2006 (1) TMI 186 - AT - Income Tax

Applicability of section 2(24)(iv) - whether the case of the assessee fell within the ambit of section 2(24) or 2(24)(iv) of the Act? - whether the assessee acquired shares of EHIRC Ltd. directly or in lieu of its holding of shares in the Chandigarh Society (after amalgamation with the Delhi Society)? - HELD THAT - A share certificate for 16,00,000 shares of Rs. 10 each was issued by the Chandigarh Society, in favour of the assessee. This share certificate is dated 27-5-2000. A cheque dated 27-5-2000 had been issued by the assessee towards the consideration payable for purchase of these shares. Copy of the cheque is placed at page 81 of assessee's paper book. The cheque is in the name of Escorts Heart Institute Research Centre . One thing which is clear from this cheque is that it is not in the name of the limited company viz., EHIRC Ltd - the assessee purchased shares of the Chandigarh Society and not EHIRC Ltd. directly. The CIT(A)'s reliance on a letter written by the counsel in the course of assessment proceedings is therefore, not acceptable as they are contrary to the fact situation on record. The reasoning of the CIT(A) for concluding that 'Income' under section 2(24) accrued to the assessee based on the presumption that the assessee purchased shares of EHIRC Ltd., directly is, therefore, without any basis. According to CIT(A) the transaction of allotment of shares in favour of the assessee by the Chandigarh Society bears all the characteristics set out in section 2(24)(iv) except for the difference that the assessee was not a director and the investee was a Society and not a company. However, the assessee was a person having substantial interest in the Chandigarh Society and the benefit of lower share prices given to the assessee by the Chandigarh Society, was a benefit which was to be taxed - The CIT(A) further supports this conclusion with the various judgments of Hon'ble Courts holding that definition of Income is not exhaustive and whatever bears the character of income should be considered as Income . This is the alternate reasoning of the CIT(A) for brining to tax income in the hands of the assessee. The pre-existing relationship is the consideration for allotment of shares at a concessional price, which is treated as income, even in the context of section 2(24)(iv) of the Act. The same is the case when shares are issued to an employee at a concessional price. There the pre-existing relationship of employer-employee is considered as a benefit-giving rise to income. When there is no other pre-existing relationship between the assessee and the Chandigarh Society, can it be said that issue of shares at a concessional price to the assessee by the Chandigarh Society, is giving a benefit which can be considered as income chargeable to tax on the analogy of section 2(24)(iv) of the Act? - There is no consideration for allotment of shares at a concessional price and therefore if at all, it can be said that the Chandigarh Society has made a deemed gift within the meaning of section 4(1)(a) of the Gift Tax Act, 1958. After 1-10-1998, Gift tax has been abolished and therefore the transaction in question cannot be considered taxable under the Gift Tax Act, 1958 also. If the above distinction were not made between benefit obtained from a person having some relationship with the assessee and a benefit accruing from a person not having such relationship with the assessee, it would be equating receipt of Income with receipt of Gift . In law the concept of Income and Gift are not one and the same. The case made out by the Assessing Officer for bringing to tax the difference between the book value and the purchase price of the shares by the assessee, is also without any basis. The CIT(A) himself did not agree with the view of the Assessing Officer for the reasons assigned by him. The Revenue has not chosen to raise this issue in its appeal filed against the order of the CIT(A) on the very same issue. It is no doubt true that the revenue authorities in a particular assessment year are free to take a different view and the principles of res judicata are not applicable to income-tax proceedings. In the present case neither the Assessing Officer nor the CIT(Appeals) deemed it plausible to hold the assessee as engaged in the business of holding investments and that the purchase of shares by it at a price less than its book value was in the course of such business giving rise to income chargeable under the Act either under section 2(24)(1) read with section 28(iv) of the Act. But this background is only a pointer to the fact that the assessee was never considered as being in the business of holding investments either in the past or in the assessment proceedings of the instant year. To conclude otherwise without an enquiry into the primary facts necessary for coming to such a conclusion, would not be proper. In this background, to venture to consider and hold that the assessee was in the business of holding investments would be unjustified - the new plea raised by the revenue as to whether the purchase of shares in the Chandigarh Society (after amalgamation) by the assessee at a price less than its intrinsic value would give rise of 'income' within the meaning of section 2(24) read