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Income Tax Appellate Tribunal, BENCH “E”, MUMBAI
Before: SHRI R.C. SHARMA & SHRI PAWAN SINGH
Assessee by : Sh. P.J. Pardiwalla Sr. Advocate with Sh.Niraj Sheth Advocate Revenue by : Ms. Savita Bundas (CIT-DR) Date of hearing : 27.12.2016 Date of Pronouncement : 25.01.2017 Order Under Section 254(1) of Income Tax Act PER PAWAN SINGH, JM: 1. This appeal by assessee u/s 253 of the Income-tax Act (‘Act’) is directed against the order of Ld. Commissioner of Income-tax (Appeals) [for short ‘the CIT(A)] –7, Mumbai dated 12.02.2014 for Assessment Year (AY) 2010-11. The assessee has raised the following grounds of appeal:
1. The Commissioner of Income-tax (Appeals)-7, Mumbai [hereinafter referred to as "the CIT(A)"] erred in accepting the disallowance made by the Deputy Commissioner of Income Tax, 3(3) [hereinafter referred to as "the CJT(A)"] of an amount of Rs.13,04,37,262 towards pre-operative expenditure without appreciating the fact that the same are fully allowable being revenue in nature.
2. Without prejudice to (1) above that the entire expenditure is allowable, the CIT(A) ought to have allowed deduction for 1/5th of the total expenditure of Rs.13,04,37,262 for the year under appeal on a reasonable basis.
3. The CIT(A) ought to have allowed deduction for premium on reinsurance ceded of fire, marine and miscellaneous insurance in view of the fact that the said expenditure were incurred during the year under appeal.
2 SBI General Insurance Company Ltd. 4. The CIT(A) erred in stating there is no merit in the ground raised by the appellants on premium on reinsurance ceded since the amount of disallowance has been rectified by the AO to Rs.17,61,000 from the disallowance of Rs.22,44,87,000/- in the order under appeal.
2. Brief fact of the case are the assessee Company was incorporated on 24.02.2009. The certificate of commencement of business from the Registrar of companies was received on 25th May 2009, the license from IRDA was obtained on 15.12.2009. Initially, the assessee filed return of income for relevant AY on 15.10.2010. The return of income was revised on 21.03.2011 declaring total income of Rs. 1,33,68,342/- and book loss of Rs. 9,08,44,035/-. The reason for filing the revised return was on account of claim of pre-operative expenditure. The assessee again filed revised return of income on 11.11.2011 declaring current loss of Rs. 9,09,81,486/- and books loss of Rs. 9,08,44,035/-. In second revised return, the assessee claimed full of claim deduction of pre-operative expenditure. The return of income was selected for scrutiny. The assessment u/s 143(3) was completed on 18.12.2013. The AO disallowed the entire pre-operative expenses of Rs. 13,04,37,262/-. On appeal before the ld. CIT(A), the disallowance was confirmed. Hence, this appeal is filed before us.
3. We have heard the ld. Authorized Representative (AR) of the assessee and the ld. Departmental Representative (DR) for the Revenue and perused the orders of authorities below. The ld. AR of the assessee argued that the AO in the assessment order stated that expenditure is not incurred in the year under consideration. The observation of AO is incorrect, the expenditure of Rs. 13,04,37,262/- pertains to the period from 01.04.2009 to 15.12.2009, hence, incurred in the year under consideration. The ld. AR of the assessee referred the details of various expenditure which have been mentioned by AO in its order in para 6.1 of its order. It was further argued that expenditure is revenue in nature and the only capital expenditure is not allowable under the Act, unless specifically provided for. The expenditure incurred by assessee is not hit by the provisions of section 35D of the Act. The Ld. AR of the assessee made the stress that there is no provision in the Act to disallow the revenue expenditure incurred by assessee-company before obtaining license from IRDA. The ld. AR further relied upon the decision of ITAT, Mumbai in case of Tata AIG General Insurance Company Limited vs. ACIT in ITA No. 2597/Mum/2009 dated 22.10.2010.
3 SBI General Insurance Company Ltd. The ld. AR of the assessee further drew our attention to the provision of section 44 of 1st Schedule of the Income-tax Act. On the other hand, ld. DR for the Revenue supported the order of authorities below and argued that the Revenue has filed appeal against the decision of Tribunal in Tata AIG General Insurance Company Limited (supra) and the appeal of the Revenue is pending in the Hon’ble High Court. In short, the rejoinder argument, the ld. AR of the assessee would argue that mere filing of appeal before High Court cannot be a reason for not following the decision of co- ordinate bench.
