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Assistant Commissioner of Income Tax, Circle-11(5), Bangalore v Khoday India Limited

Income Tax Appellate Tribunal

BANGALORE BENCH

12 December 2008

IT Appeal No. 338 (Bang.) of 2008

The Judgment was delivered by : N. L. KALRA (ACCOUNTANT MEMBER)

The revenue has filed an appeal against the order of learned CIT(A)-I, Bangalore dated 7-1-2008.

2. The first grievance of the revenue is that the learned CIT(A) has erred in allowing an amount of Rs. 13, 54, 180 being penalty and penal interest levied for contravention of statutory obligations.

2.1 The Assessing Officer noticed that the assessee has debited a sum of Rs. 14, 60, 589 towards penalty and damages. The assessee added back only Rs. 1, 06, 409 instead of Rs. 14, 60, 589. The details of items which have not been added back have been mentioned by the Assessing Officer in his order and these are as under:-

Sl. No.	Particulars	Amount (Rs.)
1.	P F Penal Int.	78, 620
2.	ESI Penalty	403
3.	Towards in lieu of damages under section 14(B) of PF Act-EPFO A/c No. KN-50071.	2, 48, 262
4.	Int. payable u/s 70 of the EPF & Misc. Provision Act, 1952 on related remittance of dues the period from July, 1997 to February 2001	48, 706
5.	Int. on ESI delay in payment	15, 858
6.	Towards wrong supply of Beer	19, 657
7.	Sales tax penalty & int. u/s 10(6) & 11(D) for FY 2001-02	5, 18, 041
8.	Sales tax penalty & int. u/s 10(6) & 11(D) for FY 2002-03	2, 13, 524
9.	Sales tax penalty	15, 354
10.	Sales tax penalty for FY 2002-03	73, 000
11.	Sales tax penalty for FY 2002-03	10, 000
12.	Sales tax penalty for FY 2002-03	5, 000
13.	Sales tax penalty	11, 018
14.	Sales tax penalty for FY 2001-02	96, 737
	TOTAL	13, 54, 180

The Assessing Officer held that penalties and penal interests are levied f or contravention of statutory obligations and, therefore, these are not allowable.

2.2 The learned CIT(A) directed the Assessing Officer to allow the above-referred sums after observing as under:-

“According to the appellant, the Assessing Officer ought to have known that the CIT(A) in ITA No. 138/CC-1(1)/CIT(A)-VI/2002-03 dated 28-8-2002 for assessment year 1999-2000 (copy enclosed) in the case of Khoday Breweries Limited, own sister concern, after detailed verification allowed the claim originally rejected by the Assessing Officer. In view of the decision of the Supreme Court in the case of Prakash Cotton Mills (P.) Ltdv. CIT 201 ITR 684 and Mahalakshmi Sugar Mills Co. v. CIT 123 ITR 429 (Delhi), the claim may be allowed. As it is an issue covered in earlier order, and as per citation above, the submission is accepted”.

2.3 On the above-referred issue we have heard both the parties. From the details available in the assessment order and as reproduced in earlier paras it is clear that the amounts have been paid as penal interests and penalty. Neither the Assessing Officer nor the learned CIT(A) has analysed the sections under which these liabilities were created.

2.4 The Hon’ble Apex Court in the case of Swadeshi Cotton Mills Co. Ltd. v. CIT[ 1998] 233 ITR 199 had an occasion to consider the allowability of penalty imposed for contravening provisions of the CST. In this case, penalty was not imposed for any delayed payment of central sales tax. The Hon’ble Apex Court held that the amount of penalty is not having a compensatory element in it and, therefore, it cannot be allowed.

2.5 In the case of Malwa Vanaspati & Chemical Co. v. CIT[1997] 225 ITR 383, 92 Taxman 537, the Hon’ble Apex Court had an occasion to consider the allowability of penalty imposed under sales tax. In that case, raw material purchased at lower rate of sales tax was used for the purpose other than specified. The Hon’ble Apex Court held that such penalty comprises both elements of compensation and penalty. It was held that the amount should be bifurcated and should be allowed to the extent it is compensatory in nature. Penalty imposed for failure to file return and comply with the requirements of notice was held as not involving any element of compensation and was, therefore, not allowable.

