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Income Tax Appellate Tribunal, ‘C’ BENCH, BANGALORE
IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH, BANGALORE BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER and SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER ITA No.1004/Bang/2015 (Assessment year: 2010-11) M/s.Bellad & Co., Vidyanagar, Hubli. … Appellant PA No: AABFB6457D Vs. Deputy Commissioner of Income-tax, Hubli. … Respondent AND ITA No.1029/Bang/2015 (Assessment year: 2010-11) Asst. Commissioner of Income-tax, Circle 1(1), Hubballi. … Appellant Vs. M/s.Bellad & Co., Vidyanagar, Hubballi. … Respondent Assessee by : Shri C.R.Nulvi, CA Revenue by : Shri C.N.Bipin, JCIT(DR) Date of hearing : 04/07/2016 Date of pronouncement : 27/07/2016 O R D E R Per INTURI RAMA RAO, AM : These are cross appeals filed by the assessee as well as the revenue directed against the order of the CIT(A), Hubli, dated 26/02/2015 for the assessment year 2010-11.
ITA No.1004 & 1029/Bang/2015 Page 2 of 13 2. Briefly facts of the case are as under: The assessee-firm is engaged in the business of dealers in HMT Tractors, spares, Hero Honda Motors-cycles and dealing in Sony products and also in the business of generation of power through Wind Mills. Return of income for the assessment year 2010-11 was filed on 30/09/2010 declaring income of Rs.51,74,070/-. Against said return of income, assessment was completed by the ACIT, Circle 1(1), Hubli, vide order dated 14/03/2013 passed under section 143(3) Income-tax Act, 1961 ['the Act' for short] at a total income of Rs.1,51,04,807/- after making several disallowances. One of those disallowances relates to expenditure incurred on renovation of showroom of Rs.17,18,671/- treating it capital expenditure allowed depreciation at 10%. He also made addition of Rs.29,02,161/- as deemed dividend under section 2(22)(e) of the Act. The AO also disallowed deduction under section 80IA(5) of the Act as, according to the AO, after setting off of brought forward loss, there was no eligible profit for deduction u/s 80IA of the Act.
Being aggrieved, assessee filed an appeal before the CIT(A) who, vide impugned order, allowed grounds of appeal in respect of addition of deemed dividend and 80IA deduction. However, confirmed the other two additions.
Being aggrieved by that part of the CIT(A)’s order which is against the assessee, assessee is in appeal in ITA No.1004/Bang/2015 and raised the following grounds of appeal:
ITA No.1004 & 1029/Bang/2015 Page 3 of 13 1. The order of the A.O is against the fact and circumstances of the case, against the judicial pronouncements and bad in law. 2. On the facts and circumstances of the case and in law, the A.O erred in making the addition U/s 40(a)(ia) for the payment made during the year. 3. On the facts and circumstances of the case and in law, the A.O erred in disallowing the payment of gratuity u/s 43B, wherein, the provision u/s 43B is not applied for payment of gratuity. 4. On the facts and circumstances of the case and in law, the authorities below erred in holding the amount spent for repair and renovation of leased premises as capital in nature against the claim made by the appellant in revenue in nature. 5. On the facts and circumstances of the case and in law, the authorities below erred in holding the expenditure incurred for fencing site which is temporary in nature to protect the asset as capital in nature against the claim made by the appellant in revenue in nature. 6. For these and other reasons which may be adduced at the time of hearing, the appellant prays before this Hon'ble Bench to delete the addition made by the A.O, 7. Appellant Craves Leaves, to add, to alter, to amend and to delete any of the ground at the time of hearing
Ground Nos.1, 6 & 7 are general in nature and do not require any adjudication.
Ground No.2 relates to disallowance of a sum of Rs.1 lakhs under section 40(a)(ia) of the Act. Ground No.3 challenges the disallowance under section 43B of Rs.4,62,107/-. These two grounds of appeal were raised for the first time before this Tribunal. No application was made for admission of the additional
ITA No.1004 & 1029/Bang/2015 Page 4 of 13 grounds of appeal before us. Hence, we dismiss the same without admitting the same for adjudication.
Ground No.4 relates to disallowance of expenditure incurred on renovation of showroom of Rs.17,18,671/-. The assessee claimed the same as revenue expenditure. It is claimed that expenditure was incurred on repairs and renovation such as false ceiling, floor, wooden partitioning, painting etc. The said expenditure was incurred in respect of premises taken on lease. The AO treated it as capital expenditure and allowed depreciation at the rate of 10% as applicable to furniture and fixtures. On appeal before the CIT(A), the CIT(A) has confirmed the addition that expenditure resulted in an enduring benefit to the assessee irrespective of the fact that expenditure was incurred in respect of lease or own premises.
