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TMI Blog2013 (6) TMI 220X X X X Extracts X X X X X X X X Extracts X X X X ..... p; "1. Revenue Expenses disallowed-Rs.1,69,97,820: a) The learned CIT (A) erred in law and facts in upholding order of AO treating further expenses of Rs.1,69,97,820 as capital in nature and disallowed, in addition to Rs.1,64,99,361 already capitalized by assessee. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law. b) The learned CIT (A) failed to appreciate that assessee has capitalized Rs.1,64,99,361 expenses relating to projects under implementation on scientific basis (i.e. in the ratio of capital cost of each project) and accepted by Auditors and accordingly balance is debited to Profit & Loss A/c and claimed allowable under section 37 of the Act. The disallowance made and upheld by the learned AO & learned CIT (A) is arbitrarily done on presumption and against the provisions of law, hence required to be reversed. 2. Interest Income Rs.3,82,712: The learned CIT (A) erred in law and facts in upholding the taxability of interest income of Rs.3,82,712 arose during the preoperative period instead of preoper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Andheri Complex. Substantial time, resources and devotion of the personnel and other infrastructure in the head office is invariably devoted to the newer projects under implementation. AO further held that it would be incorrect on the part of assessee to claim 68% of the total expenditure as revenue expenses. A break up of the head office expenses also indicate a high amount of expenses towards travel and tour, legal and professional fees, interest and finance and communication expenses in addition to employee cost and corporate brand building expenses. AO also held that the time and energy of corporate employees is invested more towards the newer projects rather than towards already running projects. Assessee has also not given any cogent reason as to why 68% of the head office expenses should be taken as revenue expenses. AO disregarded the proportion given by assessee and taken 1/3rd of the expenses as revenue expenses and the balance 2/3rd is capitalized as under: Total HO Expenses 100% 5,02,45,769 Revenue 33.33% 1,67,48,588 Capitalised 66.66% 3,34,97,176 AO disallowed excess revenue expenses claimed of Rs.3,37,46,408 - Rs.1,67,48,588 = Rs.1,69,97,820 from be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alore. Therefore, the Head office expenditures are to be incurred/apportioned in the ratio of efforts put in by the Head Office staff including the directors. The apportionment made by the learned AO of revenue is to capital expenditure is perfectly in order as the appellant failed to give any cogent reason for the allocation made by it. The addition made by the learned AO is accordingly upheld. This ground of appeal is thus dismissed". 4.3 The learned Counsel reiterated the submissions and placed on record the table of allocation of expenditure undertaken by assessee. The learned CIT (DR) supported the order of AO and the CIT (A). 4.4 We have considered the rival contentions. As seen from the facts on record, there is no dispute to the extent of expenditure incurred in HO. The interest expenditure was directly allocated to the project as per the loans obtained. The expenditure other than the interest of Head Office was allocated on the basis of capital cost of each project. There is no dispute with the fact that three Centres are fully in operation and the other Centres are under construction and one Andheri gaming was expansion. The basis for allocating cost as submitted by ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in the claim of assessee as the newly operational projects also require more attention and in some projects there was no activity except purchase of land. In the absence of any details of manpower allocation, time spend on each project, the only rationale method adopted by assessee is capital cost allocation. This cannot be faulted as AO did not examine any other method to allocate but estimated at two thirds capital and one third revenue (as against the similar ratio of assessee in contrary method ie. 1/3rd : 2/3rd). Bangalore project does not require any allocation as only land was purchased. Even one takes the operational : under construction ratio, it is 3: 3 i.e. 50% capital and 50% revenue. Looking at it either way the allocation made by AO has no basis or logic. In view of this, we concur with the allocation made by assessee on cost of project basis which is the only rationale method on the given facts. Therefore, AO is directed to delete the amount so treated. Ground is allowed. 5. Ground No.2 is on taxing the interest income of Rs.3,82,712 arose during the preoperative period. During the course of the assessment proceedings AO observed that assessee has credited interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that it has shown net prior period income of Rs.9,34,649 in its Profit & Loss A/c. Assessee incurred expenses as well as earned income pertaining to earlier year during the previous year as these were crystallized during the year and submitted details of the same along with nature of expense/income of each and every item. Assessee further submitted that it claimed these expenses/income as incurred during the year as the same were crystallized during the year but shown as Prior Period (Income)/Expenses in the financial statements. Assessee further submitted that this also includes Rs.1,27,125 of Ahmedabad and Rs.2,93,984 of Andheri being difference on account of short provision of depreciation computed as per Companies Act in earlier years, also included was depreciation written back as per Companies Act of Rs.13,12,695. It was the submission of assessee that the net amount of Rs.8,91,586 was reduced from the total income in the computation as these were only notional entries to rectify depreciation wrongly calculated in earlier years as per Companies Act. These entries have no tax implication as these are added/deducted from profit as per books for computation of income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s VSD Confin Ltd with whom the appellant was having a joint development agreement for Chandigarh project. After determination of the Chandigarh projects various payments were made to M/s VSD Confin as a part of the final payment made to M/s VSD Confin. Therefore, by no stretch of imagination it can be said that these expenses were crystallized in the year under consideration. Further, it is also not clear as to what is the modalities of the treatment given by the appellant as well as Confin Ltd to the payment/receipt of the amounts. From the submission given it can be inferred that the payment is made to M/s VSD Confin and not to the concerned person. Further, the allowability of the payment made to M/s VSD Confin is a part of agreement wherein a lump sum payments have been given for the termination of the contract which obviously is a capital receipt in the hand of Confin and the segregation of the same as revenue is entirely appellant's own version and is not supported by an evidence on record. The expenses even otherwise need to be capitalized to the cost of Chandigarh