Demuric Holdings Pvt. Ltd., Vapi V. The Addl. CIT., Vapi Circle, Vapi

ITA 264/AHD/2016

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 2084 (ITAT-SURAT)
• Duration Of Justice: 2 year(s) 1 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-03-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Assessment Year: 2011-2012
• Appeal Filed On: 03-02-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MRS R KAVITHA
• Assessee Lawyers: SAURABH N SOPARKAR; URVASHI SJHODHAN
• Keywords: Business expenditure; Earning of tax free income; Question of law; Revenue expenditure; Capital expenditure; Rule 8D
• Section: 37; 11; 14A; 115JB; 37(1)

Judgement Text

M/S. DEMURIC HOLDINGS PVT. LTD /I.T.A.NO.264/AHD/2016/SRT /A.Y.:2011-12 PAGE 1 OF 19 , , IN THE INCOME TAX APPELLATE TRIBUNAL SURAT BENCH, SURAT . . , . . , BEFORE SHRI C.M.GARG, JUDICIAL MEMBER AND SHRI O.P.MEENA, ACCOUNTANT MEMBER . . ./ I.T.A NO.264/AHD/2016/SRT / A.Y.:2011-12 M/S. DEMURIC HOLDINGS PVT. LTD, A-2/1, GIDC ESTATE, BULSAR DISTRIST, VAPI 396 195. PAN: AAACD 8503E V S . ADDITIONAL COMMISSIONER OF INCOME TAX, VAPI CIRCLE, VAPI. APPELLANT /RESPONDENT /ASSESSEE BY SHRI SAURABH N. SOPARKAR, SR. ADVOCATE & MS. URVASHI SJHODHAN, ADV. /REVENUE BY MRS R.KAVITHA , SR.DR / DATE OF HEARING: 09 .0 3 .2018 /PRONOUNCEMENT ON 26 .04.2018 /O R D E R PER O. P. MEENA, ACCOUTANT MEMBER: 1. THIS APPEAL FILED BY THE ASSESSEE DIRECTED AGAINST THE ORDER OF LD.COMMISSIONER OF INCOME TAX(APPEALS), VALSAD DATED 02.11.2015 FOR THE ASSESSMENT YEAR 2011-12 U/S.143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT). M/S. DEMURIC HOLDINGS PVT. LTD /I.T.A.NO.264/AHD/2016/SRT /A.Y.:2011-12 PAGE 2 OF 19 2. ADDITIONAL GROUNDS OF APPEAL: DURING THE CURRENCY OF APPEAL, THE ASSESSEE HAS ALSO FILED AN ADDITIONAL GROUND OF APPEAL BY STATING THAT THE ASSESSING OFFICER (AO) AND LD. COMMISSIONER OF INCOME TAX(APPEALS) (IN SHORT CIT-(A) OUGHT TO HAVE NOT TO MAKE ADDITION FOR DISALLOWANCE U/S.14A WHILE DETERMINING THE BOOK PROFIT U/S.115JB OF THE ACT. 3. THE LD.COUNSEL OF THE ASSESSEE SUBMITTED THE ADDITIONAL GROUND BE ADMITTED AS IT IS PURELY LEGAL ISSUE GOES TO THE ROOT OF THE MATTER AND NO ENQUIRY IS REQUIRED TO DECIDE THE SAME AS ALL FACTS ARE ALREADY ON RECORD. THE LD.COUNSEL HAS RELIED IN THE CASE OF NATIONAL THERMAL POWER COMPANY LTD. VS CIT (1998) 229 ITR 383 (SC) IN SUPPORT OF HIS CONTENTION. 4. WE HAVE CONSIDERED THE FACTS AND FIND THAT THE LEGAL ADDITIONAL GROUND BEING LEGAL ONE, HENCE, SAME IS ALLOWED TO BE ADMITTED FOLLOWING THE RATIO OF HON'BLE SUPREME COURT IN THE CASE OF NATIONAL THERMAL POWER COMPANY LTD. VS. CIT (SUPRA) WHEREIN IT WAS HELD THAT THE ADDITIONAL GROUND OF APPEAL CAN BE ADMITTED WHERE THE ISSUE INVOLVED IS PURE QUESTION OF LAW NOT INVOLVING ANY INVESTIGATION OF FACTS. ACCORDINGLY, WE ADMIT THE ADDITIONAL GROUND AND PROCEED TO DECIDE ADDITIONAL GROUND. M/S. DEMURIC HOLDINGS PVT. LTD /I.T.A.NO.264/AHD/2016/SRT /A.Y.:2011-12 PAGE 3 OF 19 5. ADDITIONAL GROUND STATES THAT THE DISALLOWABLE EXPENDITURE U/S.14A OF THE ACT COMPUTED WITH REFERENCE TO RULE 8D SHOULD NOT BE ADDED WHILE COMPUTING INCOME U/S.115JB OF THE ACT. 6. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AMOUNT OF EXPENDITURE RELATABLE TO EXEMPT INCOME AS CONTEMPLATED IN CLAUSE (F) TO EXPLANATION 1 TO SECTION 115JB (2) COULD NOT BE ARRIVED AT BY RESORTING TO SECTION 14A READ WITH RULE 8D. FOR THIS PROPOSITION, THE LEARNED COUNSEL HAS PLACED RELIANCE ON THE DECISION ON THE SPECIAL BENCH OF TRIBUNAL IN THE CASE OF ACIT VS. VIREET INVESTMENT (P) LTD. [2017] 82 TAXMANN.COM (DELHI TRIBUNAL) (SB) WHEREIN IT WAS HELD THAT COMPUTATION UNDER CLAUSE (F) OF EXPLANATION 1 TO SECTION 115JB IS TO BE MADE WITHOUT RESORTING TO THE COMPUTATION AS CONTEMPLATED U/S.14A READ WITH RULE 8D. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER RELIED ON THE JUDGEMENT OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT V. ALEMBIC LTD. [TAX APPEAL NO. 1249 OF 2014 DATED 20.07.2016 (GUJARAT] WHEREIN RELYING ON THE DECISION OF CIT V. GUJARAT STATE FERTILIZERS & CHEMICALS LTD. [2013] 358 ITR 323 (GUJARAT) HELD THAT NO DISALLOWANCE OF INTEREST EXPENDITURE MADE U/S. 14A TO BE MADE WHILE COMPUTING BOOK PROFIT UNDER SECTION 115JB OF THE ACT. M/S. DEMURIC HOLDINGS PVT. LTD /I.T.A.NO.264/AHD/2016/SRT /A.Y.:2011-12 PAGE 4 OF 19 7. THE LD. D. R. CONTENDED THAT THE OBJECT OF SECTION 14A AND CLAUSE (F) OF EXPLANATION 1 TO SECTION 115JB IS THAT EXPENDITURE RELATABLE TO EXEMPT INCOME IS REQUIRED TO BE ADDED WHILE COMPUTING INCOME AS PER PROVISION OF SECTION 115JB OF THE ACT , THEREFORE, IT IS DESIRABLE TO INVOKE THE PROVISIONS OF SECTION 14A READ WITH RULE 8D FOR FINDING OUT TO EXPENDITURE RELATABLE TO ANY INCOME WHICH IS EXEMPT AND SAME IS REQUIRED TO BE ADDED WHILE COMPUTING THE BOOK PROFIT UNDER SECTION 115JB OF THE ACT. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE ARE OF THE VIEW THAT DISALLOWANCE OF EXPENDITURE RELATABLE TO EXEMPT INCOME AS COMPUTED BY THE ASSESSEE IN COMPUTATION OF TOTAL INCOME CAN BE CONSIDERED WHILE COMPUTING THE INCOME UNDER CLAUSE (F) OF EXPLANATION 1 BELOW SECTION 115JB (2) OF THE ACT, IN THE LIGHT OF DECISION OF SPECIAL BENCH IN THE CASE OF ACIT VS. VIREET INVESTMENT (P) LTD. [2017] 82 TAXMANN.COM (DELHI TRIBUNAL) (SB) AND THE JUDGEMENT OF HON`BLE JURISDICTIONAL HIGH COURT OF GUJARAT IN THE CASE OF CIT V. ALEMBIC LTD. [TAX APPEAL NO. 1249 OF 2014 DATED 20.07.2016 (GUJARAT] WHEREIN RELYING ON THE DECISION OF CIT V. GUJARAT STATE FERTILIZERS & CHEMICALS LTD. [2013] 358 ITR 323 (GUJARAT) HELD THAT NO DISALLOWANCE OF INTEREST M/S. DEMURIC HOLDINGS PVT. LTD /I.T.A.NO.264/AHD/2016/SRT /A.Y.:2011-12 PAGE 5 OF 19 EXPENDITURE MADE U/S. 14A TO BE MADE WHILE COMPUTING BOOK PROFIT UNDER SECTION 115JB OF THE ACT. ACCORDINGLY , WE DIRECT THAT DISALLOWABLE EXPENSES ARRIVED AT BY RESORTING TO SECTION 14A READ WITH RULE 8D SHOULD NOT BE ADDED WHILE COMPUTING THE BOOK PROFIT UNDER SECTION 115JB OF THE ACT. SINCE THE ASSESSEE HAS SUO- MOTO MADE DISALLOWANCE OF RS.1 LAKH IN COMPUTATION OF INCOME AND SAME HAS BEEN ADDED BY THE ASSESSEE ITSELF WHILE COMPUTING THE INCOME UNDER THE PROVISIONS OF SECTION 115JB OF THE ACT, THEREFORE, THE SAID AMOUNT OF DISALLOWANCE COULD BE CONSIDERED FOR COMPUTATION UNDER CLAUSE (F) OF EXPLANATION 1 TO SECTION 115JB (2) OF THE ACT. ACCORDINGLY, THIS ADDITIONAL GROUND OF APPEAL IS THEREFORE, ALLOWED IN THE TERMS AS INDICATED ABOVE 9. GROUND NO.1 PERTAINS TO DISALLOWANCE OF EXPENSES AMOUNTING TO RS.5,67,676/- BY INVOKING THE PROVISIONS CONTAINED IN RULE 8D READ WITH SECTION 14A OF THE ACT WITHOUT ADJUDICATING ON THE POINTS IN APPEAL. 10. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HAS CLAIMED INTEREST EXPENDITURE OF RS.3,48,99,488/- AS AGAINST INTEREST INCOME TO THE TUNE OF RS.4,00,77,930/- ON THE INTEREST BEARING ADVANCES GIVEN OUT OF THE BORROWED FUNDS AS WELLS AS EARNED THE DIVIDEND INCOME TO THE TUNE OF RS.24,468/- ON THE INVESTMENTS MADE. HOWEVER, DISALLOWANCE OF RS.1 LAKH ARE MADE BY THE M/S. DEMURIC HOLDINGS PVT. LTD /I.T.A.NO.264/AHD/2016/SRT /A.Y.:2011-12 PAGE 6 OF 19 ASSESSEE SUO-MOTO U/S. 14A OF THE ACT. THE AO, THEREFORE ASKED TO EXPLAIN AS TO WHY DISALLOWANCE IN RELATION TO EXEMPT INCOME SHOULD NOT BE MADE AS PER PROVISIONS OF SECTION 14A OF THE ACT. IT WAS FURTHER NOTICED THAT THE BOOKS OF ACCOUNTS OF THE ASSESSEE INDICATES ACCUMULATED LOSS OF RS.2,27,00,91,815/-. IT WAS ALSO NOTED BY THE AO THAT THE ASSESSEE HAS UTILISED BORROWED FUNDS AMOUNT OF RS.3,90,70,04,809/- IN COMPOSITE MANNER I.E. IN ADVANCING LOAN AND INVESTMENT IN THE SHARES. THE TOTAL INTEREST EXPENSES OF AMOUNT OF THESE BORROWINGS WERE AT RS.3,48,99,488/-. TAKING INTO CONSIDERATION OF ALL THE FACTS AND SUBMISSIONS OF THE ASSESSEE OF AND APPLICABILITY OF THE PROVISIONS OF SECTION 14A R.W. RULE 8D, THE AO CONSIDERED THE WORKING OF DISALLOWANCE UNDER RULE 8D FILED BY THE ASSESSEE VIDE LETTER DATED 03.12.2013 WHICH HAS BEEN WORKED OUT BY THE ASSESSEE TO THE TUNE OF RS.3,076/-. HOWEVER, DURING THE HEARING THE ASSESSEE FURTHER REVISED THE DISALLOWANCE U/S.14A R.W. RULE 8D TO RS.5,67,676/- VIDE SUBMISSIONS DATED 31.12.2013, HENCE, THE AO HAS CONSIDERED THE DISALLOWANCE U/S.14A R.W. RULE 8D AT RS.5,67,676/-. SINCE THE ASSESSEE HAS ALREADY MADE DISALLOWANCE OF RS.1 LAKH IN THE COMPUTATION TOTAL INCOME REMAINING AMOUNT OF RS.4,67,676/- WAS DISALLOWED U/S.14A OF THE ACT. M/S. DEMURIC HOLDINGS PVT. LTD /I.T.A.NO.264/AHD/2016/SRT /A.Y.:2011-12 PAGE 7 OF 19 11. BEING AGGRIEVED WITH THE ORDER OF THE AO, THE ASSESSEE FILED APPEAL BEFORE THE CIT(A). IT WAS CLAIMED BEFORE THE CIT (A) THAT MAXIMUM AMOUNT OF DISALLOWANCE U/S.14A COULD BE AT RS.3,076/- COMPUTED AS PER THE ASSESSEES STAND. HOWEVER, WITHOUT PREJUDICE, IT WAS SUBMITTED THAT MAXIMUM AMOUNT OF DISALLOWANCE U/S.14A BE RESTRICTED TO THE DIVIDEND INCOME CLAIMED EXEMPT FROM TAX AMOUNT TO RS.24,468/- IN THE LIGHT OF DECISION IN THE CASE OF ACIT VS. PUNJAB STATE CO-OPERATIVE AND MARKETING (ITAT CHANDIGARH). 12. WITHOUT PREJUDICE, THE APPELLANT FURTHER SUBMITTED THAT MAXIMUM AMOUNT OF DISALLOWANCE U/S.14A BE RESTRICTED TO SAME AMOUNT OF RS.1 LAKH DISALLOWED IN THE RETURN OF INCOME. FURTHER, IN THE ALTERNATE THE MAXIMUM AMOUNT OF DISALLOWANCE U/S.14A OF THE ACT BE RESTRICTED THE DIVIDEND AMOUNT OF RS.24,460/- OR DISALLOWANCE AT RS.3076 U/S.14A R.W.RULE 8D OF THE RULES OR AT RS. 1 LAKH SUO-MOTO DISALLOWED BY THE ASSESSEE. HOWEVER, THE CIT(A) OBSERVED THAT THE APPELLANT IS NOT SURE ABOUT THE QUANTUM OF DISALLOWANCE REQUIRED TO BE MADE U/S.14A R. W. RULE 8D OF THE INCOME TAX RULES. THE APPELLANT SUO-MOTO MAKES A DISALLOWANCE OF RS.1 LAKH ON ADHOC BASIS IN THE COMPUTATION OF TOTAL INCOME FILED WITH THE RETURN OF INCOME. BUT DURING THE ASSESSMENT M/S. DEMURIC HOLDINGS PVT. LTD /I.T.A.NO.264/AHD/2016/SRT /A.Y.:2011-12 PAGE 8 OF 19 PROCEEDINGS, HE IS CHANGING THIS AMOUNT TO RS.3,076/- AND PLEADS FOR THE SAME AND ULTIMATELY REVISED THE DISALLOWANCE AT RS.5,67,676/- VIDE