DCIT, BANGALORE vs. M/S AVASARALA TECHNOLOGIES LTD., BANGALORE

When the case was called up, nobody was present for the assessee despite service of notice.

Ld. DR submitted that the issue involved was covered its favour, by virtue of this Tribunal’s decision in assessee’s own case for A. Y. 2008-09. Copy of the order was placed on record.

What we find is that assessee had claimed amortisation of an expenditure of Rs.1,01,59,162/- incurred during financial year relevant to A. Y. 2008-09, relying on Section 35D of the Act. The expenditure incurred was in connection with preparation of feasibility report, market survey, project report etc., The claim which was first made for A. Y. 2008-09 was disallowed by the AO, holding the outgo as capital in nature. Assessee’s appeal before CIT (A) for that year was successful. Revenue had carried the matter to this Tribunal and this Tribunal at paras 32 to 35 of its order dt.08.03.2013 in ITA.954/Bang/2011, held as under : 32. The only grievance projected by the assessee in this appeal is the action of the revenue authorities in not allowing 20% of the expenditure of Rs.1,01,59,162 i.e., a sum of Rs.20,31,832 which was the expenditure incurred in connection with preparation of feasibility report, market survey, project report preparation, stamp duty, etc. claimed by the assessee u/s. 35D of the Act.

The AO rejected the claim of the assessee for deduction u/s. 35D of the Act holding that the expenditure is capital in nature. On appeal by the assessee, the CIT(A) confirmed the order of the AO for the following reasons:- “11.2 I have considered the above. The provisions of Sec 35D is applicable when the expenditure is incurred after the ITA.815/Bang/2014 Page - 3 commencement of business for extension of the industrial undertaking or setting up a new industrial unit and such expenditure may be incurred on preparation of a feasibility report/project report/conducting market survey. The A.R. pleaded that the expenditure of Rs.1,01,59,162/- had been incurred towards cost of feasibility and preparation of project report and the total expenditure had been amortised and therefore the claim has been limited to 1/5th i.e. Rs.20,31,832/-. However, I find the expenditure has been incurred on increasing the Authorised Share Capital from 6 crores from A.Y.2005-06 to Rs.12 Crores in A.Y.2006-07. Therefore, the A.O. has rightly held the same as capital expenditure. The addition is confirmed. Appeal on this issue is decided against the appellant.”

A perusal of the order of the CIT(A) clearly reveals that he has proceeded on the assumption that the expenditure in question is for issue of share capital. In the submissions filed by the assessee before the AO, which are at pages 72 to 88 of the assessee’s paperbook, the break-up of these expenses is given, which is as follows:- The Feasibility report expenses : 31,46,080 Market survey : 7,00,000 Project Report : 56,12,000 Stamp duty expenses : 6,00,000 Legal charges : 11,28,274 Total : 1,11,86,354 Less : Service tax 10,27,192 Net expenses : 1,01,59,162 35. It is thus clear that the CIT(A) has proceeded on an erroneous basis with regard to the nature of expenses. The AO has proceeded under the assumption that capital expenditure cannot be allowed u/s. 35D of the Act. The provisions of section 35D does not make any distinction between capital and revenue expenditure. Any expenditure incurred after commencement of business in connection with expansion of the undertaking or in connection with the set up of a new unit has to be allowed as a deduction over a period of five years from the previous year in which the expansion of the undertaking is completed or the new unit commences production or operation is to be allowed as deduction u/s.35D of the Act. The nature of expenses that will be allowed is set out in Sec.35D(2) of the Act. Since the issue has not been considered in its proper perspective with reference to provisions of section 35D of the Act, we deem it appropriate to set aside the order of the CIT(A) and remand the issue to the Assessing ITA.815/Bang/2014 Page - 4 Officer for fresh consideration. The AO will afford opportunity of being heard to the assessee for deciding the issue in accordance with the law. Since the claim of the impugned assessment year, which has been allowed by CIT (A) is also the amortisation of the very same amount, the directions given by the Tribunal, reproduced supra will squarely apply. Accordingly we set aside the orders of the lower authorities on this issue and remit it back to the AO for fresh consideration in accordance with law.