DCIT, Circle-16(2), Hyderabad, Hyderabad V. Mercury Projects Private Limited, Hyderabad, Hyderabad

ITA 450/HYD/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 6548 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 4 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-07-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 09-05-2018
• Assessment Year: 2011-2012
• Appeal Filed On: 08-03-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N SWAPNA
• Assessee Lawyers: P MURALI MOHAN RAO
• Keywords: Earning of tax free income; Capital expenditure
• Section: 143(3); 14A; 37(1)

Judgement Text

ITA NO 450 OF 2017 ME RCURY PROJECTS P LTD HYDERABAD. PAGE 1 OF 8 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S.RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO.450/HYD/2017 (ASSESSMENT YEAR: 2011-12) DY. COMMISSIONER OF INCOME TAX, CIRCLE 16(2) HYDERABAD VS M/S. MERCURY PROJECTS PRIVATE LIMITED, HYDERABAD PAN: AADCM9019R (APPELLANT) (RESPONDENT) FOR REVENUE : SMT. N. SWAPNA, DR FOR ASSESSEE : SHRI P. MURALI MOHAN RAO O R D E R PER SMT. P. MADHAVI DEVI, J.M. THIS IS REVENUES APPEAL FOR THE A.Y 2011-12 AGAINS T THE ORDER OF THE LEARNED CIT (A)-4, HYDERABAD, DATE D 20-03-2014. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APP EAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE DISALLOWANCE MADE U/S 14A BY HOLDING THAT ASSESSEE DID NOT EARN ANY EXEMPT INCOME. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF PRELIMINARY EXPENSES WRITTEN OFF U/ S 35D. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, AND IN LAW, THE LD. CIT(A) ERRED BY NOT FOLLOWING T HE SUPREME COURT DECISIONS IN THE CASE OF BROOKE BOND INDIA LTD VERSUS CIT (225 ITR 798) AND PUNJAB STATE DATE OF HEARING: 09.05 . 201 8 DATE OF PRONOUNCEMENT: 1 8.07 .2018 ITA NO 450 OF 2017 ME RCURY PROJECTS P LTD HYDERABAD. PAGE 2 OF 8 INDUSTRIAL DEVELOPMENT CORPORATION LTD VERSUS CIT(220 ITR 792) 4. THE APPELLANT PRAYS THAT THE ORDER OF LD. CIT(A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY, ENGAGED IN THE BUSINESS OF SUPPLY AND TRADING OF CO NSTRUCTION MATERIAL, CONSTRUCTION MACHINERY AND OTHER GOODS FO R INFRASTRUCTURE, REAL ESTATE AND POWER SECTOR, FILED ITS RETURN OF INCOME FOR THE A.Y 2011-12 ON 01.10.2011 ADMITTING INCOME OF RS.55,61,743. SUBSEQUENTLY, THE ASSESSEE FILED REVI SED RETURN OF INCOME ON 27.09.2012 ADMITTING AN INCOME OF RS.51,4 5,828. DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE ACT, THE AO OBSERVED FROM THE BALANCE SHEET OF THE COMPANY, THA T AN AMOUNT OF RS.26,60,52,000 HAS BEEN SHOWN UNDER THE HEAD I NVESTMENTS AS ON 31.03.2011 AND THAT NO INCOME HAS BEEN OFFERE D IN THE COMPUTATION OF INCOME FROM THE SAID INVESTMENTS. HE PRESUMED THAT INCOME IS NOT OFFERED FOR THE REASON THAT THE SAME IS EXEMPT FROM TAX. OBSERVING THAT THE ASSESSEE IS