High Court Of Karnataka
CIT, Central Circle vs. Wipro Ltd.
Assessment Years : 1986-87, 1987-88 And 1992-93
Section : 37(1), 80HH, 80-I, 40A(9), 36(1)(Vii), 43(1), 32
Dilip B. Bhosale And B. Manohar, JJ.
IT Appeal Nos. 67, 68 & 133 Of 2007
August 23, 2013
JUDGMENT
Dilip B. Bhosle, J. – These appeals are directed against the common order dated 16.6.2006 rendered by the Income Tax Appellate Tribunal (for short ‘the Tribunal’) in ITA Nos.1925, 9117/Bom/1990 and 916/M/96 whereby the Tribunal partly allowed the appeals filed by respondent-assessee. In all the three appeals, the respondent-assessee is one and the same. Since all the three appeals are arising from common order, and the questions raised therein, are similar they are being disposed of by common judgment.
2. Appeals before the Tribunal were arising from the orders of Commissioner of Income-tax (A)-V, Bombay, dated 12.1.90 and 23.11.89 and the order of Commissioner of Income-tax(A)-XXXIII, Bombay, dated 13.10.95 respectively (for short “the Appellate Authority”).
The appeals before the appellate authority were preferred against three separate orders passed by Assessing Officer (for short ‘AO’) dated 10.2.89, 27.9.89 and 21.3 95 for the assessment years 1986-87, 1987-88 and 1992-93 respectively. All the three appeals were admitted to consider the substantial questions of law, framed in the memorandum of appeals.
3. In ITA 67/07, the following substantial questions of law, arise for our consideration:
“A-1 Whether the Tribunal was right in holding that a sum of Rs. 3,22,484/- as repair expenses, claimed by the assessee for removal of machinery to make way for short mix plant installation, is allowable as a revenue expenditure and that no depreciation can be allowed contrary to the judgment of the Apex Court reported in Sitalpur Sugar Works Ltd. v. CIT [1963] 49 ITR 160.
A-2 Whether the Tribunal was correct in holding that the deduction of Rs. 42,00,536/- u/s. 80HH and the deduction of Rs. 52,50,669/- u/s. 80-I of the Act is allowable despite the new industrial undertaking not meeting the conditions stipulated u/ss 80HH and 80-I of the Act?
A-3 Whether the Tribunal was correct in holding that provision for bad and doubtful debts are in principle allowable deduction?
A-4 Whether the Tribunal was correct in holding that the donations made to Khandesh Education Society do not attract the provisions of Section 40A(9) of the Act?”
4. In ITA 68/07, the following four substantial questions of law are raised for our consideration:
“A-5. Whether the Tribunal was correct in holding that a sum of Rs.8,156/- spent on modification of building, a sum of Rs.3,60,694/- spent on corporate office repairs and Rs.21,485/- spent on purchase of paintings is a revenue expenditure and no depreciation is allowable over the same contrary to the judgment of the Apex Court in Sitalpur Sugar Works Ltd. (supra)
A-6. Whether the Tribunal was correct in holding that the deduction of Rs. 29,94,000/- u/s. 80HH and a deduction of Rs.67,24,000/- u/s.80-I of the Act is allowable despite the new industrial undertaking not meeting the conditions stipulated u/ss 80HH and 80-I of the Act?
A-7. Whether the Tribunal was correct in holding that an amount of goodwill can be allocated to the various fixed assets held by the assessee for the purpose of claiming depreciation?
A-8. Whether the Tribunal was correct in holding that the donations made to Khandesh Education Society do not attract the provisions of section 40A(9) of the Act?”
5. In ITA 133/07, the following two substantial questions of law arise for our consideration:
“A-9. Whether the Tribunal was correct in holding that the stock transfers made to the new industrial undertaking at Amalner for manufacture of fatty acid and glycerin plant should be taken at market price and not at the cost price of transfer for the purpose of computation of deduction u/s.80HH and 80-I of the Act?
A-10. Whether the Tribunal was correct in holding that excise duty and sales tax should not be included in the total turnover for the purpose of computation of deduction u/s.80HHC of the Act?”
6. In all the three appeals, the following question is common:
“A-11 Whether the Tribunal was correct in holding that the expenses incurred by the assessee for community development is an allowable business expenditure?”
7. The respondent-assessee is a Public Limited Company incorporated under the provisions of the Companies Act, 1956. Registered office of the respondent-assessee at the relevant time was in Mumbai. It has factories at different places in the country, including in the State of Karnataka. Factory of the respondent-Company with which we are concerned in these appeals, situate in the State of Gujarat, at Amalner. There doesn’t appear to be any dispute that Amalner is a backward area. Returns were filed by the respondent-assessee, from which these proceedings arise, before the AO at Mumbai. Against the order of AO, appeals were preferred by the assessee before the Appellate Authority at Mumbai. Feeling aggrieved and dissatisfied by the order of the appellate authority, the respondent-assessee filed appeals before the Tribunal at Mumbai. Thereafter, it appears, the registered office of the respondent-assessee at Mumbai was shifted to Bangalore and therefore, the appeals which were filed before the Tribunal at Mumbai were transferred to the Tribunal at Bangalore.
