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TMI Blog2007 (9) TMI 449X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 37,88,563 ( ii )Provision for Restructuring expenses : Rs. 58,81,763 ( iii )Payment towards VRS : Rs. 13,63,516 Under the provisions of the Income-tax Act, restructuring expenses are allowable under section 35DD and VRS payment under section 35DDA. Further, expenditure which is allowable under section 35DDA is not allowable as a deduction under any other provisions of the Act. As per section 35DD restructuring expense is allowable @ 1/5th of the total expense over a period of five years. Accordingly, out of the total of Rs. 37,88,563, only a fifth of the same i.e. Rs. 7,57,713 appeared to have been allowable for the year. However, in computation of taxable income assessee had claimed the full amount as deduction and the same was allowed in the impugned assessment." 3. A notice in this respect was issued to the assessee asking as to why the order passed by the Assessing Officer should not be revised under section 263 of the Act. In response to this notice assessee filed following written submission along with details, documents and clarification in support of the claim made by the assessee in the return : "The company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an assessee to claim deduction to the extent of the 1/5th of the expenditure incurred wholly and exclusively for the purpose of amalgamation or demerger of an undertaking, for each of the five successive years beginning with the previous year in which the amalgamation or demerger takes place. Further no such deduction in respect of the aforesaid expenditure is to be allowed in any other section of the Act. Reference is invited to the Finance Bill, 1999 236 ITR 30, 159-160 (St.) which clearly suggests that various sections required amendments in order to enable companies to be tax neutral even though there is business reorganization. In the background of the aforesaid legislative intent, we submit that the expenses which are wholly and exclusively incurred in order to conceive a merger would be entitled to proportionate allowance. It is not denied that the expenditure related wholly and exclusively to the merger is allowable as per the provision of section 35DD. However, it is not necessary that a merger should follow relocation. Relocation of office is a business decision, separate from merger. The synergy obtained from combined operation, by revising scope of operation and pooli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciate that the only question that has to be dealt with is whether the aforesaid expenditure is a revenue expenditure, which will enable our claim the expenditure under section 37(1) of the Act. Reference is invited to the decision of the Hon ble Madras High Court in the case of CIT v. Bimetal Bearings Ltd. reported at 210 ITR 945 . The Hon ble Court held that expenditure relating to shifting of machinery is capital in nature whereas expenditure relating to shifting to employees is revenue in nature. The Madras High Court followed the decision of India Pistons Repco Ltd. v. CIT 143 ITR 424 (Mad). Further the same court in the case of CIT v. Bimetal Bearings Ltd. reported at 215 ITR 675 , 676 (Mad.) held that settling allowance given to employees because the factory had shifted to a new place is allowable as revenue expenditure. In light of the above decisions, we submit that the expenses which are wholly and exclusively related to the shifting of business inter alia employee s and regular office maintenance expenses should be allowed as revenue expenditure. It is submitted that we had also incurred certain transportation cost in relation to the shifting of comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect of the Hon ble High Court s decree of amalgamation, the assessee-company did not have a de jure existence on 7-1-2002, the date of grant of fresh certificate of incorporation, since the merger took effect from 1-1-2002. ( iv )However, the Assessing Officer allowed the said restructuring expenses on actuals, that is, as a general deduction under section 37(1) of the Income-tax Act, 1961, deduction under section 37(1) can be allowed only on residual expenses, that is, such expenses as are not specifically covered by deductions claimable and allowable under sections 30 to 36 of the Act. As discussed earlier, the expenses wholly and exclusively incurred in connection with merger of the companies can only be granted deduction under section 35DD. By virtue of the said provisions, the assessee can be allowed a deduction of an amount equal to one-fifth of such expenditure for each of five successive previous years beginning with the previous year in which the amalgamation takes place." 