Being aggrieved, assessee is in appeal before us.
8.1 Learned authorized representative of the assessee submitted that expenditure was incurred under this head represent as false ceiling, flooring, wooden partition, painting etc. which are in the nature of repairs. The expenditure does not create an asset. Therefore, according to him, expenditure should be allowed as revenue expenditure. In support of this submission, he relied on the following decisions: i. Mercantile And Marine Services vs. CIT (233 ITR 257) ii. CIT vs. Associated Cement Companies Ltd. (172 ITR 257) iii. CIT vs. Lucent Technologies Hindustan Ltd. (345 ITR 407)
ITA No.1004 & 1029/Bang/2015 Page 5 of 13 8.2 On the other hand, learned Departmental Representative relied on the orders of the lower authorities.
8.3 We heard rival submissions and perused material on record. It is undisputed fact that the assessee has incurred expenditure in respect of leased premises. This expenditure was incurred on false ceiling, floor, painting etc. This expenditure has not resulted in creation of any new asset. Mere fact that expenditure resulted in enduring benefit cannot alone be the criteria to decide whether expenditure is capital or revenue. The principles laid down by the Hon’ble Supreme Court in the case of CIT vs. Madras Auto Services Pvt. Ltd. (233 ITR 463) are as follows: (1) outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment; (2) expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether; (3) whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, where the object of incurring the expenditure was to employ what was taken as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital." Applying the above principles to the facts of the present case, we hold that expenditure was not incurred on any capital outlay.
ITA No.1004 & 1029/Bang/2015 Page 6 of 13 Therefore, the expenditure is revenue in nature. Even the provisions of Explanation 1 to section 32 cannot be invoked in the present case as there was no construction of any structure, extension, improvement to the building as involved. Therefore, we direct the AO to allow the same as revenue expenditure.
8.4 The reasoning given above is equally applicable in respect of fencing expenditure. Accordingly ground Nos.4 and 5 are allowed in favour of the assessee.
In the result, the assessee’s appeal is partly allowed for statistical purposes.
Now we shall take up the revenue’s appeal for assessment year 2010-11 in ITA No.2029/Bang/2015. The revenue raised the following grounds of appeal: 1. The order of ClT(A) is opposed to law and facts of the case. 2. Whether, on facts & circumstances of the case, the learned CIT(A) is correct in relying on the Hon'ble Delhi High Court judgment in the case of CIT Vs. Ankitech Pvt. Ltd., reported in 340 ITR 14 and held that the advance received by the assessee firm from its sister concern (M/s Bellad & Company Pvt. Ltd.) should not be treated as deemed dividend U/s. 2(22)(e). 3. Whether, on facts & circumstances of the case, the learned CIT(A) is correct in relying on the decision of the jurisdictional High Court of Karnataka in the case of Swarnagiri Wires Insulation Ltd., where it was held that the carried forward loss of the eligible business was required to be set-off first against the income of
ITA No.1004 & 1029/Bang/2015 Page 7 of 13 the subsequent years of eligible business while determining the profits eligible for deduction U/s. 801A of the Act and addition made on the ground of disallowance for deduction U/s. 801A was dismissed. 4. Any other ground that may be taken during the appeal.
The appellant craves leave to add, alter, amend and delete any of the grounds of leave.
Grounds No.1, 4 and 5 are general in nature and do not require any adjudication.
Ground No.2 relates to direction of the CIT(A) deleting the addition of deemed dividend. Facts surrounding this ground of appeal are as under: 12.1 During the course of assessment proceedings, the AO noticed that the assessee received loans from the company M/s.Bellad & Co. Pvt. Ltd., The partners of the assessee-firm viz., S/Shri Arvind Bellad, Chandraknt Bellad and Smt.Leelavati Bellad are also the shareholders of M/s.Bellad & Co. Pvt. Ltd., holding substantial interest. The AO found that as at the end of the accounting year, an amount of Rs.29,02,161/- was found to have been received by the assessee-firm from the said company and there are accumulated profits in the hands of the said company. The AO treated it as deemed dividend in the hands of the assessee-firm. The AO rejected the contention of the assessee- firm that the said loans were given to sister concerns who are not shareholders and therefore, cannot be brought to tax, was not accepted by the AO. The CIT(A), however, held that since the
ITA No.1004 & 1029/Bang/2015 Page 8 of 13 assessee-firm is not a shareholder in M/s.Bellad & Co., Ltd., amount of advance received by the assessee-firm cannot be brought to tax following the Hon’ble Delhi High Court decision in the case of CIT vs. Gopal Clothing Pvt.Ltd (350 ITR 67) and CIT vs. Ankitech P.Ltd. (340 ITR 14) deleted the addition.
