2008 (10) TMI 298 - AT - Income Tax

Computation of book profit u/s 115JA - Business Expenditure - pre-operative expenses - CIT(A) allowed the expenditure as revenue expenditure which being pre-operative expenses was capital in nature and was rightly so held by the AO - HELD THAT - Following the decisions of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. 1971 (8) TMI 10 - SUPREME COURT relied upon by the ld. DR itself clarifies that though the taxpayer may have written off the expenditure in its books of account over a period say of five years, it must be allowed in its entirety in the year in which it was incurred, if it is revenue expenditure, and if it is wholly and exclusively incurred for the purposes of business. In the case under consideration, there is nothing to suggest that with this expenditure, any asset, tangible or intangible, has been created. There is no evidence on record regarding accrual of any specific revenue in the years under consideration or subsequently over a defined period with the incurring of said expenditure. AO himself admitted the portion of expenditure debited in the profit and loss account as revenue expenditure. In these circumstances, we do not find any justification to interfere with the findings of the ld. CIT(A). Expenditure on computer software - Since in the case under consideration nature of software is not available on records nor any material has been placed before us in respect of nature of software(s) and expenditure incurred thereon, we are of the opinion that the matter needs to be restored back to the file of the AO for doing necessary exercise as laid down in the aforesaid decision. The AO shall examine the question whether expenditure on computer software is capital or revenue in the light of the criteria laid down in the case of Amway India Enterprises v. Dy. CIT 2008 (2) TMI 454 - ITAT DELHI-C , after allowing sufficient opportunity of being heard to the taxpayer. Expenses incurred in obtaining fixed deposits - Following the decision CIT v. Investment Trust of India Ltd. 2002 (11) TMI 26 - MADRAS HIGH COURT , We held that the expenses incurred for obtaining fixed deposits are clearly allowable as revenue expenditure. Therefore, ground No. 1 in both the appeals is disposed of as indicated hereinbefore. Claim for deduction of interest on borrowed funds - CIT(A) held that the interest was allowable u/s 36(1)(iii) although the same represents preoperative expenses and was capital in nature - Following the decisions of the Apex Court in Dy. CIT v. Core Health Care Ltd. 2008 (2) TMI 8 - SUPREME COURT and Dy. CIT v. Gujarat Alkalies Chemicals Ltd. 2008 (2) TMI 11 - SUPREME COURT wherein it was held - interest paid on the borrowing utilised to bring into existence a fixed asset which has not gone into production, goes to add to the cost of installation of that asset. It was further observed that if the said borrowing was not for the purpose of business inasmuch as no business had come into existence, it must follow that it was made for the purpose of acquiring an asset which could be put to use for doing business, and hence interest paid on such borrowing would go to add to the cost of the assets so acquired. Therefore, we hold that the AO was not justified in making disallowance of interest for the AY 1997-98 and 1998-99. There being no infirmity in the findings of ld. CIT(A), we uphold his orders for these two years. Thus, ground No. 2 in the appeals for the AY's 1997-98 and 1998-99 is dismissed. Levy of interest u/s 234C - payment of advance tax - CIT(A) directed the AO not to charge interest u/s 234C when the income is computed u/s 115JA - HELD THAT - The scope of sections 234B and 234C of the Act was considered by the Hon'ble Bombay High Court also in CIT v. Kotak Mahindra Finance Ltd. 2003 (4) TMI 30 - BOMBAY HIGH COURT held that - It is well-settled that interest u/s 234B is compensatory in character. It is not penal in nature. So also, interest u/s 234C is compensatory in character. It is for this reason that section 234B does not envisage grant of hearing insofar as levy of interest is concerned. The levy is automatic on it being proved that the assessee has committed a default as governed by section 234B. This reasoning also applies to levy of interest u/s 234C. Therefore, the question of equity, rules of natural justice and justification for not making payment do not arise for determination in cases where interest is leviable u/s 234B and section 234C. Hence, It is clear that once a default within the meaning of sections 234B and 234C takes place, levy of such interest is automatic and there is no scope for applying the principles of equity or rules of natural justice. No hearing is required to be given to the assessee seeking any justification for not making the payment of advance tax. We, therefore, find no merit in the contention that the provisions of section 234C would not be attracted in cases where a company is assessed on the income computed u/s 115JA. As already observed, the levy is automatic without any notice to the assessee. It is well-settled that all words of a statute are to be given effect, and the Legislature is presumed not to use words that are superfluous or redundant. It is also in consonance with the principle of harmoniously interpreting to make the statute workable and giving a meaning to all the provisions of the statute without making anyone of them redundant. If the interpretation as sought by ld. AR on behalf of the taxpayer is applied that would make provisions of sub-section (4) of section 115JA otiose and redundant. It is not permissible to adopt a construction which would render any expression superfluous or redundant. Therefore, the argument of the ld. AR that interest u/s 234C of the Act cannot be levied on deemed book profits is not tenable since the deeming provisions of section 115JA specifically stipulate in sub-section (4) that all other provisions of the Act shall apply. Therefore, we hold that the total income computed under the provisions of section 115JA of the Act is liable to advance tax and in the event of default in relevant provisions of payment of advance tax, levy of interest u/s 234C of the Act is mandatory in this view of the matter, the findings of ld. CIT(A) are vacated and the action of the AO in charging interest u/s 234C of the Act is confirmed. Therefore, ground No. 3 in both the appeals is allowed. Netting of interest - CIT(A) allowed the claim of the assessee of not reducing the 90 per cent of gross interest received while working out the export profit u/s 80HHC for the purpose of finding out the book profit u/s 115JA - HELD THAT - We are inclined to follow the conclusions in case CIT v. Shri Ram Honda Power Equipment 2007 (1) TMI 86 - HIGH COURT, DELHI . Since the relevant orders do not indicate as to the nature of interest nor as to whether the AO followed the steps formulated by Hon'ble Delhi High Court, we have no alternative but to restore the matter to the file of the AO with the directions to recompute the deduction u/s 80HHC in the light of aforesaid decision of Hon'ble Delhi High Court and of Special Bench in the case of Syncome Formulations (I) Ltd 2007 (3) TMI 288 - ITAT BOMBAY-H . for working out book profits u/s 115JA of the Act. Subject to these directions, ground No. 4 of the appeal for the AY 1998-99 is disposed of as indicated hereinbefore. In the result, both the appeals are treated as partly allowed for statistical purposes.

