DCIT, Coimbatore V. M/s. Treads Direct Ltd., Coimbatore

ITA 14/CHNY/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64626 (ITAT-CHENNAI)
• Duration Of Justice: 11 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-12-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 03-12-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 05-01-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: T N BETGIRI SR
• Keywords: Capital asset; Depreciation; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER I.T.A. NO. 14/MDS/2012 ASSESSMENT YEAR: 2008-09 THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE I(3), 63-A, RACE COURSE ROAD, COIMBATORE. (APPELLANT) V. M/S TREADS DIRECT LTD., NO.2000, TIRUCHY ROAD, RAMANATHAPURAM, COIMBATORE 641 005. PAN : AABCE9328C (RESPONDENT) APPELLANT BY : SHRI T.N. BETGIRI, SR. AR RESPONDENT BY : SHRI PHILIP GEORGE, ADVOC ATE DATE OF HEARING : 03.12.2012 DATE OF PRONOUNCEMENT : 06.12.2012 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE REVENUE, ITS GRIEVANCE S ARE THAT CIT(APPEALS) DELETED ADDITIONS OF ` 31,55,328/- AND ` 11,92,520/- MADE BY THE ASSESSING OFFICER. 2. FACTS APROPOS ARE THAT ASSESSEE, ENGAGED IN MANU FACTURE OF TYRE AND RUBBER PRODUCTS, HAD FILED ITS RETURN FOR IMPUG NED ASSESSMENT YEAR DECLARING AN INCOME OF ` 8,33,56,010/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTED BY THE ASSESSING OFFICER THAT THE EXPENDITURE 2 I.T.A. NO. 14/MDS/12 CLAIMED BY THE ASSESSEE INCLUDED A SUM OF ` 31,55,328/- INCURRED FOR PROFESSIONAL CHARGES PAID TO ONE M/S HARKEY DUGAM L LP, U.K. EXPLANATION OF THE ASSESSEE WAS THAT SUCH PROFESSIO NAL CHARGES WERE MADE FOR RENDERING SERVICES IN CONNECTION WITH ACQU ISITION OF A NEW COMPANY. ASSESSING OFFICER, CONSIDERING THE OUTGO TO BE CAPITAL IN NATURE, DISALLOWED THE CLAIM OF THE ASSESSEE. 3. IN ITS APPEAL BEFORE CIT(APPEALS), ARGUMENT OF T HE ASSESSEE WAS THAT THE PROFESSIONAL CHARGES MADE TO M/S HARKEY DU GAM LLP, U.K. WERE FOR THEIR WORK IN CONNECTION WITH SERVICES REN DERED FOR EXPANSION OF ITS EXISTING BUSINESS. AS PER THE ASSESSEE, IT WAS NOT FOR ANY NEW LINE OF BUSINESS. SUBMISSION OF THE ASSESSEE WAS THAT THE PROPOSED PROJECT WAS DISCONTINUED AND OUTGO WAS CLAIMED AS REVENUE E XPENDITURE. ASSESSEE ALSO FILED A COPY OF MANUAL PROVIDED BY M/ S HARKEY DUGAM LLP, U.K., FOR JUSTIFYING ITS CLAIM BEFORE CIT(APPE ALS). CIT(APPEALS) WAS APPRECIATIVE OF THIS CONTENTION. ACCORDING TO HIM, THE FEASIBILITY STUDY DONE BY M/S HARKEY DUGAM LLP, U.K. CLEARLY SHOWED T HAT IT WAS IN CONNECTION WITH ACQUISITION OF A NEW FOREIGN COMPAN Y IN THE LINE OF SAME BUSINESS AS THAT OF ASSESSEE. RELYING ON THE DECIS ION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF DCIT V. ASSAM ASB ESTOS LIMITED (263 ITR 357), CIT(APPEALS) CAME TO A CONCLUSION THAT NO ENDURING BENEFIT WAS RECEIVED BY THE ASSESSEE AND NO CAPITAL ASSET W AS CREATED. FURTHER, AS PER CIT(APPEALS), HONBLE ANDHRA PRADES H HIGH COURT IN THE 3 I.T.A. NO. 14/MDS/12 CASE OF COROMONDEL FERTILIZERS LIMITED V. CIT (247 ITR 417) HAD HELD THAT EXPENDITURE INCURRED ON TECHNICAL FEASIBILITY STUDY FOR EXPANSION OF EXISTING BUSINESS WAS NOT CAPITAL EXPENDITURE. IN THIS VIEW OF THE MATTER, HE DELETED THE DISALLOWANCE