SUBMISSIONS DATED 31.12.2013. CONSIDERING THESE FACTS, THE LD.CIT(A) HAS CONFIRMED THE DISALLOWANCE OF RS.5,67,676/- U/S.14A R.W. RULE 8D OF THE ACT AS MADE BY THE AO. 13. BEING AGGRIEVED, THE ASSESSEE FILED THIS APPEAL BEFORE US. THE LD.COUNSEL SUBMITTED THAT THE ASSESSEE HAS DEBITED TOTAL EXPENSES OF RS.3,96,73,506/- OUT OF WHICH RS.28,46,699/- HAS BEEN DISALLOWED IN THE COMPUTATION OF INCOME, THE RESIDUAL AMOUNT OF RS.3,93,88,807/- OUT OF WHICH INTEREST AMOUNTING TO RS.3,48,99,488/- AND REGISTRATION CHARGES OF RS.42,51,264/- IS NOT FOR EARNING THE DIVIDEND INCOME. THEREFORE, THE AR CLAIMED THAT AFTER THE ADJUSTMENT OF INTEREST EXPENDITURE AGAINST THE INTEREST INCOME EARNED, NO INTEREST EXPENDITURE REMAINED TO BE DISALLOWED. FURTHER, THE RESIDUAL AMOUNT OF RS.2,38,055/- IS PURELY FOR STATUTORY COMPLIANCE AND RUNNING THE BUSINESS. THE ASSESSEE HAS WORKED OUT DISALLOWANCE UNDER RULE 8D AT RS.3,076/- ON DIVIDEND YIELDING INVESTMENTS. HOWEVER, WITHOUT PREJUDICE, THE ASSESSEE HAS SUO-MOTO DISALLOWED RS.1 LAKH IN THE COMPUTATION OF INCOME, THEREFORE, THE DISALLOWANCE SHOULD BE RESTRICTED TO THE AMOUNT OF DIVIDEND INCOME. HOWEVER, DUE TO M/S. DEMURIC HOLDINGS PVT. LTD /I.T.A.NO.264/AHD/2016/SRT /A.Y.:2011-12 PAGE 9 OF 19 RELUCTANCE, THE COMPANY HAS DISALLOWED AN AMOUNT OF RS.1 LAKH IN THE COMPUTATION OF INCOME. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND GONE THROUGH THE ORDERS OF THE LOWER AUTHORITIES. IT IS NOTED THAT THE ASSESSEE HAS EARNED THE DIVIDEND INCOME AT RS.24,468/-. HOWEVER, THE EXPENDITURE INCURRED IN RELATION TO EARNING, SUCH EXEMPT INCOME HAS NOT QUANTIFIED DURING THE COURSE OF ASSESSMENT PROCEEDINGS. EVEN THOUGH THE ASSESSEE HAS SUO-MOTO DISALLOWED RS.1 LAKH TOWARDS EARNING OF EXEMPT INCOME. THE AO INVOKED THE PROVISIONS OF RULE 8D AND WORKED OUT THE DISALLOWANCE OF RS.5,76,767/-. HOWEVER, THE ASSESSEE WAS STILL NOT SURE THAT WHAT AMOUNT OF DISALLOWANCE SHOULD BE MADE AND OFFERED THE DISALLOWANCES, WHICH VARIES TO AMOUNTS AT RS.2,38,055/-, RS.24,468/-, RS.3,076/- AND RS.1 LAKHS OF RS.5,76,767/-. THEREFORE, CONSIDERING THE TOTALITY OF THE FACTS, IT WOULD MEET THE END OF JUSTICE, IF THE DISALLOWANCE IS RESTRICTED TO SUO-MOTO DISALLOWANCE OF RS.1 LAKH MADE BY THE ASSESSEE IN RETURN OF INCOME. THEREFORE, THE DISALLOWANCE U/S.14A READ WITH RULE 8D ARE RESTRICTED TO RS.1 LAKH ONLY. THIS GROUND IS THEREFORE PARTLY ALLOWED. M/S. DEMURIC HOLDINGS PVT. LTD /I.T.A.NO.264/AHD/2016/SRT /A.Y.:2011-12 PAGE 10 OF 19 15. GROUND NO.2 RELATING TO DISALLOWANCE OF RESTRUCTURING EXPENSES AMOUNTING TO RS.42,51,264/- U/S.37 OF THE ACT AND ALTERNATIVELY U/S.35D OF THE ACT. 16. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE ASSESSEE IS IN THE BUSINESS OF INVESTMENT/TRADING IN SECURITIES AND FINANCE ACTIVITIES SUCH AS LANDING, BORROWING OF FUNDS WITH THE LIBERALIZATION OF FBI POLICIES AND NEED FOR EXPANSION OF INVESTMENT ACTIVITIES ABROAD AND WITHIN INDIA. THE ASSESSEE HAS DECIDED TO RE-STRUCTURE ITS CAPITAL AND TO CONSOLIDATE AND TO RE- GROUP ITS HOLDING IN SISTER CONCERNS TO TAKE ADVANTAGE OF THE CHANGED SCENARIO, ACCORDINGLY, THE COMPANY HIRED SERVICES OF E & Y PVT. LTD., A PROFESSIONAL FIRM IN PREPARATION RESTRUCTURING SCHEME. AS A RESULT OF WHICH THE ASSESSEE COMPANY HAD PAID RS.42,51,264/- FOR IT, BY WHICH THE COMPANY HAS BEEN ABLE