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TMI Blog2012 (9) TMI 524X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 5,76,975/-, paid to IMRB for market research on life insurance business in India, was a deductible expenditure? 3. The brief facts necessary to decide the case are that the assessee is engaged in the business of printing and publishing of newspapers, periodicals and also production of video cassettes. For the Assessment Year, 2001-02, it filed a return declaring loss of Rs. 27,41,56,666/-. During this year, it claimed business expense to the tune of Rs. 38,01,632/- and another amount of Rs. 5,75,000/-. This was on account of reimbursement towards its share of joint venture company set-up for the purpose of life insurance business and towards its share for branding and re-branding of joint venture agreement. Likewise, for the Assessment Year 1999-00, the assessee claimed a deduction in the sum of Rs. 5,76,975/-, which had been paid to M/s. IMRB for conducting market research on its propose insurance project. It is a fact that the proposed insurance business was never launched and the commercial or business activity in fact never undertaken by the respondent assessee. Apart from these, for the Assessment Year 2000-01, an amount of Rs. 60,03,453/- had been claimed as payable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ationally. It was stated that the company decided to explore the market of banking and insurance business due to its wide brand recognition and depth market penetration at base level. The relevant clause in Memorandum of Association of the appellant company was also filed. It was stated that in order to expand business, the appellant entered into a joint venture with CGU, one of the leading insurance company in Europe. It was stated that in the relevant assessment year, the appellant reimbursed Rs.43,76,632/- to HTCGU Ltd. as appellant‟s share of expenses and for drafting of a joint venture agreement. It was stated that the project could not go in line and was abandoned. It was stated that the aforesaid activity of insurance undertaken by the appellant was in consonance with the object of the appellant and was only expansion of the same business carried on by the appellant, it was stated that expenditure incurred for making feasibility studies for identifying projects that may be taken up advantageously even though later on project was abandoned were allowable expenditure. Reliance in this regard was placed on the decision of Hon‟ble Andhra Pradesh High Court in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n though the business any involve a diversity, there is a unifying factor which is the unity of control. 22. Having considered the arguments of the appellant and the case law cited, I am of the view that the moot question is not whether the appellant company was authorized by its „objects clause‟ in the Memorandum and Articles of Association in undertake business of insurance or there was unity of control or otherwise unifying factor. The most question relate to capital or revenue nature of the expense. The main reference point would be, whether the expenditure resulted in an asset of an enduring nature. To my mind, the expenditure is of capital nature. The conclusion is also based on the ratio in CIT Vs. Shri Digvijay Cement Co. Ltd., (1986) 159 ITR 253 where the Gujarat High Court held that expenditure incurred in obtaining a feasibility report for setting up a ship yard, where the report was found not favourable for materializing, was held to be capital in nature. The same High Court re-confirmed the principle in Saurashtra Cement Chemicals Indst. Ltd. Vs. CIT (1992) 196 ITR 237 (Gujarat) wherein it was held that expenditure incurred in obtaining a techno economic f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture did not in any manner radically differ from any manner of capital expenditure. Even though the test of "interlacing" enunciated by the Supreme Court might prima facie be satisfied, in that, there might be unity of control and management and commonality of personnel, yet, if, in fact, the line of business proposed is entirely different from the existing one, and more importantly, if the proposed business never starts, the expenditure is capital in nature and liable to tax. Learned counsel submitted that the commissioning and receipt of a project report does not in any manner stand on a different footing and has to be likewise taxed as capital expenditure. 8. Learned counsel for the Revenue argued that the impugned judgment of the Tribunal to the extent it granted benefit of deduction for the sum of Rs. 6.03 Lakhs is contrary to the true meaning and intendment of Section 43B which mandates that expenditure that is otherwise deductible would not be permitted if it falls within the accepted category and would be deductible only on actual payment. Learned counsel emphasized upon the imperative nature of the provision highlighting the non-obstante clause. 9. Learned counsel for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gether, since the discussion of law and its application is based on common principles. The question whether expenditure by an assessee concerns an "existing" business has engaged the attention of the Supreme Court on several occasions. The earliest decision on this issue was Setabganj Sugar Mills Ltd. v. CIT, [1961] 41 ITR 272. The law declared in that judgment was later applied in successive rulings (Ref. CIT v. Prithvi Insurance Co. Ltd., [1967] 63 ITR 632; Produce Exchange Corporation Ltd. v. CIT, [1970] 77 ITR 739; Standard Refinery and Distillery Ltd. v. CIT, [1971] 79 ITR 589; Hooghly Trust (Pvt.) Ltd. v. CIT, [1969] 73 ITR 685 and Veecumsees v. CIT, [1996] 220 ITR 185 (SC)). In B. R. Ltd vs V. P. Gupta, C.I.T., Bombay, AIR 1978 SC 1320, after discussing the principles settled in the previous judgments, the Court held that the applicable test - wherever the issue arises, would be to see if the two commercial activities are "interlinked" or "interlaced": "A common management, a common business Organisation, a common administration, a common fund and a common place of business show in the instant case the interlacing and inter-dependence of the businesses carried on by the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany) in the insurance sector. This amendment was made in 2000 to the Insurance Act, 1938. The assessee apparently entered into a joint venture with some other concern. Its share of expenses to set up that joint venture, and the share of expenses for feasibility report, was held to be deductible, as it constituted part of an existing business. 14. There can be no dispute about the fact that the issue or question of whether a commercial activity or business is part of an existing business is essentially one of fact. The record reveals no document showing that the new activity was even permitted at the relevant time; if so, whether the assessee had obtained any license in this regard. Further, there could not be any assumption that there would be a common place of business, or that common staff and personnel would be used. Indeed, the business was not even that of the assessee; it was a joint venture; the identity of the other partner is unknown. Having regard to these, the question of interconnection had to be seen in the light of the facts as they presented themselves in this case. In view of these, the mere circumstance that common funding of the (proposed) business existed, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing. (e) Any sum payable by the assessee as interest on any term loan from a scheduled bank in accordance with the terms and conditions of the agreement governing such loan, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which sum is actually paid by him. Provided that nothing contained in this section shall apply in relation to any sum referred to in clause (a) or clause (c) or clause (d) or clause (e) which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return: Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on or before the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, - (a) "Public financial institution" shall have the meaning assigned to it in section 4A of the Companies Act, 1956 (1 of 1956); (aa) "Scheduled bank" shall have the meaning assigned to it in clause (ii) of the Explanation to clause (viia) of sub-section (1) of section 36; (b) "State financial corporation" means a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporations Act, 1951 (63 of 1951); (c) "State industrial investment corporation" means a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), engaged in the business of providing long-term finance for industrial projects and approved by the Central Government under clause (viii) of sub-section (1) of section 36." It would be evident that the provision is an exception to what is "otherwise" deductible in the case of an assessee. Parliamentary intention, in enacting this provision was to preclude assesses from claiming as payable, on mercantile or accrual basis, certain specified categories of liabilities. In such cases, unless payments are actually made, no deduction is admissible. A careful a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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