MADE BY THE A.O. 4. NOW BEFORE US, LEARNED D.R., STRONGLY ASSAILING THE ORDER OF CIT(APPEALS), SUBMITTED THAT THE PAYMENT MADE TO M/ S HARKEY DUGAM LLP, U.K. FOR ACQUISITION OF A NEW COMPANY BY THE A SSESSEE, COULD NOT BE TREATED AS AN EXPENSE FOR EXPANSION OF ITS OWN B USINESS. THERE WAS NOTHING ON RECORD TO SHOW THAT THE SAID COMPANY WAS IN THE SAME LINE OF BUSINESS AS THAT OF ASSESSEE. THE RECORDS STATED T O BE PRODUCED BY THE ASSESSEE BEFORE THE CIT(APPEALS), WERE NOT BEFORE T HE ASSESSING OFFICER. ACCORDING TO HIM, THE DISALLOWANCE WAS ER RONEOUSLY DELETED BY THE CIT(APPEALS). 5. PER CONTRA, LEARNED A.R. SUBMITTED THAT THE NEW COMPANY, WHICH WAS CONTEMPLATED TO BE TAKEN OVER, WAS IN THE SAME FIELD OF BUSINESS AS THAT OF ASSESSEE. THE DETAILS FILED BEFORE THE CIT (APPEALS) WERE VERY MUCH AVAILABLE BEFORE THE A.O. ALSO. RELYING ON TH E DECISION OF HONBLE GUWAHATI HIGH COURT IN THE CASE OF DCIT VS. ASSAM ASBESTOS LTD. ( 263 ITR 357), LEARNED A.R. SUBMITTED THAT EXPENSES INCU RRED FOR PREPARATION OF FEASIBILITY REPORT, ESPECIALLY WHEN IT WAS FOR E XPANSION IN THE SAME LINE OF BUSINESS, HAD TO BE CONSIDERED AS REVENUE OUTGO. 4 I.T.A. NO. 14/MDS/12 6. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. NO DOUBT, HONBLE GUJARAT HIGH COURT IN THE CASE OF AS SAM ASBESTOS LTD. (SUPRA), HAD HELD THAT EXPENDITURE INCURRED FOR PRE PARATION OF FEASIBILITY REPORT FOR A MINI CEMENT PLANT, WHICH COULD NOT BE ESTABLISHED FOR WANT OF PERMISSION FROM GOVERNMENT, WAS A REVENUE OUTGO. T HERE, THE ASSESSEE CONCERNED WAS ALREADY IN THE LINE OF MANUF ACTURING OF ASBESTOS SHEET AND PROPOSED MINI CEMENT PLANT WAS F OR SUPPLYING OF ESSENTIAL RAW MATERIAL FOR ASBESTOS PLANT, NAMELY, CEMENT. HERE, ADMITTEDLY, THE EXPENSES INCURRED BY THE ASSESSEE W ERE FOR A FEASIBILITY STUDY FOR TAKING OVER A NEW COMPANY. THERE IS NOTH ING COMING OUT FROM ASSESSMENT ORDER AS TO WHETHER THE FEASIBILITY STUD Y DONE BY M/S HARKEY DUGAM LLP, U.K., WHICH WAS RELIED ON BY THE CIT(APP EALS) FOR DELETING DISALLOWANCE, WAS AVAILABLE BEFORE THE A.O. OR NOT. THE QUESTION WHETHER THE COMPANY, WHICH WAS CONTEMPLATED TO BE T AKEN OVER, WAS IN THE SAME LINE OF BUSINESS AND EVEN IF IT WAS IN THE SAME LINE OF BUSINESS, WHETHER IT COULD STILL BE CONSIDERED AS AN OUTGO WH ICH WAS IN THE REVENUE FIELD, HAS NOT BEEN EXAMINED BY THE ASSESSI NG OFFICER OR THE CIT(APPEALS). WE ARE, THEREFORE, OF THE OPINION TH AT THE MATTER REQUIRES A FRESH VISIT BY THE ASSESSING OFFICER. 7. COMING TO THE OTHER ISSUE TAKEN UP BY THE REVENU E, WHICH IS REGARDING DISALLOWANCE OF PROFESSIONAL CHARGES PAID FOR AN 5 I.T.A. NO. 14/MDS/12 AMALGAMATION, THE FINDING OF THE A.O. WAS THAT SUCH EXPENDITURE OF ` 11,92,520/- WAS A CAPITAL OUTGO. THE CLAIM WAS WIT H REGARD TO THREE PAYMENTS AS UNDER:- SL.NO. NAME OF THE PERSON TO WHOM PAYMENT IS MADE AMOUNT PAID ` 1. M/S DEOLITE 8,87,520/ - 2. SHRI P.H. PANDIAN 2,80,000/ - 3. K. VAIDEESWARAN 25,000/ - BEFORE THE CIT(APPEALS), ARGUMENT OF THE ASSESSEE W AS THAT AMOUNTS PAID TO SOLICITORS IN CONNECTION WITH AMALGAMATION WAS REVENUE EXPENDITURE. RELIANCE WAS PLACED ON THE DECISION O F HONBLE APEX COURT IN THE CASE OF CIT V. BOMBAY DYEING AND MANUF ACTURING CO. LTD. (219 ITR 521). CIT(APPEALS) WAS APPRECIATIVE OF TH IS CONTENTION AND DELETED THE DISALLOWANCE. 