Ita/1399/2009 Of The Commissioner Of Income Tax v. Sql Star International Ltd

$-21 &22* IN THE HIGH COURT IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA 1315t2009 THE COMMISSIONER OF INCOME TAX lll ..... Appellant Through Ms. Rashmi Chopra, Adv. :/:f + VETSUS SQL STAR INTERNATIONAL LTD. ..... Respondent Through Mr. O. S. Bajpai, Sr. Adv. with Mr. V NJha and Ms. Manasvini Bajpai, Adv. ITA 1399/2009 THE COMMISSIONER OF INCOME TAX INCOME TAX TAX ..... AppellantThrough Ms. Rashmi Chopra, Adv. I(I VETSUS SQL STAR INTERNATIONAL LTD. LTD. ..... RespondentThrough Mr. O. S. Bajpai, Sr. Adv. with Mr. V NJha and Ms. Manasvini Bajpai, Adv. GORAM: HON'BLE MR. JUSTICE SANJIV KHANNAHON'BLE MR. JUSTICE R.V.EASWAR ORDER %02.11.2011 First lssue After hearing counsel for the parties, the following substantial question of law is framed : "Whether the tribunal is right in allowing the appeal filed by theassessee and holding that expenses to the tune of Rs.132.16lacs were entitled to be amortization under Section 35D of thelncome Tax Act, 1961 for the reasons set out in para 7 of theorder dated 31 .12.2002?"lacs were entitled to be amortization under Section 35D of thelncome Tax Act, 1961 for the reasons set out in para 7 of theorder dated 31 .12.2002?" Signature Not Verified Digitally Signed By:AMULYACertify that the digital file andphysical file have been compared andthe digital data is as per the physicalfile and no page is missing. under: "(1) Where an assessee, being an Indian company or aperson (other than a company) who is resident in India,incurs, after the 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 inconnection with the extension of his industrialundertaking or in connection with his setting up anew industrial unit, the assessee shall, inaccordance with and subject to the provisions of thissection, be allowed a deduction of an amount equalto one-tenth of such expenditure for each of the tensuccessive previous years beginning with theprevious year in which the business commences or,as the case may be, the previous year in which theextension of the industrial undertaking is completedor the new industrial unit commences [production ]oroperation: Provided that where an assessee incurs after the 31st dayof March, 1998, any expenditure specified in sub-section(2), the provisions of this sub-section shall have effect as iffor the words "an amount equal to one-tenth of suchexpenditure for each of the ten successive previous years",the words "an amount equal to one-fifth of suchexpenditure for each of the five successive [previous ][years"]had been substituted. (2) The expenditure referred to in sub-section (1) shall bethe expenditure specified in any one or more of thefollowing clauses, namely :- (a) Expenditure in connection with - (i) Preparation of feasibility report; (ii) Preparation of project report; (iii) Conducting market survey or any other surveynecessary for the business of the assessee; (iv) Engineering services relating to the business ofthe assessee : Uas ds as , Provided that the work in connection with the [preparation ]ofthe feasibility report or the project report or the conductingof market survey or of any other survey or the engineeringservices referred to in this clause is carried out by theassessee himself or by a concern which is for the timebeing approved in this behalf by the Board; (b) Legal charges for drafting any agreement between theassessee and any other person for any purpose relating tothe setting up or conduct of the business of the assessee; (c) Where the assessee is a company, also expenditure - assessee -(i) By way of legal charges for drafting theMemorandum and Articles of Association of thecompany;Memorandum and Articles of Association of thecompany; (ii) On printing of the Memorandum and Articles ofAssociation;Association; ds as , Provided that the work in connection with the [preparation ]ofthe feasibility report or the project report or the conductingof market survey or of any other survey or the engineeringservices referred to in this clause is carried out by theassessee himself or by a concern which is for the timebeing approved in this behalf by the Board; (b) Legal charges for drafting any agreement between theassessee