2.6 The Hon’ble Apex Court in the case of Organo Chemical Industries v. Union of India AIR 1979 SC 1803 had an occasion to consider the meaning of the expression ‘damages’ occurring in section 14B of the Employees Provident Funds and Miscellaneous Provisions Act, 1952The Hon’ble Apex Court held that such damages could not have been treated by the Tribunal as purely compensatory. The real distinction exists between an impost which is compensatory and an impost which is a penalty and this was pointed out as under:- (at page 119 of 172 ITR)

“The question whether any such impost is in essence compensatory or is by way of penalty will have to be decided having regard to the relevant provisions of the law under which it is imposed and the circumstances under which it has been imposed. The mere nomenclature as interest, penalty or damages in the Act may not be conclusive for the purpose of allowing it as a deduction under the Income-Tax Act, 1961Similarly, the circumstance that a fixed rate of interest has to be paid also may not be conclusive. Section 14B of the Act provides for levy of damages for delayed payment as a percentage of the amount due up to a prescribed maximum. Such a determination is to be done by the appropriate authority after giving an opportunity to the employer. Thus, the levy will be by a speaking order of the authority fixing quantum of damages. As held by the Supreme Court, the said amount comprises both an element of penal levy as well as compensatory payment. It will be for the authority under the Income-Tax Act, 1961 to decide with reference to the provisions of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 and the reasons given in the order imposing and quantifying the damages to determine what proportion should be treated as penal and what proportion as compensatory. The entire sum can neither be considered as mere penalty nor as mere interest”.

2.7 The Hon’ble Apex Court in the case of CIT v. Ahmedabad Cotton Mfg. Co. Ltd. [1994] 205 ITR 163, [1993] 71 Taxman 56 held as under :-

“…..what needs to be done by an assessing authority under theIncome-Tax Act, 1961 , in examining the claim of an assessee that the payment made by such assessee was a deductible expenditure under section 37 of the Income-Tax Act, 1961 although called a penalty is to see whether the law or scheme under which the amount was paid required such payment to be made as penalty or as something akin to penalty, that is imposed by way of punishment for breach or infraction of the law or the statutory scheme. If the amount so paid is found to be not a penalty or something akin to penalty due to the fact that the amoun t paid by the assessee was in exercise of the option conferred upon him under the very law or scheme concerned, then one has to regard such payment as business expenditure of the assessee, allowable under section 37……”.

2.8 Thus, the law on the allowability of expenses debited as penalty has been fully settled by the Hon’ble Apex Court and it is the duty of the assessee to show that the amounts claimed are compensatory in nature in case these are to be allowed. As per Explanation to section 37, the expenditure incurred for any purpose, which is an offence or which is prohibited by law, is to be treated to have not been incurred for the purpose of the business. Thus, the payment, which is punitive, is not allowable and in case the payment is compensatory, then the payment to the extent of compensatory nature is to be allowed. Since the issue has not been properly dealt either by the Assessing Officer or by the learned CIT(A), therefore, we have no alternative but to set aside this issue on the file of the Assessing Officer so that the assessee files all the material before the Assessing Officer to show that the amounts are allowable because these are compensatory in nature. In case the Assessing Officer finds that the amount is punitive, then it is not allowable. In case, the amount is compensatory as well as punitive, then the Assessing Officer will bifurcate the amount and will allow the amount to the extent it is compensatory.

3. The second grievance of the revenue is that the learned CIT(A) has erred in allowing the enhanced lease rent of Rs. 1, 95, 60, 000 paid to two sister concerns without appreciating the provisions of section 40A(2)(b) of the Income-Tax Act, 1961 .

3.1 The learned CIT(A) has mentioned in his order that this issue was considered by the ITAT in the appeal filed by the assessee for the assessment year 1997-98 and disallowance was deleted in ITA No. 622/ Bang./2001 dated 22-10-2002. Since the facts for the assessment year under reference are the same as those of 1997-98 and, therefore, the learned CIT(A) allowed the enhanced lease rent.

3.2 Before us, the learned AR has submitted that the Tribunal in the case of the assessee for the various assessment years has allowed the enhanced lease rent. It was, therefore, urged that the issue is covered.

