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Facts
The Revenue filed appeals against the CIT(A)'s orders for assessment years 2012-13 to 2015-16, which were delayed by 17 days. The tribunal condoned the delay and admitted the appeals for adjudication.
Held
The tribunal adjudicated various grounds of appeal concerning the classification of expenses, disallowances under Section 14A, transfer pricing adjustments, and other issues. The decisions on these grounds were often based on prior rulings for the same assessment years.
Key Issues
Classification of expenses (professional fees, repairs & maintenance, trademark/copyright consultancy) as revenue vs. capital, validity of disallowances under Section 14A, correctness of transfer pricing adjustments for loan interest and guarantee fees, and excess remuneration disallowances.
Sections Cited
250, 14A, 8D(2)(ii), 115JB, 92C, 10B, 10C, 40A(2)(a), 92A, 92F
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, KOLKATA ‘C BENCH, KOLKATA
Before: SHRI PRADIP KUMAR CHOUBEY & SHRI RAKESH MISHRA
PER RAKESH MISHRA, ACCOUNTANT MEMBER:
These appeals filed by the Revenue are against the separate orders of the Commissioner of Income Tax (Appeals)-22, Kolkata [hereinafter referred to as Ld. 'CIT(A)'] passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') for AYs 2012-13, 2013-14, 2014-15 & 2015-16 dated 31.01.2019 and 22.05.2019, respectively.
The Registry has informed that all the four appeals filed by the Revenue are barred by limitation by 17 days. An application seeking condonation of delay has been filed by the Revenue stating that there were proceedings under progress with the Ld. Pr. CIT, authorisation for filing of second appeal only on corporate ground (other than TP issue) was received and proceedings were under progress with the Ld. Pr. CIT for according approval towards transfer pricing issue only. Thereafter, approval was received for grounds of appeal with respect to transfer pricing issue on 21.05.2019. The Ld. DR requested the Bench that the delay may be condoned in view of the aforesaid reasons. Considering the application for condonation of delay and the reasons stated therein, we are satisfied that the Revenue had a reasonable and sufficient cause and was prevented from filing the instant appeals within statutory time limit. We, therefore, condone the delay and admit the appeals for adjudication.
The Revenue is in appeal before the Tribunal raising the following grounds of appeal: I. ITA No. 1246/KOL/2019; AY 2012-13:
“1. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the sum of Rs.77,70,880/- incurred towards professional fees to legal advisors which was treated as capital expenditure by the A.O.
That on the facts and the circumstances of the case, the Ld. CIT(A) erred in correct in giving part relief to the extent of Rs.86,08,865/-, being 90% of the actual disallowance made by the A.O. of Rs.95,65,406/- under Repairs and Maintenance without there being any justification of as to why such disallowance should be restricted to 10% and not more or fully disallowed.
That on the facts and the circumstances of the case, the Ld. CIT(A) erred in correct in law as well as facts in deleting the disallowance of excess depreciation of Rs.12,61,664/- claimed on building whereas the assessee company failed to substantiate its claim properly and had no approvals / permits from various authorities to use such a premise for guest house.
That on the facts and circumstances of the case, the Ld. CIT(A) erred in correct in treating the expenditure of Rs.55,07,700/- claimed towards Trademark and Copyright consultancy under the head "Professional Fees" as revenue expenditure instead of capital expenditure as treated by the AO in the assessment proceeding.
That on the facts and circumstances of the case, the Ld. CIT(A) erred in correct in directing the AO to delete the disallowance of Rs.1,19,67,718/- computed u/s.14A read with Rule 8D(2) (ii) and to restrict expenses for the investments which actually yielded dividend income to the assessee company during the year for determination of actual disallowance u/s. 14A of the Act.
That on the facts and the circumstances of the case, the Ld. CIT(A) erred in correct in restricting the Addition of Rs.1,19,67,718/- being expenses incurred on exempt income, while computing book profit u/s.115JB of the Act and directing the AO to restrict the addition in terms of clause (f) contained in the Explanation 1 to section 115JB of the Act to Rs.5,53,878/-
That the Ld. CIT(A) has erred on facts and law in deleting the arm's length price adjustment of Rs.4,47,18,502/- made by the АО/ТРО оn аccount of loan advanced to AE.
That the Ld. CIT(A) has erred on facts and law by not allowing the method of benchmarking of the transaction by taking cost of funds plus credit spread as the most appropriate method in the facts of the case of the assessee.
That the Ld. CIT(A) has erred on facts and law by not determining the arm's length rate of interest in accordance with Section 92C of the Income- tax Act 1961 (the Act) read with Rule 10B & 10C of Income Tax Rules' 1962 (the Rules).
That the Ld. CIT(A) has erred in facts and law to also ignore the fundamental fact that LIBOR is just the inter-bank rate to transact between banks and to determine arm's length interest rate for loan transactions between two companies (assessee and its associated enterprise), an appropriate adjustment for difference between international transaction and comparable uncontrolled transaction as envisaged under Rule 10B & 10C of the Rules becomes imperative.
That the Ld. CIT(A) has erred on facts and law by restricting the guarantee fee rate to 1% which is much lower than the CG rate of 3.6% determined by the Ld. TPO, for a non-fund based financial assistance.
That the Ld. CIT(A) has erred on facts and law in stating that the CG rate charged by the TPO at 3.6% is highly excessive or unreasonable without giving any scientific or logical reasoning or the same while the TPO had determined the rate at 3.6% based on the information available on record.
That the Ld. CIT(A) has erred on facts and law restricting the CG rate at 1% without considering the credit rating of the AE which is a vital factor while availing loan from a financial institution and accordingly, the effective rate of interest was calculated and CG rate was determined accurately.
That the Ld. CIT(A) has erred on facts and law in determining the arm's length rate of interest in accordance with 92C of the Income-tax Act, 1961 (the Act) read with Rule 10B & Rule 10C of the Income-tax Rules, 1962 (the Rules).
