2016 (5) TMI 99 - AT - Income Tax

Disallowance u/s 14A - Held that - In respect of the assessment year 2007-08 in our opinion rule 8D has no application since this was inserted with effect from March 24 2008. Since rule 8D has no retrospective effect it cannot be applied for the assessment year 2007-08. Accordingly for the assessment year 2007-08 we direct the Assessing Officer to disallow 2 per cent. This ground of appeal is partly allowed for the assessment year 2007-08. Coming to the assessment years 2008-09 and 2009-10 the disallowance under section 14A read with rule 8D should not exceed the exempt income. The Mumbai Bench in its order in Daga Global Chemicals P. Ltd. v. Asst. CIT 2015 (1) TMI 1204 - ITAT MUMBAI sustained the disallowance on applicability of the provisions of section 14A read with rule 8D. However the alternative claim of the assessee was that disallowance if at all should be made it should be restricted to exempt income earned and not beyond that. Accordingly the Assessing Officer is directed to look at this issue on this angle and decide it afresh in the light of the above decision of the Mumbai Bench of the Tribunal - Decided partly in favour of assessee Allowance of expenditure in respect of preliminary expenses under section 35D - Held that - There is no doubt that expenses were not incurred before the commencement of the business. Therefore the first condition is not complied with. The second condition is that the expenses incurred after commencement of the business should be incurred in connection with extension of its business or in connection with setting up of a new unit. There is no case of setting up of a new unit. The question is whether there was an extension of its existing undertaking ? A great emphasis has to be given on the expression undertaking . Business expansion and market expansion of an existing business will not amount to extension of the undertaking . The expression undertaking denotes a visible expenditure on the physical facilities for manufacture and production. An undertaking is always having an area of physical structure which produces goods and services by utilising the necessary factors of production. Enhancement of the geographical area of marketing does not amount to expansion or extension of the undertaking. The expression used in the statute is extension of its undertaking . It clearly manifests that an apparent extension or expansion must take place by establishing new undertaking. There is no such case as far as the present case is concerned. The expansion in the present case is acquisition of existing undertaking. Therefore we find that the expenditure incurred by the assessee-company in connection with the issue of shares do not qualify to be amortised under section 35D. - Decided in favour of the Department. Alternate plea of the assessee is to allow the same under section 37 of the Act and the expenditure was incurred for services rendered in connection with the issue of shares to raise the capital block of the assessee-company - Held that - Once shares are issued for cash the assessee-company gets the funds in its hands and once the funds have come into the hands of the assessee-company the process of issue of share capital is complete. Therefore the scope of expenditure incurred for raising the share capital by issuing shares must also stop at that point. The scope should not be enlarged further. It is the wisdom of the company to decide in which manner the funds available with it collected by way of issue of shares should be applied. If the funds are utilised for working capital requirements it is only an appropriation of funds available in the hands of the company. Raising the capital and utilising the funds are different. Application of funds does not decide the character of the money collected against the issue of shares. Money collected against the issue of shares always remains as capital. Therefore the argument of the learned authorised representative that the expenditure incurred for issue of shares to and raise share capital for working capital requirements need to be allowed as revenue expenditure cannot be accepted. Accordingly this ground of appeal of the assessee is rejected and the ground of appeal of the Revenue is allowed. Disallowance of depreciation on application of software at lower rate - disallowance of depreciation on behalf of the entire purchase value of application of software and reducing the rate - Held that - As seen from the order of the Commissioner of Income-tax (Appeals) during the course of the assessment proceedings the assessee voluntarily offered to reduce its claim towards depreciation on the software at the rates prescribed in new Appendix I under the Income-tax Rules 1962 and depreciation on the intangible assets being IPR at the rate of 25 per cent. as prescribed under the Rules. Accordingly the assessee has revised its claim of depreciation on software and intangible asset of IPR. However the Additional Commissioner of Income-tax denied the depreciation on the IPR represented by the software GBM on the ground that depreciation to an extent of 100 per cent. in respect of this asset was already claimed by TGSL and in view of Explanation 3 placed under section 43(1) the actual cost of this asset in the hands of the assessee has to be reckoned as nil only. This conclusion of the Additional Commissioner of Income-tax was based on the financial statement of TGSL. The contention of the assessee is that the treatment given by TGSL in its account cannot be a reason to deny the depreciation on the cost incurred by the assessee. In our opinion this argument of the assessee s counsel cannot be upheld. The actual cost of assets acquired from TGSL to be considered in terms of Explanation 3 to section 43(1) of the Act. Being so the lower authorities are justified in observing that the assessee is not entitled for depreciation which was already claimed by TGSL and thereby restricting the depreciation at 25 per cent. on IPR and 60 per cent. on other software - Decided against assessee Disallowance of depreciation on temporary wooden structures - main contention of the assessee is that whatever improvement took place in the leasehold premises and all the assets created therein are temporary in nature and it does not result in enduring benefit - Held that - It is essential that the expenditure incurred on the construction of any structure on the leased premises should result in enduring benefit. That any expenditure incurred for civil work by a lessee in respect of the leased premises without any further proof cannot be said to be capital expenditure or revenue expenditure. In order to find out the nature of expenditure it is necessary to find out the nature of construction put up the purpose of construction/renovation and the use to which the construction put up and also if it is a case of repair replacement addition or improvement has to be gone into. It is only on the afore said material keeping in mind the principles enunciated in the judgments by the Supreme Court and keeping in mind section 37 and section 32 of the Act that one has to determine whether the expenditure is revenue expenditure or capital expenditure. What would apply to civil work equally applies to electrical work or interior decoration. The assessee had not stated the nature of civil works constructed the nature of interior decoration made to the leasehold premises and also the nature of electrical work undertaken. In the absence of that material and without proper application of mind the assessing authority proceeded on the footing that the expenditure constituted capital expenditure. In view of the above we remit the issue in dispute to the Assessing Officer to consider whether the expenditure is revenue or capital in nature and decide afresh. Apportioning common expenses towards STPI unit not on the basis of turnover followed by the company - Held that - The Commissioner of Income-tax (Appeals) has given a finding that apportionment of expenses to be done on the basis of turnover of the STPI unit and non-STPI unit. In our opinion this is fair and appropriate finding which is confirmed

