Appeal details
Counselvise Citation
[2009] 114 COUNSELVISE.COM (IT) 8416 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
5 year(s) 2 month(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
31-07-2009
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
I
Next Hearing Date
11-05-2009
Assessment Year
1998-1999
Appeal Filed On
31-05-2004
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I: NEW DELHI BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND SHRI DEEPAK R. SHAH, ACCOUNTANT MEMBER I.T.A.NO.2623/DEL/2004 ASSESSMENT YEAR : 1998-99 CITIFINANCIAL CONSUMER FINANCE ADDL. COMMISSIONER OF INDIA LTD. (FORMERLY KNOWN AS VS. INCOME-TAX, SPECIAL RANGE-2, ASSOCIATES INDIA FINANCIAL SERVICES NEW DELHI. LTD.), 3, LOCAL SHOPPING CENTRE, PUSHAP VIHAR, NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI M.S. SYALI, SR. ADVOCATE & SHRI TARANDEEP SINGH, ADVOCATE. RESPONDENT BY : SHRI D.N. KAR, SR. DR. O R D E R PER DEEPAK R. SHAH, ACCOUNTANT MEMBER. THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-V, NEW DELHI, DATED 22.3.2004 FOR THE ASSESSMENT YEAR 1998-99 IN AN APPEAL AGAINST TH E ASSESSMENT FRAMED UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (T HE ACT). 2. THE ASSESSEE WAS ORIGINALLY INCORPORATED AS A CO MPANY IN THE NAME OF AVCO FINANCIAL SERVICES INDIA PVT. LTD. ON 1 ST MAY, 1997. THE NAME OF THE COMPANY WAS CHANGED TO ASSOCIATES INDIA FINANCIAL S ERVICES PVT. LTD. WITH EFFECT FROM 21 ST JULY, 1999. THE ASSESSEE IS A NON-BANKING FINANCE 2 COMPANY (NBFC) WHO IS PRIMARILY ENGAGED IN THE BUSI NESS OF HIRE- PURCHASE, LEASE AND FINANCING. THE ASSESSEE WAS RE GISTERED AS A NBFC WITH RESERVE BANK OF INDIA ON 25 TH SEPTEMBER, 1997. 3. THE FIRST GROUND OF APPEAL IS AGAINST DISALLOWAN CE OF RS.60,000/- BEING ENTRANCE FEE PAID TO DELHI GOLD CLUB. 4. THE ASSESSING OFFICER HELD THAT ONE TIME PAYMENT OF ENTRANCE FEE GIVES ENDURING ADVANTAGE TO THE ASSESSEE AND IS THE REFORE, A CAPITAL EXPENDITURE. THEREFORE, THE SUM WAS DISALLOWED. B EFORE THE LEARNED CIT(A) IT WAS CONTENDED THAT BY VIRTUE OF PAYMENT OF MEMBE RSHIP FEE, THE CEO BECOMES THE MEMBER OF CLUB, THUS, HELPS THE EMPLOYE E TO PROMOTE THE BUSINESS OF COMPANY. RELIANCE WAS PLACED ON THE DE CISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF GUJARAT STATE COR PORATION LTD. VS. CIT, 209 ITR 649. 5. THE LEARNED CIT(A) REFUSED TO FOLLOW THE DECISIO N OF HONBLE GUJARAT HIGH COURT. HE HELD THAT BY PAYING ENTRANCE FEE, T HE ASSESSEE ACQUIRED ADVANTAGE OF ENDURING NATURE. AT THE SAME TIME, TH ERE IS NO IMMEDIATE BENEFIT ACQUIRED BY THE ASSESSEE IN THE SITUATION. IF NEITHER ENDURING BENEFIT IS ACCRUED NOR ANY IMMEDIATE BENEFIT HAS ACCRUED AN D HENCE THE EXPENDITURE IS NEITHER CAPITAL NOR REVENUE BUT AS A MATTER OF F ACT THE EXPENDITURE IS PURELY PERSONAL. 3 6. THE LEARNED COUNSEL FOR THE ASSESSEE SHRI M.S. S YALI SUBMITTED THAT THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. SAMTEL COLOR LTD. IN ITA 1152/2008 DATED 30 TH JANUARY, 2009 HAVE HELD THAT THE EXPENDITURE ON CORPORATE MEMBERSHIP OF A CLUB IS REVENUE EXPENDITU RE AND ALLOWABLE AS SUCH. 7. THE LEARNED DR SHRI D.N. KAR ON THE OTHER HAND, RELIED UPON THE DECISION OF HONBLE KERALA HIGH COURT IN THE CASE O F FRAMATONE CONNECTOR OEN LTD. VS. DCIT (ASSTT.) 