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TMI Blog2016 (5) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... im of the assessee was that disallowance if at all should be made, it should be restricted to exempt income earned and not beyond that. Accordingly, the Assessing Officer is directed to look at this issue on this angle and decide it afresh in the light of the above decision of the Mumbai Bench of the Tribunal - Decided partly in favour of assessee Allowance of expenditure in respect of preliminary expenses under section 35D - Held that:- There is no doubt that expenses were not incurred before the commencement of the business. Therefore, the first condition is not complied with. The second condition is that the expenses incurred after commencement of the business, should be incurred in connection with extension of its business or in connection with setting up of a new unit. There is no case of setting up of a new unit. The question is whether there was an extension of its existing undertaking ? A great emphasis has to be given on the expression "undertaking". Business expansion and market expansion of an existing business will not amount to extension of the "undertaking". The expression "undertaking" denotes a visible expenditure on the physical facilities for manufacture and produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication of software and reducing the rate - Held that:- As seen from the order of the Commissioner of Income-tax (Appeals) during the course of the assessment proceedings, the assessee voluntarily offered to reduce its claim towards depreciation on the software at the rates prescribed in new Appendix I under the Income-tax Rules, 1962, and depreciation on the intangible assets being IPR, at the rate of 25 per cent. as prescribed under the Rules. Accordingly, the assessee has revised its claim of depreciation on software and intangible asset of IPR. However, the Additional Commissioner of Income-tax denied the depreciation on the IPR, represented by the software GBM on the ground that depreciation to an extent of 100 per cent. in respect of this asset was already claimed by TGSL and in view of Explanation 3 placed under section 43(1), the actual cost of this asset, in the hands of the assessee, has to be reckoned as "nil" only. This conclusion of the Additional Commissioner of Income-tax was based on the financial statement of TGSL. The contention of the assessee is that the treatment given by TGSL in its account cannot be a reason to deny the depreciation on the cost incurred by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s) has given a finding that apportionment of expenses to be done on the basis of turnover of the STPI unit and non-STPI unit. In our opinion, this is fair and appropriate finding, which is confirmed X X X X Extracts X X X X X X X X Extracts X X X X ..... ules. 8. The facts of the issue as narrated in the assessment year 2007-08 are that the Assessing Officer observed that the assessee has received an amount of ₹ 26,20,821 as a dividend during the year which has been claimed as exempt under section 10(34) of the Act. Since any expenditure relatable to earning of exempt income is not permissible to be claimed as expenditure, the Assessing Officer has worked out the disallowance by invoking the provisions of section 14A read with rule 8D. The Assessing Officer has observed that even though the assessee incurs various expenditure to maintain its establishment and administration, it has not allowed any amount pertaining to earning of exempt income. Since the managerial staff and directors are involved in making decisions on investments which have earned exempt income, the Assessing Officer has resorted to disallowance under section 14A. According to the Assessing Officer, the provisions of section 14A has been inserted with effect from April 1, 2007, and rule 8D has come into picture with effect from March 24, 2008, and by relying on the decisions in the case of ITO v. Daga Capital Management P. Ltd. (I. T. A. No. 1372/Delhi/2005 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oth the parties. On a perusal of the order of the Mumbai Bench of the Tribunal in the case of Daga Global Chemicals Pvt. Ltd. [2016] 46 ITR (Trib) 70 (Mumbai), we find that an identical issue has been decided by the Tribunal holding that disallowance under section 14A read with rule 8D cannot exceed the exempt income. While holding so, the Tribunal observed as under (page 72) : '2. At the time of hearing, Dr. K. Shivaram along with Shri Rahul Hakani, learned counsels for the assessee, advanced their arguments which are identical to the ground raised by submitting that no expenditure directly or indirectly was incurred by the assessee for earning exempt income and further the investment in shares was made in earlier years out of own funds and not out of borrowed funds, therefore, no disallowance under section 14A read with rule 8D is to be made. 3. On the other hand, Shri Akhilendra Yadav strongly defended the conclusion arrived at by the learned Commissioner of Income tax (Appeals) by contending that a well reasoned order has been passed by the learned first appellate authority as apportionment of expend iture for earning the dividend income was done as per the provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, the alternative claim of the assessee was that disallowance if at all should be made, it should be restricted to exempt income earned and not beyond that. Accordingly, the Assessing Officer is directed to look at this issue on this angle and decide it afresh in the light of the above decision of the Mumbai Bench of the Tribunal. Accordingly, this ground of appeal is partly allowed for the assessment years 2008-09 and 2009-10. 