2019 (3) TMI 2062 - AT - Income Tax

Addition u/s. 36(1)(va) r.w.s. 2(24)(x) - employees contribution to PF/ESI - HELD THAT - We find that this issue is squarely covered against the assessee in the case of CIT vs. Merchem Ltd. 2015 (9) TMI 560 - KERALA HIGH COURT wherein it was held that due date in the respective ESI/PF Act is the date to be considered for allowing deduction u/s. 36(1)(va). We are inclined to reverse the order of the CIT(A) and restore that of the AO. Hence, employees contribution to PF/ESI after due date under the relevant PF/ESI Act is not eligible for deduction u/s. 36(1)(va) of the Act r.w.s 2(24)(x) of the Act. This ground of appeal of the Revenue is allowed. Allowance of purported non-IPO expenses - CIT(A) erred in allowing the aforesaid expenditure u/s. 37(1) in AY 2008-09 which was incurred in earlier F.Y. 2006-07 and liability discharged in that year itself - HELD THAT - We find that this issue came up for consideration in assessee s own case in 2014 (3) TMI 1228 - ITAT COCHIN wherein it was held Advertisement has to be carried on for the purpose of drawing interest of the general public for the subscription to the shares. Similarly market research expenses, as well as postal expenses for dispatch of various documents related to IPO are also directly linked to the public issue of shares. Similarly, journeys undertaken by the promoters and employees for the purpose of IPO are also related to IPO. Thus all the activities are directly and intricately linked with the initial public offer of shares, and, therefore, they are part and parcel of expenses pertaining to public issue of shares. The reliance place by the appellant on various case laws are distinguishable on fact as because none of the cases cited by the appellant deal with public issue of shares. Accordingly hold that the AO was justified in treating the entire expenditure as capital expenditure. Allowance of Prior Period Expenses already offered to tax in AY 2009-10 - HELD THAT - These expenses were not debited to the P L account in the assessment year under consideration in 2008-09. However, it was charged to the P L account of the subsequent assessment year 2009-10. The same was disallowed suo moto for the assessment year 2009-10 on the reason that it was relating to the assessment year 2008-09. In our opinion, the incurring of expenses was not at all examined by the CIT(A) and he has also not examined whether provisions of section 43B would be applicable or not. AO has to examine the applicability of section 43B towards any fee payable to SEBI and also he is required to examine the nature of the expenditure whether capital or revenue. We are inclined to remit the entire issue to the file of the AO to re-examine and decide afresh. This ground of appeal of the Revenue is partly allowed for statistical purposes. Professional and consultancy charges - capital OR revenue expenditure - HELD THAT - Claim of the assessee that the entire expenditure incurred towards consultancy charges which resulted in enhancement of share capital is of revenue nature, is devoid of merit. In our considered opinion, expenses which are incurred in connection with increase in share capital base of the company, are obviously capital in nature. This view of ours is fortified by the judgment of Brooke Bond India Ltd. 1997 (2) TMI 11 - SUPREME COURT wherein it was held that any expenditure incurred by a company in connection with the issue of shares with a view to increase in share capital is directly related to the expansion of the capital base of the company, and in profit making. The order of the CIT(A) is in conformity with the judgment of the Supreme Court in the case of Brooke Bond India Ltd. cited supra. Hence, we do not find any infirmity in the order of the CIT(A) and the same is confirmed. This ground of appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Deletion of addition made under Section 36(1)(va) read with Section 2(24)(x) concerning employees' contribution to PF/ESI.
2. Allowance of non-IPO expenses under Section 37(1) for the assessment year 2008-09.
3. Allowance of prior period expenses amounting to Rs. 1,78,48,292/- already offered to tax in AY 2009-10.
4. Treatment of professional and consultancy charges as capital expenditure.

Issue-Wise Detailed Analysis:

1. Deletion of Addition under Section 36(1)(va) read with Section 2(24)(x):
The first issue raised by the Revenue concerns the deletion of an addition of Rs. 6,74,707/- made under Section 36(1)(va) read with Section 2(24)(x) regarding employees' contribution to PF/ESI. The Tribunal found that this issue is squarely covered against the assessee by the judgment of the Jurisdictional High Court in the case of CIT vs. Merchem Ltd. (378 ITR 443). According to this judgment, the due date in the respective ESI/PF Act is the date to be considered for allowing deduction under Section 36(1)(va). Therefore, the Tribunal reversed the order of the CIT(A) and restored that of the Assessing Officer, disallowing the deduction of employees' contribution to PF/ESI after the due date. This ground of appeal by the Revenue was allowed.

2. Allowance of Non-IPO Expenses under Section 37(1):
The second issue pertains to the allowance of purported non-IPO expenses amounting to Rs. 1,17,77,496/- in AY 2008-09. The CIT(A) had allowed this expenditure under Section 37(1), which was incurred in the earlier financial year 2006-07. The Tribunal noted that the Assessing Officer had disallowed Rs. 29,57,136/- as it was considered capital expenditure. On appeal, the CIT(A) deleted Rs. 23,55,449/- of this disallowance, stating that the expenses were operational and intended for the furtherance of the assessee's business. The Revenue argued that these expenses should be capitalized under Section 35D(2)(c)(iv). The Tribunal, referencing its earlier decision in the assessee's own case, agreed that these expenses should be treated as capital in nature. Therefore, this ground of appeal by the Revenue was allowed.

3. Allowance of Prior Period Expenses:
The third issue involves the allowance of prior period expenses amounting to Rs. 1,78,48,292/-. The assessee had disallowed this amount in AY 2009-10 and claimed it as an allowable expenditure for AY 2008-09 through a revised computation of income. The CIT(A) deleted the disallowance, stating that taxing the same amount in both years would result in double taxation, which is impermissible. The Revenue argued that these expenses should be disallowed. The Tribunal found that the CIT(A) had not examined whether the provisions of Section 43B would apply or whether the expenses were capital or revenue in nature. Consequently, the Tribunal remitted the issue back to the Assessing Officer for re-examination. This ground of appeal by the Revenue was partly allowed for statistical purposes.

4. Treatment of Professional and Consultancy Charges:
The fourth issue raised by the assessee concerns the treatment of professional and consultancy charges amounting to Rs. 1,85,70,000/- as capital expenditure. The CIT(A) had confirmed the disallowance, stating that these charges were capital in nature as they were incurred to identify suitable investors, resulting in long-term enduring benefits for the company. The Tribunal upheld this view, referencing the judgment of the Supreme Court in the case of Brooke Bond India Ltd. vs. CIT (225 ITR 798), which held that expenses incurred in connection with the issue of shares to increase share capital are capital in nature. Therefore, this ground of appeal by the assessee was dismissed.

Conclusion:
- The appeal of the Revenue was partly allowed for statistical purposes.
- The appeal of the assessee was dismissed.
- The Cross Objection of the assessee was dismissed as infructuous.