294 ITR 559. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSION. CASE O F APPELLANT FALLS UNDER THE JURISDICTION OF THE HONBLE DELHI HIGH CO URT. THE HONBLE DELHI HIGH COURT IN THE CASE OF SAMTEL COLOR LTD. (SUPRA) HAVE SPECIFICALLY DISAGREED WITH THE RATIO OF THE JUDGMENT OF HONBLE KERALA HIGH COURT IN THE CASE OF FRAMATONE CONNECTOR OEN LTD. (SUPRA). THER EFORE, THE BINDING PRECEDENT WILL BE OF THE JURISDICTIONAL HIGH COURT AND FOLLOWING THE SAME, WE HOLD THAT THE EXPENDITURE ON CORPORATE MEMBERSHI P OF DELHI GOLF CLUB IS ALLOWABLE AS REVENUE EXPENDITURE. 9. GROUND NOS.2, 2.1, 2.2 AND 2.3 ARE AGAINST DISAL LOWANCE OF RS.1,11,70,464/- ON THE GROUND THAT THE SAID EXPEND ITURES WERE INCURRED PRIOR TO SETTING UP OF THE BUSINESS AND HENCE IN TH E NATURE OF PRE-OPERATIVE EXPENSES. 4 10. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE W AS INCORPORATED ON 1 ST MAY, 1997 BUT RBI GRANTED THE LICENCE TO WORK AS NB FC WITH EFFECT FROM 25.9.1997. IN THE BOOKS OF ACCOUNT THE EXPENDITURE PRIOR TO COMMENCEMENT OF BUSINESS WAS TREATED AS DEFERRED REVENUE EXPENDI TURE. IN THE REVISED RETURN, THE ASSESSEE HAS CLAIMED THE SAME AS REVENU E EXPENDITURE. THE ASSESSING OFFICER HELD THAT EXPENDITURES PRIOR TO C OMMENCEMENT OF BUSINESS ARE CAPITAL IN NATURE AND CAN BE ALLOWED ONLY UNDER SECTION 35D. THE ASSESSING OFFICER HELD THAT ISSUE OF PRE-COMMENCEME NT EXPENDITURE IS SUBJECT MATTER OF ADJUDICATION BY VARIOUS COURTS. SUCH EXPENDITURE HAS BEEN HELD TO BE CAPITAL EXPENDITURE IN THE FOLLOWING CAS ES:- 1. SHREE VALLABH GLASS WORKS LTD. VS. CIT, 127 ITR 37 (GUJ.); 2. MANIPUR SPINNING MILLS CORPORATION LTD., 226 ITR 551 (GAU.); 3. BOROSIL GLASS LTD., 161 ITR 286 (BOM.); 4. TATA CHEMICAL, 162 ITR 256 (BOM.); 5. J.M. INDUSTRIES, 129 ITR 373 (DEL); 6. NEW CENTRAL JUTE MILLS, 135 ITR 736 (GUJ.); & 7. COCHIN REFINERIES LTD., 173 ITR 461. 11. BEFORE THE LEARNED CIT(A) IT WAS CONTENDED THAT AS PER SECTION 3 THE PREVIOUS YEAR MEANS THE FINANCIAL YEAR. THE DATE O F SETTING UP OF BUSINESS AND PROFESSION IS TO BE TAKEN AS THE DATE OF COMMEN CEMENT OF BUSINESS. THE LEARNED CIT(A) HELD AS UNDER:- 6.2 THUS THERE WILL BE A NUMBER OF PERMUTATIONS A ND COMBINATION AFTER ADOPTING THREE VITAL DATES I.E. T HE DATE OF REGISTRATION OF THE CO., THE DATE OF THE SETTING OF THE BUSINESS AND THE DATE ON WHICH THE SOURCES OF INCOME COMES INTO EXISTENCE. 5 NOW IT HAS TO BE SEEN AS TO WHAT ARE DIFFERENT DATE S IN THE CASE OF THE APPELLANT CO. THE APPELLANT CO. WAS INCORPO RATED ON 1 ST MAY, 1997 AND ACCORDING TO THE APPELLANT THIS DATE SHOULD BE TAKEN AS THE DATE OF SETTING UP OF BUSINESS. HOWEV ER, IN VIEW OF PROVISO TO SECTION 3 OF THE I.T. ACT, 1961, THE DAT E ON WHICH THE SOURCE OF INCOME COMES INTO EXISTENCE IS ALSO TO BE TAKEN INTO ACCOUNT FOR DETERMINING THE PERIOD OF THE PREVIOUS YEAR. THE APPELLANT, ADMITTEDLY, IS A NON-BANKING FINANCE CO. (NBFC) AND THE RBI AS REGISTERED THE CO. AS A NBFC AS ON 2 5 TH SEPT., 97. IN THE CIRCUMSTANCES, THE APPELLANT CO. COULD NOT HAVE CARRIED OUT ANY BUSINESS ACTIVITY GENERATING INCOME