13. The next common ground for the assessment years 2007-08, 2008-09, 2009-10 and 2010-11 both, in the assessee's appeals as well as the Revenue's appeals is with regard to allowance of expenditure in respect of preliminary expenses under section 35D of the Act. 14. The facts of the issue as narrated for the assessment year 2007-08 are that the Assessing Officer observed that the assessee had claimed an amount of ₹ 1,00,28,477 as deduction under section 35D for the year in respect of expenses incurred in connection with the initial public offer (IPO). The Assessing Officer disallowed the above sum claimed by the assessee by following the directions given by the Additional Commissioner of Income-tax in his order under section 144A. The Ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner of Income-tax has also observed that out of the issue proceeds ₹ 19.71 crores were unutilised during the year and balance was utilised only in the next two years. 16. The Commissioner of Income-tax (Appeals) observed that with regard to the funds not utilised during the relevant year by the assessee, it was submitted that the expansion was complete in the relevant year itself and the new unit acquired had also commenced its operation and generated income from the same expanded unit which was offered to taxation. It was also submitted that since the assessee has put to use the application software acquired from TGSL it has claimed depreciation of ₹ 16.19 crores during the year. It was further submitted before the Commissioner of Income-tax (Appeals) that the utilisation of funds which were earmarked for working capital were as per the issue document itself. According to the Commissioner of Income-tax (Appeals), the explanation given by the assessee with regard to utilisation of funds is reasonable. 17. Further, the Commissioner of Income-tax (Appeals) observed that with regard to the application of section 35D(1)(ii), a similar issue came up for consideration b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative' but only 'restricted' to ?" 21. According to the Commissioner of Income-tax (Appeals), following the above decision of the jurisdictional High Court, the meaning of "being" will be taken as "restrictive" and not "illustrative". 22. Further, the Commissioner of Income-tax (Appeals) observed that with regard to issue management fee shown as expenditure by the assessee, the Additional Commissioner of Income-tax held that it is not fitting into the permissible expenditure mentioned in section 35D(2)(c)(iv). The assessee has objected for the same stating that issue management fee is nothing but underwriting commission. The Commissioner of Income-tax (Appeals) has not agreed with the argument of the assessee and held that as per the SEBI guidelines the company which is going for public issue has to engage underwriters for the guarantee of its issue through its lead merchant banker. The Commissioner of Income-tax (Appeals) further observed that the assessee has entered into an agreement dated September 11, 2006, with SBI Capital Markets Ltd as lead merchant banker, wherein it was mentioned that 2 per cent. of the total issue size is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35D(1) or (2) of the Act. In the present case, the assessee made an argument that the funds was utilised by the assessee during the relevant assessment year that the expansion was complete in the relevant year itself and the new unit acquired had also commenced its operation and generated income from the same expended unit, which was offered to taxation. However, there is no evidence to support the findings of the Commissioner of Income-tax (Appeals) that expansion or extension was undertaken by the assessee within the meaning of section 35D(1)(ii) of the Act. The Commissioner of Income-tax (Appeals) did not appreciate the facts relating to applicability of section 35D(1) or (2) by applying the judgment of the jurisdictional High Court in the case of Agrocargo Transport Ltd. cited supra, wherein it was observed that advertisement expenses, printing charges and underwriting commission were eligible for deduction under section 35D(2) of the Act. Thus, section 35D provides that specified expenditure shall be entitled for amortisation only if the expenditure were incurred before the commencement of the business or after the commencement in connection with the extension of its business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny. The funds raised by increasing the capital in that manner may be used by the assessee-company for various purposes. The capital funds may be used to set up the business ; to purchase capital assets ; or to pay off liabilities ; or to augment its working capital, etc. Once shares are issued for cash, the assessee-company gets the funds in its hands and once the funds have come into the hands of the assessee-company, the process of issue of share capital is complete. Therefore, the scope of expenditure incurred for raising the share capital by issuing shares must also stop at that point. The scope should not be enlarged further. It is the wisdom of the company to decide in which manner the funds available with it, collected by way of issue of shares, should be applied. If the funds are utilised for working capital requirements, it is only an appropriation of funds available in the hands of the company. Raising the capital and utilising the funds are different. Application of funds does not decide the character of the money collected against the issue of shares. Money collected against the issue of shares always remains as capital. Therefore, the argument of the learned authorised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m and restricted the claim of depreciation on intangible assets (IPR) to 25 per cent. and claimed 100 per cent. on other assets. According to the Commissioner of Income-tax (Appeals), the directions of the Additional Commissioner of Income-tax are reasonable, since the assessee is not entitled to claim depreciation on the amount which is already claimed by the TGSL, the restriction of depreciation to 25 per cent. on intangible assets and 60 per cent. on the