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TMI Blog2020 (6) TMI 240X X X X Extracts X X X X X X X X Extracts X X X X ..... shares as held by the decisions relied by the assessee in the submission which is reproduced in the appellate order and that the learned CIT(A) failed to appreciate the ratio laid down in the decisions relied upon by the assessee ) and that the decision relied by the CIT(A) are not applicable on the facts of the case. 2. The learned CIT(A) has erred in holding that Section 35D is not applicable on the facts of the case and thereby as erred in disallowing the amortization of 1/5th preliminary expenses under Section 35D by placing reliance on certain decisions in as much as the assessee is eligible to claim deduction under Section 35D as per the ratio laid down in the decisions relied by the assessee reproduced in the submission to CIT(A) and that the decision relied by the CIT(A) are not applicable on the facts of the case." 3. The 1st issue raised by the assessee is that the learned CIT (A) erred in confirming the order of the AO by not allowing the interest cost incurred in connection with the acquisition of shares to be capitalized amounting to Rs. 1,61,81,506/-. 4. The facts in brief are that the assessee in the present case is a private limited company and engaged in the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee as on 31 March 2014. 5. Aggrieved assessee preferred an appeal to the learned CIT (A). 6. The assessee before the learned CIT (A) submitted that investments made by it does not represent the business assets and therefore the provisions of section 36(1) (iii) and the explanation 8 to section 43(1) has no application in the given facts and circumstances. The income on the transfer of such investments is to be taxed under the provisions of section 48 of the Act, and which provides for the deduction for the cost of acquisition and also cost of improvement. The cost of acquisition includes interest expenses incurred on the money borrowed which was utilized for the acquisition of the capital assets. However the learned CIT (A) found that the accounting standard 13 issued by the Institute of chartered accountant of India requires the assessee not to capitalize the interest expenses on acquisition of shares. The learned CIT (A) further agreed that amount of interest expenses cannot be treated as revenue in nature in pursuance to the provisions of section 36(1)(iii) of the Act. It is because such interest expenses does not pertain to the business assets. However, the learned CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been challenged by the revenue. Thus it is transpired that the finding of the learned CIT (A) has reached to its finality. Now the question arises for the treatment of such interest expenditure in the books of accounts of the assessee. There is no dispute to the fact about the incurrence of such expenditure by the assessee directly attributable to the investments. From the preceding discussion we note that the learned CIT (A) on one hand has not allowed to be treated such expenditure as revenue in nature and on the other hand he has not allowed the same to be capitalized. In our considered view, such finding of the learned CIT (A) is contrary to the provisions of Act. Accordingly we disagree with the finding of the learned CIT (A). 11. In our considered view, once the assessee has been held as Investment Company, then the interest expenses directly attributable to such investments required to be capitalized. In this regard we find support and guidance from the judgement of Hon'ble Madras High Court in the case of CIT versus Trishul Investments Ltd reported in 305 ITR 434 wherein it was held as under: As per the memorandum of association of the assessee company, it could b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Rs. 26,42,282/- under the provisions of section 35D of the Act. However, the AO was of the view that the assessee cannot claim the expenditures under section 35D of the Act, which were incurred in connection with the increase of authorized share capital. It is because the expenses incurred on the increase of authorized capital /stamp duty for allotment of shares were incurred much later after the date of incorporation of the company. Accordingly, the AO sought clarification from the assessee. The assessee in response to such notice vide letter dated 22nd December 2016 submitted that the authorized share capital was increased within 3 weeks of the incorporation of the company for the reason that it decided to buy the shares of Sterling Addlife Limited which is nothing but new business activity for the 1st time since incorporation. Accordingly the assessee claimed that it is eligible for deduction of such expenditure under the provisions of section 35D of the Act. However, the AO disregarded the contention of the assessee by observing that the main object of the assessee is to make investment in the shares of other companies. As such the assessee has fulfilled its object by acq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the shares of such company. As such the registration of the company and the commencement of the business of the assessee are 2 different things. The incorporation/registration of a company does not mean that the assessee has commenced business activities. In fact the business activities of the assessee company commences only after doing the transaction for which it was established. Thus in such a situation, we are of the view that the activity of the assessee commenced upon the acquisition of the shares of the company as discussed above. Thus the expenses incurred by the assessee as specified under the provisions of section 35D of the Act, before the commencement of the business are eligible for deduction. The relevant provisions of section 35D of the Act reads as under: 35D. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2),- (i) before the commencement of his business, or (ii) after the commencement of his business, in connection with the extension of his 92[***] undertaking or in connection with his setting up a new 92[***] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of section 35D of the Act. In view of the above, we set aside the finding of the learned CIT (A) and direct the AO to allow the claim of the assessee. Hence the ground of appeal of the assessee is allowed. Coming to the ITA No. 2417/AHD/2017 for the assessment year 2014-15, an appeal by the revenue. 20. The Revenue has raised following grounds of appeal: "1. That the ld. CIT(A) has erred in law and on facts in deleting the disallowance of Rs. 1,63,29,319/- u/s 14A of the Act without considering that expenses relatable to earning exempt income cannot be allowed." 21. The only issue raised by the revenue is that the learned CIT (A) erred in deleting the disallowances made by the AO for Rs. 1,63,29,319/- under the provisions of section 14A of the Act. 22. The AO during the assessment proceedings found that the assessee has made investments in the shares of other companies which are capable of giving rise to the exempted income. But the assessee has not made any disallowance of the expenses claimed in the profit and loss account amounting to Rs. 1,47,813 under the provisions of section 14A read with rule 8D. The AO also observed that the assessee has incurred inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e under this Act. The term used under section 14A of the Act "amount of expenditure incurred in relation to such income" implies that the expenditure cannot exceed the amount of exempted income. In holding so we find support and guidance from the judgment of Hon'ble Delhi High Court in the case of joint investments private Ltd versus CIT reported in 372 ITR 694 wherein it was held as under: "By no stretch of imagination can s. 14A or r. 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in s. 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case." We also note that in the identical facts and circumstances the Hon'ble jurisdictional High Court has decided that the amount of disallowance of the expenditure cannot exceed the amount of exempted income in the case of CIT vs. Vision Finstock Stock Ltd. In tax appeal No. 486 of 2017 vide order dated 31 July 2017. The relevant extract of the order is extracted below: "1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances but the same should not ordinarily be further extended beyond another 30 days. In simple words the total time available to the Bench is of 90 days upon the conclusion of the hearing. However, during the prevailing circumstances where the entire world is facing the unprecedented challenge of Covid 2019 outbreak, resulting the lockdown in the country, the orders though substantially prepared but could not be pronounced for the unavoidable reasons within the maximum period of 90 days. In such circumstances we find that the Hon'ble Mumbai Tribunal in the case of JSW Limited Vs Deputy Commissioner of Income Tax in ITA No. 6103/MUM/2018 vide order dated 14-5-2020 extended the time for pronouncing the order within 90 days of time by observing as under: 9. Let us in this light revert to the prevailing situation in the country. On 24th March, 2020, Hon'ble Prime Minister of India took the bold step of imposing a nationwide lockdown, for 21 days, to prevent the spread of Covid 19 epidemic, and this lockdown was extended from time to time. As a matter of fact, even before this formal nationwide lockdown, the functioning of the Income Tax Appellate Tribunal at Mumbai was severe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thing but an "ordinary" period. 10. In the light of the above discussions, we are of the considered view that rather than taking a pedantic view of the rule requiring pronouncement of orders within 90 days, disregarding the important fact that the entire country was in lockdown, we should compute the period of 90 days by excluding at least the period during which the lockdown was in force. We must factor ground realities in mind while interpreting the time limit for the pronouncement of the order. Law is not brooding omnipotence in the sky. It is a pragmatic tool of the social order. The tenets of law being enacted on the basis of pragmatism, and that is how the law is required to interpreted. The interpretation so assigned by us is not only in consonance with the letter and spirit of rule 34(5) but is also a pragmatic approach at a time when a disaster, notified under the Disaster Management Act 2005, is causing unprecedented disruption in the functioning of our justice delivery system. Undoubtedly, in the case of Otters Club Vs DIT [(2017) 392 ITR 244 (Bom)], Hon'ble Bombay High Court did not approve an order being passed by the Tribunal beyond a period of 90 days, but then in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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