That the appellant craves leave to add to and/or alter, amend, modify or rescind the grounds herein above before or hearing of this appeal.” II. ITA No. 1247/KOL/2019; AY 2013-14:
“1. That on the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting in correct in treating the expenditure of Rs.77,56,332/- as revenue expenditure instead of capital expenditure as treated by the then AO in the assessment proceeding.
That on the facts and the circumstances of the case, the Ld. CIT(A) erred in correct in directing the AO to delete the disallowance computed u/s.14A read with Rule 8D(2)(ii) and to restrict expenses for the investments which actually yielded dividend income to the assessee company during the year for determination of actual disallowance u/s.14A of the Act.
That on the facts and the circumstances of the case, the Ld. CIT(A) erred in correct in restricting the Addition of Rs.51,48,540/- being expenses incurred on exempt income, while computing book profit u/s.115JB of the Act and directing the AO to restrict the addition in terms of clause (f) contained in the Explanation 1 to section 115JB of the Act to Rs.4,19,505/-
That the Ld. CIT(A) has erred on facts and law by restricting the guarantee fee rate 1% which is much lower than the CG rate of 3.6% is highly excessive or unreasonable without giving any scientific or logical reasoning for the same while the TPO had determined the rate at 3.6% based on the information available on record.
That the Ld. CIT(A) has erred on facts and law in stating that the CG rate charged by the TPO at 3.6% is highly excessive or unreasonable without giving any scientific or logical reasoning for the same while the TPO had determined the rate at 3.6% based on the information available on record.
That the Ld. CIT(A) has erred on facts and law by restricting the CG rate at 1% without considering the credit rating of the AE which is a vital factor while availing loan from a financial institution and accordingly, the effective rate of interest was calculated and CG rate was determined accurately.
That the Ld. CIT(A) has erred on facts and law in determining the arm's length rate of interest in accordance with 92C of the Income-tax Act, 1961 (the Act) read with Rule 10B and Rule 10C of the Income tax Rules, 1962 (the Rules).
That the appellant craves leave to add to and/or alter, amend, modify or rescind the grounds herein above before or hearing of this appeal.” III. ITA No. 1248/KOL/2019; AY 2014-15:
“1. That on the facts and circumstances of the case the Ld. CIT(A) erred in correct upholding the Order of the Ld. CIT(A) deleting the disallowance made by the AO of excess depreciation of Rs. 43,39,284/- claimed by the assessee, as the assessee-сотрапу ехсept for claiming that the equipment identified for having claimed excess depreciation are integral to the manufacturing process, has not been able to prove or justify as to in which way the concerned in terms have been able to enhance the production process or output of the assessee's business.
That on the facts and the circumstances of the case, the Ld. CIT(A) erred in correct in giving part relief to the extent of Rs. 40,89,253/-, being 90% of the actual disallowance made by the AO of Rs.45,43,615/- under Repairs and Maintenance without there being any justification of as to why such disallowance should be restricted to 10% and not more or fully disallowed.
That on the facts and the circumstances of the case, the Ld. CIT(A) erred in correct in law as well as facts in deleting the disallowance of Rs 2,84,02,596/- being excess payment of remuneration made to Executive Director Gazette, when the fact is that Notification No.GSR534(E) dated 14.07.2011, issued by the Ministry of Corporate Affairs, Government of India is applied for listed entities, and the assessee-company is not a listed one.
That on the facts and the circumstances of the case, the Ld. CIT(A) erred in correct in treating the expenditure of Rs.26,84,657/- claimed towards Trademark and Copyright consultancy under the head Professional Fees as revenue expenditure instead of capital expenditure as treated by the A.O. in the assessment proceeding.
That on the facts and the circumstances of the case, the Ld. CIT(A) erred in correct in directing the AO to delete the disallowance of Rs.2,97,71,945/- computed u/s.14A read with Rule 8D(2)(ii) and to restrict expenses for the investments which actually yielded dividend income to the assessee company during the year for determination of actual disallowance u/s. 14A of the Act.
That on the facts and the circumstances of the case, the Ld. CIT(A) erred in correct in restricting the Addition of Rs.2,97,71,945/- being expenses incurred on exempt income, while computing book profit u/s.115JB of the Act and directing the AO to restrict the addition in terms of clause (1) contained in the Explanation 1 to section 115JB of the Act to Rs.49,670/-
That the Ld. CIT(A) has erred on facts and law by restricting the guarantee fee rate 1% which is much lower that the CG rate of 3.6% determined by the Ld. TPO, for a non-fund based financial assistance.
That the Ld. CIT(A) has erred on facts and law in stating that the CG rate charged by the TPO at 3.6% is highly excessive or unreasonable without giving any scientific or logical reasoning for the same while the TPO had determined the rate at 3.6% based on the information available on record
That the Ld. CIT(A) has erred on facts and law by restricting the CG rate at 1% without considering the credit rating of the AE which is a vital factor while availing loan from a financial institution and accordingly, the effective rate of interest was calculated and CG rate was determined accurately
That the Ld. CIT(A) has erred on facts and law in determining the arm's length rate of interest in accordance with 92C of the Income-tax Act, 1961 (the Act) read with Rule 10B and Rule 100 of the Income tax Rules, 1962 (the Rules).
That the appellant craves leave to add to and/or alter, amend, modify or rescind the grounds herein above before or hearing of this appeal.” IV. ITA No. 2037/KOL/2019; AY 2015-16:
“1. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.50,73,670/- made by the A.O on account of Excess depreciation on Furniture & Fixtures when the assessee, except for claiming that the equipment identified for having claimed excess depreciation are integral to the manufacturing process, has not been able to prove or justify as to how the concerned items enhance the production process or output of the business.
That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.46,75,775/- being 90% of the actual addition made by the A.O on account of Repairs & Maintenance of Rs. 51,95,305/-.