BEFORE 25 TH SEPT., 97. AS PER LAW THE DATE ON WHICH THE SOURCE OF INCOME COMES INTO EXISTENCE IS EQUALLY IMPORTANT. IN THIS CASE, THE DATE OF SOURCE OF INCOME CANNOT BE PRIOR TO 25 TH SEPT., 97. I WOULD LIKE TO EXPLAIN THE SITUATION WHERE ANY BUSINESS SI S SET UP FOR MANUFACTURE OF LIQUOR FIRE, ARMS, DRUGS ETC. FOR WH ICH A LICENCE IS REQUIRED. THE ASSESSEE CANNOT START GENERATING INCOME BEFORE THE LICENCE IS GRANTED AND ACTUAL MANUFACTURING IS DONE. HE ACCORDINGLY HELD THAT THE APPELLANT COMPANY BEIN G A NBFC COULD NOT HAVE GENERATED INCOME BEFORE OBTAINING REGISTRATION LICENCE FROM THE RBI. CASE LAWS RELIED BY THE ASSESSEE ARE DISTINGUISHABL E ON FACTS. 12. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE NEVER CONTENDED THAT THE DATE OF COMMENCEMENT OF BUSINESS SHALL BE TAKEN AS 1 ST MAY, 1997. IT WAS CONTENDED THAT THE DATE OF COMME NCEMENT OF BUSINESS SHALL BE TAKEN AS 17.6.1997 BEING THE DATE ON WHICH THE ASSESSEE TOOK THE PREMISES ON RENT FOR CARRYING ON THE BUSINESS. THO UGH IN RESPECT OF CERTAIN BUSINESS LIKE HIRE, PURCHASE, LEASING ETC., THE ASS ESSEE WAS REQUIRED TO OBTAIN APPROVAL FROM RBI YET IN RESPECT OF CERTAIN OTHER B USINESS, THE SAME WERE IN ACCORDANCE WITH THE MEMORANDUM OF ASSOCIATION AND I N RESPECT OF WHICH NO 6 LICENCE FROM RBI IS REQUIRED. HE SUBMITTED THAT TH E ASSESSEE RECEIVED PROCESSING FEE WHICH IS OFFERED FOR TAXATION AND IN RESPECT OF WHICH NO LICENCE WAS REQUIRED. AS PER MEMORANDUM OF ASSOCIA TION CLAUSE 2 OF THE MAIN OBJECT PERMITTED THE ASSESSEE TO CARRY BUSINES S OF FINANCE, DISCOUNT, MAKE LOANS AND DEAL IN ACCEPTANCE NOTES, DRAFTS, BI LLS OF EXCHANGE, WAREHOUSE RECEIPTS ETC. AS PER THE SIGNIFICANT ACC OUNTING POLICIES ATTACHED TO THE ANNUAL ACCOUNTS REVEAL THAT PRE-OPERATIVE EX PENSES ARE AMORTIZED OVER A PERIOD OF 5 YEARS. THE ASSESSEE IN THE NOTES ON ACCOUNTS STATED 2) THE ACCOUNTS ARE FOR THE PERIOD FROM MAY 1, 199 7 (DATE OF INCORPORATION OF THE COMPANY) TO MARCH 31, 1998. T HE COMPANY HAVING BEEN REGISTERED AS A NON-BANKING FIN ANCE COMPANY (NBFC), WITH EFFECT FROM SEPTEMBER 25, 1997 , THE PROFIT & LOSS ACCOUNT IS PREPARED FOR THE PERIOD FR OM THAT DATE TO MARCH 31, 1998 . BEING THE FIRST ACCOUNTING PERIOD OF THE COMPANY, THERE ARE NO CORRESPONDING FIGURES FOR THE PREVIOUS YEAR. 3) THE COMPANYS BUSINESS WAS SET-UP IN JUNE 1997. HOWEVER, REGISTRATION WITH RESERVE BANK OF INDIA S A NON-BAN KING FINANCE COMPANY (NBFC) WAS RECEIVED ONLY ON SEPTEMB ER 25, 1997 AFTER WHICH THE COMPANY COULD CARRY ON THE BUS INESS OF A NBFC, ACCORDINGLY THE EXPENSES INCURRED UPTO SEPTEMBER 2 4, 1997 I.E., UPTO THE DATE OF REGISTRATION WITH RBI A S A NBFC AS PER DETAILS HEREUNDER ARE BEING AMORTIZED OVER 5 YE ARS FROM SEPTEMBER 25, 1997. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT FOLLOWING FACTS JUSTIFIED THE DATE OF SETTING UP OF BUSINESS AS 17 TH JUNE, 1997:- 7 A) ALL REQUIRED INFRASTRUCTURE HAD BEEN CREATED AN D FACILITIES WERE PUT IN PLACE BY 17 TH JUNE, 1997 TO CARRY ON THE BUSINESS OF THE COMPANY . THIS FACT OF SETTING UP OF THE BUSINESS OF THE APPELLANT WAS ALSO DULY CERTIFIED BY THE AUDITORS OF THE COMPANY VIDE NOTE NO.3 OF SCHEDULE NO.17 TO THE ANNUAL ACCOUNTS OF THE COMPANY FOR THE YEAR ENDED ON 31 ST MARCH, 1998 [SEE PAGE NO. 32 OF PAPER BOOK]. B) DETAILS OF EXPENSES INCURRED FROM 17 TH JUNE, 1997 TO 25 TH SEPTEMBER, 1997 ARE PLACED AT PAGE NO.72 OF PAPER BOOK. IT CA N BE SEEN FROM THERE THAT THE APPELLANT INCURRED ALL THE NECESSARY EXPENSES A S REQUIRED FOR THE RUNNING OF THE BUSINESS LIKE RECRUITMENT EXPENSES, SALARY T O STAFF, ELECTRICITY, RENT, TRAVELING, REPAIRS AND MAINTENANCE ETC. C) INITIALLY, THE APPELLANT OPERATED FROM HOTEL TA J MAHAL AND LATER ON ENTERED INTO A LEASE AGREEMENT FOR THE OFFICE PREMI SES ON 20 TH JUNE, 1997 [COPY OF HOTEL BILLS AND OF THE LEASE DEED IS PLACE D AT PAGES 42 TO 62 OF PAPER BOOK]. D) THE APPELLANT COMPANY HAD RAISED THE CAPITAL RE SOURCES AND THE BALANCE OF CURRENT ACCOUNT NO.6048978 WITH ABN AMRO BANK AS ON 17 TH JUNE, 1997 WAS RS.4.08 CRORE (COPY OF BANK BOOK IS PLACED AT P AGE 64 OF PAPER BOOK]. IT IS SUBMITTED THAT FOR A NBFC MONEY IS WHAT RAW-M ATERIAL IS TO A 8 MANUFACTURING CONCERN. AS ON 17 TH JUNE, 1997, THE APPELLANT HAD A BALANCE OF RS.4.08 CRORE WITH ABN AMRO BANK AND WAS, THUS, IN A POSITION TO START ITS BUSINESS OPERATIONS OF LENDING FINANCE. E) THE APPELLANT PAID RS.8,000 P.M. TO M/S. RAJESH KATHURIA & ASSOCIATES, CHARTERED ACCOUNTANTS AS PROFESSIONAL CHARGES TOWAR DS ACCOUNTING AND OTHER MATTERS COMMENCING FROM JUNE 1997 [COPY OF INVOICE PLACED AT PAGE NO.65 OF PAPER BOOK]. SHRI SYALI ALSO RELIED UPON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. HUGHES ESCORTS COMMUNICATIONS, 165 TAXMAN 318. 13. THE LEARNED DR ON THE OTHER HAND, RELIED UPON T HE OBSERVATIONS OF THE LEARNED COMMISSIONER (APPEALS). HE SUBMITTED THAT THERE IS NO EVIDENCE TO SHOW THAT ANY BUSINESS OTHER THAN NBFC WAS EVER CAR RIED ON. FOR THE BUSINESS TO BE CARRIED OUT AS NBFC, THE PRE-CONDITI ON IS TO OBTAIN A LICENCE FROM RBI. THE SAME WAS GRANTED ONLY ON 25.9.1997. EVEN AS PER THE ASSESSEES OWN NOTES ON ACCOUNTS IT REVEALS THAT TH E EXPENSES WERE PRE- OPERATIVE EXPENSES AND WERE ACCORDINGLY NOT CHARGED TO PROFIT & LOSS ACCOUNT. EVEN THOUGH THE ACCOUNTS ARE FROM THE DAT E OF INCORPORATION TILL 31 ST MARCH, 1998, THIS SHOWS THAT PRIOR TO 25.9.1997 TH E BUSINESS NEVER COMMENCED. EVEN FROM THE ACCOUNTS THE INCOME IS SH OWN TO BE FROM 9 OPERATION AND THERE IS NO INCOME FLOWING FROM OBJEC TS STATED IN CLAUSE 2 OF THE MEMORANDUM OF ASSOCIATION. HE ACCORDINGLY PLEA DED THAT THE EXPENSES ARE NOT ALLOWABLE AS SUCH. ALTERNATIVELY IT WAS PL EADED THAT TO VERIFY WHETHER ANY BUSINESS OTHER THAN NBFC WAS EVER CARRI ED ON FROM 17.6.1997, THE MATTER REQUIRES EXAMINATION AND FOR WHICH, IT M AY BE RESTORED TO THE FILE OF THE ASSESSING OFFICER. IN REPLY, THE LEARNED COUNSEL FOR THE ASSESSEE SUBM ITTED THAT WHAT IS RELEVANT IS SETTING UP OF BUSINESS AND NOT EARNING OF ANY INCOME AFTER THE BUSINESS WAS SET UP. 14. WE HAVE CONSIDERED THE RELEVANT FACTS, ARGUMENT S ADVANCED AND THE CASE LAWS CITED. THE COMPANY IN ITS NOTES ON ACCOU NTS FOR THE FINANCIAL YEAR ENDED ON 31 ST MARCH 1998 REPORTED THAT THE PROFIT AND LOSS ACCOU NT IS PREPARED FOR THE PERIOD 25 TH SEPTEMBER, 1997 TO 31 ST MARCH, 1998. 