REDUCE INTEREST EXPENDITURE FROM RS.11.23 CRORES IN FINANCIAL YEAR 2009-10 TO RS.3.48 CRORES IN FINANCIAL YEAR 2010-11. THE COMPANY HAS ALSO INVESTED 10% OF NON-CONVERTIBLE DEBENTURES AMOUNTING TO RS.45.01 CRORES AND 10.25% IN COMMERCIAL PAPERS AMOUNTING TO RS.13.87 CRORES. THE INCOME FROM THESE INVESTMENT HAS BEEN OFFERED FOR TAX IN SUBSEQUENT YEARS. THEREFORE, THE EXPENDITURE INCURRED WERE CLAIMED TO BE ALLOWABLE AS DEDUCTION M/S. DEMURIC HOLDINGS PVT. LTD /I.T.A.NO.264/AHD/2016/SRT /A.Y.:2011-12 PAGE 11 OF 19 U/S.37(1) OF THE ACT. HOWEVER, THE AO REJECTED THE CLAIM OF DEDUCTION OF THIS EXPENDITURE ON THE GROUND THAT THE AMOUNT OF EXPENDITURE INCURRED BY ASSESSEE WOULD GIVE LONG LASTING AND ENDURING BENEFIT AND IT IS ALSO INCREASING THE CAPITAL BASE OF THE ASSESSEE, HENCE, THIS EXPENDITURE IS NOT ALLOWABLE U/S. 37 OF THE ACT. IN DOING SO, THE AO PLACED RELIANCE ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF BROOKE BOND INDIA LTD. VS. CIT [1997] 225 ITR 798(SC) AND ALSO CIT VS. GENERAL INSURANCE CORPORATION (2006) 286 ITR 232. THE ASSESSEE HAS ALSO CLAIMED DEDUCTION U/S.35D OF THE ACT. THE SAME WAS ALSO REJECTED ON THE GROUND THAT SECTION 35D ALLOWS AMORTIZATION OF CERTAIN PRELIMINARY EXPENSES AND THE DEDUCTION IS ONLY ALLOWABLE IF THE RELEVANT CONDITIONS ARE FULFILLED WHICH HAS BEEN NAMED IN PARA 4 OF THE ASSESSMENT ORDER. 17. BEING AGGRIEVED, THE ASSESSEE FILED THIS APPEAL BEFORE THE CIT(A), WHEREIN IT WAS CLAIMED THAT THE EXPENDITURE IS ALLOWABLE U/S.37(1) OF THE ACT, YET, IT IS ALSO ALLOWABLE U/S.35D OF THE ACT. IT WAS FURTHER CLAIMED THAT THE EXPENDITURE IS REVENUE IN NATURE. IT WAS ALSO CONTENDED THAT THE DECISION OF BROOKE BOND INDIA LTD. VS. CIT [1997] 225 ITR 798(SC) IS NOT APPLICABLE AS EXPENDITURE INCURRED CAN BE UTILISED FOR CREATING FOR PROFIT MAKING ACTIVITY M/S. DEMURIC HOLDINGS PVT. LTD /I.T.A.NO.264/AHD/2016/SRT /A.Y.:2011-12 PAGE 12 OF 19 AND NOT FOR PROFIT MAKING APPARATUS AS SHARE CAPITAL. THE SERVICES AVAILED WERE CREATING A PROFIT MAKING ACTIVITY INVOLVING HOST SERVICES AND NOT SIMPLY INCREASING THE CAPITAL BASE TO FALL WITHIN THE AMBIT OF DECISION LAID DOWN IN THE CASE OF BROOKE BOND INDIA LTD. VS. CIT [1997] 225 ITR 798(SC). IT WAS FURTHER, SUBMITTED THAT THE SIMILAR EXPENDITURE WAS ALLOWED IN THE ASSESSMENT YEAR 2009-10 & 2010-11 BY THE AO. FURTHER, THE CIT(A) WAS OF THE VIEW THAT THE EXPENDITURE INCURRED BY THE APPELLANT IS IN FACT TO BRING FDI TO THE APPELLANT COMPANY AS WELL AS TO COMPANIES. IT AMOUNTS TO INCREASING THE CAPITAL BASE, HENCE, THE EXPENDITURE INCURRED FOR THIS IS NOT REVENUE EXPENDITURE. THE HON'BLE APEX COURT HAS GIVEN THE FINDING THAT THE EXPENDITURE INCURRED FOR INCREASING THE CAPITAL BASE SUCH AS ISSUE OF SHARES IS RELATED TO THE EXPANSION OF CAPITAL BASE. IT HAS NOT BEEN DISCLOSED BY THE AR OF THE APPELLANT THAT IN THIS COMPANY/COMPANIES THE FDI WILL BE BROUGHT IN. THEREFORE, THE CIT(A) DENIED THE CLAIM OF THE ASSESSEE BY HOLDING THAT THE EXPENDITURE CANNOT BE ALLOWED U/S.37(1) OR ALTERNATIVELY U/S.35D OF THE ACT, BECAUSE EXPENDITURE IS NOT OF REVENUE IN NATURE. 