DCIT, COIMBATORE vs. M/S. CHIRANJEEVI WIND ENERGY LTD., COIMBATORE

Assessment Year 2011-12

A) Assessee’s Appeal: The assessee has raised several elaborative grounds in its appeal, however the cruxes of the issue are stated herein below for adjudication:- (i) The Ld.CIT(A) has erred in confirming the addition made by the Ld.AO by disallowing the claim of additional depreciation U/s.32(1)(iia) of the Act for Rs.55,33,000/-. (ii) The Ld.CIT(A) has erred in confirming the addition made by the Ld.AO for Rs.55,23,203/- by disallowing service tax element attributable to the 1/5th portion of the preliminary expenses claimed U/s.35D of the Act. (iii) The Ld.CIT(A) has erred in confirming the addition made by the Ld.AO by disallowing the advance written-off as bad debts for Rs.2,04,26,000/- and claimed as revenue expenditure.

B) Revenue’s Appeal: ITA No.2324/Mds/2016:- however the crux of the issue are that the Ld.CIT(A) has erred in deleting the addition made by the Ld.AO for Rs.1,27,80,000/- which was claimed as preliminary and pre-operative expenses U/s. 35D of the Act, without considering the decision of the Hon’ble Apex court in the case M/s. Brokebond India Ltd reported in 225 ITR 798 (SC) and the decision of the Hon’ble Jurisdictional High Court in the case CIT vs. Sakthi Finance Ltd cited in 130 Taxmann 304.

The assessee had received Rs.1 crore from M/s. India Globalization Capital Inc, USA for installation of 96 Nos. 250KV wind energy generators vide agreement dated 29.04.2007. It was further noticed that this agreement had expired on 31.03.2009. However, the amount of Rs.1 crore advance received by the assessee was kept as liability in its books of account. The Ld.AO opined that it is a case of remission of liability U/s.41(1) of the Act. The assessee had explained before the Ld.AO that there was some dispute with respect to the contract agreement, therefore the amount was kept pending as advance, hence it cannot be treated as remission of liability because the matter has not become final. However, the Ld.AO taking cue from the agreements executed between both the parties which is elaborated in his order invoked the provisions of Section 41(1) of the Act and treated the amount of Rs.1 crore as appeal, the Ld.CIT(A) confirmed the order of the Ld.AO by observing as under: “13. I have gone through the submissions made by the Appellant and also the order of the Assessing Officer. The assessee company filed Contact Agreement dated 29.04.2007 and Amendment dated 20.08.2007 with M/s. India Globalization Capital Inc. U.S.A. As per this Agreement has received RS.1Crore for installation of 96 Nos. of 250 KV Wind Energy Generators. It is seen from the supplementary agreement that the contract expired on 31.03.2009. The amount of RS.1 Crore has been kept as liability for the past 3 financial years i.e. F.Y. 2007-08, 2008-09 and 2009-10. The Authorized Representative submitted that the assessee is not liable to refund the sum of RS.1 Crore to M/s. India Globalization Capital Inc. As seen from the details, the assessee has no liability to refund the amount of RS.1 Crore after the expiry of the contractual obligation which expired on 31.09,2007. As seen from the details, Clause 11.3 of the Agreement, Rs.25 Lakhs is non- refundable amount which is crystal clear in the contract agreement. During the course of appellate proceedings, the Authorized Representative was asked to produce the details regarding the contractual obligation to pay the amount of RS.75 Lakhs which is refundable, However, the Authorized Representative could not furnish any details regarding the liability for RS.75 Lakhs. Hence the entire amount of RS.1 Crore is to be treated as the business income of the assessee. The addition made by the Assessing Officer is CONFIRMED. These grounds of appeal are DISMISSED”

5.1 At the outset, the Ld.AR submitted before us that the amount of Rs.1 crore received as advance by the assessee had because of non-compliance of the agreements by the clients of the assessee. Accordingly, the assessee had declared the amount of Rs.1 crore as its income in its return of income for the assessment year 2014-15 and duly paid tax. It was therefore pleaded that treating the amount of Rs.1 crore as its income for the relevant assessment year would amount to double taxation; hence the addition is not warranted. The Ld.DR strongly objected to the submission of the Ld.AR and pleaded in support of the orders of the Revenue authorities.

