M/s.Eastern Condiments P. Ltd, Idukki V. The ACIT, Cochin

ITA 136/COCH/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 96730 (ITAT-COCHIN)
• Duration Of Justice: 7 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-10-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 07-10-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 20-02-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: K P GOPAKUMAR
• Assessee Lawyers: R KRISHNAN
• Keywords: Business income; Depreciation; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

IT A NO 136/C/2015 1 IN THE INCOME TAX APPEL L A TE T R IBUNAL COCHIN BENCH , COCHIN BEFORE S/SH RI B P JAIN , A M & G EORGE GEORGE.K , J M ITA NO . 136/COCH/2015 (ASST YEAR 2007 - 08 ) M/S EASTERN CONDIMENTS (P)LTD VI/91 EASTERN VALLEY ADIMALI IDUKKI DIST VS THE ASST COMMR OF INCOME TAX C IRCLE 1(2), KOCHI ( APPELLANT) (RESPONDENT) PAN NO. AAACE5276F ASSESSEE BY SHRI R KRISHNAN REVENUE BY SHRI K P GOPAKUMAR, SR DR DATE OF HEARING 07 TH OCT 2015 DATE OF PRONOUNCEMENT 08 TH OCT 2015 OR D ER PER GEORGE GEORGE. K. J M: THIS A PPEAL , AT THE INSTANCE OF THE ASSESSEE , IS DIRECTED AGAINST THE CIT(A)S ORDER DATED 20.10.2014. THE RELEVANT ASSESSMENT YEAR IS 2007 - 08. 2 THE GROUNDS RAISED READ AS UNDER: I) THE CIT(A) ERRED IN CONFIRMING THE CLAIM OF EXCESS DEPRECATION OF RS. 72,97,7 01/ - MERELY FOLLOWING THE ORDERS OF THE EARLIER YEARS. II) THE CIT(A) ERRED IN DISALLOWING A SUM OF RS. 55,80,000 BEING PAYMENT MADE TO VEDA CORPORATE ADVISORS P LTD ON THE GROUND THAT THE SAME IS A CAPITAL EXPENDITURE AND NOT REVENUE IS NATURE. IT A NO 136/C/2015 2 III) THE CIT OUGHT TO HAVE NOTICED THE UTILITY OF THE FUNDS RATHER THAN CONCLUDING THE SAME AS A ONETIME PAYMENT AND BECAUSE IT IS NOT A RECURRING REVENUE EXPENDITURE, THE SAME SHOULD BE TREATED AS A CAPITAL EXPENDITURE. IV) THE CIT OUGHT TO HAVE CONSIDERED THE ALTERNATE PLEA OF THE APPELLANT THAT IT IS AN ALLOWABLE EXPENDITURE U/S 35D OF THE ACT. 3 THE BRIEFLY STATED FACTS RELATING TO GROUND NO.1 , ARE AS FOLLOWS: THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF CURRY POWER AND OTHER CONDIMENT S. FOR THE RELEVANT ASSESSMENT YEAR , THE RETURN OF INCOME WAS FILED ON 22.11.2007 DECLARING TOTAL INCOME OF RS.19,65,10,000/ - . THE ASSESSMENT WAS COMPLETED U/S 143(3) OF THE ACT BY ORDER DATED 25.12.2009 DETERMINING A TOTAL INCOME OF RS. 21,12,79,290/ - . IN COMPLETING THE ASSESSMENT, THE AO DISALLOWED/ADDED BACK THE CLAIM OF DEPRECIATION AMOUNTING TO RS.72,97,701/ - . DURING THE YEAR , THE ASSESSEE HAD LET OUT CERTAIN LORRIES OWNED BY IT TO ITS SISTER CONCERN AND HAD RECEIVED RENT/LEASE IN RESPECT OF THE SAME. ACCORDING TO THE ASSESSEE, THEY WERE ENTITLED TO HIGHER RATE OF DEPRECATION AT 30% AS PER INCOME TAX RULES. THE AO DID NOT ACCEPT THE ASSESSEES CONTENTION AND BASED ON THE STAND TAKEN BY THE DEPARTMENT IN THE EARLIER YEARS, THE AO ADDED BACK THE EX CESS DEPRECIATION OF RS. 72,97,701/ - . 