3.3 We have heard both the parties. The issue under reference has been decided by the Tribunal in favour of the assessee for the assessment years 1997-98, 1998-99, 2000-01 and 2002-03. Thus, the issue is covered by the earlier decision of the Tribunal. Hence, we find no infirmity in the order of the learned CIT(A). It is held that the learned CIT(A) was justified in allowing the enhanced lease rent.

4. The third grievance of the revenue is that the learned CIT(A) has erred in allowing an amount of Rs. 3, 24, 91, 003 as revenue expenditure without appreciating the provisions of section 35D of the Income-Tax Act, 1961 .

4.1 The Assessing Officer from the details filed noticed that the assessee has claimed a sum of Rs. 3, 24, 91, 003 as deferred revenue expenditure. The assessee vide letter dated 15-12-2005 submitted that a new call centre was in the process of being completed, but was not completed during the year. The expenditure is revenue in nature and, therefore, this has been claimed in the current year. According to the Assessing Officer, setting up of call centre is a new business of the assessee. The expenses are in the nature of preliminary expenses and are required to be capitalized. These expenses are not attributed the business of the assessee in the current year. Hence, these do not qualify to be set off against income to which they have no nexus. In view of the above, the Assessing Officer disallowed the claim of Rs. 3, 24, 91, 003. However, the Assessing Officer held that the assessee will be entitled to capitalize the same as preliminary expenses of call centre venture.

4.2 Before the learned CIT(A), it was submitted that the assessee has earned income of Rs. 1, 95, 24, 601 from the call centre during the year ending 31 -3-2003 i.e., relevant to the assessment year under consideration. It was submitted that the list of expenses were furnished before the Assessing Officer and these lists show that the payments were largely consist of staff salaries, electricity charges, dish net charges, travelling expenses, staff food expenses etc. There was business of call centre functioning during the year and such business was substantial. The fact that the assessee described the revenue expenditure as deferred revenue expenditure does not militate against the claim nor does not justify the inference that the amount paid is in the nature of capital expenditure. The call centre is only an extension of new line of business and not of new business by itself. There was already an established facility by leasing or otherwise. It is incorrect to assume that there was no business at all. The law required that there should be a business during the year for allowing the expenses incurred during the year. Even there was a particular activity which forms part of business yet to be started or discontinued, deduction cannot be disallowed. Once business is set up, deduction becomes admissible by tests laid down by the following decisions:-

(1) CIT v. Ramraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478 (SC)

(2) CIT v. Sarabhai Management Corpn. Ltd, [1991] 192 ITR 151 (SC)

(3) CIT v. Industrial Solvents & Chemicals (P.) Ltd. [1979] 119 ITR 608 (Bom.) and

(4) CIT v. Western India Seafood (P.) Ltd. [1993] 199 ITR 777, 69 Taxman 246 (Guj.)

Under the Company Law, the expenditure has to be claimed when it is put to use. Hence, in accounts, it was treated as deferred revenue expenditure. In view of the above arguments and considering the fact that there is income of Rs. 1.95 crore relating to business for which the expenditure was incurred, the learned CIT(A) held that the expenditure is allowable. The learned CIT(A) has referred to the decision of Hon’ble Apex Court in Ramraju Surgical Cotton Mills (supra).

4.3 During the course of proceedings before us, the learned CIT(A), DR has filed written submissions on this issue. Our attention was drawn towards the expenses debited under the head ‘rates and taxes’. The assessee paid fees to RAC towards increase of authorized capital and stamp duty amounting to Rs. 16, 78, 009. In view of the decision of the Hon’ble Apex Court in the case of Brook Bond India Ltd. v. CIT[1997] 225 ITR 798, 91 Taxman 26, such expenses are not revenue expenses. Other expenses like salaries, travelling expenses, rent, car hiring charges, advertisement etc. are not relatable to earning of income during the year. The learned DR pointed out that the AR admitted that expenses were not incurred towards setting up of new call centre division at Kanakapura, Bangalore and no income was derived during the year from this facility. However, in the next para, the learned AR contradicted himself by mentioning that the company had earned income of Rs. 1.9 crore for the year ending 31 -3-2003 i.e., assessment year 2003-04 from the lease premises. The learned DR drew our attention to the annual report for the financial year 2002-03. Page No. 6 of the annual report contains report of the Director to the shareholders. The learned DR drew our attention to the following observation at page 6 of the annual report:-

“During the year under review, the company had not commenced the Call Centre operations for M/s Khodays System Limited which has been merged with the Company with effect from 1-4-2002.”