5.2 We have heard the rival submissions and carefully perused the materials on record. If the assessee had declared the amount of Rs.1 crore as its income, for the assessment year 2014-15 then obviously making addition once again in the hands of the assessee for the relevant assessment year 2010-11 would amount to double taxation. Further due to the various commercial relationships between the assessee and its clients, the assessee had treated the amount of Rs.1 crore as its liability in the relevant assessment year, by not invoking the penalty clause in the agreement executed between them, thereby conditions of the agreement and hence the assessee had not appropriated the advance. Only during the assessment year 2014-15, the assessee had invoked the penal provisions of the agreement and appropriated the advance received from its clients. This act of the assessee based on commercial prudence cannot be questioned by the Revenue. Therefore, if the assessee had declared the amount of Rs.1 crore as its income, for the assessment year 2014-15 then there is no scope for the Revenue to make addition for the assessment year 2010-11 once again. Hence we hereby direct the Ld.AO to verify whether assessee had declared the amount of Rs.1 crore as its income U/s.41(1) of the Act, for the assessment year 2014-15 and if found so, delete the addition made for the relevant assessment year and if found otherwise, reinstate his earlier order on this issue.

The assessee had claimed the aforesaid amount as miscellaneous expenditure in the balance sheet and written off 1/5th of Rs.6,10,00,000/- viz., Rs.1,22,00,000/- as preliminary and pre-operative expenses in its profit & loss account. The Ld.AO disallowed the aforesaid expenses and added to its income by observing as follows:- “3.6 From the above, it is clear that though the increase in the capital results in expansion of the capital base of the company and incidentally that would help in the expansion of its business activities and may also help in the profit making, the expenses incurred in that connection still retain the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company.

3.7 Further, it is a settled law that the expenses incurred by the assessee in issuing the shares with a view to increase its capital did not constitute revenue expenditure and it is nothing but capital expenditure only. Hence, the impugned expenditure is neither Preliminary expense as per Section 35D nor Revenue expenditure as per Section 37.

3.8 In view of the above discussion, the expenditure claimed as Preliminary and Pre-operative expenses written off which relates to arrangement of private equity amounting to 6.1 On appeal, the Ld.CIT(A) following the decision of the Chennai bench of the Tribunal on the identical issue in dated 21.10.2013 allowed the appeal of the assessee.

6.2 Before us the Ld.DR referring to the decision of the Hon’ble Apex Court in the case M/s. Brokebond India Ltd reported in 225 ITR 798 (SC) and the decision of the Hon’ble Jurisdictional High Court in the case CIT vs. Sakthi Finance Ltd cited in 130 Taxmann 304 vehemently pleaded that the expenditure incurred by the assessee does not fall under the Revenue field because it is capital in nature. He further pointed out that provision of Section 35D of the Act does not provide for deduction of expenditure incurred in the nature of commission for private placement of shares. He therefore requested that the order of the Ld.AO may be reinstated.

6.3 The Ld.AR on the other hand relied on the order of the Ld.CIT(A) and decision of the Hon’ble Jurisdictional High Court and the decision rendered in the case CIT vs. Ashok Leyland Ltd reported in 349 ITR 663, wherein it was held that the expenditure incurred towards raising of additional equity shares by private placement can be attributable to extension of undertaking and is thus eligible for amortization under the provisions of Section 35D of the Act.