4 AGGRIEVED, THE ASSESSEE PREFERRED APPEAL TO THE FIRST APPELLATE AUTHORITY. THE CITIA) DISMISSED THE APPEAL OF THE ASSESSEE. THE CIT(A) FOLLOWED HIS OWN ORDER FOR THE ASSESSMENT YEARS 2005 - 06 AND 2006 - 07 IN ASSESSEES OWN CASE IT A NO 136/C/2015 3 WHICH WAS CONFIRMED BY THE TRIBUNAL IN ITA NOS 52 & 53/COCH/2014 (ORDER DATED 18.7.2014). T HE RELEVANT FINDINGS OF THE CIT(A) READ AS FOLLOWS: 4.1 THE SAME ISSUE HAD COME UP FOR CONSIDERATION FOR THE ASST YEARS 2005 - 06 AND 2006 - 07 AND AFTER GIVING DETAILED DISCUSSION IT WAS HELD BY ME IN ORDE RS DATED 21.11.2013 AND 28.11.2013 FOR THESE ASSESSMENT YEARS RESPECTIVELY THAT THE ASSESSEE IS NOT ENTITLED FOR HIGHER RATE OF DEPRECIATION ON THE VEHICLES USED IN EFFECT FOR HIS OWN BUSINESS. THIS STAND OF THE CIT(A)II HAS BEEN CONFIRMED BY THE HONBLE I TAT, KOCHI BENCH IN IT NO.52 AND 53/COCH/2014 DATED 18.7.2014. 5 THE ASSESSEE BEING AGGRIEVED IS IN APPEAL BEFORE US. THE LD COUNSEL FOR THE ASSESSEE FAIRLY CONCEDED THAT THE ISSUE IN QUESTION IS COVERED AGAINST THE ASSESSEE BY THE ORDER OF THE TRIBUNA L FOR AYS 2005 - 06 AND 2006 - 07 (SUPRA). HOWEVER , HE HAS SUBMITTED THAT THE TRIBUNAL HAS NOT CONSIDERED THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF M/S I.C.D.S LTD V S CIT IN CIVIL APPEAL NO. 3282 OF 2008 (JUDGMENT DATED 14.1.2013) . IT WAS FURTHER SUBMITTED BY THE LD COUNSEL THAT THE LEASE AMOUNT/RENT AMOUNT THAT IS RECEIVED FOR LETTING OUT LORRIES ON HIRE TO ITS SISTER CONCERN IS ASSESSED AS BUSINESS INCOME . T HEREFORE, IT WAS SUBMITTED THAT THE ASSESSEE IS ENTITLED TO HIGHER PERCENTAG E OF DEPRECIATION. 6 THE LD DR ON THE OTHER HAND STRONGLY SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW . THE LD DR SUBMITTED THAT THE ISSUE HAS BEEN ELABORATELY CONSIDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE AYS 2005 - 06 AND 2006 - 07. IT WAS FURTHER SUB MITTED THAT THE DOMINANT OBJECT/BUSINESS OF THE ASSESSEE IS NOT LETTING OUT OF LORRIES ON HIRE AND THEREFORE, IT IS NOT ENTITLED TO THE BENEFIT OF HIGHER RATE OF DEPRECIATION. IT A NO 136/C/2015 4 7 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE JUDGMENT OF THE HONBLE SUPREME COURT , RELIED ON BY THE LD AR , IN THE CASE OF M/S I.C.D.S LTD ., I S DISTINGUISHABL E ON FACTS. THE LORDSHIP OF THE HONBLE SUPREME COURT WAS CONSIDERING THE CASE OF AN ASSESSEE, WHO IS IN THE BUSINESS OF HIRE PURCHASE , LEASING AND REAL ESTATE. AS A PART OF ITS BUSINESS, THE ASSESSEE IN THIS CASE WAS LEASING OUT VEHICLES ON HIRE. THE PREDOMINANT AND THE MAIN BUSINESS OF THE ASSESSEE WERE LETTING OUT VEHICLES ON HIRE. IN TH IS CONTEXT , THE HONBLE SUPREME C OURT HELD THAT THE ASSESSEE, WHICH IS A HIRE PURCHASE COMPANY, WAS ENTITLED TO HIGHER RATE OF DEPRECIATION SINCE IT WAS LETTING OUT VEHICLE ON HIRE. IN THE INSTANT CASE, THE ASSESSEE IS NOT DOING THE BUSINESS OF RUNNING LORRIES ON HIRE NOR WAS THE LORRIES ARE USED FOR RUNNING THEM ON HIRE. AS MENTIONED EARLIER, THE DOMINANT BUSINESS OF THE ASSESSEE IS MANUFACTURE OF CURRY POWER AND OTHER CONDIMENTS . THEREFORE, T HE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE AYS 