25 TH SEPTEMBER, 1997 IS THE DATE ON WHICH THE COMPANY WA S REGISTERED AS AN NBFC WITH RBI. THIS MANIFESTS THAT THE COMPANY CAR RIED ON THE BUSINESS ONLY AS AN NBFC AND NO OTHER BUSINESS WAS CARRIED T HOUGH CERTAIN OTHER OBJECTS ARE MENTIONED IN THE MEMORANDUM OF ASSOCIAT ION. THE COMPANY HAS ALSO TREATED THE EXPENSES PRIOR TO REGISTRATION WITH RBI AS AN NBFC AS EXPENSES INCURRED PRIOR TO CARRYING ON OF THE BUSIN ESS AS AN NBFC AND HAS AMORTIZED SUCH EXPENSES OVER 5 YEARS FROM 25 TH SEPTEMBER, 1997. THIS ALSO 10 MAKES CLEAR THAT THE EXPENSES CLAIMED ARE INCURRED IN RELATION TO THE BUSINESS AS AN NBFC AND NOT IN RESPECT OF ANY OTHER BUSINESS . IN FACT AS PER THE ACCOUNTS, NO OTHER BUSINESS WAS EVER CARRIED ON BY THE ASSESSEE. IT IS CONTENDED THAT THE EXPENSES INCURRED IMMEDIATELY AF TER SET UP OF THE BUSINESS IS ALLOWABLE AND FOR THIS PURPOSE REFERENC E IS MADE TO SECTION 3 OF THE ACT. SECTION 3 OF THE ACT DEFINES THE TERM PR EVIOUS YEAR. AS PER PROVISO TO SECTION 3 IN THE CASE OF A BUSINESS OR P ROFESSION NEWLY SET UP THE PREVIOUS YEAR SHALL BEGIN WITH THE DATE OF SETTING UP OF THE BUSINESS AND ENDING WITH THE FINANCIAL YEAR IN WHICH THE BUSINES S WAS NEWLY SET UP. HOWEVER, THE DEFINITION OF PREVIOUS YEAR IS LIMIT ED FOR THE PURPOSE OF COMPUTATION OF THE PERIOD OF PREVIOUS YEAR AND DOES NOT IN ANY WAY DETERMINE THE ALLOWABILITY OF EXPENSES. THE EXPENS ES CLAIMED HEREIN ARE THOSE REFERRED TO IN SECTION 37 OF THE ACT. AS PER SECTION 37(I) ANY EXPENDITURE NOT BEING IN THE NATURE OF CAPITAL EXPE NDITURE OR PERSONAL EXPENSES OF THE ASSESSEE LAID OUT OR EXPANDED WHOLL Y AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OR PROFESSION SHALL BE ALLO WED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. THE INCOME CHARGEABLE UNDER THE HEAD PROFITS & GAINS OF BUSINESS OR PROFESSION IS COMPUTED AS PER SECTIONS 28 & 29 OF THE ACT. AS PER SECTION 28(I) THE PROFITS AND GAINS OF ANY BUSI NESS OR PROFESSION WHICH 11 WAS CARRIED ON BY THE ASSESSEE AT ANY TIME DURING T HE PREVIOUS YEAR IS CHARGEABLE TO TAX UNDER THE HEAD PROFITS & GAINS O F BUSINESS OR PROFESSION. UNDER SECTION 29, THE INCOME REFERRED IN SECTION 28 SHALL BE COMPUTED IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SECTION 30 TO 43D OF THE ACT. THEREFORE, IN RESPECT OF ANY EXPENSES CLAIMED UNDER SECTION 37, THE SAME CAN BE ALLOWED AS PER SECTION 29 ONLY IN RESPECT OF COMPUTING THE INCOME CHARGEABLE UNDER SECTION 28 OF THE ACT. FOR PURPOS E OF INCOME CHARGEABLE UNDER SECTION 28 OF THE ACT, THE SAME CAN BE CHARGE D ONLY WHEN THE BUSINESS OR PROFESSION IS CARRIED ON BY THE ASSESSEE. THERE FORE, THOUGH AS PER SECTION 3, THE PREVIOUS YEAR MAY COMMENCE ON SETTING UP OF THE BUSINESS, YET THE INCOME WILL BE CHARGEABLE TO TAX UNDER THE HEAD PR OFITS AND GAINS OF BUSINESS ONLY WHEN THE BUSINESS OR PROFESSION WAS CARRIED ON BY THE ASSESSEE. THEREFORE, FOR PURPOSE OF ALLOWING ANY E XPENSES UNDER SECTION 37 IN RESPECT OF ANY BUSINESS OR PROFESSION, SUCH BUSI NESS OR PROFESSION SHOULD HAVE BEEN CARRIED ON DURING THE PREVIOUS YEAR. ADM ITTEDLY, SINCE THE EXPENSES WERE INCURRED PRIOR TO CARRYING ON OF BUSI NESS AS AN NBFC, THE EXPENSES ARE NOT ALLOWABLE AS SUCH. TAKING