2012 (4) TMI 237 - HC - Income Tax

Capital versus Revenue expenditure - AO noticed that assessee had claimed depreciation on such amount by treating it as capital expenditure in the books and still claimed it has revenue expenditure in the return of the income - the assessee contended that such payments were made to company who was engaged to take up project of profit improvement programme which helped the company in increasing sales, cost reduction and eventually would increase the profit and therefore, the expenditure was claimed as revenue expenditure AO treated it as capital expenditure as auditors of the company had treated it - Held that - Tribunal committed no error as no technical know-how for any new project was provided and thus the expenditure resulted only in improving income and efficiency of the business and hence to be treated as revenue expenditure - mere entries in account books would not decide the nature of expenditure. MAT - book profit under Section 115JB of the Act - Revenue vehemently contended that in view of provisions contained in Section 115JB of the Act and considering sub-section (7) of Section 94 of the Act inserted with effect from 1.4.2002, Tribunal erred in deleting disallowance of loss of 47.23 crores (rounded off) for the purpose of computation of book profit under Section 115JB of the Act. Counsel pointed out that such loss was suffered by the assessee on account of dividend stripping. To control which activities sub-section (7) of Section 94 of the Act was added. - held that - Such provision cannot be applied while computing book profit for the purpose of Section 115JB of the Act. Book profit under Section 115JB of the Act has to be worked out as per the provisions made in the section, giving effect to explanation contained therein. Appeal admitted.

Summary

Issues Involved:
1. Restriction of addition made by the Assessing Officer on account of disallowance of agricultural loss.
2. Deletion of disallowance of payments made to Meconcy & Company.
3. Deletion of non-allowance of deduction under Section 80HHC for computation of book profit under Section 115JB.
4. Deletion of disallowance of expenditure for agricultural activities for computing book profit under Section 115JB.
5. Deletion of disallowance of loss for computing book profit under Section 115JB.
6. Error in reversing the order of the Commissioner of Income Tax (Appeals) without assigning cogent reasons.
7. Whether the order of the Tribunal is contrary to evidence and material on record and hence perverse.

Detailed Analysis:

1. Restriction of Addition on Account of Disallowance of Agricultural Loss:
The court noted that the question regarding the restriction of the addition made by the Assessing Officer and confirmed by the Appellate Commissioner on account of disallowance of agricultural loss is being considered in a cross appeal (Tax Appeal No. 288 of 2010). Therefore, this question requires further consideration.

2. Deletion of Disallowance of Payments Made to Meconcy & Company:
The Tribunal deleted the disallowance of Rs. 6.36 crores paid to Meconcy & Company for advising on profit-improving measures. The Assessing Officer had treated this expenditure as capital expenditure based on the auditors' treatment and the enduring benefit to the company. However, the Tribunal upheld the assessee's contention, noting that the expenditure was for improving income and efficiency of the existing business, not for acquiring a new capital asset. The court found no error in the Tribunal's decision, citing that mere entries in account books do not decide the nature of expenditure (Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT). Additionally, the treatment of this expenditure had no bearing on the tax liability of the company.

3. Deletion of Non-Allowance of Deduction under Section 80HHC for Computation of Book Profit under Section 115JB:
The court acknowledged that this question is covered by the decision of the Apex Court in Ajanta Pharma Ltd. v. CIT. Hence, this question was not entertained.

4. Deletion of Disallowance of Expenditure for Agricultural Activities for Computing Book Profit under Section 115JB:
The court was informed that a similar question is being considered in Tax Appeal No. 287/2010. Therefore, this question was required to be admitted for further consideration.

5. Deletion of Disallowance of Loss for Computing Book Profit under Section 115JB:
The Revenue contended that the Tribunal erred in deleting the disallowance of Rs. 47.23 crores for computing book profit under Section 115JB, arguing that the loss was due to dividend stripping, which is controlled by sub-section (7) of Section 94. The court referred to the Apex Court's decision in CIT v. Walfort Share & Stock Brokers (P.) Ltd., which negated the contention that loss from dividend stripping should be considered as expenditure. The court also noted that Section 115JB is a self-contained code, and provisions from other sections cannot be applied while computing book profit. Therefore, the court found no merit in the Revenue's contention and did not entertain this question.

6. Error in Reversing the Order of the Commissioner of Income Tax (Appeals) without Assigning Cogent Reasons:
The court considered this question to be in the nature of a contention and did not require further consideration.

7. Whether the Order of the Tribunal is Contrary to Evidence and Material on Record and Hence Perverse:
Similar to question 6, the court found this question to be a contention and did not require further consideration.

Conclusion:
The tax appeal was admitted for substantial questions (1) and (4) only.