9911796707
TMI Blog2008 (12) TMI 314X X X X Extracts X X X X X X X X Extracts X X X X ..... I Penalty 403 ------------------------------------------------------------ 3. Towards in lieu of damages under s. 14(B) of PF Act-EPFO account No. KN-50071. 2,48,262 ------------------------------------------------------------ 4. Int. payable under s. 70 of the EPF and Miscellaneous Provision Act, 1952 on related remittance of dues the period from July, 1997 to February, 2001 48,706 ------------------------------------------------------------ 5. Int. on ESI delay in payment 15,858 ------------------------------------------------------------ 6. Towards wrong supply of beer 19,657 ------------------------------------------------------------ 7. Sales-tax penalty and interest under ss. 10(6) and 11(D) for financial year 2001-02 5,18,041 ------------------------------------------------------------ 8. Sales-tax penalty and Int. under ss. 10(6) and 11 (D) for financial year 2002-03 2,13,524 ------------------------------------------------------------ 9. Sales-tax penalty 15,354 ------------------------------------------------------------ 10. Sales-tax penalty for financial year 2002-03 73,000 ------------------------------------------------------------ 11. Sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penalty imposed under sales-tax. In that case, raw material purchased at lower rate of sales-tax was used for the purpose other than specified. The Hon'ble apex Court held that such penalty comprises both elements of compensation and penalty. It was held that the amount should be bifurcated and should be allowed to the extent it is compensatory in nature. Penalty imposed for failure to file return and comply with the requirements of notice was held as not involving any clement of compensation and was therefore not allowable. 2.6 The Hon'ble apex Court in the case of Organo Chemical Industries vs. Union of India AIR 1979 SC 1803 had an occasion to consider the meaning of the expression 'damages' occurring in s. 14B of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952. The Hon'ble apex Court held that such damages could not have been treated by the Tribunal as purely compensatory. The real distinction exists between an impost which is compensatory and an impost which is a penalty and this was pointed out as under: "The question whether any such impost is in essence compensatory or is by way of penalty will have to be decided having regard to the relevant provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 37, the expenditure incurred for any purpose, which is an offence or which is prohibited by law, is to be treated to have not been incurred for the purpose of the business. Thus, the payment, which is punitive, is not allowable and in case the payment is compensatory, then the payment to the extent of compensatory nature is to be allowed. Since the issue has not been properly dealt either by the AO or by the learned CIT(A), therefore, we have no alternative but to set aside this issue on the file of the AO so that the assessee files all the material before the AO to show that the amounts are allowable because these are compensatory in nature. In case the AO finds that the amount is punitive, then it is not allowable. In case, the amount is compensatory as well as punitive, then the AO will bifurcate the amount and will allow the amount to the extent it is compensatory. 3. The second grievance of the Revenue is that the learned CIT(A) has erred in allowing the enhanced lease rent of Rs. 1,95,60,000 paid to two sister concerns without appreciating the provisions of s. 40A(2)(b) of the IT Act. 3.1 The learned CIT(A) has mentioned in his order that this issue was considered by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gely consisting of staff salaries, electricity charges, dish net charges, traveling expenses, staff food expenses etc. There was business of call centre functioning during the year and such business was substantial. The fact that the assessee described the revenue expenditure as deferred revenue expenditure does not militate against the claim nor does not justify the inference that the amount paid is in the nature of capital expenditure. The call centre is only an extension of new line of business and not of new business by itself. There was already an established facility by leasing or otherwise. It is incorrect to assume that there was no business at all. The law required that there should be a business during the year for allowing the expenses incurred during the year. Even there was a particular activity which forms part of business yet to be started or discontinued, deduction cannot be disallowed. Once business is set up, deduction becomes admissible by tests laid down by the following decisions: (1) CWT vs. Ramaraju Surgical Cotton Mills Ltd. (1967) 63 ITR 478 (SC); (2) CIT vs. Sarabhai Management Corporation Ltd. (1992) 102 CTR (SC) 164 : (1991) 192 ITR 151 (SC); (3) CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drew our attention to p. 15 of the annual report. At p. 15, it is mentioned that the company is one of the leading manufacturers and distributors of high quality alcoholic beverages in the country, catering to both Indian and overseas market. Of late the company has diversified its business activities by carrying on the business of high quality bottles and printing and writing papers etc. Pursuant to the scheme of amalgamation as approved by the Hon'ble High Court of Karnataka by its order dt. 22nd Aug., 2003, Khodays Systems Ltd., the sister concern of the Khoday group was amalgamated with the company thereby enabling the company to carry on the business of information technology as well. While highlighting the outlook for 2003-04, it is mentioned that the company is geared up to meet the challenges by diversifying its activities into the area of information technology, paper and paper products and hope to capitalize on the opportunities open the company in the year 2003-04. Thereafter, the learned Departmental Representative drew our attention to p. 38 of the annual report. In Sch. 23 of the annual report, it is mentioned that the operations of Khodays System Ltd. include tradin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Such receipts included the receipts from the call centre. The details of sales on system division has also been filed vide letter dt. 27th Nov., 2008. These details were filed as desired by the Bench. Call center details are of Rs. 1,95,25,602. Rs. 15,31,965 are the sales of trading division. The learned Authorised Representative filed the ledger account of technical service charges and has also enclosed copies of certain bills. From these details, the learned Authorised Representative submitted that the business of call centre was already in existence. 