18. BEING AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. THE LD. SENIOR ADVOCATE SUBMITTED THAT WITH THE M/S. DEMURIC HOLDINGS PVT. LTD /I.T.A.NO.264/AHD/2016/SRT /A.Y.:2011-12 PAGE 13 OF 19 LIBERALIZATION OF FDI, THE COMPANY HAS DECIDED TO RE-STRUCTURE ITS CAPITAL AND TO CONSOLIDATE AND RE-STRUCTURE ITS HOLDING IN SISTER CONCERNS TO TAKE ADVANTAGE OF THE CHANGED SCENARIO, THEREFORE, SERVICES OF E & Y PVT. LTD. WERE HIRED FOR RESTRUCTURING THE MANAGEMENT AS TO HOW THE COMPANY CAN AVAIL DIFFERENT FUNDS FROM OVERSEAS COUNTRIES WHICH OBTAIN RELEVANT APPROVAL FOR ACQUIRING THE RELEVANT STATUS OF FOREIGN AND INDIAN COMPANY RE- STRUCTURE OF SHAREHOLDING PATTERN, OBTAIN PROFESSIONAL AND EXEMPTIONS TO BE SOUGHT FROM SEBI ALLOWING NECESSARY COMPLIANCES FOR WHICH THE ASSESSEE COMPANY HAS PAID AN AMOUNT OF RS.42,51,264/- TO E & Y PVT. LTD. ON ACCOUNT OF ASSISTANCE RENDERED BY THE CHARTERED ACCOUNTANTS, THE COMPANY WAS ABLE TO COMPLY WITH VARIOUS LAW AND REGULATIONS. THEREFORE, THIS EXPENDITURE WAS CLAIMED AS REVENUE EXPENDITURE BY THE ASSESSEE COMPANY IN THE RETURN OF INCOME. AS A RESULT OF RE-STRUCTURING THE COMPANY WAS ABLE REDUCE THE INTEREST EXPENDITURE AND TO MAKE INVESTMENT IN NON-CONVERTIBLE DEBENTURES AND IN COMMERCIAL PAPERS. THE INCOME FROM WHICH WAS OFFERED IN FINANCIAL YEAR 2011-12. THIS EXPENDITURE INCURRED WAS FOR ENHANCING THE INCOME AND WAS IN CONFORMITY WITH THE PROVISION OF SECTION 37 OF THE ACT AS THE SAME WERE FOR THE PURPOSE OF BUSINESS. THE LD. SENIOR ADVOCATE ALSO PLACED RELIANCE ON THE M/S. DEMURIC HOLDINGS PVT. LTD /I.T.A.NO.264/AHD/2016/SRT /A.Y.:2011-12 PAGE 14 OF 19 DECISION IN THE CASE OF CIT VS SOUTH INDIAN SUGARS LTD. (2005) 275 ITR 491 (MAD), WHICH SUPPORTED THE CASE OF THE COMPANY THAT IF THE COMPANY HAD INCURRED THE EXPENDITURE ON LEGAL FINANCIAL AND INDUSTRIAL CONSULTATIONS, THEN IT COULD BE SAID THAT IT IS WITHIN THE PURVIEW OF BUSINESS OF THE COMPANY. 19. THE LD.AR FURTHER CITED THE DECISION OF CIT VS JCT ELECTRONICS LTD. (2010) 188 TAXMANN.COM 191 (PUNJAB & HARYANA) WHEREIN IT WAS HELD THAT EXPENDITURE FOR CARRYING OUT RE- STRUCTURING AND VIABILITY STATUS AND FOR PREPARATION OF RE- CONSTRUCTING PROPOSAL CONCLUSION OF THE TRIBUNAL THAT AMOUNT PAID TO THE CAS AND A COMPANY AS CONSULTATION CHARGES FOR RE- STRUCTURING OF THE ASSESSEE COMPANY WAS INCURRED FOR EARNING INCOME AND WAS THEREFORE ALLOWABLE AS REVENUE EXPENDITURE. THE HON`BLE HIGH COURT HELD AS UNDER: 3. THERE IS NO STATUTORY DEFINITION OF EXPRESSION 'CAPITAL EXPENDITURE'. THE COURTS HAVE REPEATEDLY HELD THAT SUCH EXPRESSION HAS TO BE CONSTRUED IN A BUSINESS SENSE SAVE INSOFAR AS THERE MAY BE RULES OF CONSTRUCTION APPLICABLE TO IT. THE EXPRESSION OCCURRING IN S. 37(1) OF THE ACT MAKES ITS MEANING MORE ELASTIC IN ITS APPLICATION TO THE FACTS OF EACH CASE. THIS IS CONSISTENT VIEW OF THE COURTS. THE WORD 'CAPITAL' CONNOTES PERMANENCY AND CAPITAL EXPENDITURE IS THEREFORE, CLOSELY AKIN TO THE CONCEPT OF SECURING SOMETHING, TANGIBLE OR INTANGIBLE PROPERTY, CORPOREAL OR INCORPOREAL RIGHT SO THAT THEY COULD BE OF A LASTING OR ENDURING BENEFIT TO THE ENTERPRISE IN ISSUE. REVENUE NATURE EXPENDITURE, ON THE OTHER HAND, IS OPERATIONAL IN ITS PERSPECTIVE AND SOLELY INTENDED FOR THE FURTHERANCE OF THE ENTERPRISE. [SEE CIT VS. WOLKEM (P) LTD. CO. (2002) 175 CTR (RAJ) 303 : (2002) 258 ITR 350 (RAJ)]. IN THE INSTANT CASE, THE CONCLUSION REACHED BY THE TRIBUNAL WAS THAT THE EXPENDITURE TOWARDS CONSULTATION CHARGES FOR RESTRUCTURING OF THE COMPANY AND THE AMOUNT PAID TO THE CHARTERED ACCOUNTANTS WERE INCURRED FOR EARNING INCOME. FURTHER, FINDING OF THE TRIBUNAL WAS THAT EXPENSES WERE ALSO INCURRED IN CONFORMITY WITH THE M/S. DEMURIC HOLDINGS PVT. LTD /I.T.A.NO.264/AHD/2016/SRT /A.Y.:2011-12 PAGE 15 OF 19 PROVISIONS OF SECTION 37 WHICH WERE MEANT FOR THE PURPOSES OF THE BUSINESS. THEREFORE, THE VIEW TAKEN BY THE TRIBUNAL WAS UNEXCEPTIONABLE. 