2005 - 06 AND 2006 - 07 , WHICH IS IDENTICAL TO THE FACTS FOR THE CURRENT ASSESSMENT YEAR , NEEDS TO BE FOLLOWED. HENCE, THE ORDER OF THE CIT (A) , I S R I G H T AN D IN ACCORDANCE WITH LAW AND NO INTERFERENCE IS CALLED FOR . IN THE RESULT, T HE GROUND NO.1 RAISED BY THE ASSESSEE IS REJECTED. GROUND NOS 2 TO 4: 8 DURING THE YEAR THE ASSESSEE HAD CLAIMED EXPENDITURE OF RS. 55,80,000/ - PAID TO ONE M/S VEDA CORPORATE ADVISOR S PVT LTD. THE CONSIDER ATION WAS PAID TO M/ S VEDA CORPORATE ADVISORS P LTD ., FOR SUCCESSFULLY BRIN G ING AN INVESTMENT OF IT A NO 136/C/2015 5 RS. 37.20 CRORES FROM NEW VERNON PRIVATE EQUITY FUND, TO WHOM PREFERENCE SHARES WERE ALLOTTED. THE AO WHILE COMPLETING ASSESSMENT U/S 143(3) HELD THE EXPENDITURE TO BE A ONETIME FEE PAID, WHICH IS CAPITAL EXPENDITURE AND THE SAME WAS DISALLOWED WHILE COMPUTING THE TOTAL INCOME OF THE ASSESSEE. 9 AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL TO THE FIRST APPELLATE AUTHORITY. BEFORE THE FIRST A PPELLATE AUTHORITY, THE ASSESSEE SUBMITTED THAT THE FEE PAID TO M/S VEDA CORPORATE ADVISORS PVT LTD ., AMOUNTING TO RS. 55,80,000/ - IS TO BE ALLOWED AS A REVENUE EXPENDITURE. ALTERNATIVELY, IT WAS SUBMITTED THAT IT SHOULD BE AMORTIZED U/S 35D OF THE ACT. T HE CIT(A) REJECTED BOTH THE PLEAS OF THE ASSESSEE. THE RELEVANT FINDINGS OF THE CIT(A) WITH REFERENCE TO REJECTION OF THE ASSESSEES PLEAS THAT IT SHOULD BE ALLOWED AS REVENUE EXPENDITURE READ AS UNDER: 5.3 I HAVE GONE THROUGH THE ASSESSMENT ORDER AND TH E SUBMISSIONS OF THE ASSESSEE. IT IS SEEN THAT THIS PAYMENT HAS BEEN MADE TO VEDA CORPORATE ADVISORS PVT LTD FOR ENSURING THAT THE SHARE CAPITAL IS INCREASED AND THERE IS PRIVATE PLACEMENT BY NEW COMPANIES. DUE TO THE INVOLVEMENT OF VEDA CORPORATE ADVISO RS PVT LTD , IT IS SEEN THAT THEYHAVE ARRANGED PRIVATE PLACEMENT TO THE TUNE OF RS. 37.2 CRORES FROM M/S NEW VERSON. I AGREE WITH THE STAND OF THE AO THAT FOR OBTAINING/ARRANGING THIS PRIVATE PLACEMENT, THE ASSESSEE HAS MADE ONETIME PAYMENT AND THAT ITS NO T A RECURRING REVENUE EXPENDITURE AND HENCE IT SHOULD BE TREATED AS CAPITAL EXPENDITURE. ACCORDINGLY, THE ADDITION OF RS. 55,8 0 ,000/ - MADE BY THE AO IS HEREBY CONFIRMED AS CAPITAL EXPENDITURE. 10 THE ASSESSEE, BEING AGGRIEVED, IS IN APPEAL BEFORE US. T HE LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AMOUNT OF RS. 55,80,000/ - PAID TO M/S VEDA IT A NO 136/C/2015 6 CORPORATE ADVISORS PVT LTD IS NOTHING BUT CONSULTANCY FEE PAID FOR SUCCESSFULLY BRINGING IN PRIVATE PLACEMENT OF RS. 37.20 CRORES FROM M/S NEW VERNON. THE INVESTMENT OF RS. 37.20 CRORES WAS FOR AUGMENTING RESOURCES . THE CAPITAL INTRODUCED BROUGHT IN ADDITIONAL FACILITY, IMPROVED PLANTS , COLD STORAGE, R&D TESTING ETC., WHICH HA D RESULTED IN INCREASED BUSINESS FOR THE ASSESSEE AND THEREBY INCREASED THE PROFITS OF THE COMPANY. THEREFORE, IT WAS SUBMITTED THAT THE EXPENDITURE PAID AS CONSULTANCY FEE AMOUNTING TO RS. 55,80,000/ - TO M/S NEW VERNON FOR SUCCESSFULLY BRINGING CAPITAL TO THE C OMPANY SHOULD BE ALLOWED