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TMI Blog2007 (9) TMI 456X X X X Extracts X X X X X X X X Extracts X X X X ..... regard pertaining to this issue are allowed. Disallowance of expenditure u/s 37 - Incurred on Commercial Expediency - HELD THAT:- On going through the order of the CIT(A), we find that before recording a finding that the expenditure was not incurred for the business purpose of the assessee the CIT(A) has not allowed an opportunity to the assessee for explaining as to how the expenditure related to the business expediency of the assessee. We find force in the contention of the learned AR for the assessee that once the assessee has filed the complete details of the expenditure nothing more was required to be done by the assessee for showing its eligibility for claiming the deduction for the impugned expenditure and, therefore, the assessee did not consider it necessary to explain the same before the CIT(A). Had the CIT(A) asked the assessee to explain the assessee would have done so. We consider it appropriate to set aside the issue to the file of the CIT(A) for deciding the issue afresh after allowing reasonable opportunity of being heard to the assessee for explaining as to how the expenditure incurred/claimed related to the commercial expediency of the assessee. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking was negative. 3. Aggrieved with the order of the Assessing Officer, the assessee filed an appeal before the CIT(A) and the CIT(A), after rejecting all the pleas of the assessee as detailed in his order, upheld the order of Assessing Officer in carrying out the long-term gain of Rs. 2,86,27,260 by making following relevant observations : "When there is no extinguishment of liability of the amount of Rs. 5,11,17,260 it has to be treated as an advice payment for acquiring the undertaking on slump sale basis. In the agreement deed the cost of acquisition has purposely been taken as aggregate value of total assets of the undertaking as reduced by the value of all its liabilities. This has been done to make the net worth a negative figure so as to create confusion about chargeability of capital gains. Unless the amount of Rs. 5,11,17,260 is treated as extinguishment of liability or as an advance to be adjusted towards purchase the accounts cannot be settled under double entry system. By treating the amount of Rs. 5,11,17,260 as advance, it will form as part of sale consideration. Thus, the sale consideration will be at Rs. 5,86,17,260 (Rs. 5,11,17,260 + Rs. 75,00,000). C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be taken as written down value determined under section 43(6)( c ) of the Act, while value of non-depreciable assets shall be taken as per books. The net worth so computed is to be certified by the report of accountant as defined in section 288(2). The question for consideration is whether net worth as computed can be in negative so as to increase the sale consideration by such negative figure of net worth for computing capital gain. In other words, can the capital gain be more than the sale consideration received by the assessee. The answer is in negative for the reasons given hereafter. Firstly, capital gain is always a portion of sale consideration and, therefore, portion can never be higher than the whole. Gain would arise only where sale consideration is more than the cost. By no stretch of imagination, it can be said that capital gain would be more than the sale consideration. No man of prudence can ever think of capital gain higher than the sale consideration. Capital gain can either be excess of sale consideration over the cost or nil if sale consideration is equal to cost. Where the cost is more than sale consideration, it would be a case of loss. No other situ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liabilities. It is because of written down value of assets under section 43(6)( c ) of the Act, that value of depreciable assets had to be computed at substantially low figure which resulted in the value of assets lesser than liabilities but on that account net worth cannot be reduced below the Nil account since such process would be contrary to the scheme of the section itself. Therefore, in view of the above discussion, it is held that net worth of the cement division would be taken as Nil which shall be deemed to be the cost of acquisition for the purpose of computing capital gain under section 48. When an asset is saddled with liability then there are two ways for considering the value of liability while computing the capital gain. Firstly, sale consideration should be increased to the net amount realized by the vendor. Secondly, the value of liability can be deducted from the value of assets while determining the cost of acquisition as provided in section 50B. The Legislature, in its wisdom, having opted for the second option, it is not open now for the revenue to contend that such liability should again be added to the sale consideration realized by the vendor. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed. 8. The facts relating to the second issue regarding the disallowance of expenses claimed by the assessee are that the assessee-company was engaged in manufacturing and sale of stationery item and trading activities. It sold its main manufacturing unit at Navi Mumbai for a consideration of Rs. 75 lakhs to its holding company M/s. Ballarpur Industries Ltd. on slump sales basis as on 31-8-2000. Before effecting the sale of the undertaking, the assessee-company entered into an agreement on 15-5-2000 with M/s. Ballarpur Industries Ltd. to carry out necessary study for identifying new markets in India and abroad for establishment of new distribution network for marketing of paper stationery. The report was submitted to the assessee-company on 14-3-2001. However, till the time the report was submitted the assessee had already sold its manufacturing unit of stationery to its holding company. For conducting study an expenditure of Rs. 3.22 crores was alleged to have been incurred by M/s. Ballarpur Industries Ltd. on behalf of the assessee, which has been claimed as allowable expenditure under section 37(1) of the Income-tax Act. 9. The Assessing Officer simply treated this expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18,24,125 dated 3-12-2000 is in respect of travelling expenses of senior officers of Ballarpur Industries. The amount of Rs. 12,31,418 was incurred for travelling expenses for the month of October and November. The balance amount of Rs. 5,92,707 was incurred by Shri Yogesh Agarwal, Vice President on foreign visit for the business of Ballarpur Industries. Therefore, the expenditure of Rs. 18,24,125 cannot be treated to have been incurred for conducted of market study. ( v )Bill for Rs. 27,04,834 represents TA expenses bill for the senior officers of Ballarpur Industries for the month of December 2000 and January 2001. The expenditure for travelling within the country are at Rs. 10,83,955. The balance amount of Rs. 16,20,879 was incurred by senior officers of the company for foreign visits for the business of Ballarpur Industries. ( vi )Bill for Rs. 16,52,070 dated 31-3-2001 is for travelling expenses of February and March 2001. The expenditure incurred for tours conducted by senior officers of the company are at Rs. 12,34,862. The balance amount of Rs. 4,17,208 was incurred by senior officers like CGM and GVP CFO for foreign visit for the work of Ballarpur Industries. ( vii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our employees to collect data within a period of 5 to 7 days and compile the information. The expenditure of Rs. 3,22,30,015 has been diverted by Ballarpur Industries Ltd., the holding company to the subsidiary company s account to wipe out the capital gains arising on slump sale. The appellant has not given the names of the persons who have conducted surveys, the material gathered by the surveyors and copies of original survey reports to justify that any such market study was conducted. If the genuine market study was conducted the appellant would have given the information. From the above, it is clear that the expenditure has been diverted by Ballarpur Industries to the account of the subsidiary company in the guise of market research to wipe out the profits earned on slump sale. The expenditure is not genuine expenditure and therefore, the amount of Rs. 3,22,30,015 has not been incurred at all for the purposes of business of the appellant. The Assessing Officer has disallowed the expenditure as capital expenditure. Since the appellant has not incurred the expenses and it is case of diversion of expenditure of Ballarpur Industries Ltd., the same is not allowable as deduction. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "Once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expenditure and not from the point of view whether the amount was advanced for earning profits. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has failed to do so, hence, the disallowance of the entire expenditure by the CIT(A) was fully justified. In support of the contentions, the learned DR for the revenue placed reliance on the observations of the Apex Court in the case of S.A. Builders Ltd. ( supra ) wherein their Lordships observing that decisions relating to section 37 will also be applicable to section 36(1)( iii ) because in section 37 also the expression used is for the purpose of business . For the purpose of business includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. In this very decision their Lordships further observed that what is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits. Thus, according to the learned DR for the revenue, even as per decision ( supra ) of the Apex Court the assessee was required to show that it incurred the expenditure as a measure of commercial expediency to become eligible for claiming the deduction under section 37 of the Act. 15. Countering the arguments of the learned DR for th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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