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TMI Blog2017 (12) TMI 1698X X X X Extracts X X X X X X X X Extracts X X X X ..... to be an expenditure expended wholly and exclusively for the purpose of business allowable u/s 37 ? - HELD THAT:- Taking into consideration the expenses which are done in view of decision in SA Builder s case [ 2006 (12) TMI 82 - SUPREME COURT] and other judgments relied on the assessee, the issue is answered in favour of the assessee. Benefit of deduction u/s 80IA - sum received on account of minimum guarantee covenant under the agreement by holding the same to be not derived from the business of power generation undertaking - HELD THAT:- regarding liquidated damages which are given are business losses which the undertaking ought to have done, if the machines which were delivered to the assessee would have performed very well, therefore, damages which were given for loss of business which was guaranteed by the supplier, ALPINE SOLVEX LTD. [ 2004 (11) TMI 58 - MADHYA PRADESH HIGH COURT] will not apply in the present case. This is not damages for compensation for business loss. In that view of the matter, this issue is also answered in favour of the assessee and against the department. - D.B. Income Tax Appeal No. 146/2016 - - - Dated:- 13-12-2017 - MR. JUSTICE K.S. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er in response to notice u/s 142(1) and query letter the A/R of the assessee submitted a copy of return of income, computation sheet, balance sheet and audit report etc. Subsequent to change incumbent , issued notice u/s 142(1) 143(2) alongwith query letter dt. 25.9.2012, served through registered post and the case was fixed for hearing on 8.10.2012. Further, in response to notice u/s 142(1) and 143(2) and query letter. Assessee derives income from mining, processing and trading of minerals, consultancy services, power generation allied products. There is no change in the nature of business as compared to preceding year/s. 5. Counsel for the appellant Mr. Jhanwar has taken us to the Accounting Standard (AS) 6 and how to get a depreciation, he has taken us to Introduction clause (1) (ii) which reads as under:- Introduction 1. This Statement deals with depreciation accounting and applies to all depreciable assets, except the following items to which special considerations apply:- (ii) wasting assets including expenditure on the exploration for and extraction ofminerals, oils, natural gas and similar non-regenerative resources; 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures. 17. The appellant, therefore, had, in its return, correctly claimed a deduction only in respect of the proportionate part of discount of ₹ 12,500 over the relevant accounting period in question. In this connection, we agree with the reasoning and conclusion of the Madhya Pradesh High Court in the case of M.P. Financial Corporation v. Commissioner of Incometax (supra). The view that we have taken is also in conformity with accounting practice of showing the discount in discount on debentures account which is written off over the period of the debentures. 18. The appellant is, therefore, entitled to deduct a sum of ₹ 12,500 out of the discount of ₹ 3,00,000 in the relevant assessment year. The balance expenditure of ₹ 2,87,500 cannot be deducted in the assessment year in question. Question No. 2 (as reframed) therefore, which is the sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair 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 its 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 expediency and not from the point of view whether the amount was advanced for earning profits. 35. 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 sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es not result in expansion of profit-making apparatus of the assessee. The case of Empire Jute Co. Ltd (supra) was the case in which the assessee, by incurring the disputed expenses purchased the loom hours resulting in increased loom hours for the assessee during the currency of contract period, which was to augment production and productivity of assessee per loom. Even applying the test of enduring benefit, the Supreme Court held it to be a revenue expenditure. It was considered that by purchase of loom hours, no new asset was created. There was no expansion of the profit making apparatus of the assessee. The income earning machine remained the same as it was prior to the purchase of loom hours. 23. In the present case also, by incurring expenditure for construction of building for the institute, the profit-making apparatus of the assessee was not expanded. Its income earning machinery remained the same. Assessee has, by contributing to construction of building, only facilitated the training of his workers at hand without necessitating their training at distant place causing more expense of time and money. Therefore, it cannot be said that assessee acquired an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rts including the decision of the Supreme Court in Associated Cement Companies Ltd.'s case (supra), decision of the Bombay High Court in Bombay Dyeing Manufacturing Co. Ltd.'s case (supra) and the decision of the Hon'ble Supreme Court in the matter of CIT v. Madras Auto Service (P) Ltd. : [1998]233ITR468(SC) , opined as under: From the aforesaid judgments of the Supreme Court, it is apparent that merely because the amount spent has been used for construction of a building or structure of permanent nature is not the decisive test for holding the expenses to be capital outlay or revenue outlay. The two tests emerging from the aforesaid decisions are that firstly where the building or construction of any permanent structure is brought into existence that is by itself not sufficient to hold the expenses to be capital nature invariably. Where such construction does not result in acquisition of any capital assets to the trade of the assessee or the property does not become the property of the assessee, it does not result in acquisition of capital assets of enduring nature by the assessee. Secondly, it is also clearly discernible that if such expenses are incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est house expenses, it is the common ground between the parties that the matter is squarely covered by the decisions of the Hon'ble Supreme Court in Britannia Industries Ltd.'s case (supra). In the said case, the Hon'ble Supreme Court while considering the question as to whether the expression premises and buildings referred to in Sections 30 and 32 and used for the purposes of business operation would include within its scope and ambit, the expression