12.2 We heard rival submissions and perused material on record. An identical issue has been decided by one of us i.e. the Accountant Member in the case of Suresh Enterprises in ITA No.1284/bang/2015 dt.20/07/2016 held as follows: “7. The co-ordinate bench Delhi in ITA No.6302/Del/2013 dated 10/06/2015 in the case of IAG Promoters and Developers Pvt. Ltd., Vs. ACIT , to which one of us is the author, held as follows: “5. We have heard the rival submissions and perused the material on record. Undisputedly, the appellant is not a shareholder of M/s Countrywide Promoters Pvt. Ltd. It is trite law that the provisions of Section 2(22)(e) have no application to non-registered shareholders. The Hon'ble Apex Court in the case of CIT Vs. C.P. Sarathy Mudaliar (1972) 83 ITR 170 (SC) while construing the provisions of Section 2(6A)(e) of the Act, 1922 which are in pari materia with the provisions of Section 2(22)(e) of the Income-tax Act, 1961, held that the provisions governing the deemed dividend can be made applicable only in the hands of the registered shareholders. Since, admittedly, in the present case, the appellant is not a shareholder of M/s Countrywide Promoters Pvt. Ltd. the amount of Rs.1,73,262/- cannot be taxed in the hands of the appellant company. Hence the appeal filed by the assessee is allowed. ” The Hon’ble jurisdictional High Court in the case of Bagmane Constructions (P) Ltd. vs. CIT (2015) (277 CTR 338)(Kar) held that in a case where loans are
ITA No.1004 & 1029/Bang/2015 Page 9 of 13 advanced/granted to a concern which falls under clause (e) of sub-sec.(22) of sec.2, tax is leviable as deemed dividend only in the hands of the shareholder and not in the hands of the concern. The relevant part is extracted below: “30. It was also contended on behalf of the revenue that having regard to the plain words used in clause (e) 'to any concern', when the amount is paid or when any payment is made to a concern, the tax is levied on the concern and not on the shareholders. As far as this question is concerned, this Court following the judgment of the Bombay High Court in the case of Commissioner of Income Tax vs Universal Medicare (P) Limited reported in 324 ITR 263 has categorically held that when any payment is made by a company to any concern, which falls under clause (e), the tax is leviable on the shareholder only and not on the concern. We respectfully agree with the aforesaid judgment and we do not see any justification to take another view of this matter. Therefore, the finding recorded by the Tribunal that, these advances made by the BDPL to the sister concern as well as to its shareholder do not constitute deemed dividend under section 2(22)(e) of the Act, is legal and valid and do not call for any interference. ”
Respectfully following the above decision, we hold that deemed dividend cannot be taxed in the hands of the assessee-company as the assessee is not a shareholder in the company Shejawadkar Builders Pvt. Ltd from which loans were received. However, we add here that it is open to the department to tax it in the hands of the shareholder by initiating appropriate action by the process known to law.”
In this case also, condition precedent that advances were not received by shareholders is not satisfied. Therefore, the amount cannot be brought to tax as deemed dividend in the hands of the assessee-firm. However, we make it clear that it is open to the department to initiate appropriate action to bring to tax dividend
ITA No.1004 & 1029/Bang/2015 Page 10 of 13 in the hands of the registered shareholder by the process known to law. Accordingly, this ground of appeal raised by the department is dismissed.
