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Facts
The assessee incurred legal and amalgamation expenses amounting to Rs. 2,54,64,869. The AO treated these as capital expenditure and disallowed them, also making additions for re-computation under section 115JB. The CIT(A) allowed the appeal, deleting the additions and directing the AO to accept the assessee's computation.
Held
The Tribunal held that legal expenses related to amalgamation were eligible for deduction under Section 35DD of the Act and that the assessee had correctly computed book profits under Section 115JB, allowing deferred tax and unabsorbed depreciation.
Key Issues
Whether the legal and amalgamation expenses are allowable as revenue expenditure or under Section 35DD, and whether the book profit computation under Section 115JB was correctly done by the assessee.
Sections Cited
250, 1961, 143(3), 115JB, 35DD
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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYA, ACCOUNT MEMBER & SHRI ANIKESH BANERJEE
O R D E R Per Anikesh Banerjee (JM):
Instant appeal of the revenue was filed against the order of the National Faceless Appeal Centre (NFAC), Delhi, [in short, ‘Ld.CIT(A)] passed under section 250 of the Income-tax Act, 1961 (in short, ‘the Act’) for Assessment Year 2016-17, date of order 07/02/2024. The impugned order emanated from the order of the Ld. Income-tax Officer, Ward 3(2)(2), Mumbai (in short, ‘Ld.AO’) passed under section 143(3) of the Act, 1961, date of order 28/12/2018.
2 ITA 1710/Mum /2024 Manas Agro Industries and Infrastructure Limited 2. The revenue has raised the following grounds:- “i)"Whether on the facts and circumstances of the case and in Law, the Ld CIT(A) erred in holding that the Legal expenses and consultancy charges of Rs. 2,05,11,106/- as fully revenue in nature and the balance of Rs. 49,53,764/- as Deferred Revenue Expenses to be allowed in 5 equal instalments." ii)"Whether on the facts and circumstances of the case and in Law, the Ld CIT(A) was justified in disallowing the reworking of the book profit u/s 115JB by the AO". iii) The appellant prays that the order of the CIT(Appeals) on the above ground be set aside and that of the Assessing Officer be restored. iv)The appellant craves leave to amend or alter any ground or to submit additional new ground, which may be necessary.”
3. The brief facts of the case are that the assessee filed return with a loss amount to Rs.19,89,968/- under normal provisions of the Act and total amount of Rs. 1,70,44,903/- under section 115JB of the Act. The case was selected for scrutiny and the order was passed under section 143(3) with an addition of legal expenses for amalgamation under composite scheme of arrangement and amalgamation of the seven companies. The assessee has incurred amount of Rs.2,54,64,869/- which was debited in the P&L Account as legal expenses and consultancy charges. The Ld.AO treated this amount as a capital expenditure, so entire expenses were duly disallowed and added back with the total income of the assesse. Further, the addition was made related to re-computation under section 115JB of the Act and the Ld. AO added back the extraordinary item amount to Rs.1,84,52,910/- and deferred tax amount to Rs.70,02,985/- with the profit calculated by the assesse amount to Rs.1,00,78,506/-. The aggrieved assesse filed an appeal before the Ld.CIT(A). The Ld.CIT(A) considering the submissions of the assessee, allowed the 3 ITA 1710/Mum /2024 Manas Agro Industries and Infrastructure Limited appeal of the assesse and the additions were deleted and related to section 115JB of the Act, the Ld.CIT(A) directed the Ld.AO to consider the assessee’s calculations and accept the said computation filed during filing of return. Aggrieved, the revenue filed an appeal before us.
The Ld.DR argued and relied on the impugned assessment order.
The Ld.AR argued and submitted a paper book which is containing 1 to 56 pages and is placed on record. The Ld.AR related to legal expenses stated that the said expenses are claimed as per the provisions of section 35DD of the Act. The Ld.AR fully relied on impugned appeal order. The relevant paras 5.4 & 5.5 are reproduced as below: - “5.4 I have carefully considered the facts of the case, the submission of the appellant and evidences on record, Any expenditure, wholly and exclusively, incurred for the purpose of amalgamation/ demerger is allowed as a deduction under section 35DD. The provisions of section 35DD of the Income Tax Act are simplified hereunder-
1. 1. Eligible expenditure- a. The assessee, claiming the deduction, should be an Indian company. b. Expenditure should have been incurred, wholly and exclusively, for the purpose of amalgamation or demerger of an undertaking. c. Expenditure should have been incurred on or after 1st April 1999.