5. Certain dates of events which took place during the period 2001 to 2003 are relevant to the issue under consideration : "25-7-2002 EGM held for shifting Registered Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 35DDA Rs. 1,10,33,843 6. Out of this total amount of Rs. 1,10,33,843 the assessee in the computa-tion of income had claimed only 1/5th of VRS expenses and actual expenditure incurred on relocation amounting to Rs. 2,72,703 i.e. 1/5th of Rs. 13,63,516 and Rs. 37,88,563 respectively while offering to tax the provision made in the accounts on account of such relocation amounting to Rs. 58,81,763. The Assessing Officer after taking into consideration the above details accepted the claim made by the assessee in the return of income assessing the total income of the assessee at a loss of Rs. 3,34,49,260 under section 143(3) vide order dated 23-3-2005 after verification of the details and submissions given by the assessee at the time of hearing. This order is not prejudicial to the interest of the revenue since there was no error in allowing the claim of the assessee for the actual expenditure incurred on account of relocation of office from Delhi to Kolkata. The Hon ble Supreme Court in Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 has held that "if an order of the ITO is erroneous but is not prejudicial to the revenue or if i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Subhas Project s case decided by the Hon ble Calcutta High Court and CIT v. Arvind Jewellers [2003] 259 ITR 502 (Guj.), it was submitted that revisionary jurisdiction under section 263 cannot be invoked unless an impossible view has been taken by the Assessing Officer. Concluding his arguments, the Ld. Counsel for the assessee submitted that the Assessing Officer has already taken a possible view in the order passed under section 143(3) of the Act insofar as it related to the claim for relocation expenses which the Ld. CIT had tried to link with the amalgamation of the assessee with another company which was a decision subsequent to the decision of relocation of office from Delhi to Kolkata. In view of this, following the ratios laid down by the Hon ble High Courts the impugned notice issued under section 263 of the Act by the Ld. CIT was without any authority of law and is liable to be cancelled. 7. Ld. Departmental Representative, on the other hand, while meeting the technical objection raised by the assessee submitted that M/s. VAI India Pvt. Ltd., Delhi had applied for amalgamation with its sister concerns VAI Automation Pvt. Ltd., Kolkata by which name the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hifting the office from Delhi to Kolkata. The assessment order does not refer to any of these materials which were obtained by the Ld. CIT only in his inquiry under section 263. The assessment order thus lacked finding of fact and no decision can be made in the absence of facts. This in itself makes the order erroneous and the interest of revenue has suffered for want of examination of facts and still permitting deduction. 9. The Ld. Departmental Representative further submitted that it has been argued on behalf of the assessee that the Assessing Officer examined the issue based on the materials furnished in course of the assessment proceedings and consciously did not disturb the claim of admissibility of deduction of the imposed sum under section 37. In fact, no details or materials were furnished to the Assessing Officer as evident from the letter dated 29-7-2004 of the assessee addressed to the Assessing Officer. The last para of the letter clearly states that restructuring expenses has been offered for tax and hence, details in respect thereof were not enclosed. Without furnishing any such details the assessee writes again vide letter dated 3-2-2007 to the Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Authority is taking. In cases where the order passed by a statutory authority is silent as to the reasons for the conclusion it has been drawn, it can well be said that the authority has not applied its mind to the issues before it nor formed an opinion. It has been contended on behalf of the assessee that a mere change of opinion cannot be a basis for revisiting an assessment. This principle may apply only to situations where the Assessing Officer has applied his mind and taken a conscious decision on a particular matter in issue. It will have no application where the order of assessment does not address itself to the aspect which is the basis for the revisionary proceedings, as is the position in the present case. It is in that view inconsequential whether or not the material necessary for taking a decision was available to the Assessing Officer either generally or in the form of a reply to the questionnaire served upon the assessee or in the form of a physical inspection reportedly done of the premises of the assessee. What is important is whether the Assessing Officer had based on the materials available to him taken a view. If he had not done so, the proposed revision can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 to 15 of the paper book were filed for the first time by