Business deduction under section 35D towards Fees to ROC for increase in capital

Short Overview  ROC expenses as fees for enhancement of capital would not be considered as revenue expenditure. Thus, AO was justified in treating the payment made by assessee-company to ROC for increase in capital as capital expenditure.

Assessee-company debited preliminary expenses and claimed deduction under section 35D. It was submitted that the said expenditure was in the nature of payment to ROC for increasing the capital of the company and the same was revenue expenditure. However, AO disallowed the same by holding that payment to ROC for increase in capital was a capital expenditure. 

It is held that  In view of Supreme Court decision in cases of Brooke Bond India Ltd. v. CIT (1997) 225 ITR 798 (SC) : 1997 TaxPub(DT) 1116, (SC) and Punjab State Industrial Development Corporation Ltd. v. CIT (1997) 225 ITR 792 (SC) : 1997 TaxPub(DT) 0919 (SC), ROC expenses as fees for enhancement of capital was not a revenue expenditure. Thus, AO was justified in treating the payment to ROC for increase in capital as capital expenditure.

Decision: Against the assessee

Followed: Brooke Bond India Ltd. v. CIT (1997) 225 ITR 798 (SC) : 1997 TaxPub(DT) 1116 (SC) and Punjab State Industrial Development Corporation Ltd. v. CIT (1997) 225 ITR 792 (SC) : 1997 TaxPub(DT) 0919 (SC).

 

IN THE ITAT, HYDERABAD BENCH

P. MADHAVI DEVI, J.M. & L.P. SAHU, A.M.

Moldtek Packaging Ltd. v. Asstt. CIT

ITA No. 938/Hyd/2017

2 July, 2021

Appellant by: K. Sriram & Raghuram Praturi

Respondent by: Sunil Kumar Pandey, DR

ORDER

L.P. Sahu, A.M.

This is an appeal filed by the assessee against the order of CIT-10, Hyderabad Order, dt. 30-12-2016 passed in Case No. 0120/CIT(A)-10/2016-17 raising the following grounds of appeal :

1. The Order of the Honurable Commissioner (Appeals)-10 dt. 31-12-2016 is contrary to facts and law.

2. The Honourable Commissioner (Appeals)-10 erred in passing an order dismissing the appeal of the applicant in respect of Rs. 58500 being 20% claimed towards preliminary expenses under section 35D of the Income Tax Act attributing the same to be capital expenditure in his order.

3. The Honourable Commissioner (Appeals)-10 erred in passing an order dismissing the appeal of the applicant in respect of Rs. 364000 disallowed by the erstwhile assessing officer under section 14A of the Income Tax Act, 1961 read together with rule 8D of the Income Tax Rules, 1962, towards interest and financial charges which was added the same to the income returned in the ROI.

4. The Honourable Commissioner (Appeals)-10 erred in passing an order disallowing deferred employee compensaction Rs. 2059963 which are basically employee remuneration costs incurred and added the same to the Income returned in the ROI filed to the detriment of the assessee on grounds that the same is not an allowable expenditure as per the previsions of the Income Tax Act, 1961 in the absence of details.

5. Due to the above reasons, and adding back of corporate dividend tax paid by the assessee, the taxable income was erroneously computed at Rs. 116928240 instead of Rs. 114445780 as filed in the return of income. The Honourable Commissioner (Appeals)-10 however allowed the appeal of the appellant in respect of such Corporate dividend tax of Rs. 4549002 pending verification by the assessing officer.

6. The assessee urges for an interm stay on the demand unjustly raised to the extent of Rs. 24,10,900 for the above reasons. & the submissions made by it in writing. and consequentially the levy of interest on the erroneous demand for taxes thus raised pending the adjudication of this matter.

7. The Appellant craves leave to add to amend, or alter any or all of the aforesaid ground of appeals.

2. At the outset, during the course of hearing the learned AR submitted that the Ground No.5 is not pressed therefore this ground is dismissed as not pressed.

3. The brief facts of the case are that the assessee filed Return of Income on 27-9-2012 declaring total income of Rs. 11,44,45,780. The case was selected for scrutiny and statutory notices were issued to the assessee. During the course of assessment proceedings, it was observed by the assessing officer that the assessee has debited in the profit and loss account under the head preliminary expenses and claimed deduction under section 35D of the Act but the assessing officer disallowed by holding that payment to ROC for increase in capital is a capital expenditure and added to the total income of the assessee. The assessing officer further noticed that the assessee has received dividend of Rs. 6.35 lakhs and claimed the same as exempt income under section 10(34) of the Income Tax Act, 1961 ( the Act ) It was observed that there was a total investment of Rs. 316.32 lakhs and paid interest and has received exempt income, therefore the assessing officer applied rule 8D for making disallowance of section 14A of the Act. It was observed that the assessee has debited Rs. 380.17 lakhs towards finance charges in the profit and loss account. The assessing officer calculated disallowance under rule 8D(ii) of Rs. 2.08 lakhs and under rule 8D(2)(iii) of Rs. 1.56 lakhs resusltantly total disallowance was made of Rs. 3.64 lakhs (Rs. 2.08 lakhs + Rs. 1.56 lakhs = Rs. 3.64 lakhs).