8. The respondent-assessee had filed returns under Section 139 of the Income-tax Act (for short ‘IT Act) for the assessment years 1986-87, 1987-88 and 1992-93, from which these appeals arise. We would like to deal with every appeal independently one after another.
ITA No. 133/2007
9. First, we would consider ITA 133/07 which is arising from the returns filed by the respondent-assessee for the year 1992-93. Substantial questions of law on which this appeal was Admitted are A9, A10 and A11. Insofar as the question of law A9 is concerned, learned counsel appearing for the parties fairly stated that this question is squarely covered by the judgment of the Division Bench of this Court in ITA No.509/2002 decided on 17.12.2008. Similar question was raised in the said appeal and it was decided in favour of the assessee and against the revenue. Hence, we answer this question in terms of the judgment dated 17.12.2008 in ITA No.509/2002, in favour of the assessee and against the revenue.
10. Similarly, learned counsel for the parties state that the question of law A10 has also been covered by the judgment of the Supreme Court in CIT v. Lakshmi Machine Works [2007] 290 ITR 667/160 Taxman 404 and it is answered against the revenue. In view thereof, we answer question A-10 in terms of the judgment of the Supreme Court in favour of the assessee and against the revenue.
11. That takes us to consider question of law A-11, which is common in all these appeals. The AO disallowed the claim of respondent-assessee, treating a sum of Rs. 14,396/- for the assessment year 1986-87, Rs. 32,315/- for the assessment year 1987-88 and Rs. 68,570/- for the assessment year 1992-93 as an expenditure under Section 37(1) of the I.T. Act. The respondent-assessee claims that this expenditure was incurred by them for “community development” in a backward area at Amalner where their factory situate. The AO disallowed the expenditure on the ground that those were in the nature of charity and not connected with the business. Similar was the view taken by the appellate authority, dismissing the appeal insofar as this question is concerned.
12. The Tribunal, in the appeal filed by the respondent-assessee reversed the findings of the authorities below and allowed the expenditure incurred on community development. The relevant observations in paragraphs 15.1, 15.2 and 15.3 made by the Tribunal read thus:
“15.1 The AO has disallowed a sum of Rs. 14,396/- for AY 1986-87, Rs. 1,32,315/- for AY 1987-88 and Rs.68,570/- for AY 1992-93. The AO disallowed these expenses on the ground that they were in the nature of charity and therefore not allowable. The CIT(A) has given a finding that the institutions/persons to whom these payments were made had no business connection with the assessee and that the payments amounted to charity. Accordingly he upheld the disallowance.
15.2 Before us, the learned AR submitted that the appellant’s factory is situated in a backward area and the expenditure incurred is incidental to the carrying on of business in backward area. The learned AR drew our attention to the decision of the Hon’ble Madras High Court in CIT v. Madras Refineries Ltd. [2004] 266 ITR 170/138 Taxman 261.
The observations made in paragraph 15.3, to the extent it is necessary read thus:
Though similar expenditure has been disallowed in the past, the benefit of the above High Court was not available earlier. No contrary decision has been cited. Following the above High Court decision, we have no hesitation in allowing the expenditure incurred on community development.”.
13. We have perused the impugned order as well as the orders of the first appellate authority and of the AO and so also the other materials placed before the Court. The respondent-assessee did not place any materials to show what was the exact nature of expenditure, incurred for community development, to be allowed under Section 37(1) of the Act. The only basis on which the expenditure claimed was that the factory is situated in backward area and they have incurred the expenditure, as indicated in paragraph 10, to discharge their social responsibility. In support, the respondent-assessee placed reliance upon the judgment of the Madras High Court in CIT v. Madras Refineries Ltd. [2004] 266 ITR 170/138 Taxman 261.
14. Mr. Rajesh Chander, learned counsel for the respondent-assessee, at the outset, invited our attention to the very same judgment of the Madras High Court and submitted that the concept of business is not static and it has evolved over a period of time to include within its fold the concrete expression of care and concern for the society at large and the people of the locality in which the business is located in particular. He submitted that the respondent-assessee being a good corporate citizen, in order to bring goodwill of the local citizen and so also to maintain good relations with the regulatory agencies and the society at large and thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill incurred the aforesaid expenditure. In support of his contention, he also pressed into service the test of commercial expediency. He submitted that in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the assessee’s business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the revenue. In support of this contention, he placed reliance upon the judgment of the Supreme Court in CIT v. Walchand & Co. (P.) Ltd. [1967] 65 ITR 381, Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC) and J.K. Woollen Mfrs. v. CIT [1969] 72 ITR 612 (SC).
