibility of Rs. 43,01,632/- Paid by the Assessee as Its Share of the Joint Venture
The Tribunal allowed the deduction for Rs. 43,01,632/- paid towards the joint venture for insurance business, treating it as part of the existing business. The Tribunal relied on several judgments, including CIT v. Tata Chemicals and Produce Exchange Corporation Ltd. v. Commissioner of Income-tax. The Revenue argued that expenditure towards a proposed business that was never fulfilled is capital in nature and not deductible. The Court found that the proposed insurance business was a different commercial activity with no details showing common personnel or other commonalities besides common funding. The Court held that the expenses were pre-start-up expenses in respect of an aborted activity and thus capital in nature, not qualifying as revenue expenditure. The Court distinguished the case from Priya Village Road Show, where the existing business was sought to be expanded.

Issue 3: Deductibility of Rs. 5,76,975/- Paid to IMRB for Market Research
The Tribunal allowed the deduction for Rs. 5,76,975/- incurred towards market research fees, treating it as part of the existing business. The Tribunal relied on CIT v. Relaxo Footwears Limited. The Revenue argued that such expenses were capital in nature. The Court held that the market survey was for a different kind of business and thus constituted pre-start-up expenses for an aborted activity, falling within the proscribed category. The Court found the decision in Priya Village Road Show distinguishable, as it dealt with expanding an existing business, whereas the market survey in this case was for a different proposed business.

Conclusion:
The Court answered the first two questions in favor of the Revenue, holding that the expenses towards the joint venture and market research were capital in nature and not deductible. The third question was answered in favor of the assessee, upholding the Tribunal's decision that the wage arrears liability was deductible as expenditure. The appeal was partly allowed, adding back the amounts related to the first two questions to the income of the assessee for taxation.

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