Further scrutiny of the account of the assessee, it was noticed that the assessee has debited an amount of Rs. 20,59,963 towards differed employee compensation and the assessing officer holds that it was not an allowable expenditure under the Income Tax Act. Accordingly, he added the same into the total income of the assessee. Feeling against the order of the assessing officer, the assessee filed an appeal before the Commissioner (Appeals). The Commissioner (Appeals) partly allowed the appeal of the assessee. Feeling against the order of the Commissioner (Appeals), the assessee is in appeal before the ITAT.

4. The learned Authorised Representative submitted that the assessee company has incurred expenditure is a revenue expenditure which was incurred in increase in the capital of the company.

In respect of disallowance made under section 14A by the assessing officer, he submitted that the assessee had sufficient reserves and surplus which was invested towards earning of the exempt income and dividend income was directly credited into the bank account of the assessee, therefore, there was no expenditure incurred. Further in respect of deferred employee compensation of Rs. 20,59,963, he submitted that 2,02,000 options were allotted to the employees of the company under the employees stock option scheme as per SEBI guidelines at Rs. 26 per option. Intrinsic / discount price @ Rs. 36.95 of option is accounted as deferred employee compensation and amortised on straight line basis over the resting period on the basis of the option exercised whichever is earlier. The same amounts to be taxed in the hands of the employee as a pre-requisite and duly tax has been deducted at source.

He submitted that the details of the Form No.16 and computation of income submitted before Your honour for prior of payment of tax on perquisites and stated that the matter may be sent back to the assessing officer for further verification for proof of payment of tax on the deferred employee compensation by the employees.

5. On the other hand, the learned departmental representative relied on the order of the authorities below. He submitted that in respect of ROC expenses, the learned Commissioner (Appeals) has relied on the decision of Brookbond India Ltd. v. CIT (1997) 225 ITR 798 (SC) : 1997 TaxPub(DT) 1116 (SC) is squarely applicable in the present case. Therefore, the assessing officer has rightly treat it as a capital expenditure. Further in respect of disallowance made under section 14A of the Act, the authorities below have rightly decided this issue, the assessee has received dividend income during the year and in respect of differed employee compensation, he relied on the order of the Commissioner (Appeals). He further submitted in this regard the assessee could not file any details as well as documents from the SEBI.

6. After hearing both the sides and perusal of the record, the assessee has claimed ROC expenses in the profit and loss account under section 35D of Rs. 58,500.

This issue has rightly been decided by the Commissioner (Appeals) on relying on the judgment of Hon ble Supreme Court in the case of Brookbond India Ltd. v. CIT (supra) and Punjab State Industrial Development Corporation v. CIT (1997) 225 ITR 792 (SC) : 1997 TaxPub(DT) 0919 (SC) wherein it was held that the ROC expenses as fees for enhancement of capital was not a revenue expenditure. Therefore this ground cannot be allowed. Respectfully following the above case laws relied on by the Commissioner (Appeals), we dismiss this ground of assessee. The Ground No.2 is dismissed.

7. The assessing officer has made disallowance under section 14A of Rs. 3,64,000 as it was calculation made under rule 8D(ii) and 8D(iii) within the impugned assessment year, the assessee has received dividend of Rs. 6,35,000 and it as exempt under section 10(34) of the Act; and huge finance cost debited into the profit and loss account. No suo moto any expenditure in this regard disallowed by the assessee. After considering the submissions of both sides, we find similar issue has been decided by the co-ordinate bench of this Tribunal in NSL Renewable Power Pvt. Ltd. v. DCIT in ITA Nos.1024/Hyd/2017 and 2031/Hyd/2018, order dt.17-6-2021 : 2021 TaxPub(DT) 3257 (Hyd-Trib) and the case was heard on 22-4-2021. For the sake of convenience the relevant paras of the order is extracted hereunder :

13.1 After hearing both the parties, we are of the view that the Commissioner (Appeals) has restricted the disallowance to the extent of dividend income of Rs. 57,60,120.

In Cross Objections No. 09/Hyd/2020, the objection of the assessee is that Commissioner (Appeals) has wrongly decided the issue and restricted the disallowance to the extent of exempt income earned by the assessee. While going through the calculation of disallowance made by the assessing officer, the assessing officer has taken the value of average investments of Rs. 174.87 crores, but, the contention of the assessee in the cross objections, the assessee has not received any exempt income from its subsidiaries. As per our thoughtful consideration, the disallowance under section 14A read with rule 8D(2)(ii) and (iii) the value of investments should be considered only on the investments from which the assessee has earned exempt income. In this connection, we rely on the decision of the coordinate bench of this Tribunal in the case of Transport Corporation of India Ltd. in ITA No. 117/Hyd/2016, order dt. 21-9-2016 : 2016 TaxPub(DT) 4521 (Hyd-Trib), wherein the coordinate bench has held as under:

11. Considered the submissions of both the counsels and perused the material facts on record. The AR submitted that the assessee has sufficient own funds which are interest free to make investment. He also relied on various decisions, in particular, Reliance Utilities & Power Ltd. (supra). We cannot take this argument further because there exist interest bearing funds and it is difficult to identify the utilization of the funds in the business unless the assessee brings proper records to show that the specific interest free funds were utilized to acquire the investment which are exempt from tax. In the present case, it is difficult to identify the funds utilization considering the complicated structure of the business. To address this issue, the legislature has introduced rule 8D for calculation of disallowance relating to direct expenses associated with the exempt income, interest relating to the investment and administrative expenses.