LIKELY TO EARN DIVIDEND INCOME WHICH IS EXEMPT FROM TAX, HE SOUGHT TO MAKE THE DISALLOWANCE U/S 14A OF THE ACT. THE ASSESSEE SUBMI TTED THAT IT HAS NOT EARNED ANY DIVIDEND INCOME DURING THE A.Y 2 011-12 AND HENCE NO DISALLOWANCE U/S 14A IS WARRANTED. THE AO WAS, HOWEVER, NOT CONVINCED WITH THE ASSESSEES CONTENTI ONS. THE AO MADE A REFERENCE TO THE DECISION OF THE ITAT DELHI IN THE CASE OF CHEMINVEST LTD, REPORTED IN (2009) 121 ITD 0318, WH EREIN IT WAS HELD THAT EVEN IF THERE IS NO INCOME EARNED BY THE ASSESSEE IN THE YEAR UNDER CONSIDERATION, WHICH WOULD BE EXEMPT FRO M TAX, A ITA NO 450 OF 2017 ME RCURY PROJECTS P LTD HYDERABAD. PAGE 3 OF 8 DISALLOWANCE U/S 14A TO BE MADE. ACCORDINGLY, HE MA DE THE DISALLOWANCE OF RS.58,44,724 UNDER RULE 8D OF THE I .T. RULES. 3. THEREAFTER, HE PROCEEDED TO CONSIDER THE PRELIMI NARY EXPENSES OF RS.22,40,400 U/S 35D. FROM THE P&L A/C OF THE ASSESSEE, THE AO U/S 35D OBSERVED THAT DURING THE F INANCIAL YEAR 2010-11, THE ASSESSEE HAS INCURRED R.O.C FEE EXPEND ITURE AMOUNTING TO RS.1,11,02,000 TOWARDS INCREASE IN AUT HORIZED SHARE CAPITAL AND DEBITED THE SAME TO THE P&L A/C A ND THAT THE ASSESSEE ADDED BACK THE EXPENDITURE AND CLAIMED 1/5 TH OF THE EXPENDITURE AS A DEDUCTION U/S 35D OF THE ACT. OBSE RVING THAT THE ROC FEE EXPENDITURE INCURRED TOWARDS INCREASE I N AUTHORIZED SHARE CAPITAL IS NOT ALLOWABLE U/S 35D, IT BEING CA PITAL IN NATURE AND RELYING UPON THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF BHARAT CARBON & RIBBON MFG. CO. LTD VS. CIT REPORTED IN (1981) 127 ITR 239 (DEL.) WHICH HAS BEEN APPROVE D BY THE HON'BLE SUPREME COURT IN THE CASE OF PUNJAB STATE I NDUSTRIAL DEVELOPMENT CORPORATION LTD VS. CIT (1997) 93 TAXMA NN.COM 5 (S.C), HE DISALLOWED A SUM OF RS.22,20,400 AND BROU GHT IT TO TAX. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT (A), WHO GRANTED RELIEF TO THE ASSESSEE AND THE REVENUE IS IN APPEAL BEFORE US BY RAISING THE GROUNDS REPRODUCED IN PARA -1 ABOVE. 4. AS FAR AS GROUND NO.1 IS CONCERNED, THOUGH THE LEARNED DR SUPPORTED THE ORDER OF THE AO, IT IS SEE N THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE D ECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD VS. CIT REPORTED IN 378 ITR 33 (DEL.) WHEREIN IT HAS BEEN H ELD THAT IF THERE ITA NO 450 OF 2017 ME RCURY PROJECTS P LTD HYDERABAD. PAGE 4 OF 8 IS NO DIVIDEND INCOME (WHICH IS EXEMPT FROM TAX) EA RNED DURING THE RELEVANT PERIOD, NO DISALLOWANCE U/S 14A CAN BE MADE. RESPECTFULLY FOLLOWING THE SAME, WE SEE NO REASON T O INTERFERE WITH THE ORDER OF THE CIT (A) WHO HAS FOLLOWED THE DECIS ION OF THE HON'BLE DELHI HIGH COURT. THEREFORE, GROUND OF APPE AL NO.1 IS REJECTED. 