That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.3,71,75,123/- made by the A.O on account of disallowance computed u/s 14A r.w. Section 8D(2) (ii) and to restrict expenses for the investments which actually yielded dividend income to the assessee company during the year.
That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AO to restrict the addition in terms of clause (f) contained in the Explanation 1 to section 115JB of the Act to Rs. 2,12,146/-
That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.2,06,17,228/- being excess payment to remuneration made to Executive Director as the Gazette Notification No. GSR 534(E) dtd. 14.07.2011 in question applied to listed entities which the assessee is not.
That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.24,99,734/- made by the A.O by treating the renewal of previously sanctioned IPR/Trademark as capital expenditure instead of revenue expenditure. Transfer Pricing Ground
That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the guarantee fee rate to 1% which is much lower than the CG rate of 3.6% & 2.85% determined by the Ld. TPO, for a non fund based financial assistance.
The Ld. CIT(A) has erred on the facts and in law in stating that the CG rate charged by the TPO_at 3.6% & 2.85% is highly excessive or unreasonable without giving any specific or logical reasoning for the same while the TPO had determined the rate at 3.6% and 2.85% based on the information available on record.
The Ld. CIT(A) has erred on the facts and in law by restricting the CG rate at 1% without considering the credit rating of the AE which is a vital factor while availing loan from a financial institution, and accordingly, the effective rate of interest was calculated and CG rate was determined accurately.
The Ld. CIT(A) has erred on the facts and in law in determining the arm's length rate of interest in accordance with 92C of the Income Tax Act, 1961 (the Act) r.w. Rule 10B & 100 of the Income Tax Rules, 1962 (the Rules).
The appellant craves to add, delete or modify any of the grounds of appeal before or at the time of hearing.”
1 Since the issues are common, all the four appeals were heard together and are being decided vide this common order for the sake of convenience and brevity. A. We shall first take up the appeal in ITΑ Νο. 1246/KOL/2019; AY 2012-13 for adjudication.
Brief facts of the case are that the assessee is a company engaged in the business of trading and servicing of vacuum cleaners, water filters cum purifiers, water & waste water treatment plant, electronic air cleaning systems, small household appliances and digital security system, etc. The assessee had filed its return of income for AY 2012-13 showing total income of ₹28,94,75,270/-. The return was selected for scrutiny and notices u/s 143(2) and 142(1) of the Act were issued to the assessee. In respect of the international transactions entered during the assessment year, a reference was made to the Ld. Transfer Pricing Officer, Kolkata ("TPO") u/s 92CA(1) of the Act. The Ld. TPO computed the Arm's Length Price and passed an Order u/s 92CA(3) of the Act on January 25, 2016. On receipt of the Ld. TPO's order, the Draft Assessment Order was passed on 10.03.2016 and was sent to the assessee. Vide letter dated 22nd March, 2016 the assessee stated that they were not filing any application with the Dispute Resolution Panel against the Draft Assessment Order and would prefer an appeal with the Ld. CIT(A). Thereafter, a Final Assessment Order u/s 143(3) r.w.s. 144C of the Act was passed assessing the total income of the assessee at ₹52,72,64,911/-. Aggrieved with the assessment order, the assessee filed an appeal before the Ld. CIT(A) who considered the facts of the case, the Assessing Officer's (hereinafter referred to as Ld. 'AO') findings, the submissions of the assessee and passed a detailed order dated 31.01.2019 and partly allowed the appeal of the assessee.
Aggrieved with the order of the Ld. CIT(A), the Revenue has filed
the appeal before the Tribunal. It may be mentioned that the assessee had also filed appeals against the orders of the Ld. CIT(A) for all the four years but the same were not pressed and were dismissed as not pressed vide common order dated 08.10.2024 for all the four years.
Rival contentions were heard and the submissions made have been examined.
Ground No. 1 relates to the Ld. CIT(A) erring in deleting a sum of *77,70,880/- incurred towards professional fees to legal advisors which was treated as capital expenditure by the Ld. AO.
1 The Ld. AO had observed as under regarding this issue: “Disallowance of Rs.77,70,880/- paid as Professional Fees to various legal advisors for the works related to either acquisition of new unit or expansion of the existing undertaking:
From the details filed by the assessee it is seen that the assessee has paid to various professionals for the works/services which pertain to either acquisition/setting up of a new unit which has not yielded any revenue or for the expansion of existing business. Out of those Rs.77,70,880/- has been paid to Borel and Barbey for acquisition (of) a company/business unit in foreign country which not yet generated any revenue and the assessee has claimed the same as revenue expenditure. Though the assessee has tried to impress that it is not an expansion of existing business and also not an effort of setting up of a new business unit and it should not be covered by the provision of section 35D of I.T. Act, 1961. 2. The contention of the assessee is considered and compared with the language of section 35D of I.T. Act, 1961 and it is observed that the said expenditure does not qualify for deduction either u/s.36(2) or 37(1) as the said unit is not yet operational during this year. Further, the details of professional activities done by Borel & Barbey according to the work sheet filed by the assessee during the course of hearing has revealed that it comprises review of draft amendment to the Article of association, amendments to Articles, drafting of Board Regulations, draft legal opinion of Lux International AG which led to charge of Rs.77,70,880/- as legal/professional charges to help in acquisition of a foreign business is being disallowed as a capital expenditure. However, the assessee is at liberty to bifurcate this disallowance at 1/5th of total expanse and may start claiming as expenditure u/s. 35D for 10 consecutive years from the year in which such business will be operational or ready for operation. Therefore, the disallowance proposed here to the extent of Rs.77,70,880/- and added back to the returned income of the assessee.”
