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TMI Blog2010 (10) TMI 764X X X X Extracts X X X X X X X X Extracts X X X X ..... owance, the departmental authorities would not be justified in adding back the amount under rule 5(a) - Decided in favor of the assessee Regarding amortization of the pre-operative expenses - The brief facts in this connection are that the assessee company was incorporated on 24th August 2000 and the certificate of commencement of business was issued on 3rd January 2001 - There is no dispute that the expenditure was incurred between the date of incorporation and the date on which the license to carry on the business was obtained from the Regulatory Authority. Thus it is clear that the expenses were incurred before the actual carrying on of the business - Only capital expenditure can be amortized under section 35D and that is a special allowance for capital expenditure, which is not otherwise allowed as a deduction - An assessee can correct any mistake or omission in the original return by filing a revised return, the validity of which has not been challenged - Decided in favor of the assessee - ITA No. 2597/Mum/2009, ITA No. 2543/Mum/2009 - - - Dated:- 22-10-2010 - S.E. Dastur and Nishant Thakker for the Appellant Sanjeev Dutt for the Respondent ORDER R.V. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d taking the example given above further, the assessee was required to show the value of the security in its Balance Sheet at Rs.1,003/- which was the historical cost and the difference between the face value of Rs.1,000/- and the historical cost of Rs.1,003/-, namely, Rs.3/- was to be amortized. The amortization naturally was to be for a period from the date of purchase of the security and the date of maturity. For example, if the debt security was to mature in five years and the assessee had acquired it after two years from the date of issue, there will still be three years remaining for its maturity. In the example given above, the excess of Rs.3/- paid by the assessee was to be amortized over the remaining period of three years. The basis behind this Rule, in our humble understanding, is to value the investment only at its face value which is what the assessee would get at the end of the period and any excess paid over the face value while acquiring the security though will have to be shown as part of the cost, but still would have to be amortized over the remaining period till the maturity of the security so that the excess paid is properly accounted for and also the true pict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ished to the Controller of Insurance, subject to the adjustments made in clauses (a) to (c) of the rule. So far as the first ground of the appeal is concerned, it relates to the interpretation of clause (a) of rule 5. Under this clause, any expenditure or allowance including any amount debited to the Profit and Loss Account by way of a provision for any tax, dividend, reserve or other provision as may be prescribed, which is not admissible under the provisions of sections 30 to 43B in computing the profits and gains of a business shall be added back to the balance of the profits disclosed in the annual accounts furnished to the Controller of Insurance. While completing the assessment, the Assessing Officer took the view that the amortization claim of Rs.1,91,33,945/-, debited to the Profit and Loss Account, has to be added back to the balance of profits shown in the annual accounts under rule 5(a) of the First Schedule. According to him, the investments (debt securities) were not the stock-in-trade of the assessee, nor was the assessee engaged in any investment business. It was only the compulsion of law that required the assessee to invest its funds in specified securities so that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to fulfill a condition for the allowance. He contended that since section 37 was covered by sections 30 to 43B, it would be material to find out if an expenditure was capital in nature and the Assessing Officer has rightly examined this aspect and held that the amortization claim being capital in nature cannot be allowed. It was further contended that there is no specific provision in the Profit and Loss Account permitting amortization claim, including the instructions of the IRDA. In this behalf he submitted that rule 6(d) of the IRDA instructions does not say that amortization shall be treated as an item of expense in the Profit and Loss Account. 7. On a careful consideration of the facts and the rival contentions, we are of the view that the amortization claim cannot be considered as an expenditure or allowance within the meaning of rule 5(a) of the First Schedule. As held by the Supreme Court in the case of Indian Molasses Co. (Private) Ltd. vs. CIT, West Bengal (1959) 37 ITR 66 (SC), spending in the sense paying out or away of money is the primary meaning of expenditure. Expenditure is what is paid out or away and is something which is gone irretrievably. Expenditure, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lete the addition of Rs.1,91,33,945/- and allow the first ground. 8. The second ground is directed against the action of the Income Tax authorities in disallowing the assessee's claim for amortization of the pre-operative expenses amounting to Rs.1,40,30,352/-. The brief facts in this connection are that the assessee company was incorporated on 24th August 2000 and the certificate of commencement of business was issued on 3rd January 2001. It obtained the license to carry on business from the Regulatory Authority on 22nd January 2001. Between the date of incorporation and the date of obtaining the license, the assessee incurred the following expenses which were described as preoperative expenses:- Sr. No. Particulars Amount In Rs. 1. Employees remuneration and welfare benefits 3,10,03,000 2, Travel, conveyance and vehicle running expenses 1,52,50,000 3. Rent, rates and taxes 94,77,000 4. Repairs and maintenance 2,52,000 5. Printing and stationary 8,49,000 6. Communication expenses 27,90,000 7. Legal and profess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly, was