DCIT, CHENNAI vs. MODINE THERNAL SYSTEMS PVT. LTD., KANCHEEPURAM

आदेश / O R D E R

PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:

This is an appeal filed by the Revenue against the Order dated

13.09.2016 of Commissioner of Income Tax (Appeals)-8, Chennai, in ITA

No.66/2010-11 for the AY 2008-09 and raised the following grounds:

ITA No.3310/Mds/2016 :- 2 -:

2.1 The CIT(A) erred in not following the Hon’ble Apex Court’s decision in the case of Punjab State Industrial Development Corporation Ltd. v. CIT (1997) 225 ITR 792 (SC), wherein it is held that that expenses as have been claimed for increasing the authorized share capital of the assessee company are capital expenditure and not allowable as revenue expenditure.

2.2 The CIT(A) erred in holding that the fees paid for increase in Authorized Share Capital is eligible for deduction u/s.35D whereas section 35D has no application to the facts of the case.

2.3 Having regard to the decision of Delhi High Court in the case of CIT vs. Hindustan Insecticides Ltd, 2001 250 ITR 338 (Del) has held that fees paid for increase of share capital is not deductible, that fees paid for increase in authorized share capital is not fees for registration of the company and is not amortizable u/s.35D, the CIT(A) ought to have upheld the action of the AO.

3.1 The CIT(A) erred in not appreciating that the manufacturing activity of the assessee had not yet commenced during the previous year relevant to the assessment year under consideration and hence the interest on ECB loan is capitalized by the AO.

4.1 The CIT(A) erred in not appreciating the findings of the AO that sales promotion expenses can neither be allocated to Design Centre services nor to manufacturing activity since manufacturing of the products of the assessee had not yet commenced.

4.2 The CIT(A) erred in not appreciating that the manufacturing activity of the assessee had not commenced during the previous year relevant to the assessment year under consideration. The claim on sales promotion expenses and professional charges on market research is not allowable u/s.37 of the IT Act and hence the AO has rightly treated the impugned expenses as capital expenses.

2.0 Delay: There was a delay of three days in filing the appeal by the

Revenue and furnished the affidavit explaining the reasons. We have

considered the submissions made by the AO and heard the Ld.DR and and

assessee’s Counsel and condone the delay.

3.0 Ground Nos.1 & 4 are general in nature which do not require specific

adjudication.

ITA No.3310/Mds/2016 :- 3 -:

4.0 Ground Nos.2 to 2.3 are related to the disallowance of fee paid for

increase of authorized share capital. The AO found during the previous

year relevant to Asst. Year 2008-09 that the Authorized Share Capital of

the Assessee company has increased from Rs.12.60 Crores to Rs.30.00

Crores and the assessee has debited a sum of Rs.1,20,000/- ‘Rates &

Taxes’ and Rs.7,60,162/- were paid towards increase in Authorized Share

Capital. The AO has asked the assessee explain as to why the above

expenses should not be capiralised? The Assessee in its reply dated

25/11/2010 withdrew the claim of revenue expenditure and claimed the

deduction u/s 35D of IT act. The AO not being impressed with the

explanation disallowed the claim stating as under:

The matter is squarely concluded by two decisions of the Supreme Court in Punjab State Industrial Development Corporation Limited v. CIT [1997) 225 ITR 792 and Brooke Bond India Limited v, CIT [1997] 225 ITR 798. It was held in both the cases 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. In view of the above, the expenses claimed under the head ‘Rates and Taxes’ amounting to Rs.8,80,162/- is disallowed and added to the Total Income.

5.0 Aggrieved by the order of the Assessing Officer (in short ‘AO’), the

assessee went on appeal before the Learned Commissioner of Income

Tax(Appeals) (in short ‘Ld.CIT(A)’) and the Ld.CIT(A) deleted the addition

made by the AO as under:

4.1 I have considered the observations of the Assessing Officer and the submissions made by the appellant. The first ground of appeal is general in nature. The second ground of appeal is with regard to disallowance of expenses amounting to Rs.8,80,162/- classified under ‘rates & taxes’. The Assessing Officer observes that the appellant incurred expenditure of Rs.8,80,162/- under the head ‘Rates & Taxes’ in connection with increase in authorized share capital from Rs.12.6 Crores to Rs.30 Crores. However, in the course of appellate proceedings before me, the appellant made an alternate claim that these expenditure are allowable under sec 35D(2).

ITA No.3310/Mds/2016 :- 4 -:

As rightly pointed out by the appellant, fees paid to Registrar of Companies for increase in Authorized Share Capital was held to be eligible for deduction u/s.35D in the following cases:

Respectfully following the above decisions of the Hon’ble High Courts of Rajasthan and Punjab & Haryana, the alternate claim of the appellant with regard to the expenditure of Rs.8,80,162/- incurred in connection with increasing their Authorized Share Capital is allowed. The appellant succeeds on this ground.

6.0 We heard both the parties and perused the material placed on

record.