2 The Ld. CIT(A) after considering the facts of the case and submissions of the assessee gave his findings as under:
“1. I have carefully considered the action of the Ld. A.O in making the impugned disallowance of Rs.77,70,880/- paid as professional fees to legal advisors on the alleged ground that the same are related to either acquisition of new unit or expansion of the existing undertaking and is to be governed by provisions of section 35D of the Act. In a nutshell, the relevant juri ictional facts are that during the subject assessment year under consideration, the assessee-company paid a sum of Rs. 77.71 lacs to M/s Borel and Barley, Advocates based in Geneva, Switzerland, for rendering various services like analysis, amendments to the proposed Share Purchase Agreement and Shareholders Agreement, review and finalization of due diligence reports, conference calls, e-mails and communication with clients and in legal matters, draft legal opinion on agreement with LUX International AG ("new acquisition") relating to the acquisition of new unit. After examining the matter, the Ld. A.O has concluded that the impugned expenditure did not qualify for deduction u/s. 37(1) or 36(2) of the Income Tax Act. While so concluding the Ld. A.O has observed that the assessee- company was at liberty to bifurcate the expense u/s. 35D at 1/5th of total expenditure. In appeal, the appellant-company Ld. A.R have advanced arguments and made the following submissions: a. The e details of invoices as received from M/s Borel and Barbey were submitted during assessment proceedings, which clearly specifies the purpose and nature of expenses (Refer PB по. 290-304). The target acquisition company is in the same business of direct sale of vacuum cleaners, the same business as the Appellant company. Further, as planned by the Appellant, the target company has been made (directly/through a wholly owned subsidiary in Mauritius) a wholly owned subsidiary of the Appellant. b. The Appellant could expand its business either directly or through its subsidiary- the modality of expansion not being relevant to determine whether the expenses incurred for such expansion are revenue or otherwise. Resultantly, any expenditure incurred towards "expansion" of the existing business of the Appellant has to be held as "laid out or expended wholly and exclusively for the purpose of business" and as such allowable u/s 37(1) of the Act. c. It was held in case of Television Eighteen India Ltd. [2014] 46 taxmann.com 283 (Delhi HC) that expenditure related to expansion incurred for carrying out existing business more efficiently and with a view to generate more revenues, expenditure was in revenue field. d. Without Prejudice to the above, it is further submitted that since the expenditure was incurred on conducting due diligence and feasibility studies, it is in the nature of revenue expenditure. It is only a preliminary step to determine the feasibility of undertaking a particular project and is purely revenue in nature. This is also affirmed in case of ACIT, Circle- 7(1), New Delhi v. Intercontinental Hotels Group India (P.) Ltd [2013] 33 taxтапп.com 153 (Delhi - Trib.) in Para 6. e. Further reliance is places in case of On Mobile Global Ltd. v. Additional Commissioner of Income-tax [2014] 45 taxmann.com 346 (Bangalore -Trib.) it was held that Professional charges paid for conducting due diligence for acquisition of another company which was to be acquired is allowed as a revenue expenditure. f. It was held in case of Kesoram Industries & Cotton Mills Ltd. v. CIT [1992] 196 ITR 845 (Cal) that: "This expenditure was not related to the setting up of a new factory, it pertained to exploring the feasibility of expanding or extending the existing business by setting up a new factory in the same line of business. The assessee, during the course of its business, might incur expenditure for obtaining a project report or legal opinion regarding the validity of such project. This could not, be considered as capital expenditure as, in that case, any legal expenses incurred by an assessee for taking any opinion on the desirability or feasibility of expansion of the business would not be allowable as deduction. Such expenditure was unmistakably connected with the running of the business." g. It was relied in the case of Commissioner of income tax v. Priya village Roadshows Ltd [2009]185 Taxman 44 (Delhi High Court) expenditure incurred for preparation of feasibility report of a new project, is in respect of same business which is already carried on by assessee, to start a new unit which is same as earlier business, and there is unity of control and a common fund, then such expenditure is to be treated as revenue expenditure.
After carefully examining the submissions made by the appellant along with the necessary evidence placed in the Paper Book and weighing the same against the observations and conclusions as made by the Ld. A.O, I find that there could be no dispute in the claim of the assessee that the impugned expenses were incurred in order to expand its existing business, in this case by the takeover of a subsidiary. Therefore I find myself in agreement with the argument of the assessee that any expenditure incurred towards "expansion" of the existing business of the Appellant has to be held as "laid out or expended wholly and exclusively for the purpose of business" and as such allowable u/s 37(1)'of the Act. I observe that the case of the appellant is well covered by the Hon'ble Juri ictional High Court of Calcutta which had held in the case of M/s Kesoram Industries & Cotton Mills Ltd. v. CIT [1992] 196 ITR 845 (Cal) that: "This expenditure was not related to the setting up of a new factory, it pertained to exploring the feasibility of expanding or extending the existing business by setting up a new factory in the same line of business. The assessee, during the course of its business, might incur expenditure for obtaining a project report or legal opinion regarding the validity of such project. This could not, be considered as capital expenditure as, in that case, any legal expenses incurred by an assessee for taking any opinion on the desirability or feasibility of expansion of the business would not be allowable as deduction. Such expenditure was unmistakably connected with the running of the business."
I am also in agreement with the appellant-company that its situation was also covered by the case of Commissioner of income tax v. Priya village Roadshows Ltd [2009]185 Taxman 44 (Delhi High Court) expenditure incurred for preparation of feasibility report of a new project, is in respect of same business which is already carried on by assessee, to start a new unit which is same as earlier business, and there Is unity of control and a common fund, then such expenditure is to be treated as revenue expenditure. In the light of the circumstances narrated, I am unable to agree with the Ld. A.O that the expenditure of capital Nature, and was therefore to be allowed. I hold that the impugned expenditure of Rs.77,70,880/ - had been "laid out or expended wholly and exclusively for the purpose of business" by the appellant-company, and was deductible allowable u/s 37(1) of the Income Tax act, 1961. The disallowance made by the Ld. A.O strands deleted, and the ground of appeal stands allowed.”
