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Income Tax Appellate Tribunal, DELHI BENCH “SMC-2” NEW DELHI
Before: SHRI S.V. MEHROTRA :
This is assessee’s appeal against the order dated 1.10.2014, passed by the ld. CIT(A)-VI, New Delhi, relating to A.Y. 2010-11.
Grounds of appeal
raised by the assessee in its appeal are as under: Ground I: Disallowance of Rs. 67,84,592/-
1. On the facts and in the circumstances of the case and in law, the -learned Commissioner of Income Tax (Appeals)-VI, New Delhi (lithe CIT (A)") erred in upholding the action of Deputy Commissioner of Income Tax officer, Circle- 3(1), New Delhi (lithe AO") of disallowing the expenditure amounting to Rs. 67,84,592/- on the alleged ground that the Appellant has not carried out any business during the relevant year.
2 q 2. The Appellant prays that the disallowance made by the AO be deleted and the returned income/loss be accepted. Ground II: Disallowance of Rs. 15,00,000/- of legal and professional expenses 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the action of the AO of disallowing the expenditure amounting to Rs. 15,00,000/- incurred towards legal and professional services u/s. 37(1) by treating the same as capital in nature.
2. The Appellant prays that the disallowance made be deleted and the returned income/loss be accepted. Ground III: General The Appellant craves leave to add to, alter and/or amend all or any of the foregoing grounds of appeal
3. Brief facts of the case are that assessee company filed its return declaring a loss of Rs. 62,40,745/-. The AO noticed that assessee had declared only other income amounting to Rs. 5,43,847/-. Against this income the assessee company had claimed Rs. 72,52,147/- as operating and other expenses and Rs. 1,91,552/- as financial expenses totaling to Rs. 74,43,699/-. The AO further noticed that out of these expenses, assessee company itself had disallowed Rs. 6,59,107/- and had claimed business loss of Rs. 67,84,592/-. The AO show caused the assessee as to why the expenses claimed should not be disallowed, since the business of the assessee
3 q company had not commenced. The assessee vide tis reply dated 25.2.2013 submitted as under:
"During the year under review the company management continued to carry on business by evaluating various options with regards to the future. Although the company did not generate any revenue from the client to whom services had been rendered in the preceding year, however, this cannot be equated with a statement that there was no business activity". 4. The AO being not satisfied with the assessee’s reply pointed out that assessee company failed to proceed with the main object of its incorporation and had provided only support services to its holding company. It was incorporated to manufacture and roll form zinc/aluminium coated steel sheets and deal in all qualities and grades of iron & steels. In this regard the AO has reproduced the following contents from assessee’s letter dated 14.06.2012:
"Brief Note on Activities and History: The assessee company (formerly BHP Steel India Pvt. Ltd.) was incorporated on January 5, 1996 as a subsidiary of BlueScope Steel Limited (Formerly BHP Steel Limited, Australia). The company's primary objective on incorporation was to manufacture and roll form zinc/aluminium coated steel sheet and deal in all quantifies and grades of iron and steel. During the year, under review, as in the previous year, the company was engaged in providing business support services to its Holding Company ... ".
4 q 5. The AO relying on case law on the issue that merely on the basis of incorporation of a company it cannot be concluded that business had been set up because carrying on business would require activities systematically and continuously, disallowed the assessee’s claim of Rs. 67,84,592/-.
Without prejudice to these findings, the AO further pointed out that even if at appellate stage a view is taken contrary to its stand, then too Rs. 15 lacs paid to M/s Nayan Rawal & Associates, Advocates could not be allowed because that was in the capital field as incurred in connection with the increase of share capital.
Ld. CIT(A) confirmed the AO’s action subject to allowing deduction u/s 35D and depreciation u/s 32, inter alia, observing that the assessee company had not carried out any core business activity and had only declared interest income from fixed deposits parked with banks & financial institution amounting to Rs. 5,43,847/-.
Ld. counsel for the assessee submitted that the assessee company was incorporated on 5.1.1996, but remaind defunct till Mach 2004. However, from 1.4.2004 it started rendering business support services to its holding company. Also it sold project to Tata Blue Scope steel Ltd. (“TBSL”).
Assessee also rendered technical services to TBSL. Ld. Counsel referred to 5 q the statement showing income from April 2005 to March 2009, contained in the synopsis filed in course of hearing, which is reproduced hereunder:
Year ended Assessment Receipt from Receipt from Other Business Year business support Technical services receipt service to TBSL March 31,2006 2006-07 90,140 68,79 1,008.29 March 31,2007 2007-08 221.07 310.87 44.29 March 31,2008 2008-09 1,452.84 254.87 17.37 March 31,2009 2009-10 81.63 79.81 2.39
In support of its contention, ld. counsel referred to pages 44 to 72 of the PB, wherein the assessment orders have been passed by AO of earlier years are contained. At page 44 of the PB, wherein assessment order for AY 2006-07 is contained, ld. counsel pointed out that AO himself has noticed that during the relevant previous year the assessee was engaged in the business of providing business support and technical services to design and establish ferrous and non-ferrous plants.