Summary

Issues Involved:
1. Allowability of certain expenditures as revenue or capital.
2. Deduction of interest under section 36(1)(iii) of the Income-tax Act.
3. Charging of interest under section 234C when income is computed under section 115JA.
4. Netting of interest for the purpose of deduction under section 80HHC while calculating book profits under section 115JA.

Issue-wise Analysis:

1. Allowability of Certain Expenditures as Revenue or Capital:
The main contention was whether certain expenditures should be treated as revenue or capital. The taxpayer claimed deferred revenue expenditure totaling Rs. 240.97 lakhs for AY 1997-98 and Rs. 342.38 lakhs for AY 1998-99. The Assessing Officer (AO) disallowed the claim, treating the expenditures as capital in nature based on their treatment in the books of accounts. The CIT(A) allowed the claim, treating the expenditures as revenue in nature.

The Tribunal held that the concept of deferred revenue expenditure is an accounting concept and alien to the Act, which recognizes only capital or revenue expenditure. The Tribunal referred to several judgments, including the Supreme Court's decision in Alembic Chemical Works Co. Ltd. v. CIT, which emphasized that the nature of expenditure should be flexible and respond to changing economic realities. The Tribunal concluded that the expenditures on corporate advertisement, exhibition, public relation expenses, quota expenses, and sales promotion are revenue in nature and should be allowed in the year they are incurred, despite being written off over several years in the books of accounts.

For computer software expenses, the Tribunal referred to the ITAT Special Bench decision in Amway India Enterprises v. Dy. CIT, which held that software expenses can be treated as revenue if the software's life is less than two years. The matter was remanded to the AO to determine the nature of the software and whether the expenditure should be treated as capital or revenue.

For fixed deposit expenses, the Tribunal referred to the Madras High Court decision in Southern Petrochemical Industries Corpn. Ltd., which held that expenses related to obtaining fixed deposits are revenue in nature.

2. Deduction of Interest under Section 36(1)(iii):
The issue was whether the interest capitalized in the books of accounts should be allowed as a deduction. The AO disallowed the deduction, treating the interest as capital expenditure. The CIT(A) allowed the deduction, relying on his order for the previous year.

The Tribunal referred to the Supreme Court's decision in Dy. CIT v. Core Health Care Ltd., which held that interest on borrowed capital is allowable under section 36(1)(iii) irrespective of whether the capital is used to acquire a revenue or capital asset. The Tribunal upheld the CIT(A)'s order, allowing the deduction of interest for both assessment years.

3. Charging of Interest under Section 234C:
The issue was whether interest under section 234C should be charged when income is computed under section 115JA. The CIT(A) directed the AO not to charge interest under section 234C, relying on several ITAT decisions and the Karnataka High Court decision in Kwality Biscuits Ltd. v. CIT.

The Tribunal noted that the provisions of sections 234A, 234B, and 234C are mandatory and automatic. The Tribunal referred to several High Court decisions, including the Bombay High Court in Kotak Mahindra Finance Ltd., which held that interest under sections 234B and 234C is compensatory and not penal. The Tribunal also referred to the Karnataka High Court decision in Jindal Thermal Power Co. Ltd. v. Dy. CIT, which held that the provisions of section 115JA(4) make all other provisions of the Act applicable, including sections 234B and 234C. The Tribunal vacated the CIT(A)'s order and confirmed the AO's action of charging interest under section 234C.

4. Netting of Interest for Deduction under Section 80HHC:
The issue was whether 90% of gross or net interest should be excluded while computing the deduction under section 80HHC for book profits under section 115JA. The CIT(A) directed the AO to recompute the export profit, allowing only net interest to be excluded.

The Tribunal referred to the Delhi High Court decision in CIT v. Shri Ram Honda Power Equipment, which held that only net interest should be excluded under clause (baa) of the Explanation to section 80HHC. The Tribunal also referred to the ITAT Special Bench decision in Dy. CIT v. Syncome Formulations (I) Ltd., which held that the deduction under section 80HHC in a MAT scheme should be computed on the adjusted book profit. The Tribunal remanded the matter to the AO to recompute the deduction under section 80HHC in light of these decisions.

Conclusion:
The Tribunal partly allowed the appeals for statistical purposes, directing the AO to follow the specific guidelines and judicial precedents mentioned in the judgment.