Thereafter, the learned DR drew our attention to page 15 of the Annual Report. At page 15, it is mentioned that the Company is one of the leading manufacturers and distributors of high quality alcoholic beverages in the country, catering to both Indian and Overseas market. Of late the company has diversified its business activities by carrying on the business of High Quality Bottles and Printing and Writing Papers etc. Pursuant to the Scheme of Amalgamation as approved by the Hon’ble High Court of Karnataka by its order dated 22-8-2003, Khodays Systems Ltd., the sister concern of the Khoday Group was amalgamated with the Company thereby enabling the company to carry on the business of Information Technology as well. While highlighting the outlook for 2003-04, it is mentioned that the Company is geared up to meet the challenges by diversifying its activities into the area of information technology, paper and paper products and hope to capitalize on the opportunities open to the company in the year 2003-04. Thereafter, the learned DR drew our attention to page 38 of the annual report. In Schedule 23 of the annual report, it is mentioned that the operations of Khoday System Ltd. include trading of computers, embedded software solutions, software development and other proposed allied activities. From this, the learned DR inferred that there was no business of call centre during the year. At page 34 of the annual report, it is mentioned that deferred revenue expenditure is written off over a period of 5 years from the year of the commencement of commercial production. Schedule 14 to the Annual Report show that expenses have not been written off during the year and had indicated that the production has not started during the year. Running of call centre was not a regular business of the assessee during the year under consideration. In view of the above submissions, it was urged that the expenditure is not allowable in view of section 35D of the IT. Act .

4.4 On the other hand, the learned AR has filed a paper book containing 86 pages. It was submitted that the list of expenses were furnished to the Assessing Officer. The call centre was not completed and there was no income derived from such facility during the year, therefore, the expenditure was shown as deferred revenue expenditure. The expenditure was claimed as deduction from the taxable income. The company has earned income of Rs. 1, 95, 24, 601 from the call centre during the year ending 31-3-2003 relevant to assessment year 2003-04 which was carried on from the lease premises during the year. The learned AR enclosed copy of the letter dated 15-12-2005 vide which the assessee has enclosed evidence of having paid the management fee to Customer Services Pvt. Ltd., Bangalore for using their facility during the year. The expenses debited are largely towards staff salaries, electricity charges, dish net charges, travelling expenses, staff food expenses etc. It is not true that the call centre business was new business. It was only an extension of new line of business. There was already an established facility by leasing or otherwise. It is correctly assumed that there was no business at all. The learned AR also relied on the decisions which have been referred to by the learned CIT(A). The learned AR drew our attention to Schedule 15 of the annual report. Schedule 15 contains the details of sales of various divisions. Under the head ‘system division’, the assessee has shown receipts of Rs. 2, 10, 57, 000. Such receipts included the receipts from the call centre. The details of sales on system division has also been filed vide letter dated 27-11-2008. These details were filed as desired by the Bench. Call centre details are of Rs. 1, 95, 25, 602. Rs. 15, 31, 965 are the sales of trading division. The learned AR filed the ledger account of technical service charges and has also enclosed copies of certain bills. From these details, the learned AR submitted that the business of call centre was already in existence.

4.5 The learned AR relied on the decision of the Mumbai Bench in the case of Situ Electro Instruments (P.) Ltd. v. ITO [2008] 19 SOT 13. In this case it was held that the entries in books of account cannot be the basis to decide whether an expenditure is allowable as deduction or not. If the expenditure is of revenue nature, then the same is to be allowed irrespective of its treatment in books of account. The learned AR relied on the decision of the Hyderabad Bench in the case of ITW Signode India Ltd. v. Dy. CIT[2007] 110 TTJ 170. In this case it was held that installing new plant or machinery for expansion of existing business, though sometimes loosely referred as setting up of a new unit, does not attract section 35D. If the expenses have been incurred in connection with the expansion of the existing unit, then the entire expenditure is allowable and section 35D is not attracted.