Summary

Issues Involved:
1. Disallowance of prior period expenses.
2. Directions under section 144A.
3. Disallowance under section 14A read with rule 8D.
4. Allowance of preliminary expenses under section 35D.
5. Depreciation on application software.
6. Depreciation on temporary wooden structures.
7. Apportionment of common expenses towards STPI unit.

Detailed Analysis:

1. Disallowance of Prior Period Expenses:
The assessee claimed Rs. 9,65,903 as prior period expenses for the assessment year 2006-07, which was disallowed by the Assessing Officer (AO) since they did not pertain to that year. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the disallowance, noting that it originated from the original assessment order under section 143(3) dated December 12, 2008, and not from the order passed under section 263. The Tribunal rejected the assessee's ground, stating it could not challenge the addition as it did not emanate from the order passed under section 143(3) read with section 263.

2. Directions under Section 144A:
The assessee's appeal concerning directions given by the Additional Commissioner of Income-tax under section 144A was dismissed as not pressed.

3. Disallowance under Section 14A read with Rule 8D:
For the assessment year 2007-08, the AO disallowed expenses related to earning exempt income by invoking section 14A read with rule 8D. The CIT(A) confirmed the disallowance at 5% of the gross dividend. The Tribunal noted that rule 8D, effective from March 24, 2008, could not be applied retrospectively for the assessment year 2007-08 and directed the AO to disallow 2% of the exempted income. For the assessment years 2008-09 and 2009-10, the Tribunal, following the Mumbai Bench's decision in Daga Global Chemicals P. Ltd., held that disallowance under section 14A read with rule 8D should not exceed the exempt income and directed the AO to reconsider the issue.

4. Allowance of Preliminary Expenses under Section 35D:
The AO disallowed Rs. 1,00,28,477 claimed under section 35D for IPO-related expenses, following the Additional Commissioner's direction. The CIT(A) partially allowed the claim, permitting amortization of advertisement expenses, printing charges, and underwriting commission. The Tribunal, however, held that the expenditure did not qualify for amortization under section 35D as it was not incurred before the commencement of the business or for setting up a new unit, and also rejected the alternative plea to allow the same under section 37.

5. Depreciation on Application Software:
The AO restricted the depreciation claimed on application software, following the Additional Commissioner's directions. The CIT(A) upheld this restriction. The Tribunal agreed with the lower authorities, stating that the actual cost of assets acquired from TGSL should be considered as "nil" under Explanation 3 to section 43(1) and upheld the restriction of depreciation at 25% on IPR and 60% on other software.

6. Depreciation on Temporary Wooden Structures:
The AO granted depreciation at 10% on improvements made to leasehold properties, which the assessee claimed at 100%. The CIT(A) treated the expenditure as capital, allowing depreciation as applicable to furniture and fixtures. The Tribunal remitted the issue back to the AO to determine whether the expenditure was revenue or capital in nature, considering the Tribunal's earlier decision in K. R. Bakes P. Ltd.

7. Apportionment of Common Expenses towards STPI Unit:
The AO reallocated common expenses to the STPI unit based on the Additional Commissioner's directions. The CIT(A) upheld the assessee's method of apportioning expenses based on turnover. The Tribunal confirmed the CIT(A)'s finding, stating the apportionment based on turnover was fair and appropriate.

Conclusion:
The appeals of the assessee were partly allowed for statistical purposes, and the appeals of the Revenue were partly allowed. The Tribunal provided detailed directions on each issue, ensuring compliance with relevant legal provisions and judicial precedents.