We have considered the rival contention of the parties. We have seen that the AO while making the assessment disallowed the claim of expenses holding that expenses are not allowable u/s 37(1) as the same were not incurred in the year under consideration. The AO further concluded that there is no provision in the Act to allow the pre-operative expenses. The ld. CIT(A) while considering this ground of appeal
concluded that the expenses do not quality for amortization u/s 35D which allowed the deduction of specified expenses. The ld. CIT(A) further concluded that the fact of present case is distinguishable from the decision of Tata AIG General Insurance Company Limited (supra). The ld. CIT(A) relied upon the decision of Kingfisher Training & Aviation Services Ltd. vs. ACIT (2011)
15. Taxman.com 325 (Bang.). We have seen that the facts of the case law relied upon by ld. CIT(A) in Kingfisher Training & Aviation Services Ltd.(supra) are entirely different. In the said case, the Tribunal found that no Aircraft was purchased until the end of year and the assessee has not set up its business. However, in the present case, the business of assessee was set up during the year. Hence, the facts of the case of Kingfisher Training & Aviation Services Ltd. (supra) are differentiable. We have notice that the co-ordinate bench of Mumbai Tribunal in Tata AIG General Insurance Company Limited vs. ACIT( supra) while relying upon the decision of Hon’ble Delhi High Court in Shriram Refrigeration Industries Ltd. vs. CIT (127 ITR 747 (Del) passed the following order: “11· We have carefully considered the facts and the rival contentions. There is no dispute that the expenditure was incurred between the date of incorporation and the date on which the license to carry on the business was obtained from the Regulatory Authority. Thus it is clear that the expenses were incurred before the actual carrying on of the business. We are concerned with the assessment year 2003-04 for which the relevant previous year was 01.04.2002 to 31.03.2003. The entire pre-operative expenses of Rs.7,03,38,000/- was incurred earlier, i.e. between 24.08.2000 and 22.01.2001. The question for consideration is whether 4 SBI General Insurance Company Ltd. the expenditure which did not relate to the year under consideration can be allowed as a deduction. The facts of the case before the Delhi High Court in Shriram Refrigeration Industries Ltd. (supra) shows that the assessee was to pay a sum in three instalments to its collaborator. These instalments were paid in May 1962, June 1963 and May 1964. The commercial production started thereafter, i.e. in October 1964 and the business itself was set up only in the accounting period ending 30th September 1965 relevant to the assessment year 1966-67. The question was whether the amount was allowable as revenue expenditure for the assessment year 1966-67. The Tribunal decided against the assessee by holding that the expenditure was capital in nature and that even assuming that it could be of the nature of revenue, it can be considered for allowance only' in the assessment year 1966-67. On these facts the following two questions were referred to the Delhi High Court for opinion:-
"(1) Whether, on the facts and in the circumstances of the case, the amount of Rs. 2,39,084/- paid by the assessee to Westinghouse represented expenditure of a capital nature? (2) If the answer to question No.1 is in the affirmative, whether, on the facts and in the circumstances of the case, any portion of the amount is allowable as a deduction in each or either of the two assessment years 1966-67 and 1967 -68?" On the first question, the High Court held in favour of the assessee, i.e. that the expenditure was revenue in nature. As regards the second question, the High Court held at pages 762 and 763 as follows: - "The second question referred to us proceeds on the footing that the answer to question No.1 is in the affirmative. Since we have answered the first question in the negative, no answer need be given to the second question. However, since we have held that the entire amount is allowable as revenue expenditure it is obvious that the entire amount should be allowed in the assessment year 1966-67 and no question of apportioning it over a series of years can at all arise. There can, therefore, be no question of allowing any deduction in respect of the whole or any part of this amount in the assessment year 1967-68”.
This judgment of the Delhi High Court fully supports the assessee's claim. The facts of that case show that the entire amount paid to the collaborator was claimed as a deduction in the return filed for the assessment year 1966-67 though the payments were made before the business was set up. The facts further show that, initially the assessee had claimed only 1/14th of the payment as a deduction but later revised its claim and claimed the entire payment as deduction in the assessment year 1966-67 though no part of the payment either related to the said assessment year or was paid in the said assessment year. The Delhi High, Court, speaking through Hon'ble Justice S. Ranganathan (His Lordship then was) held that the entire payment allowable in the assessment year 1966- 67" as revenue expenditure without being apportioned between the assessment years 1966-67 and. 1967-68. It cannot be argued that the High Court was not aware of the fact that the payment did not relate to the assessment year. 1966-67 or that it was not paid in the previous· year relevant to the assessment year 1966- 67. The payment was nevertheless allowed as revenue expenditure in its entirety in the assessment year 1966-67.