5. AS REGARDS GROUND NO.2, THE LEARNED DR RELIED UP ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CA SE OF BROOKE BOND INDIA LTD VS. CIT REPORTED IN (1997) 91 TAXMAN 26 (S.C) AND ALSO THE DECISION IN THE CASE OF PUNJAB STATE INDUS TRIAL DEVELOPMENT CORPORATION VS. CIT REPORTED IN (1997) 225 ITR 792 (S.C) IN SUPPORT OF THE DISALLOWANCE MADE BY THE AO . 6. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTH ER HAND, SUBMITTED THAT THE DECISIONS RELIED UPON BY T HE LEARNED DR ARE DISTINGUISHABLE IN FACTS FROM THE CASE OF THE A SSESSEE. HE SUBMITTED THAT THE HON'BLE SUPREME COURT IN THE CAS E OF BROOKE BOND INDIA LTD (SUPRA) WAS CONSIDERING THE ISSUE OF ALLOWABILITY OF EXPENDITURE INCURRED IN CONNECTION WITH INCREASE OF SHARE CAPITAL U/S 37(1) OF THE ACT AND ALSO IN THE CASE OF PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION (SUPRA) WHEREIN THE HON'BLE SUPREME COURT OBSERVED THAT THE AMOUNT OF RS.1,50,0 00 PAID TO THE REGISTRAR OF COMPANIES, AS FILING FEE FOR ENHAN CEMENT OF CAPITAL WAS NOT REVENUE BUT WAS CAPITAL IN NATURE. HE PLACED RELIANCE UPON THE DECISION OF THE HON'BLE HIGH COUR T OF RAJASTHAN IN THE CASE OF CIT VS. MULTI METALS LTD REPORTED IN (1991) 188 ITR 151 (RAJ.) AND ALSO THE DECISION OF THE HON'BLE PUN JAB & HARYANA ITA NO 450 OF 2017 ME RCURY PROJECTS P LTD HYDERABAD. PAGE 5 OF 8 HIGH COURT IN THE CASE OF CIT VS. NUCHEM LTD REPORT ED IN (2015) 59 TAXMANN.COM 455 (P&H) IN SUPPORT OF ALLOWABILITY OF ASSESSEES CLAIM. 7. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE M ATERIAL ON RECORD, WE FIND THAT A SUM OF RS.1,11,02,000 WAS PAID BY THE ASSESSEE TO THE REGISTRAR OF COMPANIES TOWARDS INCR EASE IN AUTHORIZED CAPITAL AND HAS DEBITED THE SAME TO THE P&L A/C. THE ASSESSEE HAS AMORTIZED THE SAID EXPENDITURE AND HAS CLAIMED 1/5 TH OF THE SAME AS DEDUCTION U/S 35D OF THE ACT. IT IS ALSO THEREFORE, TO BE SEEN WHETHER THE SUM IS ALLOWABLE U/S 35D OF THE ACT. THE HON'BLE SUPREME COURT IN THE CASES CITED B Y THE LEARNED DR HAS HELD THAT THE EXPENDITURE INCURRED FOR INCRE ASE IN THE AUTHORIZED SHARE CAPITAL, IS CAPITAL IN NATURE. 8. FROM THE FACTS OF THE CASE BEFORE US, WE FIND TH AT UNDISPUTEDLY, THE AMOUNT PAID BY THE ASSESSEE TO RO C FOR ENHANCEMENT OF THE AUTHORIZED SHARE CAPITAL IS CAPI TAL IN NATURE. THE HON'BLE SUPREME COURT WAS CONSIDERING THE NATUR E OF SUCH EXPENDITURE IN THE CASES OF BROOKE BOND INDIA LTD A S WELL AS PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION (SU PRA) AND THEIR ALLOWABILITY U/S 37(1) OF THE ACT. THE QUESTI ON BEFORE US IS THE AMORTIZATION OF SUCH EXPENDITURE AND ALLOWABILI TY OF 1/5 TH THEREOF DURING THE RELEVANT A.Y U/S 35D OF THE ACT. ITA NO 450 OF 2017 ME RCURY PROJECTS P LTD HYDERABAD. PAGE 6 OF 8 9. THE HEADING OF SECTION 35D REFERS TO AMORTIZATIO N OF CERTAIN PRELIMINARY EXPENSES. FOR THE SAKE OF CLARI TY AND READY REFERENCE, THE RELEVANT PROVISIONS ARE REPRODUCED H EREUNDER: SECTION 35D(1) OF THE I.T. ACT: (1) WHERE AN ASSESSEE, BEING AN INDIAN