15. The principle laid down by the Supreme Court in all the three judgments is similar. These judgments state that in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the assessee’s business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the income-tax department. It is, of course, open to the appellate Tribunal to come to a conclusion either that the alleged payment is not real or it is not incurred by the assessee or in the character of a trader or it is not laid out wholly and exclusively for the purposes of the business of the assessee and to disallow it. Having regard to what has been laid down by the Supreme Court, learned counsel for the parties have fairly stated that the expenditure over a charity in any case would, not stand to the test of commercial expediency.
16. It is in this backdrop, we have perused the orders passed by the AOs in this appeal and in ITA Nos.67/07 and 68/07. Though in the present appeal (ITA No.133/07) there is no whisper regarding the exact nature of the expenditure incurred for community development by the assessee, the AO in ITA No.68/08 has made reference to the nature of expenditure incurred under this head by the respondent-assessee. From the order of AO in ITA 68/07, it appears that the contributions were made to various religious functions, charitable institutions, social clubs and certain acts of charity such as donating a borewell to the Municipality, etc. The respondent-assessee has not placed any other materials on record in support of their claim of expenditure over community development, in other two appeals, so to apply the test of commercial expediency.
17. From plain reading of the order of the AO and so also the order of the appellate authority in ITA No.68/07, it appears to us that the expenses contributed for religious functions, charitable institutions, social clubs and charity such as donating a borewell to the municipality, etc. would not fall within the expenditure contemplated under Section 37(1) of the Act. Section 37(1) of the Act states that any expenditure not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”. It is not the case of assessee that the expenditure incurred by them is covered by Sections 30 to 36 of the Act, and even if that was so the question of allowing the expenditure under Section 37(1) of the Act would not arise.
18. In our opinion, the expenditure towards the religious funds, charitable institutions, social clubs or for charity do not stand to the test of commercial expediency. In any case, the expenditure under these heads cannot be stated to be exclusively for the purposes of business of the respondent-assessee and to allow it. That apart, the respondent-assessee has failed to place any material, in support of their case so as to claim the aforementioned expenditure under this head as contemplated by Section 37(1) of the Act as being commercial expediency. In the circumstances, we answer the question in favour of the revenue and against the asseessee. The order of the Tribunal is accordingly set aside to this extent.
ITA No. 67/2007
19. Next, we would like to consider ITA 67/07 wherein substantial questions of law A1 to A4 fall for our consideration. Insofar as the question A1 is concerned, the respondent-assessee claimed expenditure incurred by it for repairs and removal of machinery to make way for short mix plant installation, ‘as revenue expenditure. The expenditure contemplated under Section 37(1) of the Act was claimed by the respondent-assessee for the assessment year 1986-87. The AO disallowed the expenditure relying upon the judgment of the Supreme Court in Sitalpur Sugar Works Ltd. v. CIT [1963] 49 ITR 160. The appellate authority confirmed the findings recorded by the AO on the ‘substantial questions of law, while the Tribunal reversed it for the following reasons recorded in paragraph 19.3 of the order:
“We have perused this case. The case is applicable to the facts of the case. In the instant case, there is no enduring benefit which is derived by the appellant by mere re-location of the machinery within the same premises. The learned AR stated that the re-location is only to accommodate new machinery and it is just an adjustment within the available space. Therefore, we hold that the expenses on such re-location are revenue expenditure and accordingly direct the AO 10 allow a deduction in respect of the same.”
20. Learned counsel for the revenue placed reliance upon the very same judgment of the Supreme Court in Sitalpur Sugar Works Ltd.’s case (supra) to contend that the expenditure for removal of machinery to make way for short mix plant installation cannot be allowed under Section 37(1) of the Act. The Supreme Court, in this case, while considering the question whether the expenditure of Rs. 3,19,766 incurred by the assessee in dismantling and shifting the factory from SitalpurSugar Works Ltd.’s case (supra) and erecting the factory and fitting the machinery at Garaul was expenditure of a capital nature and not revenue expenditure within the meaning of Section 10(2)(xv) of the I.T. Act? in paragraph three of the judgment observed thus:
“3.Considering the matter apart from the authorities, it seems to us impossible that the expenditure could be revenue expenditure. It was clearly not incurred for the purpose of carrying on the concern but it was incurred in setting up the concern with a greater advantage for the trade than it had in its previous set up. The expenditure was not incurred in earning any profit but only for putting its factory, that is, its capital in better shape so that it might produce larger profits, when worked. It really went towards effecting a permanent improvement in the profit-making machinery, that is, in the capital assets. It was, therefore, a capital expenditure and not a revenue expenditure.” (Emphasis supplied)
21. From bare perusal of the observations made by the Supreme Court in the aforementioned paragraph, it is clear that in the facts of that case, the Supreme Court has held that the expenditure was a capital expenditure and not a revenue expenditure. In that case, the factory was shifted from one place to another for which the entire machinery and the plant was required to be shifted and the expenditure was not incurred for the purpose of carrying on the concern but it was incurred in setting up the concern with a greater advantage for the trade than it had in its previous set up.