4.6 We have heard both the parties. Before proceeding further, it will be useful to reproduce section 35D of the Income-Tax Act, 1961 :-

“35D (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31-3-1970, any expenditure specified in sub-section (2)-

(i) before the commencement of his business, or

(ii) after the commencement of his business, in connection 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 business commences or, as the case may be, the previous year in which the extension of the (industrial) undertaking is completed or the new (industrial) unit commences production or operation :

[Provided that where an assessee incurs after the 31-3-1998 any expenditure specified in sub-section (2), the provisions of this sub-section shall have effect as if for the words ‘an amount equal to one-tenth of such expenditure for each of the ten successive previous years’, the words ‘an amount equal to one-fifth of such expenditure for each of the five successive previous years’ had been substituted.]

(2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of the following clauses, namely :-

(a) expenditure in connection with-

(i) preparation of feasibility report;

(ii) preparation of project report;

(iii) conducting market survey or any other survey necessary for the business of the assessee;

(iv) engineering services relating to the business of the assessee :

Provided that the work in connection with the preparation of the feasibility report or the project report or the conducting of market survey or of any other survey or the engineering services referred to in this clause is carried out by the assessee himself or by a concern which is for the time being approved in this behalf by the Board;

(b) legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee;

(i) by way of legal charges for drafting the Memorandum and Articles of Association of the company;

(ii) on printing of the Memorandum and Articles of Association;

(iii) by way of fees for registering the company under the provisions of theCompanies Act, 1956 (1 of 1956);

(iv) in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, or brokerage and charges for drafting, typing, printing and advertisement of the prospectus;

(d) such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provision of this Act) as may be prescribed.”

4.7 Section 35D was inserted by Taxation Laws Amendment Act, 1970 with effect from 1-4-1971. The CBDT issued Circular No. 56 dated 19-3-1971 to explain the provisions in the Taxation Laws Amendment Act, 1970Paras 42 and 43 of the Circular arc reproduced as under :-

“42. Section 8 of the Amending Act has introduced two new sections 35D and 35E with effect from 1-4-1971. New section 35D provides for the amortisation of certain preliminary expenses incurred by an Indian company or a resident assessee other than a company before the commencement of business or in connection with the extension of an industrial undertaking or the setting up of a new industrial unit. The amortisation will be allowed against the profits of the company or other taxpayer in 10 equal instalments over a period of 10 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 completed or the new industrial unit commences production or operation. Such amortisation will be allowed only in respect of expenditure incurred after 31-3-1970 under specified heads. The heads of qualifying expenditure specified for this purpose are the following :

1. Expenditure in connection with : (i) preparation of feasibility report; (ii) preparation of project report; (iii) conducting market survey or any other survey necessary for the business of the assessee; and (iv) engineering services relating to the business of the assessee.

These items of expenditure will qualify for amortisation where the work in connection with the preparation of the feasibility report or the project report or the conducting of the market survey or other survey or the engineering services, is carried out within the organization of the company or other assessee himself, or, where it is entrusted to an outside concern, such concern is, for the time being, approved for the purpose of this provision by the Central Board of Direct Taxes.

2. Legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee.

3. In the case of a company, in addition to the expenditure falling under items (1) and (2) above, the following items of expenditure will also qualify for amortisation;

(a) legal charges for drafting the memorandum and articles of association of the company;

(b) expenditure on printing of the memorandum and articles of association;

(d) expenditure in connection with the issue, for public subscription, of share in or debentures of the company, by way of underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus. [This will include legal charges and auditors’ fees for drafting of the prospectus].

The Central Board of Direct Taxes is also empowered to specify in the Income-tax Rules, 1962 any other item or items of expenditure in respect of which the law does not provide for any allowance or deduction, and, thereupon the items of expenditure so specified will also be eligible for amortisation under section 35D.

43. The aggregate amount of the expenditure under all the specified heads will, for the purpose of amortisation be limited to 2 1/2 per cent of the cost of the project. The ‘cost of the project’ has been defined to mean the actual cost of the fixed assets, namely, land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings), which are shown in the books of the assessee as on the last day of the previous year in which the business of the assessee commences. Where the amortisation is to be allowed with reference to expenditure incurred in connection with the extension of an existing industrial undertaking or in connection with the setting up of a new industrial unit, the ‘cost of the project’ is defined to mean the actual cost of the fixed assets as stated above which are shown in the books of the assessee as on the last day of the previous year in which the extension of the industrial undertaking is completed or, as the case may be, the new industrial unit commences production or operation insofar as such fixed assets have been acquired or developed in connection with the extension of the industrial undertaking or setting up of the new industrial unit of the assessee.”

