2017 (12) TMI 927 - AT - Income Tax

Disallowance of claim u/s. 35D - assessee has claimed the expenditure incurred for increasing the authorized share capital u/s.35D - Held that - The assessee has sought to make the claim u/s.35D which provides for allowance as preliminary expense fee paid for registering the company. In the present case, the company was registered on 20.03.2009. Hence, the fee paid for increase in capital in the current assessment year can by no stretch of imagination be said to be the fee paid for registering the company. Hence, the assessee s claim in this case as preliminary expenditure is not at all sustainable. See Brooke Bond India Ltd vs. CIT 1997 (2) TMI 11 - SUPREME Court - Decided against assessee. Disallowance u/s. 40(a)(ia) - non deduction of tds on recruitment and training expenses - Held that- Commissioner of Income Tax (Appeals) has erred in not adjudicating the alternate contention of the assessee that when payee has offered the alleged amount as income in their return of income and paid the required tax thereon, the assessee should not be treated as assessee in default and no disallowance u/s.40(a)(ia) is required. Furthermore, the case laws referred in this regard also need to be taken into account. Moreover, this aspect needs reference to factual records. Hence, I remit this issue of the ld. Commissioner of Income Tax (Appeals) to consider this aspect and pass a speaking order after giving the assessee proper opportunity of being heard.

Summary

Issues Involved:

1. Disallowance of amortized expenses claimed under Section 35D of the Income Tax Act.
2. Disallowance under Section 40(a)(ia) for non-deduction of tax on expenses paid to the Seamen Welfare Foundation.

Issue-wise Detailed Analysis:

1. Disallowance of Amortized Expenses Claimed Under Section 35D:

During the assessment proceedings, the Assessing Officer (AO) observed that the assessee claimed preliminary expenditure of ?49,367 under Section 35D of the Income Tax Act. This amount represented 1/5th of the total expenses incurred towards increasing the authorized share capital during the Financial Year 2009-10. The AO disallowed this claim, treating the expenses as capital in nature, relying on the Supreme Court decisions in Brooke Bond India Ltd vs. CIT and Punjab State Industries Development Corpn. Ltd. vs. CIT. The Commissioner of Income Tax (Appeals) upheld the AO's decision, stating that expenses incurred for increasing authorized share capital are capital in nature and not allowable as business expenses.

Upon appeal to the ITAT, the assessee contended that the AO disallowed the expenditure based on case laws where the expenditure was claimed under Section 37(1), not Section 35D. The assessee argued that the claim should be allowed under Section 35D, which provides for the amortization of certain preliminary expenses over five years. However, the ITAT found no infirmity in the orders of the lower authorities, stating that the fee paid for increasing capital cannot be considered as preliminary expenses for registering the company. Thus, the ITAT confirmed the disallowance of ?49,367.

2. Disallowance Under Section 40(a)(ia) for Non-Deduction of Tax:

The AO noticed that the assessee claimed ?16,00,000 as recruitment and training expenses in the Profit & Loss account without deducting TDS. The payment was made to Seamen Welfare Foundation under a Memorandum of Understanding (MOU) granting the assessee exclusive privilege to conduct campus interviews. The AO treated this payment as fees for professional or technical services under Section 194J and disallowed the expense for non-deduction of TDS.

The Commissioner of Income Tax (Appeals) upheld the AO's decision, citing the ITAT Hyderabad Bench's decision in M/s. Bajaj Consumer Care Ltd vs. DCIT, which held that recruitment services are professional services subject to TDS under Section 194J. The assessee argued that the payment was for exclusive privilege and not for professional services, and thus should not fall under Section 194J. Additionally, the assessee contended that the payee had included the amount in their income return and paid the required tax, invoking the second proviso to Section 40(a)(ia) which deems the assessee not in default if the payee has paid the tax.

The ITAT found merit in the assessee's alternate contention that when the payee has offered the amount as income and paid the tax, the assessee should not be treated as in default. The ITAT remitted the issue back to the Commissioner of Income Tax (Appeals) to consider this aspect and pass a speaking order after providing the assessee an opportunity to be heard.

Conclusion:

The ITAT dismissed the issue regarding the disallowance of expenses under Section 35D but allowed the appeal for statistical purposes concerning the disallowance under Section 40(a)(ia), remitting it back for reconsideration. The order was pronounced in the open court on 14.12.2017.