8. NOW BEFORE US, LEARNED D.R., STRONGLY ASSAILING THE ORDER OF CIT(APPEALS), SUBMITTED THAT IN THE RESULT, THE DEC ISION RENDERED BY HONBLE APEX COURT IN BOMBAY DYEING AND MANUFACTURI NG CO. LTD.S CASE (SUPRA) WAS IN CIVIL NOS.593-594 OF 1978 AND T HEREFORE, THE CONCERNED ASSESSMENT YEAR WAS PRIOR TO 1978. ACCOR DING TO HIM, SECTION 35DD OF THE ACT WAS INTRODUCED BY FINANCE A CT, 1999 WITH EFFECT FROM 1.4.2000 AND ONCE THE SAID SECTION CAME INTO S TATUTE, THE QUESTION WHETHER PROFESSIONAL CHARGES PAID TO SOLICITORS, IN CONNECTION WITH SERVICES RENDERED TO AN AMALGAMATION, COULD BE ALLO WED AS REVENUE 6 I.T.A. NO. 14/MDS/12 OUTGO IN ONE STROKE, STOOD CLEARLY ANSWERED BY THE LEGISLATURE. ACCORDING TO HIM, SECTION 35DD WAS APPLICABLE FOR I MPUGNED ASSESSMENT YEAR. THE CLAIM OF EXPENDITURE COULD NO T BE CONSIDERED IN ONE OUTGO. 9. PER CONTRA, LEARNED A.R. STRONGLY SUPPORTED THE ORDER OF CIT(APPEALS). 10. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. NO DOUBT, HONBLE APEX COURT IN THE CASE OF BOMBAY DYE ING AND MANUFACTURING CO. LTD. (SUPRA) HAD HELD THAT PROFES SIONAL CHARGES TO SOLICITORS FOR SERVICE RENDERED IN CONNECTION WITH AMALGAMATION, WAS DEDUCTIBLE AS REVENUE EXPENDITURE. AS POINTED OUT BY THE LEARNED D.R., THE SAID DECISION RELATED TO AN YEAR PRIOR TO1978. SECTION 35DD OF THE ACT WAS INTRODUCED BY FINANCE ACT, 1991. SECTION 3 5DD READS AS UNDER:- AMORTISATION OF EXPENDITURE IN CASE OF AMALGAMATION OR DEMERGER. 35DD. (1) WHERE AN ASSESSEE, BEING AN INDIAN COMPANY, IN CURS ANY EXPENDITURE, ON OR AFTER THE 1ST DAY OF APRIL, 1999, W HOLLY AND EXCLUSIVELY FOR THE PURPOSES OF AMALGAMATION OR DEMERGER OF AN UND ERTAKING, THE ASSESSEE SHALL BE ALLOWED A DEDUCTION OF AN AMOUNT EQUAL TO ONE-FIFTH OF SUCH EXPENDITURE FOR EACH OF THE FIVE SUCCESSIVE PREVIOU S YEARS BEGINNING WITH THE PREVIOUS YEAR IN WHICH THE AMALGAMATION OR DEMERGE R TAKES PLACE. (2) NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF THE EXPENDITURE MENTIONED IN SUB-SECTION (1) UNDER ANY OTHER PROVI SION OF THIS ACT.] THE ABOVE SECTION CLEARLY STIPULATES THAT ANY EXPEN DITURE INCURRED FOR THE PURPOSE OF AMALGAMATION HAS TO BE AMORTIZED THR OUGH A FIVE-YEAR 7 I.T.A. NO. 14/MDS/12 PERIOD COMMENCING FROM PREVIOUS YEAR IN WHICH THE A MALGAMATION HAD TAKEN PLACE. NEITHER THE CIT(APPEALS) NOR THE A.O. CONSIDERED THIS SECTION WHILE MAKING THE DISALLOWANCE. WE ARE, THE REFORE, OF THE OPINION THAT THIS ISSUE ALSO REQUIRES A RE-LOOK BY THE ASSESSING OFFICER, AND HE HAS TO CONSIDER THE RELEVANCE OF SECTION 35D D OF THE ACT IN CONSIDERING THE CLAIM OF THE ASSESSEE IN RELATION T O AMALGAMATION. 11. WE, THEREFORE, SET ASIDE THE ORDERS OF LOWER AU THORITIES AND REMIT BOTH THE ISSUES BACK TO THE FILE OF THE A.O. FOR DE NOVO CONSIDERATION. 12. IN THE RESULT, APPEAL FILED BY THE REVENUE IS A LLOWED FOR STATISTICAL PURPOSES. THE ORDER WAS PRONOUNCED IN THE COURT ON THURSDAY, THE SIXTH OF DECEMBER, 2012, AT CHENNAI. SD/- SD/- (CHALLA NAGENDRA PRASAD) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 6 TH DECEMBER, 2012. KRI. COPY TO: APPELLANT/RESPONDENT/CIT(A)-I, COIMBATORE / CIT-I, COIMBATORE/D.R./GUARD FILE