4.5 The learned Authorised Representative relied on the decision of the Mumbai Bench in the case of Situ Electro Instruments (P) Ltd. vs. ITO (2008) 19 SOT 13 (Mumbai). In this case it was held that the entries in books of account cannot be the basis to decide whether an expenditure is allowable as deduction or not. If the expenditure is of revenue nature, then the same is to be allowed irrespective of its treatment in books of account. The learned Authorised Representative relied on the decision of the Hyderabad Bench in the case of ITW Signode India Ltd. vs. Dy. CIT (2007) 110 TTJ (Hyd) 170. In this case it was held that instal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is for the time being approved in this behalf by the Board; (b) legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee; (c) where the assessee is a company, also expenditure (i) by way of legal charges for drafting the memorandum and articles of association of the company; (ii) on printing of the memorandum and articles of association; (iii) by way of fees for registering the company under the provisions of the Companies Act, 1956 (1 of 1956); (iv) in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, or brokerage and charges for drafting, typing, printing and advertisement of the prospectus; (d) such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provision of this Act) as may be prescribed." 4.7 Sec. 35D was inserted by Taxation Laws Amendment Act, 1970 w.e.f. 1st April, 1971. The CBOT issued Circular No. 56 dt. 19th March, 1971 to explain the provisions in the Taxation Laws (Amendment) Act, 1970. Paras 42 and 43 of the cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f share in or debentures of the company, by way of underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus. (This will include legal charges and auditors' fees for drafting of the prospectus). The CBDT is also empowered to specify in the IT Rules any other item or items of expenditure in respect of which the law does not provide for any allowance or deduction, and, thereupon the items of expenditure so specified will also be eligible for amortisation under s. 35D. 43. The aggregate amount of the expenditure under all the specified heads will, for the purpose of amortisation be limited to 2 1/2 per cent of the cost of the project. The 'cost of the project' has been defined to mean the actual cost of the fixed assets, namely, land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings), which are shown in the books of the assessee as on the last day of the previous year in which the business of the assessee commences. Where the amortisation is to be allowed with reference to expenditure incurred in connection with the extension of an exist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing the same analogy, the expenses of revenue nature are to be allowed and if there are ex-capital expenses or expenses covered under s. 35D(2), then 35D will come into play. 4.9 The Hon'ble apex Court in the case of India Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC) had an occasion to consider the allowability of expenditure incurred for raising loan. The Hon'ble apex Court allowed the expenditure as according to the Hon'ble apex Court, the loan obtained is not an asset or advantage of an enduring nature. It is irrelevant to consider the object with which the loan was obtained. In that case, the contention was raised by the Revenue that even if the expenditure is held to be revenue, then it is not to be allowed as it has not been incurred wholly and exclusively for the purpose of business. The Hon'ble apex Court referred to the observations in the case of CIT vs. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC) and these are available at p. 63 in the case of India Cements Ltd., which are reproduced as under: "The expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is wide: it may take in not only the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o situations. The first situation is where expenditure is incurred before the commencement of business. In the present case, we are not concerned with this situation. The second situation is where the assessee incurs the expenditure after the commencement of business in connection with the extension of its industrial undertaking or in connection with the setting up of a new industrial unit. Since the assessee has commenced its business long back and has incurred the impugned expenditure after the commencement of its business, we have to appreciate the facts in the light of this situation. This second situation further visualizes either of the two situations. One is, the expenditure is incurred in connection with the extension of its industrial undertaking. Let us examine whether the assessee's case falls within this situation. The expression used is 'extension' and not 'expansion'. The former connotes that the assessee has extended its operations from the present activity to another activity. On the other hand, the latter indicates that the assessee merely expanded its present operations. The expansion is generally meant to be the expansion of its present installed capacities. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , there is no gainsaying that the assessee has put up new industrial unit and hence the expenditure in connection therewith should be amortised under s. 35D. In the two Tribunal decisions, the assessee had launched altogether a new product and had incurred huge advertisement expenditure. In both the cases, the expenditure was treated as deferred revenue expenditure by the assessee in its books of account. The assessee had claimed the entire expenditure in the return of income as revenue expenditure. The Tribunal allowed the entire expenditure by observing that by its very nature, deferred revenue expenditure presupposed that the expenditure was in revenue field. It was also observed that though the expenses may have enduring benefit, no estimate can be made about the period for which the assessee may be benefited. Therefore, on these grounds, the Tribunal allowed the expenditure. The assessee's case in the present appeal is on a much better footing insofar as that the assessee has not launched any new product worth its name. The production of Edge Board which is a new product introduced during the year is too insignificant to be considered. Thus, considering the overall facts of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --------------------------------------------- Depreciation 4,24,570.00 -------------------------------------------------- Miscellaneous expenses 59,436.00 -------------------------------------------------- Office equipment hire charges 2,52,500.00 -------------------------------------------------- Office maintenance charges 2,14,776.00 -------------------------------------------------- Rates and taxes 16,78,009.00 -------------------------------------------------- Rent 4,55,000.00 -------------------------------------------------- Repairs and maintenance computers 4,764.00 -------------------------------------------------- Service charge teaching 60,000.00 -------------------------------------------------- Training expenses 1,45,259.00 -------------------------------------------------- Transportation charges 61,500.00 -------------------------------------------------- Travelling expenses-Inland Air Fare 1,44,930.00 -------------------------------------------------- Salaries-Contract 31,09,924.00 -------------------------------------------------- Salaries trainees 53,30,063.00 -------------------------------------------------- Salaries technical staff 88,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