residential accommodation in nature of guest house used in Sub-sections (3), (4) and (5) of Section 37 of the Act of 1961, observed as under: While the two expressions can be similarly interpreted, a distinction has been sought to be introduced for the purposes of Section 37 by specifying the nature of building to be a guest house. In our view, the intention of the legislature appears to be clear and unambiguous and was intended to exclude the expenses towards rents, repairs and also maintenance of premises/accommodation used for the purposes of a guest house of the nature indicated in Sub-section (4) of Section 37. When the language of a statute is clear and unambiguous, the Courts are to interpret the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Being known as a good corporate citizen brings goodwill of the local community, as also with the regulatory agencies and the society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill. 10. The facts in this case before us stand on a stronger footing, since the contribution made by the company is for the Chamber of Commerce whose activities are closely linked with the welfare of the Corporate entities who are members therein and whose interest are taken care of by the Chamber of Commerce, irrespective of whether the expense incurred is compulsory or otherwise. Hence, considering the fact that the payment is made for the purpose of the business, it satisfies the commercial expediency test to accept the case of the assessee. In the circumstances, we do not find any justification to accept the case of the Revenue that the Provisions of Section 37 have to be viewed in a very strict manner. It may be noted that Section 37 itself is concerned with 'an expenditure laid at or extended wholly or exclusively for the purpose of business or profession' to qualify for deduction. With the necessity no lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sale consideration therefrom could not be said to be directly from profits and gains by the industrial undertaking but only attributable to such industrial undertaking inasmuch as such import entitlements did not relate to manufacture or sale of the products of the undertaking, but related only to an event which was post manufacture namely, export. On an application of the aforesaid test to the facts of the present case, it can be said that as all the four subsidies in the present case are revenue receipts which are reimbursed to the Assessee for elements of cost relating to manufacture or sale of their products, there can certainly be said to be a direct nexus between profits and gains of the industrial undertaking or business, and reimbursement of such subsidies. However, Shri Radhakrishnan stressed the fact that the immediate source of the subsidies was the fact that the Government gave them and that, therefore, the immediate source not being from the business of the Assessee, the element of directness is missing. We are afraid we cannot agree. What is to be seen for the applicability of Sections 80-IB and 80-IC is whether the profits and gains are derived from the business. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 15) 25. The decision in Sahney Steel and Press Works Ltd. v. Commissioner of Income Tax, A.P.-I, Hyderabad : (1997) 7 SCC 764, dealt with subsidy received from the State Government in the form of refund of sales tax paid on raw materials, machinery, and finished goods; subsidy on power consumed by the industry; and exemption from water rate. It was held that such subsidies were treated as assistance given for the purpose of carrying on the business of the Assessee. 26. We do not find it necessary to further encumber this judgment with the judgments which Shri Ganesh cited on the netting principle. We find it unnecessary to further substantiate the reasoning in our judgment based on the said principle. 27. A Delhi High Court judgment was also cited before us being CIT v. Dharampal Premchand Ltd. : 317 ITR 353 from which an SLP preferred in the Supreme Court was dismissed. This judgment also concerned itself with Section 80- IB of the Act, in which it was held that refund of excise duty should not be excluded in arriving at the profit derived from business for the purpose of claiming deduction Under Section 80-IB of the Act. 6.7 He also reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed upon the decision of Madhya Pradesh High Court, Indore Bench in CIT vs. Alpine Solvex Ltd. reported in (2005) 276 ITR 92 wherein it has been held as under:- 10. It is not in dispute that a sum of ₹ 57,83,675 claimed by the assessee to be in the nature of profit said to be derived from the industrial undertaking was not an amount earned directly by sale of their finished commodity manufactured in their undertaking/plant. In other words, the amount claimed was alleged to be received by assessee from their supplier and purchaser not as a price/value of the goods but it was in the nature of compensation/damages on account of breach alleged to have been committed by them qua assessee in performance of contract. We cannot thus equate such sum at par with actual profit which the assessee earned by sale of the finished goods. 11. In our opinion, the assessee is entitled to claim deduction of that amount which they have derived as direct profit by sale of manufactured goods in their newly set up industrial undertaking. The object underlined in these sections is to give incentive to the assessee who earns/derive income from their actual manufacturing activity, i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, first issue is required to be answered in favour of the department and against the assessee. 13. However, on the second issue, on a close scrutiny of Sub section 32 (ii) of the Income Tax Act which reads as under:- Section 32. (1) In respect of depreciation of- (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, 13.1. In our considered opinion, the rights which are given to the assessee are of commercial rights which are akin to license for mining. 13.2. In that view of the matter, the contention of the assessee regarding depreciation u/s 32(ii) is required to be accepted, therefore, the second issue is answered in favour of the assessee and against the department. 14. Regarding issue no.3, taking into consideration the expenses which are done in view of decision in SA Builder s case (supra) and other judgments relied on the assessee, the issue is answered in favour of the assessee. 15. On issue no.4 regarding liquidated damages which are given are business ..... X X X X Extracts X X X X X X X X Extracts X X X X
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