COMPANY OR A PERSON (OTHER THAN A COMPANY) WHO IS RESIDENT IN INDIA, INCURS, AFTER TH E 31ST DAY OF MARCH, 1970 , ANY EXPENDITURE SPECIFIED IN SUB- SECTION (2),- (I) BEFORE THE COMMENCEMENT OF HIS BUSINESS, OR (II) AFTER THE COMMENCEMENT OF HIS BUSINESS, IN CONNECT ION WITH THE EXTENSION OF HIS INDUSTRIAL UNDERTAKING OR IN CONNECTION WITH HIS SETTING UP A NEW INDUSTRIAL UNIT, THE ASSESSEE SHALL, IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THIS SECTION, BE ALLOWED A DEDUCTION OF AN AMOUNT EQUAL TO ONE- TENTH OF SUCH EXPENDITURE FOR EACH OF THE TEN SUCCESSIVE PREVIOUS YEARS BEGINNING WITH THE PREVIOUS YEAR IN WHICH THE BUSIN ESS COMMENCES OR, AS THE CASE MAY BE, THE PREVIOUS YEAR IN WHICH THE EXTENSI ON OF THE INDUSTRIAL UNDERTAKING IS COMPLETED OR THE NEW INDUSTRIAL UNIT COMMENCES PRODUCTION OR OPERATION. 10. WE FIND THAT SIMILAR ISSUE HAD ARISEN BEFORE TH E HON'BLE SUPREME COURT IN THE CASE OF M/S. SHASUN CHEMICALS & DRUGS LTD VS. CIT, REPORTED IN 225 ITR 798 (S.C) AND THE HON'BLE SUPREME COURT HELD AS UNDER: 12. QUESTION NO. 1: WHETHER EXPENDITURE INCURRED ON ISSUE OF SHARES IS ELIGIBLE TO BE AMORTIZED UNDER SECTION 35D OF THE A CT? AS ALREADY NOTED ABOVE, THE ASSESSING OFFICER HAD A LLOWED THE CLAIM OF THE ASSESSEE IN THIS BEHALF FOR THE ASSESSMENT YEAR S 1994-95 AND 1996 - 97. SUCH EXPENSES WHICH ARE INCURRED AND AMORTIZA TION WHEREOF IS SOUGHT UNDER SECTION 35D OF THE ACT, IT IS ALLOWED FOR A PERIOD OF 10 YEARS @ 1/10TH EACH. THIS IS SO PROVIDED BY SECTION 35D O F THE ACT AS IT IS CLEAR FROM THE READING OF THE SAID SECTION WHICH IS REPRODUCED HEREUNDER: '35D. (1) WHERE AN ASSESSEE, BEING AN INDIAN COMPAN Y OR A PERSON (OTHER THAN A COMPANY) WHO IS RESIDENT IN INDIA, IN CURS, AFTER THE 31ST DAY OF MARCH, 1970, ANY EXPENDITURE SPECIFIED IN SUB-SE CTION (2),- (I) BEFORE THE COMMENCEMENT OF HIS BUSINESS, OR (II) AFTER THE COMMENCEMENT OF HIS BUSINESS, IN CON NECTION WITH THE EXTENSION OF HIS UNDERTAKING OR IN CONNECTION WITH HIS SETTING UP A NEW ITA NO 450 OF 2017 ME RCURY PROJECTS P LTD HYDERABAD. PAGE 7 OF 8 INDUSTRIAL UNIT, THE ASSESSEE SHALL, IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THIS SECTION, BE ALLOWED A DEDUCTION OF AN AMOUNT EQUAL TO ONE-TENTH OF SUCH EXPENDITURE FOR EACH OF THE TEN S UCCESSIVE PREVIOUS YEARS BEGINNING WITH THE PREVIOUS YEAR IN WHICH THE BUSINESS COMMENCES OR, AS THE CASE MAY BE, THE PREVIOUS YEAR IN WHICH THE EXTENSION OF THE INDUSTRIAL UNDERTAKING IS COMPLETE D OR THE NEW INDUSTRIAL UNIT COMMENCES PRODUCTION OR OPERATION:' 13. IN THE INCOME TAX RETURN WHICH WAS FILED FOR TH E ASSESSMENT YEAR 1995-96 THE ASSESSEE HAD CLAIMED THAT IT HAD INCURR ED A SUM OF RS.45,51,890/- TOWARDS THE SHARE ISSUE EXPENSES AND HAD CLAIMED 1/10TH OF THE AFORESAID SHARE ISSUE EXPENSES UNDER SECTION 35D OF THE ACT FROM THE ASSESSMENT