From the language of the section as well as from the Circular, it is clear that the expenses which are falling under section 35(2) are to be considered for amortization under section 35D. In a case where the business is already in existence, then the revenue expenses cannot be disallowed on the ground that business has not commenced. It is not the case of the revenue that business was not in existence. The details filed by the learned AR show that the company has shown receipts under the head ‘system division’. The learned AR has submitted that these receipts are from call centre. Moreover, section 35D does not start with the words ‘notwithstanding anything contain in any other provisions of the Act’. Hence, an expenditure which is otherwise allowable, cannot be considered under section 35D. If the expenditure is allowable under section 37, then the same is to be allowed. The Hon’ble Apex Court in the case of CIT v. Swaraj Engines Ltd.

[2008] 171 Taxman 495 had an occasion to consider the applicability of section 35AB in respect of expenditure. The Hon’ble Apex Court observed as under:-

“At the same time it is important to note that even if the applicability of section 35AB, the nature of expenditure is required to be decided at the threshold because if the expenditure is found to be revenue in nature, then section 35AB may not apply. However, if it is found to be capital in nature, then the question of amortization and spread over as contemplated by section 35AB would certainly come into play”.

4.8 Section 35AB deals with expenditure on know-how. The Hon’ble Apex Court has held that if the expenditure on know-how is revenue in nature, the same will be allowable under section 37 and if it is capital, then section 35AB will be applicable. Following the same analogy, the expenses of revenue nature are to be allowed and if there are ex-capital expenses or expenses covered under section 35D(2), then section 35D will come into play.

4.9 The Hon’ble Apex Court in the case of India Cements Ltd. v. CIT[1966] 60 ITR 52 had an occasion to consider the allowability of expenditure incurred for raising loan. The Hon’ble Apex Court allowed the expenditure as according to the Hon’ble Apex Court, the loan obtained is not an asset or advantage of an enduring nature. It is irrelevant to consider the object with which the loan was obtained. In that case, the contention was raised by the revenue that even if the expenditure is held to be revenue, then it is not to be allowed as it has not been incurred wholly and exclusively for the purpose of business. The Hon’ble Apex Court referred to the observations in the case of CIT v. Malayalam Plantation Ltd.[1964] 53 ITR 140 and these are available at page 63 of 60 ITR 52 in the case of India Cements Ltd. (supra), which are reproduced as under :-

“The expression ‘for the purpose of the business’ is wider in scope than the expression ‘for the purpose of earning profits’. Its range is wide: it may take in not only the day-to-day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business”.

4.10 For the purposes of Companies Act, 1956 , the assessee has treated the expenditure as deferred revenue expenditure because no receipts were obtained from the call centre which was being set up. However, the business of call centre was already there and the assessee has shown receipts from them. One has to see the allowability of expenditure as per the provisions of the Income-Tax Act, 1961The expenses debited are mainly of revenue nature and it is not necessary that these expenses will be allowable only when there are receipts. If the expenses are incurred for the purposes of business, then these are to be allowed. In the instant case, section 35D(1)(i) is not applicable as the business has already commenced. Section 35D(1)(i) is not applicable because it is not the case of the extension of industrial undertaking. The assessee was earlier carrying out call centre activities from a lease premises and now it was setting up of its own call centre. Moreover, none of the expenses which have been claimed can be classified under section 35D(2).