The assessee had also entered into international transactions with its AEs, as defined u/s 92A of the I.T. Act for which T.P. analysis had also been carried.
Ld counsel referred to TPO’s order for AY 2006-07, contained at pages 35 to 43 of the PB. He pointed out that similar orders have been passed for AYs 2007-08 to 2009-10. He further referred to assessment order passed for AY 2011-12, contained at page 73 of the PB and pointed out that 6 q the assessee’s claim had been allowed though there was no receipt from such activity. Ld. counsel referred to page 4 of the PB, wherein the P&L A/c is contained to point out that though in the year ended on 31.3.2009, the assessee had receipts from business support services of Rs. 81,62,899/- and from technical support services of Rs. 79,80,613/- but during the year no income was earned. Ld. counsel pointed out that ld. CIT(A) has wrongly observed that there was interest income earned by assessee because assessee had only written back misc. balances aggregating to Rs. 5,43,347/-, a is evident from schedule 9 of the P&L A/c. He submitted that assessee had not claimed any expenditure u/s 57.
Ld. counsel further referred to page 9, wherein the details of operating and other expenses are contained to demonstrate that the expenditure was mainly for the business activities undertaken by assessee. Further, ld. counsel referred to memorandum and articles of association and pointed out that under the main object, one of the object was as under:
“To extend consultancy services required to design, establish, provide, maintain and perform engineering and other related technical and consultancy services for the development of ferrous and non ferrous, metallurgical enterprises, refractory plants, laboratories for control and/ or research purposes.”
Thus, in sum and substance, ld. counsel submitted that assessee company had already set up and had commenced its activities from 7 q 1.4.2004. The income from business support services and technical consultancy services were assessed as business income. Ld. counsel submitted that assessee company was in lull phase and, therefore, expenses necessary for maintaining corporate status, expenses had to be incurred.
Ld. Sr. DR referred to page 4 of the PB to demonstrate that no depreciation had been claimed by the assessee and there were no personnel expenses which clearly showed that no business activity was carried out by assessee. Further, assessee had changed its business object.
Ld. Sr. DR further submitted that, in any view of the matter, the sum of Rs. 15 lacs paid by assessee for increase in share capital cannot be allowed.
I have considered the submissions of both the parties and have perused the record of the case. Admittedly from AY 2006-07 to 2009-10 the assessee’s receipts from business support services and technical services to TBSL were assessed under the head “business income”. Ld. counsel in course of submissions referred to page 15 of the PB, wherein the notes to account are contained, in which it is, inter alia, stated as under:
“…..The parent company has assured continued financial support through infusion of equity capital of Rs. 10,000,000 in the current year. The company presently has enough funds to meet its liabilities (in the next twelve months) as and when they fall due. Pending finalization of future business plans of the company, the financial statements has been prepared on going
8 q concern basis. The financial statements do not include any adjustments relating to recoverability and classification of recorded asset amounts or to amount and classification of liabilities that may be necessary if the entity is unable to continue as a going concern.”
From this it is evident that there was no intention to close down the business and, therefore, I am in agreement with the submission of ld. counsel for the assessee that though there was no receipt from the two sources during the year but it was a case of lull phase of business and normal business expenses incurred by it to keep the status of company as a going concern had to be incurred. From page 9 of the PB, wherein schedule 11 relating to operating and other expenses is contained, I find that the details of expenses were as under: Year ended Year ended March 31, March 31, 2010 2009 Rupees Rupees Electricity expenses 42,630 165,520 Rent 585,292 3,087,650 Rates and taxes 417,839 490,000 Insurance - - Repairs and maintenance - 1,101,813 Travelling and conveyance 71,327 5,496,082 Communication costs 16,963 30,082 Legal and professional charges 5,105,498 1,717,807 Foreign exchange difference (Net) 479,563 6,222,694 Security charges - 179,024 Auditors Remuneration (Net of 521,333 899,000 Reversal of Rs. NIL for prior period) Previous year include Rs. 168,664 for prior period Miscellaneous expenses 11,702 178,381 7,252,147 19,617,223
9 q 18. None of these expenses can be said to be not necessary for retaining the status of assessee company. Further, ld. counsel also pointed out that during the year under consideration the assessee continued to realize its debtors and made payments to its creditors and further continued its efforts to revive the business. Therefore, foreign exchange difference (net) had to be allowed. In view of above discussion, all the expenses are to be allowed subject to my subsequent findings in respect of legal and professional charges.
As far as the sum of Rs. 15 lacs included in legal and professional charges is concerned, I am of the considered opinion that since the amount was spent for increase of share capital, therefore, the same could not be allowed. Hence disallowance of Rs. 15,00,000/- is confirmed.
In the result, assessee’s appeal is partly allowed. Order pronouncement in open court on 08/07/2016.