THE PRE MISES ON HIRE WILL ONLY DEMONSTRATE THE INTENTION OF SETTING UP OF THE BUSI NESS BUT CANNOT BE SAID TO BE CARRYING ON OF THE BUSINESS. THE ASSESSEE HAS P LACED RELIANCE ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. HUGHES ESCORTS 12 COMMUNICATIONS (SUPRA). IN THE SAID CASE THE HONB LE DELHI HIGH COURT HELD THAT THE BUSINESS OF ASSESSEE INVOLVED DIFFERE NT ACTIVITIES IN WHICH THE FIRST STEP WAS THE PURCHASE OF VSAT EQUIPMENT. THE SAID PURCHASE WAS FOR THE PURPOSE OF BUSINESS. ACCORDINGLY IT WAS HELD T HAT THE BUSINESS OF THE ASSESSEE SHOULD BE HELD TO HAVE BEEN SET UP. IN TH E PRESENT CASE THERE IS NO DISPUTE REGARDING SET UP OF THE BUSINESS OF THE ASS ESSEE BUT FOR CLAIMING EXPENSES. UNDER SECTION 37, WHAT IS REQUIRED TO BE ESTABLISHED IS WHETHER SUCH EXPENSES WERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR PROFESSION CARRIED ON BY THE ASSESSEE. SINCE THE ACCOUNTING TREATMENT BY THE ASSESSEE AND AS PER THE NOTES OF A CCOUNTS, SINCE IT IS MADE CLEAR THAT THE EXPENSES ARE IN RELATION TO BUSINESS NOT CARRIED ON PRIOR TO 25.9.1997, THE EXPENSES INCURRED PRIOR THERETO ARE NOT ALLOWABLE UNDER SECTION 37 OF THE ACT. 15. GROUND NO.3 IS AGAINST DISALLOWANCE OF RS.35,91 ,227/- BEING THE COST OF SOFTWARE PURCHASED BY THE ASSESSEE. 16. THE ASSESSING OFFICER TREATED THE SAME AS CAPIT AL EXPENDITURE AND ALLOWED DEPRECIATION @ 25%. 17. AT THE TIME OF HEARING BOTH THE COUNSELS AGREED THAT WHETHER THE EXPENSES ON ACQUISITION OF SOFTWARE WAS CAPITAL OR REVENUE EXPENDITURE IS REQUIRED TO BE LOOKED INTO IN ACCORDANCE WITH THE G UIDELINES LAID DOWN BY 13 THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF AM WAY INDIA ENTERPRISES VS. DCIT, 111 ITD 112 (DELHI)(SB). 18. IN VIEW OF THE DECISION OF SPECIAL BENCH OF TRI BUNAL, THE MATTER IS RESTORED BACK TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THE NATURE OF EXPENDITURE AND TO APPLY THE RATIO LAID DOWN BY SPE CIAL BENCH TO ARRIVE AT A FINDING WHETHER THE EXPENSES ARE CAPITAL OR REVENUE IN NATURE. ACCORDINGLY, THE MATTER IS RESTORED BACK TO THE FILE OF THE ASSE SSING OFFICER. 19. GROUND NOS.4 & 4.1 ARE AGAINST DISALLOWANCE OF RS.48,38,636/- BEING COMMISSION PAID TO DIRECT SELLING AGENT. 20. THE ASSESSING OFFICER NOTED THAT IN THE BOOKS O F ACCOUNT THE COMMISSION PAYABLE TO DIRECT SELLING AGENTS (DSA) O F RS.48,38,636/- IS TREATED AS DEFERRED REVENUE EXPENDITURE OVER THE PE RIOD OF LOAN BUT NOT DEBITED TO THE PROFIT & LOSS ACCOUNT. HOWEVER, IN COMPUTATION OF INCOME ENTIRE EXPENDITURE HAS BEEN CLAIMED. THE ASSESSING OFFICER RELYING UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE O F MADRAS INDUSTRIAL INVESTMENT CORPN. LTD. VS. CIT, 225 ITR 802, HELD T HAT THE ENTIRE EXPENDITURE IN ONE YEAR CANNOT BE ALLOWED. 