M/s. IBC Knowledge Park Pvt Ltd, Bengaluru V. Deputy Commissioner of Income Tax, Circle-3(1)(1), Bengaluru

ITA 2561/BANG/2017

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 8076 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 11 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-11-2021
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 30-11-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Commercial expediency; Capital expenditure
• Section: 115JB; 37(1); 80G

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ITA No.2561/Bang/2017 Assessment year : 2012-13 IBC Knowledge Park Pvt. Ltd., No.150, Diamond District, Tower B, Pent House, Old Airport Road, Bangalore – 560 008. PAN: AABCI 0816L Vs. The Deputy Commissioner of Income Tax, Circle 3(1)(1), Bangalore. APPELLANT RESPONDENT Appellant by : Shri S. Ramasubramanian, CA Respondent by : Shri Priyadarshi Mishra, Addl. CIT(DR)(ITAT), Bengaluru. Date of hearing : 27.10.2021 Date of Pronouncement : 22.11.2021 O R D E R Per Chandra Poojari, Accountant Member This appeal by the assessee is directed against the order of the CIT(Appeals)-3, Bengaluru dated 16.11.2017 for the assessment year 2012-13. 2. The first issue for our consideration is with regard to disallowance of Rs.1,93,68,969 being contribution made by the assessee to various institutions. The assessee made contribution of Rs.1,93,68,969 to KME Society National Hostel Birdi and Darul Uloom Sabeelur Rashad towards social contribution, etc. towards projects undertaken by these entities. These entities are rendering charitable services to the poor. According to ITA No.2561/Bang/2017 Page 2 of 8 the lower authorities, these amounts were not incurred for the purpose of business, hence not considered as business expenditure u/s. 37(1) of the Income-tax Act, 1961 [the Act]. Against this, the assessee is in appeal before us. 3. The contention of the assessee is that these expenditure were incurred so as to earn the goodwill in the society which resulted in improving the image and thus enhanced the business of the assessee company. Considering the broad perspective and looking at the long term interest the assessee incurred these expenditure and claimed it as business expenditure u/s. 37(1) of the Act. He also relied on the various case laws in support of the above proposition. 4. On the other hand, the ld. DR relied on the order of the lower authorities and argued that the donations of this kind cannot be allowed as business expenditure u/s. 37(1) of the Act and there was no commercial expediency for incurring such expenditure which was not incurred wholly and exclusively for the purpose of the business of the assessee. 5. We have heard both the parties and perused the material on record. The claim of the assessee before us is with regard to allowability of donation given to various institutions u/s. 37(1) of the Act and the question is whether it should be considered as expenditure for the purpose of the business. For this purpose, it is appropriate to refer to the judgment of the Hon’ble High Court of Karnataka in the case of Mysore Kirloskar Ltd. v. CIT, 166 ITR 836 (Karn) wherein it was held as under:- “6. Again, the words 'for the purpose of business' used in section 37(1) should not be limited to the meaning of 'earning profit alone'. Business expediency or commercial expediency may require providing facilities like schools, hospitals for the employees or their children or for the children of the ex- employees. The employees of today may become the ex- ITA No.2561/Bang/2017 Page 3 of 8 employees tomorrow. Any expenditure laid out or expended for their benefit, if it satisfies the other requirements, must be allowed as deduction under section 37(1). It may also be stated, as observed by the Supreme Court in the aforesaid case, that the fact that somebody other than the assessee is also benefited or incidentally taken advantage of by the provision made, should not come in the way of the expenditure being allowed as a deduction under section 37(1). But nevertheless, it must be an 'expenditure' allowable for deduction under the Act.” 6. Now the question that still remains is whether the donation claimed by the assessee for deduction can be said to be an 'expenditure' as contemplated under section 37(1). The 'expenditure' primarily denotes the idea of 'spending' or 'paying out or away'. It is something which is gone irretrievably, but should not be in respect of an unascertained liability of the future. It must be an actual liability in praesenti, as opposed to contingent liability of the future. For this principle, we go through the judgment of the Hon’ble Supreme Court in Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66, wherein it has been observed as follows:- "... The income-tax law does not allow as expenses all the deductions a prudent trader would make in computing his profits. The money may be expended on grounds of commercial expediency but not of necessity. The test of necessity is whether the intention was to earn trading receipts or to avoid future recurring payments of a revenue character. Expenditure in this sense is equal to disbursement which, to use a homely phrase, means something which comes out of the trader's pocket. Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the income-tax law do not take every such allowance as legitimate for purposes of tax. A distinction is made between an actual liability in praesenti and a liability de futuro which, for the time being, is only contingent. The former is deductible but not the latter. ..." ITA No.2561/Bang/2017 Page 4 of 8 7. In the present case, donations made to various institutions are to be considered whether it is incurred on commercial expediency for the purpose of business of the assessee so as to promote the business of the assessee or whether the expenditure was incurred as part of the process of profit making of the assessee. To allow the expenditure, it must be incidental to the business and must be necessitated or justified by commercial expediency. It must be directly or indirectly connected with the business of the assessee and there must be connection between the business and incurring of expenditure by the assessee. The expenditure incurred by the assessee should directly or indirectly benefit the business of the assessee or carrying on the business of the assessee. 8. The contention of the ld. AR is that contribution to donations enhanced the business of the assessee indirectly. However, essential condition for allowing deduction u/s. 37(1) is that the expenditure should have been expended for the purpose of business. In other words, it should be incurred to enable the assessee to carry on or earn profit in that business. It is not enough that expenditure is incurred in the course of business or arises out of or concerned with or made out of profit of the business, but that must also be for the purpose of earning of the business and it should be for the purpose of the business. The word “business” used in section 37(1) connotes some real, substantial and systematic or organized course of activity or conduct with a set purpose which is carried on with the end in view of making or earning profit. Thus, in order to be deductible u/s. 37(1), the expenditure must be incurred for the purpose of the business which was in existence in the accounting year and the profits of which are under assessment. 9. In the present case, though the donation is with an intention to earn goodwill from the public, but the same does not fulfill the criteria laid down in section 37 to come within the purview of allowability as the same cannot ITA No.2561/Bang/2017 Page 5 of 8 be said to be an expenditure incurred wholly and exclusively for the purpose of business. Therefore, the claim of the assessee cannot be allowed as the said donations are not incurred for the purpose of business. Accordingly, we do not find any infirmity in the orders of the lower authorities. The same is confirmed. 10. Alternatively, the assessee is at liberty to claim this expenditure as a donation u/s. 80G of the Act, if so advised. With these observations, we dismiss this ground of the assessee. 11. The next ground is with regard to disallowance of Rs.69,50,00,000 as unascertained liability. The assessee developing a project called IBC Knowledge Park at Bannerghatta Road. It has been selling the units there from the financial years 2007-08. One of the subject matters of the sale is sale of 10,000 Sq Ft cafeteria to Sucharitha Estates Pvt Ltd. The assessee had taken a stand before the authorities for the AY 2007-08 that the profit on sale of cafeteria is chargeable to tax only in the assessment year 2012- 13. While framing the assessment for the AY 2007-08, the AO held that the profit arising from the sale of cafeteria is to be assessed in the AY 2007-08 itself. The profits were accordingly taxed in the AY 2007-08. The matter was pending in appeal. The assessee had accounted the sale of cafeteria in its account for the year ended 31st March 2012 and offered to tax the profit arising from such sale. Since the amount has already been taxed in the AY 2007-08, the assessee submitted before the AO that a sum of Rs. 71,80,000/- should be excluded, It may be stated here that a sum of Rs. 71,80,000/- has