6.4 We have heard the rival submissions and carefully perused the materials on record. The moot question before us is whether the expenditure incurred as commission for procuring private placement of equity shares is allowable as deduction. The assessee has taken cover U/s.35D of the Act, to amortize such expenditure as preliminary expenses. However, on perusing the provisions of Section 35D(2) of the Act, it is clear that only specific expenditures are provided under the Act which can be amortized viz.,

“(a) expenditure in connection with (i) preparation of feasibility report; (ii) preparation of project report; (iii) conducting market survey or any other survey necessary for the business of the assessee. (iv) engineering service relating to the business of the assessee;

12 & 442/Mds/2015 ITA Nos.2324 & 2468/Mds/2016 Provided that the work in connection with the preparation of the feasibility report or the project report or the conducting of market survey or of any other survey or the engineering services referred to in this clause is carried out by the assessee himself or by a concern which is for the time being approved in this behalf by the Board.

(b) legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee.

(c) where the assessee is a company, also expenditure (i) by way of legal charges for drafting the Memorandum and Articles of Association of the company; (ii) on printing of the Memorandum and Articles of Association; (iii) by way of fees for registering the company under the provisions of the Companies Act, 1956 (1 of 1956) (iv) in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus; (d) such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provision of this Act) as may be prescribed.”

6.5 From the above, it is clear that towards any commission expenditure incurred for private placement of equity shares, benefit U/s. 35D of the Act cannot be claimed. Section incurred in connection with issue for public subscription and not for private placement. Further, the Hon’ble Apex Court in the case Broke Bond India Ltd vs. CIT (supra) it has been categorically held that “Expenditure incurred by a company in connection with issue of shares, with a view to increase its share capital, is directly related to the expansion of the capital base of the company, and is capital expenditure, even though it may incidentally help in the business of the company and in the profit-making.” Further, the decision of the Hon’ble Jurisdictional High Court in the case CIT vs. Sakthi Finance (supra) also such claim of deduction U/s.35D of the Act was denied. From the above, it is apparent that the Hon’ble Apex Court has held that any expenditure incurred directly related to the expansion of capital base of a company will fall in the capital field and not in the revenue field.

In the case of the assessee, the expenditure is incurred for increasing its equity capital base. Therefore, as per the ratio laid down by the Hon’ble Apex court such expense will fall under the capital field. Further as per the provisions of Section 35D of the Act, there is no scope for the assessee to amortize such expense. The decisions of the Hon’ble Apex Court supra and the sight off by the Tribunal while passing orders in the earlier instance. Since, we are bound to follow the decision of the Hon’ble Apex Court, respectfully following the same, we hereby hold that, in the case of the assessee the commission expenses incurred towards increasing its equity capital base, can neither be amortized U/s.35D of the Act, nor it can be claimed as Revenue expenditure as it falls in the Capital field. It has been also categorically held by the Hon’ble Apex Court in the case Punjab State Industrial Development Corporation vs. CIT that expenses incurred in relation to increase in capital base is capital expenditure incurred by the assessee company, even though its certainty helps the company in profit making but yet it retains the characteristics of capital expenditure. In the case CIT vs. Motor Industries Limited reported in 229 ITR 139, the Hon’ble Karnataka High Court held that the expenses incurred in relation to right issue where of capital in nature and therefore cannot be claimed as revenue expenditure. Hence we find the order of the Ld.AO to be appropriate in the given circumstance. Accordingly, we hereby set aside the order of the Ld.CIT(A) and reinstate the order of the Ld.AO on this issue.

During the course of scrutiny assessment proceedings, it was observed by the Ld.AO that the assessee had claimed additional depreciation on windmill. The Ld.AO disallowed the claim of additional depreciation because the business of generation, transmission or distribution of power which was made eligible for additional depreciation U/s.32(1)(iia) of the Act, came in to effect from the assessment year 2013-14 as per Finance Act, 2012. On appeal, the Ld.CIT(A) also agreed to the view of the Ld.AO and upheld the order by distinguishing the decision in the case VTM Limited reported in 319 ITR 336.

From the facts of the case, it is evident that the assessee had claimed additional depreciation on the windmill erected by it for generating and distribution of power in order to earn revenue. In this situation, we do not find any infirmity in the order of the Ld. Revenue Authorities on this issue. As held by the Ld.AO the business of generation, transmission or distribution of power was Finance Act, 2012 w.e.f. 01.04.2013 i.e., from the assessment year 2013-14. Since the case of the assessee is for the assessment year 2011-12, obviously the assessee will not be eligible for the benefit of additional depreciation during the relevant assessment year. Further it is not the case of the assessee that the assessee is claiming the additional depreciation with respect to its manufacturing activities. Therefore this issue raised by the assessee does not have any merits.