21. BEFORE THE LEARNED CIT(A) IT WAS CONTENDED THAT THE COMMISSION IS PAID TO DSA FOR THE SERVICE IN SOURCING THE HIRER I N YEAR IN WHICH THE LOAN IS DISBURSED ON PER CASE BASIS AND VOLUME OF BUSINESS GENERATED. THE 14 COMMISSION IS PAID TO DSA ON THE BASIS OF HIRER PRO CURED AND THE SAME HAS NO DIRECT LINKAGE TO THE PERIOD OF FINANCING. EVEN IN CASE OF PRE-MATURE REPAYMENT OF LOANS, THE UNAMORTIZED PORTION OF COMM ISSION PAYABLE TO THEM IS NEVER RECOVERED BACK. SINCE THE COMMISSION IS P AYABLE IMMEDIATELY AFTER DISBURSAL OF FINANCE, THE DEDUCTION IS ALLOWABLE IN THE YEAR IN WHICH IT IS INCURRED IRRESPECTIVE OF THE ACCOUNTING TREATMENT. IT WAS ALSO CONTENDED THAT THE ASSESSEE ALSO RECEIVES PROCESSING FEE FOR PROCE SSING ANY LOAN APPLICATION FROM THE CUSTOMERS AND WHICH AS PER THE ACCOUNTING POLICY, IS TREATED AS INCOME OVER THE PERIOD OF LOAN. THE PROPORTIONATE AMOUNT WHICH RELATES TO THE PERIOD FALLING BEYOND THE CLOSE OF THE YEAR IS TREATED AS DEFERRED INCOME IN BOOKS OF ACCOUNT AND IS RECOGNIZED AS INCOME OVE R THE PERIOD OF LOAN. HOWEVER, IN THE REVISED RETURN, THE ASSESSEE HAS TR EATED SUCH FEE AS INCOME CHARGEABLE TO TAX IN THE YEAR OF RECEIPT. THOUGH T HE ASSESSING OFFICER HAS TAXED THE ENTIRE PROCESSING FEE AS INCOME OFFERED I N REVISED RETURN, BUT IN RESPECT OF COMMISSION PAID TO DSA WAS NOT ALLOWED I N ITS ENTIRETY. THUS DIFFERENT TREATMENT IS GIVEN TO INCOME AND EXPENDIT URE WHICH IS NOT PERMISSIBLE IN LAW. THE LEARNED CIT(A) HELD THAT T HE DECISION OF HONBLE SUPREME COURT IN THE CASE OF MADRAS INDUSTRIAL INVE STMENT CORPN. LTD. (SUPRA) APPLIES. IN THE CASE OF APPELLANT THE COMM ISSION IS DETERMINED AND PAID WITH REFERENCE TO PERIOD OF LOAN WHEREAS IN TH E CASE OF MADRAS 15 INDUSTRIAL INVESTMENT CORPN. LTD. (SUPRA), DISCOUNT ON THE DEBENTURE WAS PAID OVER THE PERIOD OF DEBENTURE. THUS, THERE IS NO DIFFERENCE BETWEEN TWO SITUATIONS. ACCORDINGLY, THE ACTION OF THE ASSESSI NG OFFICER IS CONFIRMED. 22. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE LEARNED CIT(A). FURTHER RELIANCE WAS PL ACED ON THE FOLLOWING DECISIONS:- 1. CIT VS. PRINTPAK MACHINERY LTD., 248 ITT 684 (DE L); 2. ACIT VS. ASHIMA SYNTEX LTD., 310 ITR (AT) 1 (AHM D.)(SB); 3. JCIT VS. MODI OLIVETTI LTD., 4 SOT 859 (DEL); & 4. INDUSTRIAL FINANCE CORPORATION OF INDIA VS. DCIT , 4 SOT 223 (DEL). 23. THE LEARNED DR ON THE OTHER HAND, RELIED UPON T HE APPELLATE ORDER. HE SUBMITTED THAT THE ASSESSEE FILED REVISED RETURN FO R OFFERING PROCESSING FEE AS ITS INCOME BUT NEVER CLAIMED EITHER IN THE ACCOUNTS OR IN THE ORIGINAL RETURN THE PROCESSING FEE AS ITS INCOME OF THE YEAR. HE S UBMITTED THAT THE CONCEPT OF DEFERRED REVENUE EXPENDITURE IS RECOGNIZED BY TH E HONBLE SUPREME COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT C ORPN. LTD. (SUPRA) AND WHICH WAS FOLLOWED IN THE FOLLOWING CASES:- (1) NATIONAL ENGINEEERING INDUSTRIES LTD. VS. CIT, 236 ITR 577 (CAL); (2) TAPARIA TOOLS LTD. VS. JCIT, 260 ITR 102 (BOM); & (3) CIT VS. TUBE INVESTMENTS OF (INDIA) LTD., 261 I TR 753 (MAD.). HE FURTHER CONTENDED THAT THE INCOME OF THE ASSESSE E IS IN THE FORM OF INTEREST ON LOAN OR BY WAY OF HIRE CHARGES FOR THE PERIOD OF HIRE. THEREFORE, JUST AS THE INCOME IS ACCRUING OVER A PERIOD, SIMIL ARLY THE EXPENSES IN 16 RELATION TO SUCH INCOME, ARE TO BE AMORTIZED OVER A PERIOD OF LOAN AND NOT ENTIRELY IN THE YEAR OF PAYMENT. 