4.11 The issue of allowability of expenditure under section 35D has been considered by the Hyderabad Bench in the case of ITW Signode India Ltd. (supra). The Hyderabad Bench has observed as under:-

“6. We have duly considered the rival contentions and the material on record. The Revenue has invoked the provisions of section 35D and has made the disallowance on the basis of the provisions of section 35D(2)(a)(iii) of the Act. The said sub-clause (iii) refers to expenditure incurred for conducting market survey or any other survey for the business of the assessee. Sub-section (2)(a) in which this sub-clause is contained is with reference to the expenditure referred to in sub-section (1) of section 35D. Section 35D(1) provides for a spread over of the expenses over ten assessment years with regard to certain preliminary expenses. For such amortization, the provision contemplates either of the two situations. The first situation is where expenditure is incurred before the commencement of business. In the present case, we are not concerned with this situation. The second situation is where the assessee incurs the expenditure after the commencement of business in connection with the extension of its industrial undertaking or in connection with the setting up of a new industrial unit. Since the assessee has commenced its business long back and has incurred the impugned expenditure after the commencement of its business, we have to appreciate the facts in the light of this situation. This second situation further visualizes either of the two situations. One is, the expenditure is incurred in connection with the extension of its industrial undertaking. Let us examine whether the assessee’s case falls within this situation. The expression used is ‘extension’ and not ‘expansion’. The former connotes that the assessee has extended its operations from the present activity to another activity. On the other hand, the latter indicates that the assessee merely expanded its present operations. The expansion is generally meant to be the expansion of its present installed capacities. The capacity may be expanded either at the same location or at a different location. But the Legislature has not used the word ‘expansion’ and that is with a purpose. If there is merely an expansion, then it may not be necessary for the assessee to incur the type of expenditure envisaged in section 35D. On the other hand, if there is extension or where altogether a new industrial unit is set up, such extension or setting up of a new unit may be preceded with the preparation of a feasibility report or a project report or conducting market survey and so on. These preliminary expenses are envisaged in section 35D for the reason that the extension or setting up of a new unit presupposes that the assessee is entering into altogether a new line of activity or is setting up an undertaking which is independent of the present undertaking. With the background, let us consider the facts of the present case.

7. The assessee-company is in manufacture of state or art packaging systems. It manufactures several products like steel strapping; sealing tools, industrial packaging machines, stretch wrapping and packing systems, paper conversion products etc. It is not unknown to anyone that the market gets flooded with new innovative products everyday. It is also not uncommon that the manufacturers of such products always try to package them in a sophisticated way to attract customers. Secondly, automation in every activity is the order of the day and, hence, new machines are also being evolved to hasten the process of packaging with efficiency and efficacy. The assessee, therefore, has to keep on innovating new products and improving the existing products to cope up with the expanding market and consumerism. For this it requires dedicated department which keeps on conducting surveys of various types. It is in connection with this department that the assessee has incurred various expenses. As mentioned by the assessee, this department has been treated as a separate cost centre and hence its expenses are shown separately. To cope up with its expanding activities and production, the assessee has to install new plants or new machinery. Installing such new plants or machinery is sometimes loosely referred to as setting up a new unit. The contention of the assessee before the CIT(A) that it has set up new units was in this context and not in the context in which it is envisaged in section 35D. Therefore, there is no gainsaying that the assessee has put up new industrial unit and hence the expenditure in connection therewith should be amortised under section 35D. In the two Tribunal decisions, the assessee had launched altogether a new product and had incurred huge advertisement expenditure. In both the cases, the expenditure was treated as deferred revenue expenditure by the assessee in its books of account. The assessee had claimed the entire expenditure in the return of income as revenue expenditure. The Tribunal allowed the entire expenditure by observing that by its very nature, deferred revenue expenditure presupposed that the expenditure was in revenue field. It was also observed that though the expenses may have enduring benefit, no estimate can be made about the period for which the assessee may be benefited. Therefore, on these grounds, the Tribunal allowed the expenditure. The assessee’s case in the present appeal is on a much better footing insofar as that the assessee has not launched any new product worth its name. The production of Edge Board which is a new product introduced during the year is too insignificant to be considered. Thus, considering the overall facts of the case, we do not see any reason to apply the provisions of section 35D. The Assessing Officer is directed to allow full deduction of the expenditure as claimed by the assessee”.

4.12 The Hon’ble Bombay High Court in the case of CIT v. Mahindra Ugine & Steel Co. Ltd. [2001] 250 ITR 84, [2002] 120 Taxman 250 observed that section 35D is applicable only in respect of expenditure, which is otherwise not allowable under law, for example, capital expenditure. Hence, section 35D will not be applicable if the expenditure is of revenue in nature.