3 The Ld. DR submitted that the Ld. CIT(A) had based his findings on the decisions which were distinguishable and not applicable to the facts of the case of the assessee. The Ld. AR submitted that the Ld. CIT(A) had rightly followed the decision of the juri ictional High Court of Calcutta in the case of Kesoram Industries & Cotton Mills Ltd. Vs. СІТ, (1992) 196 ITR 845 (Cal) and the decision of the Hon'ble Delhi High Court in the case of CIT Vs. Priya Village Roadshows Ltd., [2009] 185 Taxman 44 (Del). The principle laid down by the two Hon'ble High Courts in these two decisions fully apply to the facts of the instant case as on record and set out in para 12.1 of the impugned order and para 12.2(a) and (b). In the premises, there being no infirmity in the findings of the Ld. CIT(A) on this issue, the contention of the Department cannot survive.
4 We have considered the submissions made, gone through the facts of the case and perused the record and the order of the Ld. CIT(A). In the case of Kesoram Industries & Cotton Mills Ltd. (supra) it has been held that the principles are well-settled. It cannot be disputed that if the expenses are incurred in connection with the setting up of a new business, such expenses will be on capital account. But where the setting up does not amount to starting of a new business but expansion or extension of the business already being carried on by the assessee, expenses in connection with such expansion or extension of the business must be held to be deductible as revenue expenses. One has to consider the purposes of the expenditure and its object and effect. The finding of the Tribunal in this case is that there was an expansion or extension of the existing business of the assessee. The assessee is a manufacturer of cement. In addition to its factory in Andhra Pradesh, it proposed to start another cement factory in Rajasthan. There is one business. Although the factory at Rajasthan was not set up in the previous year relevant to the assessment year, this fact, in our view, is not a relevant factor in determining whether the deduction is allowable or not. The expenses in this case are miscellaneous expenses and legal charges for the proposed cement factory project. This expenditure is not related to the setting up of a new factory, it pertains to exploring the feasibility of expanding or extending the existing business by setting up a new factory in the same line of business. The assessee, during the course of its business, may incur expenditure for obtaining a project report or legal opinion regarding the viability of such project. This cannot, in our view, be considered as capital expenditure as, in that case, any legal expenses incurred by an assessee for taking any opinion on the desirability or feasibility of expansion of the business will not be allowable as deduction. Such expenditure is unmistakably connected with the running of the business. Thus, in that case the issue related to the feasibility of expansion of the business while the assessee was acquiring a new unit and it was an extension of his undertaken/setting up a new unit. In the case of CIT Vs. Priya Village Roadshows Ltd., it has been held that in the instant case, expenditure was incurred in respect of same business, which was already carried on by the assessee. Two projects which were undertaken were for the expansion of the same business, namely, one for taking over another cinema for conversion into multiplex and operation and management thereof and other for conversion of self-owned cinema into multiplex. Payments were made to the consultants for preparing feasibility reports in respect of both the projects. However, ultimately projects were not found to be financially and technically viable and were shelved. Thus, finding given, that no new asset came into existence, which was the basis adopted by the Assessing Officer for treating the expenditure as capital expenditure was wrong. Thus, in both these cases, the issue related to feasibility report, and whether the expenditure was capital or revenue in nature and the applicability of section 35D of the Act was not under consideration. The Ld. AO has mentioned that the expenditure related to the extension of the undertaking or in connection with the setting up of a new unit and discovered under section 35D (1)(ii) of the Act in the case of an Indian company and for the expenditure incurred after the 31/03/1998, 1/5 of such expenditure for each of the 5 successive previous year shall be allowed, beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the undertaking is completed the new unit commences production or operation. It has been held in the case of Nathmal Bankatlal Parikh & Co. vs. CIT [1980] 3 Taxman 97 (AP) that section 37(1) being a residual provision, it cannot be taken aid of, unless and until it is established that none of the provisions of sections 30 to 36 are applicable to a given case. Before examining the question, applying section 37(1), it is the duty of the assessing authority to see whether the claim of the assessees falls under any one of the items of deduction specified in sections 30 to 36. Where the case specifically falls under any one of the specific provisions of sections 30 to 36, although, it was not specifically pleaded by the assessee, the assessing authority has a statutory duty and obligation to consider the claim of the assessee pertaining to a particular item as revenue expenditure. Since there is a specific provision under section 35D for amortization of certain preliminary expenses which was applicable on the facts of the case, the recourse could not have been had to the residuary provision of section 37(1) of the Act. Thus, on the facts of the case, the decision of the Ld. CIT(A) is not correct and is reversed, the findings of the Ld. AO are upheld and Ground No. 1 of the appeal is allowed.
Ground No. 2 relates to the Ld. CIT(A) erring in giving part relief to the extent of ₹86,08,865/-, being 90% of the actual disallowance made by the Ld. AO of ₹95,95,406/- under repairs and maintenance without there being any justification of as to why such disallowance should be restricted to 10% and not more or fully disallowed.
1 The Ld. AO had observed as under regarding this ground: “The expenditure of Rs.1,27,53,875/- spent for renovation of various offices premises taken on rent/lease for three years of term, but renewed continuously is disallowed being capital expenditure:
During the course of scrutiny proceedings, it is noticed that the assessee company has incurred Rs.1,27,53,875/- for Renovation on leased premises for the financial year 2011-12 under "Repairs and maintenance" to the various offices taken on either Rent or Leased basis and the assessee has claimed at such expense was allowed by Kolkata ITAT vide I.T.A. No. 1346/Cal/1999. The details of such expenditures are submitted vide Annexure-9 to the written submission dated: 10th Dec, 2016 and the sample copy of agreement enclosed thereof revealed that substantial amount of expenditures is incurred the assessee for different premises across the country.
Further, all such rental or leasehold offices have been running more than three years or not because, it is a prevailing market system to make an agreement for the maximum period of three years by the landlords to avoid the litigation due to tenancy right. The assessee was requested to furnish the details of such rented and leasehold office premises and which gave the breakthrough on this issue which is different from the reasons mentioned in the said assessment order which was dealt by Hon'ble ITAT, Kolkata. On verification of details, it is noticed that the assessee comрапу has claimed repair and maintenance expenses amounting to Rs.1,27,53,875/- in its profit & loss account for the office premises which are taken on rent or lease for three years at a time per agreement but those office premises have been continuing without any intervention for a long time by way of time to time renewal. The stay period of all the hired (rent/lease) office premises was more than the three years. The assessee has not denied said fact.