and any other person for any purpose relating tothe setting up or conduct of the business of the assessee; (c) Where the assessee is a company, also expenditure - assessee -(i) By way of legal charges for drafting theMemorandum and Articles of Association of thecompany;Memorandum and Articles of Association of thecompany; (ii) On printing of the Memorandum and Articles ofAssociation;Association; (iii) By way of fees for registering the company underthe provisions of the Companies Act, 1956 (1 of1e56);the provisions of the Companies Act, 1956 (1 of1e56); (iv) In connection with the issue, for public subscription, of shares in or debentures of thecompany, being undenruriting commission, brokerageand charges for drafting, typing, printing andadvertisement of the prospectus;company, being undenruriting commission, brokerageand charges for drafting, typing, printing andadvertisement of the prospectus; (d) Such other items of expenditure (not being expenditureeligible for any allowance or deduction under any otherprovision of this Act) as may be prescribed. (3) Where the aggregate amount of the expenditurereferred to in sub-section (2) exceeds an amountcalculated at two and one-half per cent - (a) Of the cost of the project, or (b) Where the assessee is an lndian company, at theoption of the company, of the capital employed in thebusiness of the company, the excess shall be ignored forthe purpose of computing the deduction allowable undersub-section (1).business of the company, the excess shall be ignored forthe purpose of computing the deduction allowable undersub-section (1). Provided that where the aggregate amount of expenditurereferred to in sub-section (2) is incurred after the 31st dayreferred to in sub-section (2) is incurred after the 31st day \?, of March, 1998, the provisions of this sub-section shallhave effect as if for the words "two and one-half [per ]cent",the words "five per cent" had been substituted. Explanation : In this sub-section, - (a) "Cost of the project" means - (i) In a case referred to in clause (i) of sub-section (1), the actual cost of the fixed assets, being land,buildings, leaseholds, plant, machinery, furniture,fittings and railway sidings (including expenditure ondevelopment of land and buildings), which are shownin the books of the assessee as on the last day ofthe previous year in which the business of theassessee commences; (ii) In a case referred to in clause (ii) of sub-section (1), the actual cost of the fixed assets, being land,buildings, leaseholds, plant, machinery, furniture,fittings and railway sidings (including expenditure ondevelopment of land and buildings), which are shownin the books of the assessee as on the last day ofthe previous year in which the extension of theindustrial undertaking is completed or, as the casemay be, the new industrial unit commencesproduction or operation, in so far as such fixedassets have been acquired or developed inconnection with the extension of the industrialundertaking or the setting up of the new industrialunit of the assessee; (b) "Capital employed in the business of the company" means - (i) In a case referred to in clause (i) of sub-section (1), the aggregate of the issued share capital,debentures and long-term borrowings as on the lastday of the previous year in which the business of thecompany commences; (ii) In a case referred to in clause (ii) of sub-section (b) "Capital employed in the business of the company" means - (i) In a case referred to in clause (i) of sub-section (1), the aggregate of the issued share capital,debentures and long-term borrowings as on the lastday of the previous year in which the business of thecompany commences; (ii) In a case referred to in clause (ii) of sub-section (1), the aggregate of the issued share capital,debentures and long-term borrowings as on the lastday of the previous year in which the extension ofthe industrial undertaking is completed, or, as thecase may be, the new industrial unit commencesproduction or operation, in so far as such capital, tJ debentures and long-term borrowings have beenissued or obtained in connection with the extensionof the industrial undertaking or setting up of the newindustrial unit of the company; -(c) "Long-term