the assessee before the Ld. CIT during proceedings under section 263. Similarly, the dates of events which have been mentioned by the Ld. CIT in para 5 of his order were also not before the Assessing Officer. The assessee has placed reliance on letters filed by him during the assessment proceedings on 29-7-2004 and 3-2-2005 to submit that assessee did file details in respect of Rs. 37,88,563 incurred during the year. While going through the letter dated 29-7-2004, we find that in the last para of that letter assessee himself admits that since restructuring expenses have been offered for tax no details in respect thereof was enclosed. Similarly, in the letter dated 3-2-2007 assessee did not file any further details except giving the heads of expenditure incurred in respect of the restructuring expenses. This letter also speaks of restructuring expenses only. The contention that these expenses have been erroneously termed as restructuring expenses by the assessee which were in fact relocation expenses was taken for the first time by the assessee during the proceedings before the Ld. CIT. While pursuing copies of order sheet o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this appeal is whether the actual expenses incurred amounting to Rs. 37,88,563 would be allowable as revenue expenditure or should be allowed on proportionate basis as per the provisions of section 35DD of the Act. At the time of hearing the Ld. Counsel for the assessee submitted that the assessee operated in principle from Calcutta Office whereas its head office and the administrative office was situated in Delhi to synergise with the demand and the expanding market in the eastern region. The Board of Directors decided to relocate its office from Delhi to Kolkata and the expenses incurred amounting to Rs. 37,88,563 had been claimed as revenue expenditure and such claim had been accepted by the Assessing Officer. These expenses had been erroneously termed as restructuring expenses by the assessee which were actually relocation expenses. The detail break up of these expenses were filed before the Ld. CIT at the time of section 263 proceedings and are available at pages 9 to 15 of the paper book. The meeting of the Board of Directors for shifting of the administrative office took place on 12-6-2001. This decision was approved at the Extraordinary General Meeting of the shareholders o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in nature as has been held by the Hon ble Madras High Court in the case of CIT v. Bimetal Bearings Ltd. [1994] 210 ITR 945. In this case, the Hon ble Court specifically held that shifting of machinery could be held as capital while shifting of employees would be revenue. Further the same court in the case of CIT v. Bimetal Bearings Ltd. [1995] 215 ITR 675 (Mad.) held that settling allowances given to employees because the factory had shifted to a new place is allowable as revenue expenditure. Concluding his argument, the Ld. Counsel for the assessee submitted that the disallowance made by the Ld. CIT is not tenable in law as well as on facts. 14. On the other hand, the Ld. Departmental Representative submitted that the assessee amortised 1/5th of the VRS payment which is in accordance with the provisions of section 35DDA. However, it did not amortise similarly the impugned expenses incurred of Rs. 37,88,563. He further submitted that there is a specific provision of section 35DD to deal with restructuring expenses, in other words amalgamation or merger expenses. Once the liability in this regard is incurred, only 1/5th of the liability is to be allowed as deduction over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was taken by the assessee-company to implement these decisions till 18-3-2002 when notice to employees for shifting from Delhi to Kolkata was given. This notice has admittedly been given within one week of the decision of merger was taken by Boards of both the companies on 11/12-3-2002. After the service of this notice employees were shifted to Kolkata on 27-3-2002. This shows that within fortnight of the decision of merger the entire exercise of shifting of the office was completed. No explanation whatsoever has been given on behalf of the assessee as to why no steps were taken towards implementing the decision taken on 25-7-2001 to shift the office till the decision of merger by the respective boards of the two companies was taken on 11/12-3-2002 either before the Ld. CIT or before us. Therefore, the relevant date and event for incurring this expenditure is 11/12-3-2002 i.e. date of decision of merger and not 25-7-2001 when Extraordinary General Meeting took the decision for shifting the office. In the light of these facts of this case, we are of the considered opinion that the expenditure of Rs. 37,88,563 was incurred for purposes of amalgamation/merger of the two companies a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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