YEARS 1995-96 TO 2004-05. THIS CLAIM OF THE ASSESSEE WAS FOUND TO BE JUSTIFIE D AND ALLOWABLE UNDER THE AFORESAID PROVISIONS AND ON THAT BASIS 1/10TH S HARE ISSUE EXPENSES WAS ALLOWED UNDER SECTION 35D OF THE ACT. WHEN IT W AS AGAIN CLAIMED FOR THE ASSESSMENT YEAR 1996-97, THOUGH IT WAS DISALLOW ED AND ON DIRECTIONS OF THE APPELLATE AUTHORITY, THE ASSESSIN G OFFICER MADE PHYSICAL VERIFICATION OF THE FACTORY PREMISES. HE WAS SATISFIED THAT THERE WAS EXPANSION OF THE FA CILITIES TO THE INDUSTRIAL UNDERTAKING OF THE ASSESSEEE. IT IS ON THIS SATISFA CTION THAT FOR THE ASSESSMENT YEAR 1996-97 ALSO THE EXPENSES WERE ALLO WED. ONCE, THIS POSITION IS ACCEPTED AND THE CLOCK HAD STARTED RUNN ING IN FAVOUR OF THE ASSESSEE, IT HAD TO COMPLETE THE ENTIRE PERIOD OF 1 0 YEARS AND BENEFIT GRANTED IN FIRST TWO YEARS COULD NOT HAVE BEEN DENI ED IN THE SUBSEQUENT YEARS AS THE BLOCK PERIOD WAS 10 YEARS STARTING FRO M THE ASSESSMENT YEAR 1995-96 TO ASSESSMENT YEAR 2004-05. THE HIGH COURT, HOWEVER, DISALLOWED THE SAME FOLLOW ING THE JUDGMENT OF THIS COURT IN THE CASE OF BROOK BOND INDIA LTD (SUP RA). IN THE SAID CASE IT WAS HELD THAT THE EXPENDITURE INCURRED ON PUBLIC IS SUE FOR THE PURPOSE OF EXPANSION OF THE COMPANY IS A CAPITAL EXPENDITURE. HOWEVER, IN SPITE OF THE ARGUMENT RAISED TO THE EFFECT THAT THE AFORESAI D JUDGMENT WAS RENDERED WHEN SECTION 35D WAS NOT ON THE STATUTE BO OK AND THIS PROVISION HAD ALTERED THE LEGAL POSITION, THE HIGH COURT STILL CHOSE TO FOLLOW THE SAID JUDGMENT. IT IS HERE WHERE THE HIGH COURT WENT WRONG AS THE I NSTANT CASE IS TO BE DECIDED KEEPING IN VIEW THE PROVISIONS OF SECTION 3 5D OF THE ACT. IN ANY CASE, IT WARRANTS REPETITION THAT IN THE INSTANT CA SE UNDER THE VERY SAME PROVISIONS BENEFIT IS ALLOWED FOR THE FIRST TWO ASS ESSMENT YEARS AND, THEREFORE, IT COULD NOT HAVE BEEN DENIED IN THE SUB SEQUENT BLOCK PERIOD. WE, THUS, ANSWER QUESTION NO. 1 IN FAVOUR OF THE AS SESSEE HOLDING THAT THE ASSESSEE WAS ENTITLED TO THE BENEFIT OF SECTION 35D FOR THE ASSESSMENTS YEARS IN QUESTION. 11. RESPECTFULLY FOLLOWING THE DECISION OF THE HON' BLE SUPREME COURT IN THE CASE OF M/S. SHASUN CHEMICALS & DRUGS LTD (CITED SUPRA), WE UPHOLD THE FINDINGS OF THE CIT (A). THEREFORE, T HE REVENUES APPEAL IS DISMISSED. ITA NO 450 OF 2017 ME RCURY PROJECTS P LTD HYDERABAD. PAGE 8 OF 8 12. IN THE RESULT, REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH JULY, 2018. SD/- SD/- (S.RIFAUR RAHMAN) ACCOUNTANT MEMBER (P. MADHAVI DEVI) JUDICIAL MEMBER HYDERABAD, DATED 18 TH JULY, 2018. VINODAN/SPS COPY TO: 1 DCIT, CIRCLE 16(2) 2 ND FLOOR, B BLOCK, IT TOWERS, AC GUARDS, MASAB TANK, HYDERABAD 2 M/S. MERCURY PROJECTS P LTD, PLOT NO.4, SOFTWARE UNITS LAYOUT, HITECH CITY, MADHAPUR, HYDERABAD 3 CIT (A) - 4 HYDERABAD 4 PR. CIT 4 HYDERABAD 5 THE DR, ITAT HYDERABAD 6 GUARD FILE BY ORDER