with section 28(iv) of the Act, is declined to be adjudicated. Nature of expenditure - capital expenditure or revenue expenditure - maintenance and renovation of rented premises - HELD THAT - A perusal of the Explantion reveals that in relation to building taken on rent by the assessee, any capital expenditure incurred has to be treated as if the building is owned by such an assessee. The expenditure envisaged in the Explanation, inter alia, includes expenditure by way of renovation or extension of or improvement to the building, provided, of course that it is on capital account. It follows, therefore, that even an expenditure incurred on renovation and repairs is includible provided the same is of a capital in nature - No doubt, such an expenditure is incurred for the purposes of business, but it does result in a benefit of enduring nature and is liable to be treated as capital in nature. The expenditure is in the nature of improvement to the building and thus the provisions of Explanation 1 to section 32(1) has been rightly invoked by the Assessing Officer. Insofar as the balance expenditure of Rs. 33,47,605 is concerned, the nature of expenditure is towards payment for internal furnishings, painting and polishing work, dismantling of old false ceiling, fees for interior designing, lift maintenance, etc. All these expenses are incurred by the assessee for the purposes of its business. They can at best be considered as having been spent by the assessee on making its work place suitable and comfortable so as to carry out its business conducively. It is certainly not incurred for acquiring any asset or advantage of an enduring nature. The amount spent on such repairs; and renovation cannot be considered as a capital expenditure, and is thus outside the purview of Explanation 1 to section 32(1). To this extent, the invoking of Explanation to section 32(1) of the Act by the Assessing Officer therefore was unjustified. Now, coming to the expenses incurred by the assessee at its Bhopal Office amounting to Rs. 20,78,622. The nature of expenses, as revealed from the details placed in the paper book, are interior work, painting and polishing, electrical maintenance related work, architect fee for interior decoration etc. The expenditure incurred also relates to paneling, partition work, designing and fabricating office furniture, work stations, flooring work on kitchen, in toilets and office etc. - The expenditure incurred, is clearly incurred in the course of effectuating the business of assessee inasmuch as it only seeks to maintain and set up the office infrastructure. The expenditure is mainly on the interior work in order to make the premises fit for working and none of the items can be said to have resulted in acquisition of any asset or of a work which could be construed to be incurred on capital field. Therefore, to this extent, the invoking of Explanation 1 to section 32(1) was not justified. The invoking of Explanation 1 to section 32(1) is limited to the extent of Rs. 60,14,000 - the order of the CIT(A) is set aside and the Assessing Officer is directed to rework the disallowance as above. Of course, on the amount which is considered to be falling within the purview of Explanation to section 32(1), the same shall be eligible for depreciation at the rates applicable. The CIT(A) has allowed the same and to that extent, the decision of the CIT(A) is affirmed. The Assessing Officer shall take into consideration the aforesaid while reworking the disallowance - this ground is partly allowed. Software Technology and upgradation of computerization - capital expenditure or revenue expenditure - HELD THAT - Insofar as the factual aspect of the matter is concerned, the details of the expenditure amounting to Rs. 35,72,400 in question have been placed at pages 160 to 162 of the assessee's paper book. The major expenditure to the extent of Rs. 35,36,000 represents the cost of purchase of ERP System and the balance of the expenditure of Rs. 36,400 is the related travelling expenditure - It is in this light, the decision of the Delhi Bench of the Tribunal in the case of MARUTI UDYOG LTD. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX. 2004 (10) TMI 278 - ITAT DELHI-A is fully applicable. 'The Tribunal therein held that computer software by itself is a capital asset and therefore, was akin to know-how. It accordingly held, by following the decision of the Hon'ble High Court of Rajasthan in the case of COMMISSIONER OF INCOME-TAX VERSUS ARAVALI CONSTRUCTIONS CO. (P.) LTD. 2002 (7) TMI 41 - RAJASTHAN HIGH COURT , that the expenditure on purchase of software was capital expenditure. Respectfully concurring with the aforesaid decision, in the instant case, as the facts are identical, the expenditure of Rs. 35,72,400 is liable to be considered as a capital expenditure. Disallowing expenditure to the tune of Rs. 15,56,611 out of the total claim of Rs. 25,93,786 incurred towards the expansion and diversification of the company's existing business - HELD THAT - The allowability of the impugned expenditure is to be considered in the light whether the projects, in connection with which the expenditure has been incurred, were in the existing line of business of the assessee or not. If it is held that the new projects