that the claim was made only in the revised return and not in the original return, which shows some sort of an afterthought. It was argued that in any case the expenses were not covered by section 35D of the Act and there was no other specific provision in the Act allowing the expenditure incurred in an earlier year. It was contended that it was for the assessee to show how the claim was admissible under the provisions of sections 30 to 43B. The further contention was that when the expenditure was incurred, the assessee had not commenced its business and, therefore, the provisions of section 37(1) were also not applicable. In this connection, it was pointed out that in the case before the Delhi High Court (supra), the assessee was carrying on the business when the expenditure was incurred, which was not so in the present case. Reliance was also placed in the judgment of the Madras High Court in CIT vs. Ennar Steel and Alloy (P) Ltd. (2003) 261 ITR 347 (Mad). 11. We have carefully considered the facts and the rival contentions. There is no dispute that the expenditure was incurred between the date of incorporation and the date on which the license to carry on the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the assessment year 1966-67 and no question of apportioning it over a series of years can at all arise. There can, therefore, be no question of allowing any deduction in respect of the whole or any part of this amount in the assessment year 1967-68". This judgment of the Delhi High Court fully supports the assessee's claim. The facts of that case show that the entire amount paid to the collaborator was claimed as a deduction in the return filed for the assessment year 1966-67 though the payments were made before the business was set up. The facts further show that initially the assessee had claimed only 1/14th of the payment as a deduction but later revised its claim and claimed the entire payment as deduction in the assessment year 1966-67, though no part of the payment either related to the said assessment year or was paid in the said assessment year. The Delhi High Court, speaking through Hon'ble Justice S Ranganathan (His Lordship then was) held that the entire payment allowable in the assessment year 1966-67 as revenue expenditure without being apportioned between the assessment years 1966-67 and 1967-68. It cannot be argued that the High Court was not aware of the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of facts filed before the CIT(A), the assessee has pointed out that out of the total preliminary expenses of Rs.1,50,21,749/-, there were two items - (a) Municipal registration fees for shops and establishment Rs.3,000/-, and (b) IRDA registration fees of Rs.50,000/-; totalling to Rs.53,000/-. The assessee, however, claimed deduction only in respect of 1/5th of the Stamp duty and registration charges of Rs.1,37,00,500/- which was part of the total figure of Rs.1,50,21,749/-. Thus no deduction was claimed on account of the expenditure of Rs.53,000/-. This aspect has been overlooked by the Assessing Officer and the CIT(A). An amount which has not been claimed cannot be disallowed or reduced from the claim. Accordingly we delete the disallowance of Rs.53,000/- and allow the ground. 17. Ground No.4 is directed against the action of the Income Tax authorities in considering the profit of Rs.47,45,699/- on sale of investments as taxable income. The assessee held 11.50% Lafarge Debentures. They were purchased on 5th February 2001 and sold on 5th November 2002. The profit on the sale amounted to Rs.47,45,859/-. The same was credited to the Profit and Loss Account. In fact the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment". The argument on behalf of the assessee primarily is that when the rules for preparation of the final accounts provide that the profit on sale of investments should be shown in the credit side of the Profit and Loss Account, then there was no question of rule 5(b) being applicable and that was the reason why the said rule was omitted with effect from 01.04.1989 and the effect of the omission is that where the Profit and Loss Account already includes the profit on sale of investments, the same shall stand excluded. The effect of the omission of the rule was considered by the Pune Bench of the Tribunal in its order dated 31st August 2009, in the case of Bajaj Allianz General Insurance Company, in ITA No: 1447/PN/2007 and CO No:52/PN/2007 (assessment year 2003-04). A copy of the said order has been filed before us. The Tribunal has also considered the Circular No.528 dated 16.12.1988. After analyzing the impact of the omission of rule 5(b) and the Circular, the Tribunal held as under:- "8. A conclusion can be drawn on the basis of the above elaborate discussion that the deletion of sub rule (b) from Rule 5of the First Schedule was with a specific purpose. This Sched ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n away. He submitted further that the profit on sale of the investment has already been included in the Profit and Loss Account and there is no authority to take it out even under rule 5(b) as it existed before 01.04.1989. According to him, there was no scope for applying the rules of interpretation when the statutory provisions are clear. Since the matter is concluded by the orders of the Tribunal cited supra, where all these aspects have been considered, we are unable to take a different view of the matter. Thus Ground No.4 is allowed. 21. In the result, the appeal of the assessee is allowed. 22. The appeal of the Department in ITA No: 2543/Mum/2009 raises only one issue, namely, the allowing of the software expenses of Rs.49,30,679/-. We have considered the facts and the rival contentions. The details of the expenditure set out in paragraph 11 of the impugned order shows that the breakup of the expenditure is as below:- Description Amount (Rs.) Purchase of Software (MS Office, WIN for office application) 38,45,379 Etrust Innoculate (Anti virus software) 8,07,433 Others 2,77,887 Total 49,30,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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