2018 (2) TMI 50 - AT - Income Tax

Allowable busniss expenditure - expenses relatable to increase in Share Capital - revenue v/s capital expenditure - Held that - We find that it is noted by CIT (A) in Para no. 4.1 of his order that the assessee company had sought private equity investment from different investors and the prospective investors had conducted various audits and due diligence study to ensure the viability of such investment. It is also noted by CIT(A) that M/s. Napean Trading and Investment Co Pvt. Ltd. was engaged by the prospective investors for making such due diligence study and the assessee had apparently reimbursed the expenses incurred in this regard to the investors. From these facts it comes out that the expenses in question are incurred in respect of increase in capital base of the assessee company. The judgment in the case of Brooke Bond India Ltd. vs. CIT (1997 (2) TMI 11 - SUPREME Court) is squarely applicable and as per this judgment the expenses relatable to increase in Share Capital are not allowable as revenue expenditure because the same are capital expenditure. - Decided against assessee. Invoking the provisions of section 79 - Held that - We find that the AO has invoked the provisions of section 79 of the IT Act for the purpose of disallowing the set off of brought forward business loss and depreciation. In the facts of the present case as noted above we find that more than 51% of shares in fact to the extent of 55.90% of the total shares only two persons were holding those shares as on 31.03.2008 being the year in which loss was incurred and as on 31.03.2009 being the year in which the set off of brought forward depreciation is being claimed and hence the claim of the assessee cannot be disallowed by invoking the provisions of section 79 of the IT Act. Therefore on this issue we decide the issue in favour of the assessee. Denial of carry forward of unabsorbed depreciation loss u/s. 72A on the ground that the amalgamating company M/s. Banashankari Medical Oncology Research Centre Limited (BMORCL) is not an industrial undertaking as per the provisions of the said section - Held that - As we consider the applicability of the judgment cited by ld. DR of revenue rendered in the case of ACIT Vs. Apollo Hospitals Enterprises Ltd. (2008 (3) TMI 56 - MADRAS HIGH COURT) in this case the issue before Hon ble Madras High Court was the same as in the present case as to whether the hospital can be considered as an industrial undertaking under clause (aa) of sub section 7 of section 72A. In that case a scheme was approved to amalgamate M/s. Deccan Hospital Corporation Limited (in short DHCL ) running a Hospital at Jubilee Hills Hyderabad with the assessee company i.e. Apollo Hospitals Enterprises Ltd. of Chennai and the issue in dispute was regarding the set off of unabsorbed depreciation of 11.60 crores on account of amalgamation of DHCL with Apollo Hospitals Enterprises Ltd. and it was held by Hon ble Madras High Court that neither Apollo Hospitals Enterprises Ltd. nor DHCL are industrial undertaking within the meaning of section 72A and therefore the set off of unabsorbed depreciation is not allowable. Respectfully following this judgment of Hon ble Madras High Court we decline to interfere in the order of CIT (A). Accordingly this ground is rejected.

Summary

Issues Involved:
1. Disallowance of expenditure towards due diligence audit for equity-related investment.
2. Denial of carry forward of business losses due to change in shareholding.
3. Denial of carry forward of unabsorbed depreciation loss under Section 72A of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure Towards Due Diligence Audit for Equity-Related Investment:
The assessee contested the disallowance of ?25,00,000/- incurred for due diligence audit related to equity investment. The CIT(A) noted that the expenses were for increasing the capital base, making them capital in nature and not allowable as revenue expenditure, citing the judgment of the Hon’ble Apex Court in Brooke Bond India Ltd. vs. CIT. The Tribunal agreed with this view, stating that the expenses were not incurred in the regular course of business but for inviting investments from prospective investors. Therefore, the Tribunal upheld the disallowance, rejecting the assessee's ground.

2. Denial of Carry Forward of Business Losses Due to Change in Shareholding:
The assessee argued against the denial of carry forward of business losses amounting to ?2,00,60,988/- under Section 79 of the Income Tax Act, 1961. The CIT(A) had disallowed the set-off based on the change in shareholding pattern. The Tribunal found that more than 51% of shares were held by the same shareholders in both the years in question, satisfying the requirements of Section 79. Therefore, the Tribunal allowed the carry forward of the business losses, deciding in favor of the assessee.

3. Denial of Carry Forward of Unabsorbed Depreciation Loss Under Section 72A:
For Assessment Year 2010-11, the assessee contested the denial of carry forward of unabsorbed depreciation loss of ?3,70,22,124/- under Section 72A, arguing that the amalgamating company, M/s Banashankari Medical Oncology Research Centre Limited, should be considered an "industrial undertaking." The Tribunal examined the definition of "industrial undertaking" and concluded that the primary activity of the amalgamating company was not manufacturing or processing goods. The Tribunal referred to the judgment of Hon’ble Madras High Court in ACIT Vs. Apollo Hospitals Enterprises Ltd., which held that hospitals are not industrial undertakings under Section 72A. Consequently, the Tribunal upheld the denial of the carry forward of unabsorbed depreciation loss.

Conclusion:
- For Assessment Year 2009-10, the appeal was partly allowed: the disallowance of expenditure towards due diligence audit was upheld, but the denial of carry forward of business losses was overturned.
- For Assessment Year 2010-11, the appeal was dismissed, upholding the denial of carry forward of unabsorbed depreciation loss.