On perusal of details it is further seen that most of the expenses are relating to furniture and fixtures. The said expenditure includes partition work, electrical fittings, work stations, parking lots, and extension of two- wheeler parking, D.G. set rooms etc. Further, the said expenses were incurred for the office premises which have been continuously using due to renewal of three years of rental or lease agreement and cognizance of this fact was not given in earlier occasions or not discussed in the assessment order where the assessee had been given relief by Hon'ble ITAT. The period of agreement in that occasion was mentioned for three years only and the continuous renewal without any intervention with prior intention to continue there was not brought on record. It is a very common practice across the country not to allow any private party as tenant to occupy any building for more than three years, in a single agreement, only to avoid the litigation but not with an intention to not renew the same. Therefore, in view of this the above discussed expenses of Rs.1,27,53,875/- is in the nature of capital expenditure as the same provides the enduring benefit to the assessee. However, the assessee has claimed the said expenses as revenue in nature. The assessee has also claimed that in the case of the assessee an order was passed by the ITAT for A.Y. 1992-93 in favour of the assessee and therefore no issue should be taken in the relevant A.Y. 2012-13. The above claim of the assessee is not acceptable as the facts are totally different in this year from those of the A.Y. 1992-93. Hence, the doctrine of res judicata is not applicable here. The expenses have been incurred for major renovation and remodelling of the office premises with an intention to continue there are being considered as capital in nature. As the expenses are capital in nature, the said are allowed to be capitalized. However, considering the average span of the lease period the assessee is allowed 25% of such expenditure to claim as deferred revenue expenditure. Accordingly, 25% or 1/4th of the said expenses of Rs.1,27,53,875/- is allowed and the balance 3/4th or 75% i.e. Rs.95,65,406/- is added back with the total Income of the assessee."
2 The Ld. CIT(A) after considering the facts of the case and submissions of the assessee has given his finding in para 15 of the appeal order and relied upon his findings on this issue for preceding year AY 2011-12 which had been confirmed by the ITAT, and thereafter has held as under: “I also find that the matter had been agitated by Revenue before the Hon'ble ITAT for the two A. Ys 2010-11 and 2011-12, and the Hon'ble ITAT by their orders and adjudication at Paragraphs 29, 30, and 31 have confirmed my findings. Therefore following my findings and adjudication for the A.Ys 2010-11 and 2011- 12, as well as respectfully bound by the orders of the Hon'ble ITAT for the A.Ys 2010-11 and 2011-12, in this year also this ground is partly allowed, meaning thereby that 10% of the overall disallowance remains confirmed, being treated as capital in nature, and the appellant is relieved of the balance 90% of the disallowance. The ground is therefore in effect partly allowed.”
3 The Ld. DR relied upon the order of the Ld. AO and requested that the addition may be confirmed. The Ld. AR submitted vide the written submissions filed that the assessee had preferred an appeal against the order of the Ld. AO in disallowing the repairs and maintenance expenditure incurred on various office premises taken on lease/rent on the alleged ground that the continuous renewal of rent/lease agreement by the assessee company displays an intention to continue occupation of the premises and accordingly such repairs and maintenance expenditure would lead to benefit of enduring nature. On the said premises the expenses were treated as deferred revenue expenditure and disallowed to the extent contained in the respective assessment orders. The Ld. CIT(A), while confirming 10% of the overall disallowances considering the same as capital in nature, deleted the disallowance of the balance 90% following his earlier decision in respect of earlier assessment years, which have been affirmed by this Hon'ble Bench of the Tribunal. The Ld. AR further submitted that in deciding this issue, the Ld. CIT(A) has followed the orders passed by the Hon'ble Tribunal in assessee's own cases for the AYs 2008-09 and 2009-10, being ITA Nos. 2126 & 2625/Kol/2013 dated December 21, 2016 and for AYs 2010-11 and 2011-12 passed in ITA Nos. 2159-2170/Kol/2017 and 2160-2171/Kol/2017, dated November 28, 2018.
4 We have considered the submissions made, gone through the facts of the case and perused the record and the order of the Ld. CIT(A). The Ld. CIT(A) has given his finding in para 15 of the appeal order. He noted that the Ld. AO has disallowed the said expenses to the extent of *95.65 lakh (3/4th of ₹127.53 lakh) on the alleged ground that the said expenses are deferred revenue expenses and, therefore, the expenses are allowed over a span of 4 years. He has also gone through the appeal on identical issue decided by him for the earlier year AY 2011-12 and has reproduced the order and relied upon the order of the Hon'ble Tribunal in ITA No. 2126 & 2625/KOL/2013 for AY 2008-09 & AY 2009-10 order dated 21.12.2016 in which the Hon'ble Tribunal has held as under:
“6. Repairs and Maintenance Expenditure of Rs. 1,43,46,644/- claimed as Revenue, AO Treated as Capital in nature.