4.13 The Hon’ble Calcutta High Court in the case of CIT v. East India Hotels Ltd. [2001] 252 ITR 860, 119 Taxman 235 had an occasion to consider the applicability of section 35D in respect of amortisation of preliminary expenses. The head-note is reproduced as under:-

“Section 35D of theIncome-Tax Act, 1961 , has been introduced to give benefit to assessees in cases of capital expenses. Capital expenses cannot be allowed as deduction in computing income, but under section 35D capital expenses can be allowed as deduction in a ten years span i.e. 1/10 in each year. The Board has clarified in Circular No. 56, dated 19-3-1971, that the provision for amortization is not intended to supersede any other provision of the Income-tax Law under which such expenditure is admissible as a deduction or deduction allowable by virtue of the decision of the Supreme Court in India Cements Ltd. v. CIT[1966] 60 ITR 52″.

4.14 In the instant case, the assessee vide Annexure 5 of the paper book has filed the details of deferred revenue expenditure to the extent of Rs. 3, 24, 91, 003. The details are as under:-

Particulars	2002-03 (Rs.)
Admin charges to PF	1, 971.00
Advertisement – others	1, 163, 176.00
Advertisement – Recruitment	148, 088.00
Bonus F.Y. 2002-03	217, 000.00
Car Hire charges	1, 693, 960.00
Commission/Handling charges	11, 400.00
Computer Hire charges	106, 750.00
Courier charges	814.00
Depreciation	424, 570.00
Miscellaneous expenses	59, 436.00
Office Equipment hire charges	252, 500.00
Office maintenance charges	214, 776.00
Rates and Taxes	1, 678, 009.00
Rent	455, 000.00
Repairs and maintenance computers	4, 764.00
Service charge teaching	60, 000.00
Training expenses	145, 259.00
Transportation charges	61, 500.00
Travelling expenses – Inland Air Fare	144, 930.00
Salaries-Contract	3, 109, 924.00
Salaries Trainees	5, 330, 063.00
Salaries Technical Staff	8, 866, 202.00
Dishnet charges	140, 182.00
Electricity charges	215, 097.00
Bank charges	16, 301.00
Travelling expenses	90, 853.00
Printing and stationery	263, 030.54
Conveyance	412, 802.52
Telephone charges	614, 321.00
Boarding and lodging expenses	2, 067, 019.00
Staff food expenses	399, 530.00
Travelling expenses Foreign Air fare	4, 003, 660.00
Employer’s contribution to ESI	82, 840.00
Employer’s contribution to PF	36, 675.00
Total	32, 491, 003.06

4.15 Sub-headwise details have also been filed. The Assessing Officer has not examined all the expenses from the angle as to whether any of the expenditure is of capital nature. The Assessing Officer has disallowed the expenses by holding that these are covered under section 35D. After considering the rival contentions, we are holding that if the expenses are of revenue nature, then the same are to be allowed and section 35D will not be applicable. Therefore, the Assessing Officer will examine the details and in case any of the expenditure is in capital nature, then the same will not be allowed.

4.16 Before us, the learned AR fairly submitted that expenditure of Rs. 16, 78, 009 debited towards fees to RAC towards increase of authorized capital and stamp duty is capital and it is not allowable in view of the decision of the Supreme Court in Brook Bond India Ltd. (supra). Hence, it is held that the expenditure of Rs. 16, 78, 009 will not be allowable. With the above observations, grievance No. 3 of the revenue is disposed of.

5. The last grievance of the revenue is that the learned CIT(A) has erred in allowing delayed payment of employees’ and employer’s contribution to provident fund/ESI.

5.1 The main contention of the revenue is that the amendment made in section 43B by theFinance Act, 2003 is with effect from 1 -4-2004 and it is, therefore, not applicable for the assessment year under consideration.

5.2 The above-referred issue stands decided by the Hon’ble jurisdictional High Court in the case of CIT v. Sabari Enterprises [2008] 298 ITR 141 (Kar.). The Hon’ble jurisdictional High Court has held that amendment to section 43B with effect from 1-4-2004 is retrospective in nature. Since the issue stands decided by the Hon’ble jurisdictional High Court, therefore, following that judgment, it is held that the learned CIT(A) was justified in allowing the deduction in respect of delayed payment of employees’/ employer’s contribution to PF and ESI.

6. In the result, the appeal is partly allowed.