11.1 While carefully reading the rule 8D(2)(ii), the formula given are: A X B/C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year: B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; In particular, the notes for B clearly states that the average value of investment, income from which does not or shall not form part of the total income. It is clear that we have to include those investments which has generated income and exclude those investments, which have not generated income. In the present case, assessing officer had taken the total investment instead of those investments, which have generated income. Accordingly, we direct the assessing officer to calculate the disallowance of interest as below ( as per rule 8D): Interest X Investment( which generated income) Average total assets The main reason is that as per section 14A, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income, which is exempt from tax. The relevance is the expenditure in relation to income. The quantification has to be undertaken in relation to the exempt income. The investment which has not generated exempt income should be excluded from the calculation of ratio to determine the disallowance.

11.2 Similarly, for the administrative expenses, 0.5% of average investments from which the exempt income is received should be considered instead of average of the total investments.

11.3 considering the above discussion, we direct the assessing officer to recalculate the disallowance as per rule 8D as per the above guidance. Accordingly, ground raised by assessee is allowed.

13.2 We direct the assessing officer to recalculate the disallowance as per rule 8D as per the above guidance. We further direct the assessing officer if the disallowance under section 14A is higher in the recalculation made by the assessing officer, the same shall be restricted to the extent of exempt income earned by the assessee as per the case law Joint Investment Pvt. Ltd. v. CIT (2015) 372 ITR 694 (Del) : 2015 TaxPub(DT) 1375 (Del-HC).

13.3. Further, the revenue has raised a ground regarding the dividend income of Rs. 57,60,120 should be treated as income from other sources is also not correct. On the one hand, the assessing officer himself has treated it as a dividend income which is exempt and on other hand, he has treated as daily dividend income and taxed under the income from other sources. While recalculating disallowance under section 14A, we have restricted the disallowance to the extent of exempt earned by the assessee or less than the exempt income, whichever is lower and the same amount cannot be taxed as income from other source, which amounts double taxation in the hands of the assessee. The dividend amount received by the assessee is exempt as per section 10(35) of the Income Tax Act. The assessee has relied on the following case law, which support the case of the assessee:

1. PCIT v. Caraf Builders & Constructions (P) Ltd., ITA No. 1260 of 2018 (Del) : 2018 TaxPub(DT) 7786 (Del-HC);

2. PCIT v. McDonalds India Pvt. Ltd., ITA 725/2018 (Del) : 2018 TaxPub(DT) 7511 (Del-HC);

3. DCIT v. Pitti Electrical Equipment Pvt. Ltd., ITA No. 735/Hyd/2018;

4. Vanni Potluri v. DCIT, ITA No. 2263/Hyd/2017;

5. Mylan Laboratories Ltd. v. DCIT (2019) 180 ITD 558 (Hyd) : 2019 TaxPub(DT) 7645 (Hyd-Trib).

The assessee is unable to demonstrate that on the date of investments he had sufficient own funds available. While calculating the disallowance under section 14A, only those investments should be considered which has yielded exempt income. Respectfully following the above decisions of the co-ordinate bench of the Tribunal, we are sending back to the file of assessing officer for recalculation of the disallowance under section 14A of the Act. Needless to say that reasonable opportunity of being given to the assessee and the assessee is also directed not to seek unnecessary adjournments. Accordingly this ground is allowed for statistical purposes.

8. In regard to disallowance of Rs. 20,59,963 towards disallowance of differed employee compensation, the Commissioner (Appeals) has dismissed by holding that for want of details were not provided by the assessee as per para No.9.2 of the Commissioner (Appeals) order. Before us, the assessee has filed a paper book dt.23-3-2021 and has submitted that benefit received by the employee has been added in their income as a prerequisite and properly TDS has been made and in support he has submitted Form No.16 issued to the employees and computation of income. The Commissioner (Appeals) observed that the assessee did not file any details of perquisites paid to the employees to which the Commissioner (Appeals) has narrated in para No.9.2 in his order. Considering the totality of facts and circumstances and paper books filed by the assessee, we remit this issue to the file of assessing officer for further verification and the assessee is directed to produce all the documents in support of his claim of the expenditure and the assessing officer is directed to provide reasonable opportunity of hearing to the assessee. The assessee is directed not to seek unnecessary adjustments. Therefore this ground of the assessee is allowed for statistical purposes.

9. In the result, the appeal of the assessee is partly allowed.