borrowings" means (i) Any moneys borrowed by the company from theGovernment or the lndustrial Finance Corporation oflndia or the Industrial Credit and lnvestmentCorporation of lndia or any other financial institution[which [is ][for the time ][being approved by ][the ][Central]Government for the purposes of clause (viii) of sub-section (1) of section 361 or any banking institution(not being a financial institution referred to above), or(ii) Any moneys borrowed or debt incurred by it in aforeign country in respect of the purchase outsideIndia of capital plant and machinery, where the termsunder which such moneys are borrowed or the debtis incurred provide for the repayment thereof duringa period of not less than seven years. (4) Where the assessee is a person other than a companyor a co-operative society, no deduction shall be admissibleunder sub-section (1) unless the accounts of the assesseefor the year or years in which the expenditure specified insub-section (2) is incurreb have been audited by anaccountant as defined in the Explanation below sub-section(2) of section 288, and the assessee furnishes, along withhis return of income for the first year in which the deductionunder this section is claimed, the report of such audit in theprescribed form duly signed and verified by suchaccountant and setting forth such particulars as may beprescribed.or a co-operative society, no deduction shall be admissibleunder sub-section (1) unless the accounts of the assesseefor the year or years in which the expenditure specified insub-section (2) is incurreb have been audited by anaccountant as defined in the Explanation below sub-section(2) of section 288, and the assessee furnishes, along withhis return of income for the first year in which the deductionunder this section is claimed, the report of such audit in theprescribed form duly signed and verified by suchaccountant and setting forth such particulars as may beprescribed. (5) Where the undertaking of an lndian company which isentitled to the deduction under sub-section (1) istransferred, before the expiry of the period of ten [years]specified in sub-section (1), to another Indian company in a-scheme of amalgamation, entitled to the deduction under sub-section (1) istransferred, before the expiry of the period of ten [years]specified in sub-section (1), to another Indian company in a-scheme of amalgamation, (i) No deduction shall be admissible under sub- section (1) in the case of the amalgamating companyfor the previous year in which the amalgamationtakes place; and i! (ii) The provisions of this section shall, as far as maybe, apply to the amalgamated company as theywould have applied to the amalgamating company ifthe amalgamation had not taken place. l(5,A) [Where the ][undertaking of ][an ][Indian company ][which ][is]entitled to the deduction under sub-section (1) istransferred, before the expiry of the period specified in sub-section (1), to another company in a scheme of demerger, - (i) No deduction shall be admissible under sub-section (1) in the case of the demerged companyforthe previous year in which the demerger takes place;and (i) No deduction shall be admissible under sub- section (1) in the case of the amalgamating companyfor the previous year in which the amalgamationtakes place; and i! (ii) The provisions of this section shall, as far as maybe, apply to the amalgamated company as theywould have applied to the amalgamating company ifthe amalgamation had not taken place. l(5,A) [Where the ][undertaking of ][an ][Indian company ][which ][is]entitled to the deduction under sub-section (1) istransferred, before the expiry of the period specified in sub-section (1), to another company in a scheme of demerger, - (i) No deduction shall be admissible under sub-section (1) in the case of the demerged companyforthe previous year in which the demerger takes place;and (ii) The provisions of this section shall, as far as maybe, apply to the resulting company, as they wouldhave applied to the demerged company, if thedemerger had not taken place.l (6) Where a deduction under this section is claimed andallowed for any assessment year in respect of anyexpenditure specified in sub-section (2), the expenditure inrespect of which