other software is also reasonable and he dismissed the ground of appeal. Against this, the assessee is in appeal before us. 34. We have heard both the parties and perused the material on record. As seen from the order of the Commissioner of Income-tax (Appeals) during the course of the assessment proceedings, the assessee voluntarily offered to reduce its claim towards depreciation on the software at the rates prescribed in new Appendix I under the Income-tax Rules, 1962, and depreciation on the intangible assets being IPR, at the rate of 25 per cent. as prescribed under the Rules. Accordingly, the assessee has revised its claim of depreciation on software and intangible asset of IPR. However, the Additional Commissioner of Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,197 6. False ceiling materials, fittings and architectural charges 7,38,897 38. The Commissioner of Income-tax (Appeals) observed that from the above details, the expenditure incurred under first two heads appear to be recurring expenditure and needs to be treated as revenue. In the case of remaining heads, the expenditure is in the nature of creating a lasting asset which will have an enduring benefit to the appellant. Whether the expenditure incurred is on the leasehold premises or not is no more relevant in view of Explanation 1 to section 32 which reads as follows : "Explanation 1.-Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work, in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee." 39. Thus, there is no distinction betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and fast rule that all the expenditure on leasehold premises will partake of the character of revenue expenditure. The expenditure incurred by the assessee is definitely for improving the leased premises, making it fit for carrying out its business. Further, the improvements carried out by the assessee on the leased premises are not meant for dismantling in the same year or in the very next year. Therefore, the Commissioner of Income-tax (Appeals) held that the Assessing Officer is justified in disallowing the same as capital expenditure as per Explanation 1 to section 32 and allowing depreciation as applicable to furniture and fixtures. Against this, the assessee is in appeal before us. 42. We have heard both the parties and perused the material on record. In this case, the main contention of the assessee is that whatever improvement took place in the leasehold premises and all the assets created therein are temporary in nature and it does not result in enduring benefit. The learned authorised representative relied on the judgment of various High Courts, which are kept on record, to support his argument. In our opinion, a similar issue was came up for consideration before the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e instant case, it is an admitted fact that the assessee has taken building on lease for setting up of bakery. It is also undisputed that the assessee has carried on interior work in the leased building. These interior decoration works carried out by the assessee if put on to the test of Explanation 1 would show that the construction made by the assessee on the leased out premises would amount to capital expenditure. The assessee in order to support his case has relied on the judgment of the Madras High Court in the case of CIT v. TVS Lean Logistics Ltd. [2007] 293 ITR 432 (Mad). In the said case, the assessee had constructed a building on the leased land for the busi ness advantage. The court held that the entire cost of construction is admissible as revenue expenditure. Explanation 1 categorically states that the business or profession is carried on in a leased building and not on land. The High Court in para 8 of the judgment further held as under (page 436) : '8. What constitutes a capital expenditure and what does not, to attract Explanation 1 to section 32(1) of the Act depends upon the construction of any structure or doing any work or in relation to and by way of reno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounts. The assessee therefore could not have claimed any depreciation. Looking to the nature of the advantage which the asses see obtained in a commercial sense, the expenditure appears to be revenue expenditure.' 16. Thereafter, the apex court referring to several cases decided held as under (page 475) : 'All these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expenses have been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. In the present case also since the asset created by spend ing the said amounts did not belong to the assessee but the assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idering one-third of the audit fees and directors remuneration towards the STPI unit, recomputed the allocation of common expenses at ₹ 39,39,208. Against this, the assessee went in appeal before the Commissioner of Income-tax (Appeals). 46. Before the Commissioner of Income-tax (Appeals), the learned authorised representative submitted that the assessee had allocated common revenue expenses, among DTA and STPI unit, which was created during the year under consideration, to ascertain the exempted quantum of income earned through STPI business under section 10A/10B of the Act. Further, the learned authorised representative submitted that the assessee had proceeded on the basis of proportion/ratio of the turnover of the STPI unit to that of the total turnover, which worked out to 1.56 per cent. On the basis of this, the assessee had sought to apportion the expenditure between its STPI and DTA divisions and requested the Commissioner of Income-tax (Appeals) to allow the same. The Commissioner of Income-tax (Appeals) agreed with the argument of the learned authorised representative of the assessee and he held that there is no infirmity on apportionment of expenses on the basis o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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