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TMI Blog2007 (2) TMI 276X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,000 4. Amounts written off 2,22,04,548 5. EDP software expenses 80,500 Less: Depreciation @ 60 % 48,300 32,200 6. Disallowance out of expenses 94,425 7. Travelling & conveyance 1,00,000 8. Telephone & fax expenses 1,11,748 9. Sales promotion expenses 10,000 2,31,30,218 Total income 1,20,15,092 3. The CIT(A) allowed part relief and his order has been challenged by the assessee in the present appeal. Ground No. 1 "On the facts and circumstances prevailing in the case and as per provisions of law, it be held that the deduction claimed on account of lead manager fee of Rs. 75,000 and SEBI and PSE registration fee of Rs. 20,000 is allowable expenditure and be allowed in full. Without prejudice it further be held that deduction be allowed and in alternative the deduction be allowed on the basis of decision of the AO, just and proper relief be granted to the appellant in this respect." 4. In para 4 of his order, the AO invoked the provisions of s. 35D in respect of the expenses aggregating to Rs. 1.10,080 as under: (Rs) (i) Share transfer expenses 15,080 (ii) Lead manager's fees 75,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry course of business and is eligible for deduction under the scheme and provisions of IT Act. The claim be allowed in full as per provisions and scheme of the Act." 9. The facts of the case in brief are as follows: The assessee company, earlier known as Ador Samia Ltd. (ASL), was engaged in the business of thermal, combustion and environmental engineering products and projects. An agreement was entered into between ASL and major shareholders of M/s Indocan Engineering systems Ltd (Indocan) on 29th Aug., 1997. This agreement provided for acquisition of 60 per cent of the paid up capital of Indocan by ASL during the financial year 1997-98. The acquisition price was arrived at Rs. 2.99 crores being full value of 60 per cent equity shares of Indocan. The shares held by Shri A. Parmeshwaran and his family representing about 18 per cent of the paid up capital of Indocan were allotted to the assessee-company The balance of the shares were held by a Canadian company, M/s Peekay Holdings Ltd. 9.1 Further, the assessee company decided to place Rs. 2.22. crores by way of inter-corporate deposits (ICDs) with Indocan, out of which 1 crore was invested from out of the assessee's funds and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treatment and chemical treatment plants. - that Indocan was in need of financial assistance to tide over the liquidity problem faced in execution of its existing business as also for expansion of its business. - that an MOU was signed between the two companies on 6th July, 1997 for strategic alliance/partnership for synergizing their businesses. - that total funds of Rs. 2,99,00,000 were placed at the disposal of Indocan partly by way of purchase of shares and partly by way of ICDs. - that shortly thereafter, sometimes in October, 1997, it was noticed from the balance sheet of Indocan for financial year 1996-97 that it had accumulated substantial losses/liabilities. - that a number of steps were taken to recover the ICDs from Indocan. - that the arbitration award was passed on 18th Oct., 2001 but no recovery could be made. - that the appellant company claimed before the AO and the CIT(A) that the purchase of shares of Indocan and placement of ICDs with Indocan were for the purposes of the business of the assessee company. - that the above loss was allowable as business loss under s. 28 or alternatively as revenue expenditure under s. 37 of the Act. - that relianc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s relied upon by the learned CIT(A) was of the Delhi High Court in the case of Distillers' Trading Corpn. Ltd. In this case the Delhi High Court placed reliance on the decisions of the Supreme Court in the following three cases: (i) Ramchandar Shivnarayan vs. CIT 1978 CTR (SC) 5 : (1978) 111 ITR 263 (SC); (ii) CIT vs. Mysore Sugar Co. Ltd. (1962) 46 ITR 649 (SC); (iii) CIT vs. Motiram Nandram (1940) 8 ITR 132 (PC). 15. In the case of Ramchandar Shivnarayan, the Supreme Court summed up the principles as under: "The principle applicable in India is more or less the same. If there is a direct and proximate nexus between the business operation and the loss or it is incidental to it, then the loss is deductible, as, without the business operation and doing all that is incidental to it, no profit can be earned. It is in that sense that from a commercial standard such a loss is considered to be a trading one and becomes deductible from the total income, although in terms neither in the 1922 Act nor in the 1961 Act, there is a provision like s. 51(1) of the Australian Act." 16. In the case of Mysore Sugar Co. Ltd., the Supreme Court laid down the test as under: "To find