The Learned Authorized Representative of the assessee (in short

‘Ld.AR’) contended that the expenditure relating to fee paid to Registrar of

Company for increasing the authorized capital is eligible for deduction

u/s.35D as decided in the following case laws:

6.1 We have gone through the provisions of Sec.35D which are

reproduced as under:

[Amortisation of certain preliminary expenses. 4 35D. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2),— (i) before the commencement of his business, or (ii) after the commencement of his business, in connection with the extension of his 6[***] undertaking or in connection with his setting up a new [***] unit, the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years 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 6[***] undertaking is completed or the new 6[***] unit commences production or operation : 7[Provided that where an assessee incurs after the 31st day of March, 1998, any expenditure specified in sub- section (2), the provisions of this sub-section shall have effect as if for the words "an amount equal to one- tenth of such expenditure for each of the ten successive previous years", the words "an amount equal to one- fifth of such expenditure for each of the five successive previous years" had been substituted.] (2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of the following clauses, namely :— (a) expenditure in connection with—

(i) preparation of feasibility report; (ii) preparation of project report;

ITA No.3310/Mds/2016 :- 5 -:

(iii) conducting market survey or any other survey necessary for the business of the assessee; (iv) engineering services relating to the business of the assessee :

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 approved8 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)9; (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.

6.2 Sec.35D is relating to amortization of expenses before

commencement of the business or after commencement of business in

connection with the extension of undertaking or any connection with the

set up of new unit. As per section Sec.35D(2)(c)(iv) the expenditure is

allowed to be amortized in the following circumstances:

(i) before the commencement of his business, or (ii) after the commencement of his business, in connection with the extension of his 6[***] undertaking or in connection with his setting up a new [***] unit,

The Ld.AR submitted the financial statements and as per the

financial statements the assessee has commenced the business during the

previous year relevant to the assessment year under consideration and

appears to be a new unit eligible for deduction u/s.35D on capital

employed.

ITA No.3310/Mds/2016 :- 6 -:

6.3 The assessee is a new unit and expenditure incurred was payment of

fee to ROC. The Hon’ble Supreme Court in the case of Punjab State

Industrial Development Corporation v. CIT 93 taxmann.5 (SC) , 91

taxmann 23 [SC] Brooke bond India and CIT v. Multi Mills India Ltd., 118

ITR 151 relied up on by the Ld.DR and the lower authorities has

considered the issue whether the expenditure is capital expenditure or

revenue expenditure allowable u/s 37(1) and their Lordships held that the

expenditure was capital expenditure but not considered the issue of

deduction u/s. 35D.

6.4 The Ld.CIT(A) allowed the assessee’s appeal placing reliance on the

decisions of -

6.5 The case laws relied up on by the CIT(A) and the assessee are

squarely applicable in the instant case. Therefore, respectfully following

the above decisions we hold that the payment of fee to ROC is a capital

expenditure and the assessee is entitled for deduction under Sec.35D of

Income Tax Act for amortizing the expenditure. Accordingly, we uphold

the order of the Ld.CIT(A) and dismiss Revenue’s appeal on this ground.

7.0 Ground Nos.3 to 3.1 are related to the disallowance of interest of

Rs.4,96,364/- on re-statement of ECB loan. The assessee himself has

ITA No.3310/Mds/2016 :- 7 -:

disallowed the expenditure u/s.40(a)(i) of Income Tax Act and the AO has

not made any addition on account of the interest on ECB loan. The AO

has capitalized the expenditure since the assessee has not commenced

the business activities. The AO in his Assessment Order stated that ECB

loan neither attributable to Design Centre nor to its Corporate Division and

capitalized the expenditure and stated that the expenditure is not

allowable in subsequent year in case of remittance of TDS.

8.0 The assessee went on appeal before the Ld.CIT(A) and the

Ld.CIT(A) held that the capitalization of interest amounting to

Rs.4,96,364/- is not correct and allowed the assessee’s appeal.

9.0 Aggrieved by the order of the Ld.CIT(A), the Revenue is on appeal

before this Tribunal.

10.0 During the appeal, the Ld.DR argued that the assessee has taken

ECB loan from its holding company M/s.Modine Manufacturing Company.,

USA amounting to Rs.3,70,38,703/-. Since the company has not

commenced its business, the AO has rightly capitalized the expenditure.

According to the Ld.DR, the Ld.CIT(A) is not correct in holding the

expenditure as the Revenue expenditure. The Ld.DR also relied on the

decision of ITAT, Hyderabad in the case of M+W Zander(s) Pvt. Ltd.,

v. ACIT. On the other hand, the Ld.AR defended the order of the

Ld.CIT(A).

ITA No.3310/Mds/2016 :- 8 -:

11.0 We heard the rival submissions and perused the material placed

before us.

The assessee has taken ECB loan for the purpose of

constructing/manufacturing unit which is for acquiring the capital asset.

The interest relating the borrowed capital has already been added back to

income u/s.40(a)(i) of IT Act and has no impact on the assessment of the

year under consideration. Hence, the issues for the AY 2008-09 is only of

academic interest. The expenditure incurred for acquiring the capital

asset required to be allowed as deduction on payment basis but not on

accrual basis. This issue has been settled by Hon’ble Supreme Court CIT

vs. Woodword Govt. of India (P) Ltd. 312 ITR 254 (SC).

