2019 (2) TMI 697 - AT - Income Tax

Disallowance of preoperative expenses - expenses treated as capital in books of account, but claimed as revenue in statement of total income u/s 37(1) - Held that - AO was erred in disallowing deduction claimed towards pre-operative expenses in statement of total income u/s 37(1) of the Income-tax Act, 1961 even though the said expenditure has been treated as capital expenditure in books of account. CIT(A), after considering relevant facts has rightly deleted addition made by the AO. Therefore, we are of the considered view that there is no error in the findings of the Ld.CIT(A) and hence, we are inclined to uphold the findings of the Ld.CIT(A) and dismiss appeal filed by the revenue. Exemption u/s 14A r.w.r. 8D - Held that - We find that although the AO has accepted the fact that the assessee has made suo moto disallowance of ₹ 2,75,214, without verifying whether disallowance made by the assessee are direct expenses or other expenses which falls under the provisions of Rule 8D(2)(iii), made further disallowance of ₹ 2,69,162 by applying 0.5% of average value of investments. The assessee has filed details of expenses disallowed as per which, the expenses disallowed by the assessee are coming under the purview of rule 8D(2)(iii). Therefore, we are of the considered view that further disallowance of expenses by applying rule 8D(2)(iii) @0.5% amounts to double disallowance which is not permissible under the law. Therefore, we direct the AO to delete addition made u/s 14A r.w.r. 8D(2)(iii) of I.T. Rules, 1962. Disallowance of ROC charges paid for increase in authorised capital - AO has disallowed on the ground that fees paid for increase in authorised capital is capital in nature which cannot be allowed as deduction u/s 37(1) - Held that - The assessee has filed necessary details to prove that it has paid ROC fees for increase in authorised capital for issuance of bonus shares. But, we are not aware whether the said particulars are part of assessment proceedings before the AO or not. Therefore, we are of the considered view that the issue needs to be re-examined by the AO in the light of the decision in the case of CIT vs General Insurance Corporation Ltd 2006 (9) TMI 116 - SUPREME COURT . Hence, we set aside the issue to the file of the AO and direct him to consider the issue on the basis of working furnished by the assessee.

Summary

Issues Involved:
1. Disallowance of pre-operative expenses.
2. Disallowance of expenses incurred in relation to exempt income under Section 14A read with Rule 8D.
3. Disallowance of ROC charges paid for increasing authorized capital.

Issue-wise Detailed Analysis:

1. Disallowance of Pre-operative Expenses:
The primary issue revolved around whether pre-operative expenses, treated as capital in the books of account, could be claimed as revenue expenditure under Section 37(1) of the Income Tax Act. The assessee argued that these expenses, incurred in the nature of salaries, wages, travelling expenses, and other administrative costs, were for the expansion of its existing restaurant business and should be deductible as revenue expenditure. The CIT(A) agreed with the assessee, noting that the expenses were incurred wholly and exclusively in connection with the existing business and did not result in the creation of a capital asset or enduring benefit. The Tribunal upheld this view, emphasizing that the nature of the expenditure, rather than its treatment in the books, determines its deductibility under Section 37(1). The Tribunal cited various judicial precedents, including decisions from the Bombay High Court and the Madras High Court, which supported the treatment of such expenses as revenue expenditure when incurred for business expansion.

2. Disallowance of Expenses Incurred in Relation to Exempt Income:
The assessee challenged the disallowance of ?2,69,162 under Section 14A read with Rule 8D(2)(iii), arguing that it had already made a suo moto disallowance of ?2,75,214 for expenses related to exempt income. The Tribunal found that the AO had not verified whether the disallowance made by the assessee covered the administrative expenses under Rule 8D(2)(iii). Since the assessee's disallowance already included such expenses, the Tribunal concluded that the AO's additional disallowance amounted to double taxation, which is impermissible. Consequently, the Tribunal directed the AO to delete the additional disallowance.

3. Disallowance of ROC Charges Paid for Increasing Authorized Capital:
The AO disallowed ?4,97,181 paid as ROC charges for increasing authorized capital, treating it as capital expenditure based on the Supreme Court's decision in Brooke Bond India Ltd vs CIT. However, the assessee contended that the ROC fees were for issuing bonus shares, which should be considered revenue expenditure, citing the Supreme Court's subsequent decision in CIT vs General Insurance Corporation. The Tribunal acknowledged the need to re-examine the nature of the ROC fees in light of this decision. It remanded the issue to the AO for verification, instructing the AO to consider the assessee's claim that the ROC fees were for issuing bonus shares and, if substantiated, to treat the expenditure as revenue in nature.

Conclusion:
The Tribunal's consolidated order addressed the disallowance of pre-operative expenses, emphasizing the nature of the expenses over their treatment in the books. It also rectified the double disallowance of expenses related to exempt income and remanded the issue of ROC charges for further examination. The appeals by the revenue were dismissed, while the assessee's appeals were partly allowed, reflecting a thorough analysis of the legal and factual aspects of each issue.