out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied, in the Act. 19. In the case of Ramchandar Shivnarayan, the assessee, a registered firm, carried on business in gold, silver and gunnies at Rajahmundry. It also derived income from the investment in Government securities. In years, both preceding and succeeding the relevant accounting year, the assessee had sold some Government securities and bonds. A sum of Rs. 50,000 borrowed from a creditor for the purpose of purchasing Government securities, was brought in cash to Rajahmundry by its employee and was handed over to its cashier. At a time when the cashier had turned his back to take out some books, a stranger suddenly arrived at the place of the appellant's business and committed theft of Rs. 30,000. In spite of logding a compliant with the police the amount could not be recovered. The appellant claimed deduction of Rs. 30,000 as a business loss in computing its profits and the Tribunal allowed the claim on the ground that the loss was incidental to the carrying on of its business. On a reference at the instance of the CIT, the High Court held that the loss was not allowable as a deduction as the loss was not incidental to the appellant's business. 20. The Supreme C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as managing agents and therefore, the assessee's claim was allowed as trading loss. 23. The other decision relied upon by the learned Authorised Representative at S. No. (d), of his written submission, is of the Supreme Court in the case of Bombay Dyeing and Manufacturing Co. Ltd. In that case an amount of Rs. 2,25,000 was contributed by the assessee to the Maharashtra Housing Board towards construction of tenements for the company's workers. The tenements remained the property and the assets of the housing board. The Tribunal gave a finding that the expenditure was incurred merely with a view to carrying on the business of the assessee company more efficiently by having a contended labour force. In the light of the findings recorded by the Tribunal, the Court held that the amount constituted revenue expenditure. 24. The learned CIT(A) in his written submission has placed reliance, inter alia, on the decision of Bombay High Court in the case of Indequip Ltd. In this case the assessee company carried on the business as dealers and suppliers of mill gin stores and clothes. In the course of its business the assessee used to sell coal, glue products, Burmashell wires and all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eering and manufacturing of electromechanical assemblies. The project engineering activity comprised of designing, procuring, erecting, and commissioning of projects of different types and sizes of combustion and thermal engineering products such as flare systems, burners, furnaces, industrial/hospital waste incinerators, crematoriums, laddle heating systems, etc., The manufacturing of electromechanical assemblies is done as per the technical specification given by the customers. 27. The MOU dt. 6th July, 1997 entered into between the assessee company and Indocan stated, inter alia, as under: - that a strategic alliance between the two organizations would be of mutual interest. - that ASL (the assessee company) was interested to acquire a controlling interest upto 60 per cent of equity of Indocan during the year 1997-98. - that after such an equity transfer the management control of Indocan will shift to ASL. 28. The paid up share capital of Indocan as on 31st March, 1997 was Rs. 1,72,50,000, consisting of 1,72,500 equity shares of Rs. 100 each, out of which 70 per cent equity shares were held by M/s Peekay Holdings Ltd., a company incorporated in Canada and 12 per cent equ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; Rs. 76,68,000 Consideration at Rs. 270 per share 33. It appears that the shareholders of Indocan filed an arbitration petition (No. 288 of 1998) on 15th May, 1998 before the Bombay High Court. Also, the assessee filed a Writ Petition (No. 2770 of 1999) before the Bombay High Court which was disposed of on 29th Sept., 1999, by consent, and Mr. Justice M.L. Pendse (Retd) was appointed as Sole Arbitrator for adjudication of the disputes between the parties. The salient features of the arbitration award dt. 18th Oct., 2001. were as under: - that Shri A. Parameshwaran and Smt. Rajalakshmi Parameshwaran shall pay to the assessee company a sum of Rs. 76,68,000 towards payment of share price with interest @ 15 per cent from the date of award till payment. - that Shri A. Parameshwaran and Smt. Rajalakshmi Parameshwaran shall pay to M/s Ador Powertron Ltd. a sum of Rs. 7,15,500 with interest @ 18 per cent from the date of award till payment. - that Indocan shall pay to the assessee company a sum of Rs. 1 crore with interest @ 18 per cent per annum from 3rd Sept., 1997 till realization. - that Indocan shall pay to M/s Adavni Oerlikon Ltd. a sum of Rs. 