AS REVENUE EXPENDITURE. THE LD DR ON THE OTHER HAND STRONGLY SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 1 1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IN THE INSTANT CASE THE AMOUNT OF RS. 55,80,000 / - WAS PAID FOR SUCCESSFULLY BRINING IN CAPITAL OF RS. 37.20 CROES TO THE ASSESSEE COMPANY. THE M/S NEW VERNON WHO HAD INVESTED RS. 37.20 CRORES WAS ALLOTTED PREFERENCE SHARES OF THE ASSESSEE COMPANY. ON ACCOUNT OF INTRODUCTION OF RS. 37.20 CRO RES THE SHARE CAPITAL IS INCREASED AND THERE IS PRIVATE PLACEMENT TO M/S NEW VERNON. THE HONBLE SUPREME COURT IN THE CASE OF BROOKE BOND INDIA LTD VS CIT REPORTED IN 225 ITR 798 HAVE HELD 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, AND IS CAPITAL EXPENDITURE, IT A NO 136/C/2015 7 EVEN THOUGH IT MAY INCIDENTALLY HELP IN THE BUSINESS OF THE COMPANY AND IN THE PROFIT - MAKING. 1 2 I N THE INSTANT CASE , BY AUGMENTING OR BRINGING CAPITAL OF RS. 37.20 CRORRES FOR WHICH THE PAYEE WAS ISSUED PREFERENCE SHARES HAD RESULTED IN INCREASE OF CAPITAL OF THE ASSESSEE COMPANY . THE HONBLE SUPREM E COURT HAS CATEGORICALLY HELD THAT EXPENDITURE INCURRED IN CONNECTION WITH THE ISSUE OF SHARES WITH A VIEW TO INCREASE THE SHARE CAPITAL/ EXPANSION OF CAPITAL BASE OF THE COMPANY IS A CAPITAL EXPENDITURE. THEREFORE , CONSULTANCY FEE OF RS. 55.80 LAKHS WHICH IS EXPENDITURE INCURRED FOR INCREASE IN SHARE CAPITAL IS NOTHING BUT CAPITAL EXPENDITURE. 1 3 THE ASSESSEE , IN THE GROUND NO.4 , HAD MADE AN ALTERNATIVE PLEA THAT THE ABOVE EXPENDITURE SHOULD BE ALLOWED U/S 35D OF THE ACT. THE LD A R HAD NOT MADE ANY SPECIFIC ARGUMENTS ON THE ALTERNATIVE PLEA DURING THE COURSE OF HEARING. MOREOVER, THE CIT(A) WHILE DECIDING THIS ISSUE AGAINST THE ASSESSEE HAS GIVEN A CORRECT FINDING, WHICH IS REPRODUCED BELOW FOR READY REFERENCE: 6.1 IN THIS CONNECTION, SECTION 35D ONLY ALLOWS AMORTIZATION OF CERTAIN PRELIMINARY EXPENSES WHICH ARE IN CONNECTION WITH PREPARATION OF FEASIBILITY REPORTS, PREPARATION OF PROJECT REPORT, CONDUCTING OF MARKET SURVEY FOR THE BUSINESS OF THE ASSESSEE OR ENGINEERING SERVICE RELATING TO THE BUSINESS OF THE ASSESSEE ETC. IT ALSO INCLUDES LEGAL CHARGES AND CHARG ES FOR THE REGISTRATION OF THE COMPANY AND CHARGES FOR DRAFTING, TYPING, PRINTING AND ADVERTISEMENT OF THE PROSPECTS. SINCE THIS PAYMENT FOR ARRANGING FOR PRIVATE PLACEMENT OF SHARE IS NOT INCLUDED IN ANY OF THE PROVISIONS OF SECION35D, THE ASSESSEE IS NOT ELIGIBLE FOR ANY DEDUCTION UNDER THIS SECTION. IT A NO 136/C/2015 8 1 4 THE ABOVE REASONING OF THE CIT(A), WE DO NOT FIND ANY INFIRMITY , HENCE WE CONFIRM THE SAME. ACCORDINGLY, GROUND NOS 2 TO 4 ARE REJECTED. 1 5 IN THE RESULT, THE APPEAL FILE D BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 8 TH , DAY OF OCT 2015 . SD/ - SD/ - ( B P JAIN ) ( GEORGE GEORGE K ) ACCOUNTANT MEMBER JUDICIAL MEMBER COCHIN: DATED 8 TH OCT 2015 RAJ* COPY TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT(A) 4 . CIT , 5 . DR 6 . GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT, COCHIN