1 The ld. DR for the Revenue had submitted that the entries in the annexure 9 which was submitted by Assessee before Assessing Officer, do not bear the character of revenue expenditure or not in nature of repairs and maintenance. The ld. CIT(A) did not follow the proper procedure and he could not obtain the remand report from the Assessing Officer. As per section 250(4) of the Act, the Id CIT (A) did not conduct further inquiry to establish whether expenditure is in the nature of Revenue or Capital. It is settled position of law that a lot of factors would determine whether the expenditure is capital or revenue in nature. It is seen in the said Annexure that the assessee has debited expenses like purchase of scanners, UPS, batteries, provisions for earlier years, huge plumbing expenses, expenditure in civil construction like extra space for godown, aluminium cubicles and fittings, purchase of chairs, sofas. There are some entries which do not have any head but only amount has been mentioned. The expenditure mentioned by the assessee have an enduring benefit and has brought into existence a new capital asset for the assessee. Like for example, the scanner, the battery, the chairs are permanent assets. The office of the assessee, the godown, the computer, the building are permanent business assets of the assessee and hence, any expenditure incurred by the assessee for renovating the office, godown etc. is to be treated as capital expenditure. The assessee has failed to establish as to how the expenditures mentioned by him can help the assessee in the process of earning profit in the course of his business activities. These expenditures are adding value to the property, creating new property or appreciably prolonging its life. The assessee is in the business of selling vacuum cleaners, water purifiers etc. and definitely not in the computer business or cinema theatre etc. to justify the expenditures mentioned above as being incidental to his business. The assessee has incurred huge expenditure which has resulted in long term benefit to the assessee and such expenditure is not allowable as revenue expenditure and the same cannot be passed as repair and maintenance. Therefore, an amount of Rs. 1,43,46,644/- out of a total of Rs.4,09,64,919/- incurred under the head 'repairs and maintenance' is treated as capital in nature. This way, the ld. DR has reiterated the stand taken by the Assessing Officer. The ld DR also relied on the following judgment: CIT, Madurai Vs. Saravana Spg. Mills (P) Ltd. [2007] 163 Taxmann 201 (SC): Assessee manufacturer of yarn replaced old 3 ring frames by new ones and claimed expenditure incurred in said activity as current repairs contending that whole textile mill was a ‘Plant' and ring frames were one of 25 machines which constituted a single process and therefore, replacement of frames be treated as replacement of part of plant/total machinery and not replacement of a machine- Assessing Officer held that each machine including ring frame was an independent and separate machine capable of independent and specific function and, therefore, expenditure incurred for replacement of entire machine would not come within meaning of words ‘current repairs".
2 The Ld. AR submitted that during the year under consideration, the assessee had incurred expenses on repairs & maintenance of Rs.4,09,64,919/- out of such amount the AO has disallowed Rs. 1,43,46,644/-. The assessee submitted complete details regarding the above mentioned expenditure as well as explained the nature thereof. The Ld. AR further submitted that all these expenses have been incurred by the assessee on Leased Assets. The assessee is not owner of leased assets.
Therefore any repairs and maintenance expenditure incurred by the assessee on leased assets do not give ownership to claim depreciation. That is, in order to claim depreciation the assessee must be legal owner of the asset. Therefore, the expenditure incurred to maintain the leasehold property is revenue in nature. The Id AR for the assessee has shown us lease agreements and lease details. The AR for the assessee also relied on the following judgment: “Commissioner of Income Tax Vs. Madras Auto Service (P) Ltd. [1998] 99 Тахтап 575 (SC): “In order to decide whether this expenditure is revenue expenditure or capital expenditure, one has to look at the expenditure from a commercial point of view. What advantage did the assessee get by constructing a building which belonged to somebody else and spending money for such construction. The assessee got a long lease of a newly constructed building suitable to its own business at a very concessional rent. The expenditure, therefore, was made in order to secure a long lease of new and more suitable business premises at a lower rent. In other words, the assessee made substantial savings in monthly rent for a period of 39 years by expending these amounts. The saving in expenditure was a saving in revenue expenditure in the form of rent. Whatever, substitutes for revenue expenditure should normally be considered as revenue expenditure. Moreover, the assessee did not get any capital asset by spending the said amounts. The assessee, therefore, could not have claimed and depreciation. Looking to the nature of the advantage which the assessee obtained in commercial sense, the expenditure appeared to be revenue expenditure. The building was never belonged to the assessee. Right from the inception the building was under the ownership of the lessor. Therefore, by spending this money, the assessee did not acquire any capital asset. The only advantage the which the assessee derived by spending the money was that it got the lease of a new building at a low rent. From the business point of view, therefore, the assessee got the benefit of reduced rent. The High Court had, therefore, rightly considered this as obtaining a business advantage. The expenditure was, therefore, to be treated as revenue expenditure."
3 Heaving heard the rival submissions, perused the material available on record, we are of the view that there is merit in the submissions of the assessee, as the proposition canvassed by the Id.AR for the assessee are supported by the judgment of hon'ble supreme court in the case of CIT Vs. Madras Auto Service (P) Ltd. (Supra). The Id AR pointed out that the assessee spent the amount to repair leased property. The leased property belongs to the Lessor and not to the assessee. The assessee can not claim depreciation also. Considering the factual position, we are of the view that order passed by the Id CIT (A) does not contain any infirmity. Therefore, we confirm the order of ld. CIT(A).