were in the existing line of assessee's business, then the expenditure is allowable in terms of section 37(1) of the Act. The assessee-company is engaged in the business of manufacturing and sale of tractors, shockers, railway equipment, etc. besides certain trading activities - Coming to the disallowance partly sustained by the CIT(A) for want of details regarding nature of the expenses in relation to M/s. Kayaba Project (to the extent of Rs. 8,69,817) and M/s. Metro Rail Project (to the extent of Rs. 6,86,694) totalling to Rs. 15,56,511. We find that there is no material on record to arrive at any finding with regard to the nature of expense and neither is there any finding in the orders of the lower authorities in this regard. This aspect requires verification. Thus, in order to verify the nature of expenditure of Rs. 15,56,511, we restore the issue to the file of the Assessing Officer to carry out the aforesaid limited exercise. If the Assessing Officer finds that the expenditure is on revenue account and not on capital account, the same shall be allowable as a revenue expenditure - Appeal of assessee is allowed for statistical purposes. Disallowance of Rs. 21.70 lakhs out of the disallowance of Rs. 2,01,88,412 made by the Assessing Officer by invoking the provisions of section 14A of the Income-tax Act - HELD THAT - The import of section 14A is that if a particular income is excluded from the purview of the total income under the Act, the related expenditures should not be allowed as deduction even against the income includible in the total income so as to obviate a double benefit to the assessee, viz., first by way of income being excluded from the purview of tax and secondly, by reducing the residual taxable income, if any, by the amount of expenditure related to the excluded income. Now, in order to apply the provisions of section 14A, it envisaged two steps; firstly, the incomes which do not form part of the total income under the act has to be identified. Secondly, the expenditure which is related to such income has to be identified. In the instant case, the dividend income of Rs. 8.9 crores (approximately) and interest income of Rs. 10.13 crores approximately are excludible from the purview of total income under the Act on account of sections 10(33) and 10(23G) of the Act respectively - The assessee is in the business of manufacture of motorcycles, tractor, etc. Its business is not that of a Finance company. The interest received is also in respect of a loan advanced to a subsidiary company in earlier years. Taking into consideration the above aspects, we are of the view that the addition sustained by the CIT (Appeals) is excessive - appeal of the assessee is partly allowed. Charging of interest under sections 234B and 234C of the Act - HELD THAT - This ground is consequential in nature and the Assessing Officer shall recompute the same after considering the effect of the instant order. Disallowance of Rs. 7,48,00,851 made by the Assessing Officer on account of premium on redemption of SPNs - HELD THAT - The liability to pay the premium amount over and above the face value of SPNs on redemption is a liability incurred by the assessee for the purposes of its business by generating funds which were utilized for its business activities. Thus, such an expenditure is an allowable expenditure. Now, with regard to year of allowability, it is evident that the payment of premium results in securing of benefit over a number of years. The benefit is spread over the entire period of 7 years. The expenditure is, therefore, allowable over the entire period of the SPNs till redemption. The assessee, therefore, correctly claimed deduction only in respect of the proportionate premium relateable to the year in question - the factors considered by the Assessing Officer for making the disallowance are irrelevant and have no bearing to decide the issue on hand. Disallowance of Rs. 41,48,896 made by the Assessing Officer on development of existing products ignoring that such expenditure imparted a benefit of enduring nature - HELD THAT - The conclusion drawn by the CIT(A) is justified on facts and in law. Insofar as the nature of expenditure is concerned, there is no dispute that the same relates to the developmental activities carried out by the assessee in its R D Division. The question whether the expenditure is revenue or capital, loses its significance while considering its deductibility because the nature of expenditure is on account of Research and Development. In terms of clause (iv) of sub-section (1) of section 35, any expenditure, being in the nature of capital expenditure incurred on research related to the business carried on by the assessee, is an admissible deduction. Admittedly, the impugned Research and Development expenditure in question has been found by the CIT(A) to be related to the business of the assessee of manufacturing agricultural tractors, agriculture machinery, etc., a fact situation not controverted by the revenue. Thus, it qualifies to be deductible under section 35(1)(iv) of the Act. We do not find anything on record to conclude differently than the CIT(A) - the expenditure has been rightly held to be deductible by the CIT(A). The appeal of the revenue is treated as dismissed.