B) Ground 3(ii) Disallowance of service tax element attributable to the 1/5th portion of preliminary expenses U/s.35D of the Act for Rs.55,23,203/-:-

During the previous year the assessee company had debited Rs.55,23,203/- in its P&L account being the demand raised by the Service Tax Commissioner by holding that the assessee is not entitled to input credit in respect of legal and consultancy charges paid for private placement of equity shares. Since the expenses was related to assessment year 2009-10, the Ld.AO disallowed the claim of expenditure and even denied appeal, the Ld.CIT(A) confirmed the order of the Ld.AO. Since, we have held hereinabove that the expenses incurred in the form of commission of Rs.6,10,00,000/- for private placement of the equity shares of the assessee company, is not allowable for deduction U/s.35D of the Act, any expenses connected with it such as service tax also will not be entitled for the benefit of deduction U/s.35D of the Act to the assessee. Therefore, the appeal filed by the assessee does not have any merit.

C) Ground 3(iii):- Disallowance of the advance written-off by the assessee as revenue expenditure for Rs.2,04,26,000/-.

During the course of scrutiny assessment proceedings, it was observed by the Ld.AO that the assessee had written off Rs.2,04,26,000/- as revenue expenditure being the advance paid to M/s. MIC MiddleEast FZE in February 2009 for acquiring second hand cranes. Since this amount was not recoverable, the assessee had written off the same in its books of accounts as bad debts. The Ld.AO opined that the assessee had incurred the expenditure / loss towards cost of acquiring the profit earning apparatus and therefore it would fall in the capital feild and not in vs. Brila Bros reported in 77 ITR 75 (SC), Kwality Fund Foods & Restaurant (P) Ltd vs. DCIT reported in 356 ITR 170 (Madras High Court) and the decision of the case Empire Jute Co. Ltd. vs. CIT reported in 124 ITR 1 (SC), the Ld.AO disallowed the claim of bad debts to the assessee. On appeal, the Ld.CIT(A) agreeing with the view of the Ld.AO upheld the order. Before us the Ld.AR submitted that the advance paid by the assessee is not recoverable and hence it is a loss suffered by the assessee during the course of its business and therefore it should be allowed as deduction. While as the Ld.DR relied on the orders of the Revenue authorities.

We have heard the rival submissions and carefully perused the materials available on record. From the facts of the case, it is apparent that the assessee had advanced money for buying cranes which were to be deployed in the manufacturing activity of the assessee. However, the assessee could neither acquire the cranes nor recover the amount advanced from the company who has promised to deliver the cranes. In this situation, it is nothing but a loss which the assessee had incurred during the give advance to M/s. MIC MiddleEast FZE other than for purchase of cranes, which is to be used in the assessee’s manufacturing activities. Therefore the reliance placed by the assessee in the decision of the Hon’ble Jurisdictional Madras High Court in the case of CIT vs. Indian Biselers reported in 181 ITR 69 will hold good and accordingly the assessee deserves the benefit of deduction under the Act because it is a loss incurred during the course of the business of the assessee.

On this identical issue, in of 2015 herein above, the matter has been held against the assessee.

Therefore, for the relevant assessment year also the same decision holds good and accordingly the issue is held against the assessee.

20 & 442/Mds/2015 ITA Nos.2324 & 2468/Mds/2016 9. In the result, the appeal of the assessee in ITA No. 442 of 2015 is allowed for statistical purposes as indicated herein above and the appeal of the Revenue in ITA No.319 of 2015 & ITA No.2324 of 2016 are allowed in its favour. The appeal of the assessee in ITA No.2468 of 2016 is partly allowed.

Order pronounced in the on the 10th July, 2017 at Chennai.