Ground No.3 relates to deduction under section 80IA. The AO denied deduction, as according to him, there was no eligible profits available after set off brought forward business loss and depreciation losses. The contentions raised by the assessee-firm are as under: “Assessee has filed the written submissions where it is mentioned that "The appellant had installed Wind Mill during the FY 2004-05 and had entered into an agreement with BESCOM for distribution of power in June 2005. Deduction u/s 801A was not claimed for the assessment years 2006-07 to 2008-09 as there was loss from the Wind Mill, From AY 2009-10 the appellant has been claiming the deduction u/s 801A. This issue was discussed at length during the course of assessment proceedings and when it was proposed to disallow the claim for the year under appeal, it was submitted by the appellant that as per section 801A 100% of the profit from generation and distribution of power is deductible for 10 years commencing from the initial assessment year. The initial assessment year means the assessment year specified by the assessee at his option to be the initial year not falling beyond fifteen assessment years starting from the previous year in which the under taking generates power or commencing transmission or distribution of power. The appellant has opted the financially irrelevant to AY 2009-10 as initial assessment year. It was also brought to the notice of the AO the decision of the Bangalore ITAT in the case of Anil Lad Vs. DCII Central Circle 2(3), Bangalore where in it has been held that once the set off has taken in an earlier year against the other income, the revenue cannot rework the set off amount and bring it notionally. In coming to the decision as above the ITAT Bangalore placed reliance on the decision of the Hon'ble High Court of Madras in the case of Velayudhswamy Spinnin Mills P Ltd Vs. ACIT and CIT Vs. Mohan Breveries & Distelleries Ltd. 340 ITR 477 wherein it has been held that loss in earlier year to initial assessment year already absorbed cannot be
ITA No.1004 & 1029/Bang/2015 Page 11 of 13 notionally brought forward and set off against profits of eligible business. It does not allow the revenue to look backward and find out if there is any loss of earlier years and bring forward notionally even though the same were set of against other income of the assessee and the set off against the current income of the eligible business. The fiction is created only for the limited purpose and the same cannot be extended beyond the purpose for which it is created. The AO however rejected the contention of the appellant following the decisions in ACIT Vs. Goldmine Shares & Finance Pvt. Ltd. 2008 (ITAT SB-Ahd.)113 ITD209 and CIT Vs. Indian Farmers Fertilizers Co-operative Ltd (Del) 197 Taxman 204. It is also stated by the AO that this is a legal fiction created by the statute and to be strictly followed in view of the specified restriction placed in section 80IA(5).”
13.1 On appeal before the CIT(A), the CIT(A) accepted the claim of the assessee and directed the AO to allow deduction under section 80IA(5) following the decision of the jurisdictional High Court in the case of CIT vs. Swarnagiri Wire Insulations P Ltd. in ITA No.5050/Bang/2010 dated 27/05/2011 and the decision of the Hon’ble Supreme Court in the case of Synco Industries Ltd. vs. AO(ITO) (2008) 299 ITR 444. This issue is squarely covered by the decision of the Hon’ble jurisdictional High Court, following decision of the Hon’ble Supreme Court in the 299 ITR 444 held as under: “4. Against the said order of the Commissioner of Income Tax (Appeals), the assessee preferred appeal. The Tribunal held, the carried forward loss of the eligible business was required to be set off first against the income of the subsequent years of eligible business while determining the profits eligible for deduction under Section 801A of the Act and set off losses from other sources under the same head is not permissible. However, it should not forgotten that section 80IA of the Act is a beneficial section permitting certain
ITA No.1004 & 1029/Bang/2015 Page 12 of 13 deduction in respect of certain income under Chapter VIA of the Act. A provision granting incentive for promotion of economic growth and development in taxing statues should be liberally construed and restriction placed on it by way of exception, should be construed in a reasonable and purposive manner so as to advance the objects of the provision. It is a generally accepted principle that deeming provision of a particular section cannot he breathed into another section. Therefore, the deeming provision contained in section 80IA(5) cannot override the section 70(1) of the Act. The assessee incurs loss after claiming eligible depreciation. Hence section 801A becomes insignificant since there is no profit from which this deduction can be claimed. Section 70(1) comes to the rescue of the assessee, whereby he is entitled to set off the losses from one source against income from another source under the same head of income. However, once set off is allowed under section 70(1) from the income from another source under the assessee makes surplus profits after claiming eligible allowances and he is entitled to claim deduction under section 801A, the earlier benefit given under ocher sections of the Act should b taken into account before granting deduction under Section 801A. Therefore, the order of the Commissioner o Income Tax (Appeals) came to be set aside arid the assessee was given the benefit of setting off the profits of one business against the losses incurred in another business.”
Similarly, Hon’ble Madras High Court in the case of Velayudhaswamy Spinning Mills Vs. Asst. CIT (340 ITR 477) and the Hon’ble Delhi High Court reported in in 197 taxman.204 held that for the purpose of computing eligible profits under section 80IA, losses incurred prior to commencement of initial year should not be reckoned. Respectfully following the ratio laid down in the above cases, we hold that since loss incurred prior to the initial year of eligible business need not be deducted for the purpose of computing amount of allowance under section
ITA No.1004 & 1029/Bang/2015 Page 13 of 13 80IA(5). Hence, the ground of appeal filed by the revenue is dismissed.
In the result, the appeal filed by the revenue is dismissed.
Order pronounced in the open court on 27th July,2016
sd/- sd/- (SUNIL KUMAR YADAV) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER Place : Bangalore D a t e d : 27/07/2016 srinivasulu, sps Copy to : 1 Appellant 2 Respondent 3 CIT(A) Bangalore 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file By order Assistant Registrar Income-tax Appellate Tribunal Bangalore