deduction is so allowed shall not qualifyfor deduction under any other provision of this Act for thesame or any other assessment year."allowed for any assessment year in respect of anyexpenditure specified in sub-section (2), the expenditure inrespect of which deduction is so allowed shall not qualifyfor deduction under any other provision of this Act for thesame or any other assessment year." 3. lt is noticeable that sub-section (2) stipulates and specifies the expenditure covered by sub-section (1), in clauses (a) to (d). Therefore,to claim benefit of Section 35D, the authorities have to examine eachand every expenditure and hold that it is covered by clauses (a) to (d) ofsub-section (2) of Section 35D. 4. The expenditure which was under challenge before the tribunalwas as under : (i) Bank charges for collection of the public subscription Rs.1.32 lacs. ,r' a lf, ( 'e/ (ii) Various fees to Managers to the issue & [legal ][consultar\:1y']expenses for [public ]issue Rs.22.73 [lacs.] (iii) Stock Exchange listing fees & Sebi fees Rs.4.65 [lacs'] (iv) Registrar to the issue Rs.10.54 lacs. (v) Telephone, telex and fax for the issue Rs.2.92 [lacs'] (vi) Travelling expenses for the issue Rs.10.04 [lacs.] (vii) Misc. Expenses Rs.0.60 lacs." 5. The tribunal while dealing with the said [aspect ][in ][para ][7 ][has ][held] as under: "7. We have gone through the records including thedetails furnished by the assessee [in ][the ][paper book ][about]the exact nature of these expenses. [The ][expenditure, ][are]mainly in connection with the issue of [prospectus, ][legal]consultancy charges in connection with [the ][same ][and]payments made to the Registrar to the issue and alsotravelling expenses incurred by the assessee [in ][connection]with the issue, all these expenses are really [in ][the ][nature ][of]expenditure that fall for amortization u/s 35D(1) [of ][the ][Act.]We, therefore, direct the AO to allow the [amortization of ][the]expenses as cla.imed by the assessee and [in ][our view, ][the]restriction to 1/Stn of Rs.79.78 lakhs is [not ][in accordance with]the provisions of Section 35D(2) of [the ][Act. ][The]disallowance made in this regard [is, ][therefore, ][deleted. ][The]alternative claim of the assessee that the same [should ][be]allowed as a revenue expenditure [accordingly ][stands]rejected." 6. In the aforesaid reasoning, the tribunal has not examined [the] nature and character of expenses [and ][whether they are covered ][by] clauses (a) to (d) of Section 35D(2). The [order ][is ][cryptic ][and] .€ 6. In the aforesaid reasoning, the tribunal has not examined [the] nature and character of expenses [and ][whether they are covered ][by] clauses (a) to (d) of Section 35D(2). The [order ][is ][cryptic ][and] .€ without reasons. In view of the [above, ][the ][question ][of ][law ][i, ] answered in favour of the [Revenue ][and ][against ][the ][respondent-]assessee. The matter is [remitted ][to ][the ][tribunal ][for ][a ][fresh]decision. lt is clarified [that ][we ][have not ][expressed ][any ][opinion,]whether or not the expenses [are ][covered under Section ][35D(2).]Ld. counsel for the respondent-assessee [states ][that ][they ][are]entitled to urge and argue [that the aforesaid expenses are ][covered]under Section 37 of the Act. [The said aspect can be raised ][before]the tribunal, if [permissible, ][and ][in accordance ][with ][law.] Second lssue 7. The second [question ][which arises ][in ][this ][appeal ][was] examined and answered in ITA [No.131 ][412009 ][titled ][as ]['The]Commissioner of lncome [Tax ][Vs. ] [Sfar ][lnternational ][Ltd".] For the sake of convenience [the said ][order ][is ][reproduced below ][:] "After hearing learned counsel [for ][the ][parties, ][the]following [question ]of law [if ]framed:- (i) Whether the Special Bench of [ITAT ought ][to ][have]remanded the matter to [be decided ][on ][merits by ][the ][regular]Bench of ITAT? Learned counsel for the [parties ]agree [that ][the]aforesaid [question ]is covered [by ][the ][decision ][of this ][Court]dated 9th September, [2011 ][in ] [62412011 ][in ][the ][case ][of]Amway India Enterprises [(supra). ][The ][operative portion of]the order reads as under:- "We also note that in the operative [part ( ]i.e', [para ][60)]the Tribunal has directed that [in ][view ][of ][the ][criteria ][laid]down in the foregoing [part ][of ][their ][judgment, ][the ][matter ][is]restored to the file of the A.O. [for ][re-examination ][as ][to]whether the expenditure incurred by [assessee ][on ][computer] V iii a a(\q) software is on capital or [revenue ][account ][after.giving, ][due ]\'_/to the [assessee. ][The ][relevant ][part ][of ][\-]opportunity the directions issued by [the ][Tribunal ][as ][contained ][in]paragraph 60 of the impugned [judgment ]is [extracted]hereinbelow for the sake of [convenience:] "60. Having laid down the criteria for determining [the]nature of expenditure [incurred ][on ][acquisition ][of ][software,]whether capital or revenue, [we ][are of ][the ][view ][that ][these]criteria need to be applied to [determine ][the exact ][nature ][of]expenditure incurred by [the ][assessees ][in ][the ][present ][cases]for acquiring different [softwares. ][Since ][this ][exercise ][is]to be done in [respect ][of ][each ][and ][every]required soitware independently having [regard ][to ][the ][criteria ][laid]down above, we are o the [view ][that ][the ][matter needs ][to ][b]restored back to the file [of ][the ][Assessing ][Officer ][for ][doing]such exercise. The AO [shall examine ][the ][question whether]expenditure on computer software [is ][capital ][or ][revenue ][in]the light of the criteria laid down above [after giving ][an]opportunity of being heard to the [assessees."] Upon consideration of [the ][matter ][we ][are ][of ][the ][view]that the special bench of the [Tribunal ought ][to ][have ][placed]the matter(s) before a regular [bench, ][i.e., ][the ][Division]Bench for dealing with the [matter(s) ][in ][accordance with ][the]law, after they had answered [the ][reference. ][There ][was, ][in]our view, no occasion to restore [the ][matter ][to ][the ][file ][of]the A.O. Mr Syali, who appears for the [assessee, ][is ][satisfied if]a direction is issued by us whereby [the ][operative part of ][the]judgment of the Tribunal (i.e., para 60) is substituted by [our]direction to the Tribunal to [place ][the ][captioned ][appeal]before a regular bench of the [Tribunal.]We direct accordingly. The appeal is [disposed ][of ][with]the aforesaid directions." Upon consideration of [the ][matter ][we ][are ][of ][the ][view]that the special bench of the [Tribunal ought ][to ][have ][placed]the matter(s) before a regular [bench, ][i.e., ][the ][Division]Bench for dealing with the [matter(s) ][in ][accordance with ][the]law, after they had answered [the ][reference. ][There ][was, ][in]our view, no occasion to restore [the ][matter ][to ][the ][file ][of]the A.O. Mr Syali, who appears for the [assessee, ][is ][satisfied if]a direction is issued by us whereby [the ][operative part of ][the]judgment of the Tribunal (i.e., para 60) is substituted by [our]direction to the Tribunal to [place ][the ][captioned ][appeal]before a regular bench of the [Tribunal.]We direct accordingly. The appeal is [disposed ][of ][with]the aforesaid directions." The aforesaid [question ]is [answered ][in ][terms ][of ][the]aforesaid observations of this Court in [62412011 ][and the]appeal is accordingly disposed of. The [parties. ][will ][appear]before the Assistant [Registrar ][of ] [on ][21"' ][November,]2011, when a date of hearing [will ][be ][fixed."] , . \J- \, a\I Icordingly, the following [substantial question ][of ][law ][is ]ty n"r"l_ "Whether the Special Bench of ITAT [ought ][to ][have]remanded the matter to be [decided ][on ][merits ][by ][the]regular Bench of ITAT?"remanded the matter to be [decided ][on ][merits ][by ][the]regular Bench of ITAT?" The said [question ]is answered [in ][terms ][of ][our earlier order ][in] ITA No.131412009 and the [appeal ][is ][accordingly disposed ][of. ][The]parties will appear before the Assistant [Registrar ][of ][ITAT on ][21't]November,2011, when a date [of ][hearing ][will ][be ][fixed'] 4 tr,L [- ]f [(\--.]SAI{JIV KHANNA,J lrMt -r-t'-n.v.LASWAR, J ("rf,D,',,a t [k"'-2] NOVEMBER 02, 2011 vld 6 [tvt ]I t' n t' n n [[@ ][ar.J'1'"$'^]][[ar.J'1'"$'^]]rrlrl 't- F"*x fu I t' n t' n n [[@ ][ar.J'1'"$'^]][[ar.J'1'"$'^]]dn tf rrlrl 't-\+bt 74ul,t )