24. WE HAVE CAREFULLY CONSIDERED THE FACTS, ARGUMEN TS ADVANCED AND THE CASE LAWS CITED. THE COMMISSION IS PAYABLE TO DSA IN TERMS OF THE AGREEMENT. AS PER THE AGREEMENT THE DSA SERVICES W ILL ENTAIL SOURCING HIRER FOR THE COMPANY FOR ITS AUTOMOBILES HIRE-PURCHASE P ROGRAMMES. THE TERM REGARDING PAYMENT PROVIDED THUS 1. THE COMPANY SHALL PAY THE DSA A PER CASE BROKER AGE AND A FURTHER BROKERAGE ON THE VOLUME OF BUSINESS GENERAT ED WHICH WILL BE COMMUNICATED TO IT FROM TIME TO TIME AGAINS T THEIR MAKING AVAILABLE TO THE COMPANY THEIR EXPERTISE. T HE DSA WILL UNDER NO CIRCUMSTANCE PASS ON THE SAID BROKERA GE OR APART OF IT TO ANY PROSPECTIVE APPLICANTS IN ANY FORM WHA TSOEVER. 2. THE DSA SHALL ENSURE COLLECTION OF UP FRONT PROC ESS IN FEE FROM THE BORROWER IN FAVOUR OF THE COMPANY, AND REM IT THE SAME TO THE COMPANY. THEREAFTER THE COMPANY SHALL PAY THE DSA SHARE SEPARATELY AS DECIDED MUTUALLY BY THE COM PANY AND THE DSA. THE ASSESSEES LIABILITY TO PAY THE COMMISSION PART LY ARISES AT THE TIME WHEN THE DSA SOURCES THE HIRER AND PARTLY ON THE VOLUME OF BUSINESS GENERATED. THE ASSESSEE DISBURSES THE AMOUNT ONLY AFTER RECEIV ING THE UPFRONT PROCESSING FEE FROM THE PROSPECTIVE BORROWERS. IT IS ALSO ACCEPTED FACT THAT UPFRONT PROCESSING FEE IS TAXED IN THE YEAR OF RECE IPT ITSELF AND NOT SPREAD OVER THE PERIOD OF HIRE-PURCHASE FINANCE. THEREFOR E, IT CAN BE SAID THAT THE PAYMENT OF COMMISSION WHICH IS NOT BASED ON THE HIR E-PURCHASE CHARGES 17 RECEIVABLE BY THE ASSESSEE BUT ON THE BASIS OF HIRE R SOURCED BY THE DSA AND IN RESPECT OF SUCH HIRER THE PROCESSING FEE IS RECE IVED, IS ALLOWABLE IN THE YEAR OF PAYMENT. HOWEVER, THE COPIES OF CONTRACTS WITH DSA PLACED BEFORE US DO NOT DEMONSTRATE AS TO WHAT ARE THE SERVICES R ENDERED BY THE DSA FOR WHICH HOW THE LIABILITY TO PAY SUCH BROKERAGE ARISE S CAN BE WORKED OUT. THE AGREEMENT SHOWS THAT DSA WERE TO SOURCE THE BORROWE R BUT THE TERMS OF AGREEMENT DO NOT REVEAL AS TO ON WHAT BASIS THE BRO KERAGE IS PAYABLE AND IS LINKED TO WHAT, OR HOW THE ASSESSEE WILL BE LIABLE TO PAY SUCH BROKERAGE. IN ABSENCE OF SUFFICIENT MATERIAL BEFORE US, IT IS DIF FICULT TO GIVE FINDING AS TO ALLOWABILITY OF ENTIRE BROKERAGE IN THE YEAR OF PAY MENT ITSELF. IT IS ALSO NOTED THAT ASSESSEE ALSO TREATS THE EXPENSES AS TO BE AMO RTIZED OVER PERIOD BEYOND THE RELEVANT FINANCIAL YEAR. THEREFORE, WE REMIT T HE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THE FACTS AFRESH. THE ASSESSING OFFICER SHALL CONSIDER HOW THE BROKERAGE PAID IS WORKED OUT AND IS LINKED TO WHAT NATURE OF INCOME RECEIVABLE BY THE ASSESSEE. IF TH E BROKERAGE PAYABLE IS LINKED TO HIRE CHARGES WHICH ARE RECEIVABLE OVER PE RIOD OF HIRE PURCHASE FINANCE, THE BROKERAGE WILL ALSO BE ALLOWED ACCORDI NGLY. HOWEVER, IF IT IS OTHERWISE, THE SAME WILL BE ALLOWED IN THE YEAR OF PAYMENT ITSELF. EVEN IN CASE OF ASHIMA SYNTEX LTD. (SUPRA) THE SPECIAL BENC H OF ITAT HAS LAID DOWN SIMILAR CRITERIA. ACCORDINGLY THE MATTER IS R ESTORED BACK TO THE FILE OF 18 THE ASSESSING OFFICER TO BE DECIDED IN ACCORDANCE W ITH OUR ABOVE OBSERVATIONS. 25. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 31 ST JULY 2009. SD/- SD/- (I.P. BANSAL) (DEEPAK R. SHAH) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 31 ST JULY 2009. COPY OF THE ORDER FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR BY ORDER *MG DEPUTY REGISTRAR, ITAT.