2. The allowable amount of deduction- a. The entire eligible expenditure will be amortized. b. The amortized amount will be allowed as a deduction in five equal installments. c. The first deduction will be available from the previous year in which the amalgamation / demerger took place.
3. The expenditure allowed as a deduction under section 35DD of the Income Tax Act will not be allowed under any other provisions of the Act. 5.5 From the perusal of the legal expenses and consultancy charges find at the major expenses of Rs.2.05.11.106 are in the nature of revenue expenditure and hence the AD is directed to allow the same in full. It is also noted that the expenditure towards the Amalgamation amounts to Rs.43.53.764 and these are to be allowed as Deferred Revenue expenses in 5 equal installments as laid down u/s 35DD of the Act. In view of the above facts and discussion, the AD is directed slow the revenue expenditure of Rs.2,05.11,106 in full and 4 ITA 1710/Mum /2024 Manas Agro Industries and Infrastructure Limited allow the balance expenditure incurred towards the Amalgamation of Rs.49,53,764 as led down in Section 35DD of the Act. The appeal on Ground Nos 1 to 2 are party allowed.”
5. In further argument related to re-computation of book profit under section 115JB of the Act, the Ld.AR stated that the deferred tax amount to Rs.70,02,985/- and unabsorbed depreciation amount to Rs.36,588/- was already considered during the computation of book profit. The assessee submitted the Form 29B which is annexed in APB pages 54 to 56 and at Note No.27, already both the amounts are adjusted during calculation of book profit under section 115JB of the Act. But Ld.AO had not rejected the said Form-29B which was submitted by the assesse during the filing of return. The Ld.AR respectfully relied on Para 7.9 of impugned appellate order, which is as follows:-
7.9 In view of the above facts and discussion, I am of the considered view that only those amounts which are set aside as provision can be increased as per clause (1) of Explanation 1 to section 115.JB of the Act. There is a difference in between 'provision or retaining an amount and writing off an amount. Only those provisions, which are retained can be covered by clause (i) of Explanation 1 to s 115.JB of the Act, as the amount retained is an amount set aside as provision for diminution in the value of any asset. Where there is a write off against the value of assets, then this clause will not apply because clause (i) of Explanation 1 of section 115.JB of the Act provides for increase of book profit by the amount set aside as provision for diminution in the value of any asset. Since the said amounts are write off and not a provision, the same should not have been added to the net profit for consideration of book profit u/s 115.JB. As regards to the deferred tax of Rs.70,02,985 and unabsorbed depreciation of Rs.36,588, it is seen that the same has already been added back while calculating the book profit U/S.115JB as shown in the Form 298. In view of the above facts and respectfully following the judicial decisions cited above, I am of the considered view that the reworking of the book profit by the AO is not sustainable and the 5 ITA 1710/Mum /2024 Manas Agro Industries and Infrastructure Limited AO is directed to accept the working of the book profit u/s 115JB, as shown by the appellant. The appeal on Ground No 4 is thus allowed.
We heard the rival submissions and considered the documents available on the record. the Ld. DR relied on the impugned assessment order, while the Ld. AR placed reliance on the appellate order and filed a paper book. The Ld. AR reiterated that the legal expenses were eligible under section 35DD of the Act and further substantiated the correctness of the computation under section 115JB with the help of Form 29B, which had not been rejected by the Ld. AO. The findings of the Ld. CIT(A), as detailed in paras 5.4, 5.5 and 7.9 of the impugned appellate order, are well-reasoned and supported by the statutory provisions under sections 35DD and 115JB of the Act. The assessee has correctly claimed amortisation of amalgamation expenses and has also correctly computed book profits as per the statutory format, which includes Form 29B filed along with the return of income. No contrary evidence has been brought on record by the revenue to justify interference with the findings of the Ld. CIT(A). Accordingly, we find no merit in the grounds raised by the revenue.