5 SBI General Insurance Company Ltd.
A perusal of the details of the total expenses shows that none of the items of expenditure can be stated to be capital in nature. Only capital expenditure can be amortized under section 35D and that is a special allowance for capital expenditure, which is not otherwise allowed as a deduction. However, as rightly pointed out on behalf of the assessee, that provision cannot be pressed into service to contend that the revenue expenditure incurred during the period prior to the commencement of the business cannot be allowed. The decision of the Delhi High Court in Shriram Refrigeration Industries Ltd. (supra) is authority for the proposition canvassed on behalf of the assessee.
The judgment of the Madras High Court in CIT vs. Ennar Steel & Alloy (P) Ltd. (supra) cited on behalf of the Department shows that certain items of expenses which did not fall to be included under section 350 were sought to be included in that section and deduction was allowed accordingly by the Tribunal. The High Court held that this would amount to re-writing the section, which cannot be permitted. The precise controversy that has arisen in the present case was not before the Madras High Court.
As regards the argument of the Department that the claim was not made in the original return but was made only in the revised return; there is no prohibition in making the claim in the revised return. An assessee can correct any mistake or omission in the original return by filing a revised return, the validity of which has not been challenged. Therefore, this cannot be held against the assessee.
For the above reasons and respectfully following the Judgment of the Delhi High Court in the case of Shriram Refrigeration Industries Ltd. vs. CIT (supra), we uphold the assessee's claim and allow Ground No.2 5. Thus, in view of the above legal position as discussed by co-ordinate bench of this Tribunal, on similar grounds, we find that pre-operative expenditure is revenue in nature and the assessee is entitled for deduction. In the result, ground no.1 raised in the present appeal is allowed.
Ground No.2 relates to disallowance of premium on reinsurance ceded. In short, the facts related to the grounds of appeal are that the assessee made premium expenditure by way of reinsurance ceded which covered the period 22.03.2010 to 31.03.2010. The premium of Rs. 17,61,000/- was apportioned by the assessee relating to 10 days in FY- 2009-10 and balance Rs. 22,27,26,000/- relating to FY- 2010-11. The assessee only claimed Rs. 17,61,000/- as deduction in the AY 2010-11. The AO disallowed the entire expenses of Rs. 22,44,87,000/-, though the claim was made only for Rs 17,61,000/-. The AO passed rectification when the mistake apparent on record was brought in his notice and thus reduced the disallowance to Rs. 17,61,000/-. The ld. CIT(A) without going into the merit of the case concluded that as the AO has reduced 6 SBI General Insurance Company Ltd. the disallowance from 22,44,87,000/- in the order u/s 143(3) to Rs. 17,61,000/- by passing order u/s 154 of the Act. Thus, there was no merit in the ground raised
by assessee.
7. We have heard the ld. Authorized Representative (AR) of the assessee and the ld. Departmental Representative (DR) for the Revenue and gone through the order of authorities below. The ld. AR for assessee would argue that the premium expenditure has been incurred by way of reinsurance ceded for 10 days as per reinsurance agreement and the same was accounted for the year ended on 31.03.2010. The expenditure pertains to the year under consideration is fully allowable. The ld. AR of the assessee further argued that it is not necessary to earn income for claiming deduction for expenses incurred. As per the accounted policy followed under the historical cost convention, the cost is recognized without due and not at the commencement of risk. The ld. CIT(A) failed to appreciate that AO merely passed a rectification of mistake and the issue raised before the ld. CIT(A) required to be adjudicated and the same was not adjudicated. On the other hand, ld. DR for the Revenue supported the order of authorities below.
8. We have considered the rival contention of the parties and gone through the order of authorities below. The AO while making disallowance concluded that no corresponding income has been offered against such pro-rata reinsurance charges for the year under consideration and the same was disallowed. The ld. CIT(A) while considering the ground of appeal instead of giving any finding in respect of expenditure for 10 days concluded (in para 7.4 of its order) that AO has passed the order u/s 154 of the Act dated 22.03.2013 taking into account, the request of assessee to consider the correct disallowance against the amount of Rs. 22,44,87,000/-. The ld. CIT(A) concluded that rectification has been done by the AO. Thus, there is no merit in the ground of appeal and dismissed the ground.
9. We have seen that the ld. CIT(A) has not given any finding on the submission made on behalf of the assessee. Considering the non-adjudication of grounds of appeal by First Appellate Authority (FAA), we deem it appropriate to restore this ground of appeal to the file of ld. CIT(A) to decide the ground on merit in accordance with law. Needless to say that the ld. CIT(A) shall afford a reasonable opportunity to the 7 SBI General Insurance Company Ltd. assessee. The assessee is also directed to provide all necessary information to ld. CIT(A). Hence, this ground of appeal is allowed for statistical purpose.
10. In the result, appeal of the assessee is allowed. Order pronounced in the open court on this 25th January, 2017. Sd/- Sd/- (R.C. SHARMA) (PAWAN SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 25/01/2017 S.K.PS Copy of the Order forwarded to :