75,00,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We, therefore, hold that the claim of Rs. 2,20,36,548 can neither be allowed as a 'business loss' nor as a revenue expenditure under s. 37(1) of the Act. 37. The expressions used by the Supreme Court in the cases mentioned in the above paras are: 'carrying on of the operations of the business' and 'direct and proximate nexus'. The difference between the expressions 'carrying on of the operations of the business' and merely 'business' needs to be noted. In other words, the existence of 'some remote nexus' between the expenses and the 'business' is not enough. The nexus must be 'direct and proximate' and it should be with the 'carrying on of the operations of the business'. In the present case such a 'direct and proximate nexus' between the impugned payments aggregating to Rs. 2,97,04,548 and the 'carrying on the operations of the business' of the assessee company is totally absent as can be seen from the discussions in the above paras. 38. The facts of the cases relied upon by the learned Authorised Representative are distinguishable and therefore, they do not apply to the present case. 39. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r view was taken by the Tribunal, Pune, in the case of Kinetic Engineering Ltd. in ITA No. 1159/Pn/2003, dt. 29th Dec., 2006. We respectfully follow the precedents and reject the ground no. 3. Ground No. 4 "On the facts and circumstances prevailing in the case and as per provisions of law, it be held that the ad hoc disallowance on sundry expenses, hotel expenses, gift articles and employee welfare expenses of Rs. 50,000 substained by the first appellate authority is unjust and improper. The claim be allowed in full. Just and proper relief be granted to the appellant in this respect." 43. In the P&L a/c, the assessee had debited expenses aggregating to Rs. 9,44,250 as under: S. No. Particulars Rs) 1. Sundry expenses 1,92,521 2. Hotel expenses 2,72,829 3. Gift articles 21,591 4. Employees welfare expenses 4,57,309 Total 9,44,250 44. The AO disallowed 10 per cent of the above expenses amounting to Rs. 94,425 on the ground that full verification of these expenses was not possible and that personal and non-business element could not be ruled out. 45. The CIT(A) noted in para 9.2 of his order that the AO had not specified the instances of expenses wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound of personal/non-business user of the telephones/fax. In taking this view we are fortified by the decision of the Gujarat High Court in the case of Sayaji Iron and Engg. Co. The ground No. 5 is accordingly allowed. Ground No. 6 "On the facts and circumstances prevailing in the case and as per provisions of law, it be held that disallowance of Rs. 25,000 sustained by the first appellate authority out of travelling and conveyance is unjust and improper. The claim be allowed in full. Just and proper relief be granted to the appellant in this respect." 49. The assessee had debited in the P&L a/c Rs. 26,54,505 under the head travelling and conveyance. The AO made a disallowance of Rs. 1,00,000 on the ground of non-verifiability and personal element, The CIT(A) restricted the disallowance to Rs. 25,000 on estimate basis. The assessee is a company and therefore there could be no justification for an ad hoc disallowance on the ground of personal or non-business component in the expenses claimed. In our considered opinion, the disallowance made by the lower authorities is based on conjectures and surmises and could not be sustained. In taking this view we are fortified by the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partly sustained by the first appellate authority is contrary to the provisions of the Act. It further be held that the claim is allowable in full. The appellant be granted just and proper relief in this respect. 3. On facts and circumstances prevailing in the case and as per provisions of law, it be held that the ad hoc disallowance out of sundry expenses made by the AO and partly sustained by the first appellate authority is unwarranted, unjustified and is contrary to the provisions of law and facts prevailing in the case. The disallowance be deleted in full. The appellant be granted just and proper relief in this respect." 54. A similar disallowance made in asst. yr. 2001-02 was deleted by us for the reasons given in para 46 above. The facts in asst. yr. 2002-03 are identical and therefore we delete the impugned addition and allow the ground Nos. 2 and 3. Ground No. 4 "On facts and circumstances prevailing in the case and as per provisions of law, it be held that no interest is leviable in case of appellant company in terms of provisions of ss. 234A, 234B and 234C of the Act. The interest charged by the AO is unwarranted, unjustified and in contrary to the provisions of l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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