20. ON THE OTHER HAND, THE LD. SENIOR DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDERS OF THE LOWER AUTHORITIES. 21. WE HAVE CONSIDERED THE FACTS AND PERUSED THE MATERIAL ON RECORD AND HEARD RIVAL SUBMISSIONS. IT IS SEEN THAT THE ASSESSEE WITH A VIEW TO TAKE ADVANTAGE OF LIBERALIZATION OF FDI POLICIES DECIDED TO RE-STRUCTURE ITS CAPITAL AND CONSOLIDATE AND RE- STRUCTURE ITS HOLDINGS IN SISTER CONCERNS. THEREFORE, THE ASSESSEE HAS AVAILED THE SERVICES OF PROFESSIONAL FIRM NAMED AS E & Y PVT. LTD. IN PREPARATION FOR RE-STRUCTURING SCHEME WHICH WAS INSTITUTED THE WORK OF APPLICATION OF FIPB FOR ACQUIRING THE STATUS OF FOREIGN AND INDIAN HOLDINGS, CORRESPONDENCE FROM SEBI WITH REGARD TO EXEMPTION AND TAKE OVER AND FOR FIPB APPROVAL FROM MINISTRY OF FINANCE ON WHICH THE ASSESSEE HAS INCURRED EXPENDITURE OF RS.42,51,264/- FOR THE SERVICES RENDERED BY THE CA FIRM. AS A RESULT OF THIS EXPENDITURE, THE ASSESSEE COMPANY WAS ABLE TO REDUCE THE INTEREST EXPENDITURE FROM RS.11.23 CRORES IN FINANCIAL YEAR 2009-10 TO RS.3.48 CRORES IN THE FINANCIAL YEAR 2010-11. FURTHER, THE ASSESSEE HAS INVESTED INTO 10% NON- CONVERTIBLE DEBENTURES AMOUNT TO RS.42.01 CRORES AND 10.25% IN COMMERCIAL PAPER AMOUNTING TO RS.13.87 CRORES OF WHICH INCOME M/S. DEMURIC HOLDINGS PVT. LTD /I.T.A.NO.264/AHD/2016/SRT /A.Y.:2011-12 PAGE 16 OF 19 WAS OFFERED TO TAX IN THE FINANCIAL YEAR 2011-12. FROM THESE FACTS, IT IS CLEAR THAT THE EXPENDITURE FOR RE-STRUCTURING WAS INCURRED FOR ENHANCING THE INCOME AND THEREFORE WAS IN CONFORMITY WITH THE PROVISIONS OF SECTION 37 OF THE ACT AS THE SAME WAS INCURRED FOR THE PURPOSE OF BUSINESS. WE DO NOT FIND ANY MERIT IN THE CONTENTION OF THE REVENUE THAT THE EXPENDITURE INCURRED WAS CAPITAL IN NATURE AS TO DERIVE ENDURING AND LONG LASTING BENEFIT. SINCE THE EXPENDITURE WAS INCURRED TO INCREASE AND CREATING A PROFIT MAKING ACTIVITY AND NOT FOR PROFIT MAKING APPARATUS, THEREFORE, THE EXPENDITURE INCURRED WOULD BE OF REVENUE IN NATURE. THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. JCT ELECTRONICS (2010) 188 TAXMAN 191 (P & H) 371 (SLP DISMISSED) HAS HELD AS UNDER : 3. THERE IS NO STATUTORY DEFINITION OF EXPRESSION 'CAPITAL EXPENDITURE'. THE COURTS HAVE REPEATEDLY HELD THAT SUCH EXPRESSION HAS TO BE CONSTRUED IN A BUSINESS SENSE SAVE INSOFAR AS THERE MAY BE RULES OF CONSTRUCTION APPLICABLE TO IT. THE EXPRESSION OCCURRING IN S. 37(1) OF THE ACT MAKES ITS MEANING MORE ELASTIC IN ITS APPLICATION TO THE FACTS OF EACH CASE. THIS IS CONSISTENT VIEW OF THE COURTS. THE WORD 'CAPITAL' CONNOTES PERMANENCY AND CAPITAL EXPENDITURE IS THEREFORE, CLOSELY AKIN TO THE CONCEPT OF SECURING SOMETHING, TANGIBLE OR INTANGIBLE PROPERTY, CORPOREAL OR INCORPOREAL RIGHT SO THAT THEY COULD BE OF A LASTING OR ENDURING BENEFIT TO THE ENTERPRISE IN ISSUE. REVENUE NATURE EXPENDITURE, ON THE OTHER HAND, IS OPERATIONAL IN ITS PERSPECTIVE AND SOLELY INTENDED FOR THE FURTHERANCE OF THE ENTERPRISE. [SEE CIT VS. WOLKEM (P) LTD. CO. (2002) 175 CTR (RAJ) 303 : (2002) 258 ITR 350 (RAJ)]. M/S. DEMURIC HOLDINGS PVT. LTD /I.T.A.NO.264/AHD/2016/SRT /A.Y.:2011-12 PAGE 17 OF 19 22. IT WAS FURTHER HELD BY THE HON`BLE HIGH COURT THAT AN EXPENSE INCURRED FOR ACQUISITION OF SOURCE OF PROFIT OR INCOME WOULD, IN THE ABSENCE OF ANY CONTRARY CIRCUMSTANCE BE IN THE NATURE OF CAPITAL EXPENDITURE AS AGAINST THIS AN EXPENDITURE WHICH ENABLES TO PROFIT MAKING STRUCTURE TO WORK MORE EFFECTIVELY LEAVING THE SOURCE OR PROFIT MAKING STRUCTURE UNTOUCHED WOULD BE IN THE NATURE OF REVENUE EXPENDITURE. IN OTHER WORDS, EXPENDITURE INCURRED TO THE FINE TUNE TRADING OPERATIONS TO ENABLE THE MANAGEMENT TO RUN THE BUSINESS MORE EFFECTIVELY AND EFFICIENTLY AND PROFITABLE LEAVING THE FIXED ASSETS UNTOUCHED WOULD BE AN EXPENDITURE OF REVENUE IN NATURE, EVEN THOUGH, ADVANTAGE OBTAINED FOR AN INDEFINITE PERIOD. IN VIEW OF THIS MATTER, WE HOLD THAT THE DEDUCTION CLAIMED BY THE ASSESSEE IS ALLOWABLE DEDUCTION UNDER SECTION 37 OF THE ACT. 23. THE LD. SENIOR ADVOCATE HAS PLACED RELIANCE ON THE DECISION OF CIT VS. SOUTH INDIA SUGARS LTD. (2005) 275 ITR 491 WHEREIN IT WAS HELD THAT PAYMENT FOR RENDERING ADVICE OF LEGAL INDUSTRIAL MATTERS PROVISION LOCALLY, ORALLY OR THROUGH NEWS BULLETINS OR NATION BULLETINS IS ALLOWABLE AS BUSINESS EXPENDITURE BEING LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. M/S. DEMURIC HOLDINGS PVT. LTD /I.T.A.NO.264/AHD/2016/SRT /A.Y.:2011-12 PAGE 18 OF 19 24. IN THE LIGHT OF ABOVE DISCUSSION, WE ARE OF THE CONSIDERED OPINION THAT THE EXPENDITURE INCURRED BY THE ASSESSEE WAS FOR ENHANCEMENT INCOME AND FOR EARNING THE INCOME, HENCE, SUCH EXPENDITURE IS ALLOWABLE AS REVENUE EXPENDITURE WITHIN THE PROVISIONS OF SECTION 37(1) OF THE ACT. THE DECISION IN THE BROKE BOND INDIA LTD.(SUPRA) RELIED BY THE REVENUE WAS RENDERED IN THE CONTEXT WITH THE ISSUE OF SHARES WITH A VIEW TO INCREASE ITS SHARE CAPITAL AND IS RELATED TO THE EXPANSION OF CAPITAL BASE OF THE COMPANY AND THEREFORE WAS HELD TO BE CAPITAL EXPENDITURE, WHEREAS IN THE PRESENT CASE EXPENDITURE OF RS.42,51,264/- HAS BEEN INCURRED BY THE ASSESSEE FOR TAKING ADVICE ON THE MANAGEMENT OF THE COMPANY AS HOW THE COMPANY CAN AVAIL THESE FUNDS FROM OVERSEAS COUNTRIES AND OBTAIN RELEVANT APPROVALS FOR ACQUIRING THE STATUS OF FOREIGN AND INDIAN COMPANY AND RE- STRUCTURING OF SHAREHOLDING PATTERN OR RELEVANT GROUPS COMPANY, THEREFORE, SAID DECISION IS INAPPLICABLE TO PRESENT FACTS. SINCE THE ASSESSEE BEING A INVESTMENT TRADING IN SECURITIES COMPANY, THEREFORE SUCH ADVICE IS TAKEN TO ENHANCE THE FINANCIAL ACTIVITIES OF THE COMPANY, HENCE, THE EXPENDITURE SO INCURRED IS OF REVENUE IN NATURE. ACCORDINGLY, WE DELETE THE DISALLOWANCE OF RS.42,51,264/- CONFIRMED BY THE LOWER AUTHORITIES. THIS GROUND OF APPEAL IS THEREFORE IS ALLOWED. M/S. DEMURIC HOLDINGS PVT. LTD /I.T.A.NO.264/AHD/2016/SRT /A.Y.:2011-12 PAGE 19 OF 19 25. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED AND PARTLY SET-ASIDE FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 26-04-2018. SD/- SD/- ( . . /C.M. GARG) ( . . / O.P.MEENA) /JUDICIAL MEMBER /ACCOUNTANT MEMBER / SURAT, DATED: 26 TH APRIL, 2018 S.GANGADHARA RAO COPY OF ORDER SENT TO- ASSESSEE/AO/PR. CIT/ CIT (A)/ ITAT (DR)/GUARD FILE OF ITAT. BY ORDER / / TRUE COPY / / / / ASSISTANT REGISTRAR, SURAT