Summary

Issues Involved:

1. Applicability of Section 2(24) and 2(24)(iv) of the Income-tax Act, 1961.
2. Validity of merger and amalgamation of societies under the Societies Registration Act, 1860.
3. Taxability of benefit arising from the allotment of shares at a concessional price.
4. Allowability of renovation expenses on rented premises.
5. Treatment of software technology and computerization expenses.
6. Deductibility of expenses on expansion and diversification of business.
7. Disallowance under Section 14A for expenses related to exempt income.
8. Deductibility of premium on redemption of Secured Premium Notes (SPNs).
9. Allowability of prior period expenses.
10. Deductibility of commission, discount, and brokerage expenses.
11. Interest on interest-free loan given to a subsidiary.
12. Allowability of expenses on development of existing products.

Issue-wise Detailed Analysis:

1. Applicability of Section 2(24) and 2(24)(iv) of the Income-tax Act, 1961:
The Tribunal examined whether the benefit derived by the assessee from the allotment of shares at a concessional price could be treated as income under Section 2(24) or 2(24)(iv). It was concluded that the assessee did not receive any income within the meaning of Section 2(24) as the shares were not allotted due to any pre-existing relationship or consideration. The Tribunal held that the benefit could not be taxed as income under Section 2(24) or 2(24)(iv).

2. Validity of Merger and Amalgamation of Societies:
The Tribunal found that the merger of the Delhi Society with the Chandigarh Society was valid under the Societies Registration Act, 1860. The assets of the Delhi Society vested with the Chandigarh Society by operation of law, and the subsequent conversion of the Chandigarh Society into a limited company was also valid.

3. Taxability of Benefit from Allotment of Shares at Concessional Price:
The Tribunal held that no income accrued to the assessee at the time of purchase of shares at a concessional price. The benefit, if any, was not taxable as income under Section 2(24) or 2(24)(iv) as there was no pre-existing relationship or consideration for the allotment of shares.

4. Allowability of Renovation Expenses on Rented Premises:
The Tribunal partly allowed the assessee's claim for renovation expenses. It held that expenses incurred for making the premises suitable for business were revenue in nature, while expenses resulting in an enduring benefit were capital in nature. The Tribunal directed the Assessing Officer to rework the disallowance accordingly.

5. Treatment of Software Technology and Computerization Expenses:
The Tribunal held that the expenditure on the purchase of ERP software was capital in nature, as it resulted in an enduring benefit to the assessee. The Tribunal allowed depreciation on the capital expenditure.

6. Deductibility of Expenses on Expansion and Diversification of Business:
The Tribunal held that expenses incurred on new projects were related to the existing line of business and were allowable as revenue expenditure. The Tribunal remanded the matter to the Assessing Officer to verify the nature of certain expenses and allow them accordingly.

7. Disallowance under Section 14A for Expenses Related to Exempt Income:
The Tribunal found that the assessee did not have any dedicated setup for managing its investment portfolio and that the predominant activity was manufacturing. The Tribunal held that an ad hoc addition of Rs. 2 lakhs would meet the ends of justice, reducing the disallowance sustained by the CIT(A).

8. Deductibility of Premium on Redemption of Secured Premium Notes (SPNs):
The Tribunal held that the premium on redemption of SPNs was an allowable expenditure, as it was incurred for the purpose of business and resulted in a benefit spread over the period of the SPNs.

9. Allowability of Prior Period Expenses:
The Tribunal upheld the CIT(A)'s decision to allow prior period expenses, as the liabilities corresponding to the expenses crystallized during the year. The Tribunal followed the orders of the Tribunal in the assessee's own case for earlier years.

10. Deductibility of Commission, Discount, and Brokerage Expenses:
The Tribunal upheld the CIT(A)'s decision to allow commission, discount, and brokerage expenses, as the assessee had provided confirmations from the parties and the expenditure was related to business activities.

11. Interest on Interest-Free Loan Given to a Subsidiary:
The Tribunal upheld the CIT(A)'s decision to delete the addition of notional interest on interest-free loans given to a subsidiary, as there was no nexus between the borrowed funds and the interest-free advances. The Tribunal found that the advances were made in earlier years and were accepted as business advances.

12. Allowability of Expenses on Development of Existing Products:
The Tribunal upheld the CIT(A)'s decision to allow expenses on the development of existing products as revenue expenditure. The Tribunal found that the expenses were incurred in the R&D Division and were related to the business of the assessee. The expenses were also allowable under Section 35(1)(iv) of the Act.

Conclusion:
The Tribunal provided a detailed analysis of each issue, considering the facts, evidence, and legal provisions. The Tribunal's decisions were based on the principles of law and the specific circumstances of the case, ensuring a fair and just outcome for both the assessee and the revenue.