The Hon’ble Apex court in the decision cited supra dealt with the

capital accounts in Para No.22 to34 and amended provisions of IT Act in

respect of Sec.43A dealt with in Para No.34 as under:

ITA No.3310/Mds/2016 :- 9 -:

12.0 On the similar facts, the Co-ordinate Bench of ITAT, Hyderabad, in

ITA No.2095/Hyd/2011 held that in the case of M/s.M+W Zander (s) Pvt.

Ltd., Vs. ACIT on 06.06.2012 was held as under:

13.0 In the instant case the assessee has not claimed the deduction for

non-deduction of tax at source. However the loan is taken for the puspose

of setting up of unit and the interest on loan is allowable only on payment

basis. Therefore, we are of the opinion that the AO has to verify whether

the expenditure is actually paid by the assessee or the expenditure is

debited due to re-statement of Foreign Exchange loan and decide the

issue in the light of the decision of the Hon’ble Supreme Court and the

ITA No.3310/Mds/2016 :- 10 -:

decision of the ITAT, Hyderabad cited supra in the year in which it is

claimed. This ground is allowed for statistical purpose.

14.0 Ground Nos.4.0 to 4.2 are related to the sales promotion expenses

of Rs.13,68,298/- and marketing expenses of Rs.14,66,902/-. The AO

has disallowed the expenditure stating that the manufacturing activity was

not yet commenced. According to the AO, the expenses were incurred

before setting up of the business and the same required to be capitalized.

Accordingly the AO disallowed the expenses.

15.0 Aggrieved by the Order of the AO, the assessee went on appeal

before the Ld.CIT(A) and the Ld.CIT(A) deleted the addition observing as

under:

It is not in dispute that the trading activity of the appellant had commenced although the Assessing Officer states that only sample sales were made. It is also not in dispute that services were rendered by the Design Centre of the appellant, though confined to the holding company of the appellant. The Assessing Officer accepts the fact that marketing department was involved in rendering services to the trading activity of the appellant. No clear and cogent reasons have been given by the Assessing Officer to arrive at the conclusion that the above expenses were distinctly allocable to the manufacturing activity apart from the fact that manufacturing activity has not yet commenced. As rightly observed by the appellant, there is no reason why market research should be restricted only to manufacturing activity when they are involved in both trading arid manufacturing apart from the design of their products. The Assessing Officer did not find anything wrong with the claim of the appellant that they were involved in trading and designing activities apart from manufacturing of their products. It is pertinent here to refer to the judgment of the jurisdictional High Court in a similar case of CIT v. Electron India (241 ITR 166) (Mad) wherein it was observed as follows:

The commercial sale of the product is not the criterion for deciding as to when a business is set up. The setting up of plant and machinery and commencement of production are the material factors for deciding as to whether a business has commented. As observed by the jurisdictional High Court commercial sale of the product is not the criteria for deciding whether a business has been setup. In fact, the appellant is placed better on this criterion since sample sales have already been made and revenue earned.

ITA No.3310/Mds/2016 :- 11 -:

16.0 Appearing for the revenue Ld.DR argued that the expenses cannot

be allocated to either Design Centre or to manufacturing activity as the

assessee has not commenced the production. According to the Ld.DR,

since the expenditure is relatable to setting up of business and allocated

to the corporate the same should be capitalized since the commencement

of production yet to be started. On the other hand, the Ld.AR relied on

the order Ld.CIT(A).

17.0 We heard the rival submissions and perused the material placed

before us.

As per the Assessment Order, it is observed that the assessee has

made the sample sales to the tune of Rs.3,17,272/- which indicates that

the assessee has installed the business unit and ready for commencement

of the business and the assessee also made the sample sales in the year

under consideration. The AO also accepted the above fact. The Ld.CIT(A)

allowed the assessee’s appeal placing reliance on the observations Hon’ble

jurisdictional High Court decision on similar facts which are discussed

above. The Ld.DR did not bring any evidence to establish that the

assessee has not commenced the business activity and no other decision

to controvert the observation of the jurisdictional High Court relied up on

by the CIT(A).

From the above facts, it is clear to us that the assessee has

established the unit and commenced the business. Hence, we do not find

ITA No.3310/Mds/2016 :- 12 -:

any reason to interfere with the Order of the Ld.CIT(A) and uphold the same. The appeal of the Revenue’s in the Ground No.4 is dismissed.

18.0 In the result, the appeal of the Revenue is partly allowed for statistical purposes. Order pronounced in the Open Court on 12th April, 2017, at Chennai.

Sd/- Sd/- (एन.आर.एस. गणेशन) ("ड.एस. सु�दर %संह) (N.R.S. GANESAN) (D.S.SUNDER SINGH) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER

चे�नई/Chennai, 6दनांक/Dated: 12th April, 2017. TLN

आदेश क1 /�त%ल7प अ8े7षत/Copy to: 4. आयकर आयु9त/CIT 1. अपीलाथ./Appellant 5. 7वभागीय /�त�न�ध/DR 2. /0यथ./Respondent 6. गाड+ फाईल/GF 3. आयकर आयु9त (अपील)/CIT(A)