4 In the result, the appeal filed by the revenue on this issue is dismissed.”
5 Thereafter, relying upon the orders in appeal in AY 2010-11 & AY 2011-12 in which the Hon'ble Tribunal have adjudicated in para 29, 30 and 31 this issue and has confirmed his finding, he has confirmed 10% of the overall disallowance being treated as capital in nature and has allowed 90% of the disallowance and has given part relief. We note that whether the expenditure is capital or revenue can only be examined by considering the nature of repair and any repair which is of enduring benefit can only be treated as capital in nature since every year assessment is different and the nature of repairs would also not be identical with that of AY 2012-13. In the AYs 2008-09 and 2009-10, it was submitted by the Ld. AR that major expenditure was on leased assets of which the assessee was not a legal owner and the issue was decided relying upon the decision of the Hon'ble Supreme Court in the case of Saravana Spg. Mills (P) Ltd. (supra) and Madras Auto Service (P) Ltd. (supra). The Ld. AO has mentioned that the entire expenditure of ₹1,27,53,875/- (3/4th of which was disallowed being of ₹95,95,406/) was incurred on various office premises taken on lease/rent on the conclusion that the continuous renewal of rent/lease agreement by the assessee company displayed an intention to continue occupation of the premises of enduring nature and the same was treated as deferred revenue expenditure. However, the decision in the case relied upon was rendered on the fact that in the Annexure that the assessee had debited expenses like purchase of scanners, UPS, batteries, provisions for earlier years, huge plumbing expenses, expenditure in civil construction like extra space for godown, aluminium cubicals and fittings, purchase of chairs, sofas etc. In the decision of Saravana Spg. Mills (P) Ltd. (supra) the issue is limited to current repairs and plant & machinery and in the case of Madras Auto Service (P) Ltd. (supra) it has been held that the expenditure was revenue in nature as the leased property belongs to the Lessor and not to the assessee and the assessee cannot claim depreciation also. Therefore, we do not find any infirmity in the order of the Ld. CIT(A) who has confirmed 10% of the overall expenses on estimated basis and granted relief in respect of the rest of the amount as the Ld. AO has himself mentioned that the expenditure relates to renovation of various office premises taken on rent/lease for three years of term, but renewed continuously whereas in the case of Madras Auto Service (P) Ltd. (supra) the lease was a long lease of a newly constructed building and the assessee got the benefit for 39 years by expending these amounts, yet the amount was treated as revenue in nature. Hence, in view of the findings of the Tribunal in the assessee's own case in A.Y. 2008-09 and others, Ground No. 2 of the appeal is dismissed and the findings of the Ld. CIT(A) are confirmed.
Ground No. 3 relates to the Ld. CIT(A) erring in deleting the disallowance of excess depreciation of ₹12,61,664/- claimed on building as the assessee company failed to substantiate its claim properly and had no approvals/permits from various authorities to use such a premise for guest house.
1 The Ld. AO has observed as under regarding this issue:
“6. The assessee has claimed depreciation @10% on the residential flats and the details submitted vide Annexure-7 vide written submission dated 10-03- 2016 during the course of hearing which reveals that the flats ore situated at Starling Sea Face, Dr. Annie Bessant Road, Worli, Mumbai -400018 [Flat No. A/701 & B/1103) along with two car parking spaces and at Eden Wood "Cedar House" Co-operative Housing Society Limited, Flat No.8C/8D/9C, Thane (West), 400061 (occupied by the employees-submitted by the assessee). Though the assessee has claimed that all those flats are used for guest house purpose yet they could not file the occupancy registers for the whole year and also failed to furnish about utilizing the same for commercial purpose or business purpose other than the residential purpose. The total depreciation of Rs.25,23,328/- claimed in this regard, on WDV of Rs.2,52,33,278/-, @ 10% as admissible other than the buildings used mainly for residential purposes except hotels and boarding houses, and installation of machinery & plant etc. Here, the assessee had flats within the residential complexes and neither the occupancy registers nor the permission for utilizing the same either as hotel/boarding houses/guest houses could be filed hence, the allowable depreciation is being restricted to 5% instead of 10%. Therefore, the disallowable interest is computed 1/2 of Rs.25,23,328/-, i.e. Rs.12,61,664/- is added back with the returned income."
2 The Ld. CIT(A) after considering the facts of the case and submissions of the assessee has given his finding in para 18 of the appeal order and relied upon his findings on this issue in the preceding year AY 2011-12, which finding has been confirmed by the Hon'ble ITAT, and thereafter has held as under:
“3. I also find that the matter had been agitated by Revenue before the Hon'ble ITAT for the two A.Ys 2010-11 and 2011-12, and the Hon'ble ITAT by their orders and adjudication at Paragraphs 24,25,26,27 and 28 have confirmed my findings. Therefore following my findings and adjudication for the A.Ys 2010-11 and 2011- 12, as well as respectfully bound by the orders of the Hon'ble ITAT for the A.Ys 2010-11 and 2011-12, in this year also this ground is allowed.”
3 The Ld. DR submitted that normal deposition at the rate of 5% should have been allowed in not at the rate of 10%. The Ld. AR submitted that this issue, common in AYs 2012-13 and 2014-15, stands settled by decision of the Hon'ble Tribunal in the assessee's own case for the AYs 2010-11 & 2011-12, vide order dated November 28, 2018 passed in ITA Nos. 2159, 2160, 2170-2171/Kol/2017 for AYs: 2010-11 and 2011-12, involving similar facts. In fact, the Ld. CIT(A) has followed the said order of the Hon'ble Tribunal. The Ld. AR further submitted vide written notes filed that the contention of the Department, therefore, is unsustainable in respect of grounds referred in paragraphs 4 to 7 hereinabove following the principles of consistency laid down by the Hon'ble Apex Court in the cases of Radhasoami Satsang Vs. CIT, 1992 (1) SCC 659, paras 16 & 17 and Pr. CIT Vs. Maruti Suzuki India Ltd., [2019] 416 ITR 613 (SC), para 34 [which decision has been followed by the Hon'ble Delhi High Court in Pr. CIT Vs. PNB Housing Finance Ltd. [2024] 461 ITR 476 (Del), [SLP of Department against which has been dismissed by the Supreme Court in (2024) 461 ITR 481 (SC)] consistently followed by this Hon'ble Tribunal.
4 We have considered the submissions made, gone through the facts of the case and perused the record and the order of the Ld. CIT(A). Since the issue has been decided based upon the findings of the Ld. CIT(A) in A.Y. 2011-12 which have been confirmed by the Tribunal, therefore, there is no reason to interfere with the findings of the Ld. CIT(A) whose findings are confirmed and Ground No. 3 of the appeal is dismissed.
Ground No. 4 relates to the Ld. CIT(A) erring in treating the expenditure of ₹55,07,700/- claimed towards Trademark and Copyright consultancy under the head "Professional Fees" as revenue expenditure instead of capital expenditure as treated by the Ld. AO in the assessment proceeding.
1 The Ld. AO had observed as under regarding this issue:
“8. Disallowance of Trademark and Copyright consultancy expenditure of Rs.55,07,700/-:
The assessee has debited Rs.55,07,700/- as Trademark and Copyright consultancy under the head" Professional fees