been arrived at after providing for a future expense to the extent of Rs. 69,50,000/-. The AO rejected the contentions of the Assessee and held that the profit on sale of cafeteria is to be assessed in the AY 2012-13 because the Assessee itself included such profits. He also held that a sum of Rs. 69,50,000/- is not allowable as a deduction. The above events are summarized below in a table:- ITA No.2561/Bang/2017 Page 6 of 8 Particulars Amount in Rs. Total Sale Consideration 4,00,00,000 Less : Expenditure incurred 2,58,70,000 Less : Provision for future expenses 69,50,000 Profit 71,80,000 12. The ld. AR submitted that the CIT(Appeals) has deleted the addition of Rs. 71,80,000/- in the order for AY 2007-08 passed on 15.11.2017. Therefore, the sum of Rs. 71,80,000/- pertains to income for AY 2012-13. However, the sum of Rs. 69,50,000/- claimed as provision for future expenses relating to the above income was not allowed by the CIT(A) for this year on the ground that it is an unascertained liability. 13. He further submitted that the AO also held that the assessee is liable to pay tax on book profits u/s 115JB of the Act. While determining the book profits he added a sum of Rs. 69,50,000/- being the provision for future expenses. The CIT(Appeals) upheld the view of the AO for the same reason mentioned above. 14. The ld. DR submitted that it is unascertained liability and cannot be allowed in AY 2012-13. 15. We have heard both the parties and perused the material on record. In the assessment year the assessee offered income from the project at Bannerghatta Road on the sale of 10,000 sq.ft. to Sucharitra Estates Pvt. Ltd. If the income is offered in the assessment year under consideration, the corresponding expenditure of that project has to be allowed on the matching principle. The allegation of the department is that the assessee has not provided any details to show that the amount was determined on the basis of a scientific method and that it was not a contingent liability. In our opinion, it is appropriate to remit the issue back to the file of the AO with a direction to the assessee to furnish the details of expenditure on the ITA No.2561/Bang/2017 Page 7 of 8 basis of scientific method which can be ascertained by the AO from the records of the subsequent assessment years that the assessee has actually incurred it. In other words, the assessee has to furnish the actual amount of expenditure incurred in the subsequent assessment years on this count and on that basis the AO is directed to allow the expenditure, since profit has been taxed in the assessment year under consideration from that project. With these observations, we remit the issue to the AO for fresh consideration. On the same principle, ground No.3.3 is to be considered while determining the book profit u/s. 115JB of the Act. Accordingly, this issue is also remitted to the AO for fresh decision. 16. The last ground is with regard to disallowance of fees paid to ROC for increasing the authorised capital for issuing bonus shares. During the year ended 31st March 2012 the assessee had issued bonus shares to its shareholders. Since the authorized capital was not sufficient it had to increase the authorized capital and a fee of Rs. 13,75,000 was paid to Registrar of Companies. The assessee, by mistake, disallowed the above sum while computing the total income for the AY 2012-13. During the assessment proceedings the assessee made a submission that the above sum of Rs.13,75,000/- should be allowed in view of the decision of the Hon'ble Supreme Court in CIT Vs General Insurance Corporation (286) ITR 232. The AO did not consider the above submission. The CIT(Appeals) held that the above sum has to be treated as capital in nature since the same has been spent on increase in authorized share capital. 17. On the other hand, the ld. DR relied on the order of the CIT(Appeals) and submitted that it is capital expenditure. 18. We have heard both the parties and perused the material on record. In our opinion, the expenditure incurred by the assessee towards ROC fees to increase the share capital by issue of bonus shares is to be considered ITA No.2561/Bang/2017 Page 8 of 8 as revenue expenditure in view of the judgment of the Hon’ble Supreme Court cited supra. Accordingly, we allow this ground taken by the assessee. 19. In the result, the appeal is partly allowed for statistical purposes. Pronounced in the open court on this 22 nd day of November, 2021. Sd/- Sd/- ( N V VASUDEVAN ) ( CHANDRA POOJARI ) VICE PRESIDENT ACCOUNTANT MEMBER Bangalore, Dated, the 22 nd November, 2021. /Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.