project. Therefore, the allowability of these expenditures as revenue expenditure is also in question. The fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee submitted that the activity of film exhibition is liable to entertainment duty by the State Governments as per the rates fixed by them which range between 20% and 100%. These entertainment duties are part of the ticket prices and are collected from the viewers and paid to the respective State Governments. However, due to lack of proper facilities in theatre- cinemas and easy entertainment on cable television, occupancy in theatre-cinemas has fallen considerably. The State Governments lost revenue in a big way. Due to lack of proper facilities and infrastructure, there has been a decline and stagnation in theatrecinema business and some theatre cinemas have even closed down. Theatre-cinema involves huge capital investment and long gestation period hence economically not viable and there was no incentive for the organized sector to make investment in these ventures. Further, as a result of the onslaught of cable TV and advancement in the field of Information Technology, the average occupancy in cinema theatre has fallen considerably as public at large these days prefer to see movies at home and hardly any new theatres have been started in the recent past. Assessee further s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d entertainment tax incentive/subsidy has been wrongly offered to tax. The company, however, submits that above subsidy received in the form of exemption from payment of entertainment tax for promotion of construction of multiplex theatres in Maharashtra is a capital receipt not chargeable to tax. Assessee further placed reliance on the following decision'- * CIT v.Panni Sugars& Chemicals Ltd (306ITR 392) (SC) * Sadichha Chitra v. CIT (189 ITR 774) (Born.) * Kalpana Palace v. CIT (275 ITR 365) (All.) * Ramakrishna Cine Studio v. CIT (233 ITR 277) (AP) * Lachit Films v. CIT (195 ITR 402) (Gau.) * CIT v. Gogte Minerals (222 ITR 245) (Kar.) * ACIT v. Steel Strips Ltd. (108 ITD 720) (Chand.) * DCIT v. Reliance Industries Ltd. (88 ITD 273) * Chaphalkar Bros." 7.1 The CIT (A) rejected the additional ground as under: "15.2.1.The appellant has ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s related to the area which was not put to use without appreciating that such expenses were not allowable as they were not incurred wholly and exclusively for the purpose of business u/s 30/31/37(2) r.w.s. 38(2) of the Act." 8.1. Briefly stated, during the course of assessment proceedings, AO observed that assessee has claimed an area of 25,000 sft. area utilized for storage. This is in addition to parking space, storage areas and other services specific areas created by assessee in the commercial complexes constructed. The Ld. AO has not accepted assessee's adhoc claim of 25000 sq. of area utilized for storage. The unutilized area is computed at 14787 sft. for Ahmedabad mall complex, 5000 sft. for Chandigarh Mall complex and 33802 sft. for Andheri mall complex. The total unutilized area is computed at 53,589 sft. This unutilized area is not inclusive of parking space, service area and other storage spaces left by assessee. AO further held that assessee has admitted rentals for open spaces and rentals for services provided under' common amenities'. The specific rentals for amenities includes rent calculated for electrical, lifts, escalators and a host of other building rentable ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility to claim depreciation: * Depreciation is allowable on certain kinds of assets only. As rightly observed by the Calcutta High Court in Oil India Ltd. vs. CIT (1978) 114 ITR 323 (Cal) "It is not that depreciation on every type of assets owned by an assessee is an allowable deduction under the IT Acts. Section 32 of the IT Act, 1961, allows depreciation only on buildings, machinery, plant or furniture owned by an assessee and used by him during the relevant year for the purposes of his business or profession. II * Such an asset should be owned by the assessee. * It should be used for the purposes of the business or profession. * The deduction is subject to the provisions of section 34. 3.3.2 One of the conditions for allowance for depreciation is that the asset must be used for the purposes of the business or profession carried on by the assessee. Condition as to user of the asset was there in section 32 even prior to amendment of section 32 by the Taxation Laws (Amendment and miscellaneous Provisions) Act, 1986. This 1986 Act, amended section 32 with effect from 1-4-1988 so as provide that the depreciation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. Once the various assets are clubbed together and become block asset within the meaning of section 2(11), for the purpose of depreciation, it is one asset. Every time, a new asset is acquired, it is to be thrown into the common hotchpotch, i.e., block asset on meeting the requirement of depreciation allowable at the same rate. The value of the block asset increases and the depreciation is to be given on the aforesaid value, which is to be treated as written down value. Individual assets lose their identity from that very moment it becomes inseparable part of block asset insofar as calculation of depreciation is concerned. Fusion of various assets into the block asset gets disturbed only when eventuality contained in clause (iii) of section 32 takes place, viz., when a particular asset is sold, discarded or destroyed in the previous year (other than the previous year in which first brought in use). Even in that event, the amount by which the moneys payable in respect of that particular building, machinery, etc., together with the amount of scrap value is to be deducted from total written down value of the block asset. Once one understands and appreciates this scheme contained in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the block as a whole instead of upon an individual asset. Therefore, the observation of the Ld.AO that the depreciation on building and plant and machinery will be allowed to the extent of the area which is used for business purposes vis-a-vis for non business purposes is devoid of any merit. Once it is proved that block of asset is used for the purposes of appellant business and there is no finding as to whether the block of assets or for that matter any asset falling in the block of asset is used for other business purposes proportionate disallowances of depreciation is not warranted. Therefore, Ld.AO action in disallowing the proportionate depreciation on the pretext that the area to the extent of 14.53% was not used or remained unutilized is not sustainable. Accordingly, the addition made by the Ld.AO is deleted. Similarly, the Ld.AO had also disallowed the revenue expenditure on account of repair and maintenance and on account of housekeeping expenses on the same logic as was done in respect of depreciation i.e. the 14.53% in respect of the unutilized area, the additions made by the Ld.AO cannot be sustained in view of the facts that the revenue expenditure were incurred by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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