22. In CIT v. Sri Mangayarkarasi Mills (P.) Ltd. [2009] 315 ITR 114/182 Taxman 141 (SC), the Supreme Court was considering the question whether expenditure incurred on replacement of machinery in a textile mill amounts to “revenue expenditure” deductible under Section 37 of the Act or “current repairs” deductible under Section 31 of the Act. In that case, the assessee claimed deduction being expenditure incurred on replacement of machinery, as revenue expenditure. The AO, after having found that each machine in a spinning mill does a different function and the product from one machine is taken and manually fed into another machine and the out put is taken of the machines, are thus, not integrally connected. Based on this reasoning, the AO disallowed the claim of the assessee and held the said expenditure to be of a capital nature. That view was ultimately upheld by the Supreme Court in this case. It would be relevant to reproduce paragraphs 25 to 28 for better understanding of the view taken by the Supreme Court :
’25. Moving on to the issue of “current repairs” under section 31 of the Act, the decision of this Court in CIT v. Saravana Spg. Mills (P) Ltd. [2007] 293 ITR 201/163 Taxman 201 is again relevant. This court has laid down that in order to determine whether a particular expenditure amounts to “current repairs” the test is
whether the expenditure is incurred to “preserve and maintain” an already existing asset and not to bring a new asset into existence or to obtain a new advantage. For “current repair” determination, whether expenditure is revenue or capital is not the proper test (SCC p305, para 12)
It is our opinion that the entire textile mill machinery cannot be regarded as a single asset, replacement of parts of which can be considered to be for mere purpose of “preserving or maintaining” this asset. All machines put together constitute the production process and each separate machine is an independent entity. Replacement of such an old machine with a new one would constitute the bringing into existence of a new asset in place of the old one and not repair of the old and existing machine. Also, a new asset in a textile mill is not only for temporary use. Rather it gives the purchaser an enduring benefit of better and more efficient production over a period of time. Thus, replacement of assets as in the instant case cannot amount to “current repairs”.
26. The decision in Saravana Spg. Mills (P.) Ltd. case (supra) clearly mentions that replacement of a derelict ring frame by a new one does not amount to “current repairs”. Further in Ballimal Naval Kishore this Court has held that a new asset or new/different advantage cannot amount to “current repairs”, which has been subsequently approved in the Saravana SPG. Mills (P.) Ltd. case (supra). For these reasons, the expenditure made by the assessee cannot be allowed as a deduction under section 31 of the Act.
27. The judgment of this Court in the Saravana Mills case mentions two exceptions in which replacement could amount to current repairs, namely: (SCC p. 299)
* Where old parts are not available in the market (as seen in CIT v. Mahalakshmi Textile Mills Ltd. [1967] 3 SCR 957 or
* Where old parts have worked for 50-60 years.
In the instant case, the assessee has not claimed any of the above stated exceptions.
28. Saravana SPg. Mills (P.) Ltd. case (supra) also restricts the scope of “current repairs” to repairs made to machinery, plant and/or furniture. In this case, replacement of machine can at best amount to a repair made to the process of manufacture of yarn. Further, this court has also observed in Saravana Mills (Spg.) Mills (P.) Ltd. (supra) case that if replacement was held to be “current repair” in such cases, section 31(i) will be completely redundant and absurdity will creep in because repair implies existence of a part of the machine which has malfunctioned, which is impossible in the case of such replacement. Thus, this replacement expenditure cannot be said to be “current repairs” after the decision in the Saravana Mills (Spg.) Mills (P.) Ltd. case (supra).’
In the light of the observations made by the Supreme Court in Sri Mangayarkarasi Mills (P.) Ltd. (supra) we have examined the present case. In our case the machinery was only shifted within the same premises of the factory to make way for short mix plant installation. It is clear from the facts that shifting of the machinery was for installation of a new short mix plant. The expenditure incurred for installation of the new plant would not amount a revenue expenditure and that will have to be treated as capital expenditure. The question before us is not raised in respect of the expenditure incurred for installation of the short mix plant but the expenditure incurred for removal of existing machinery to make way for installation thereof. The arrangement, i.e. shifting of old machinery to make way for installation of new machinery, may give the assessee an enduring benefit of better and more efficient production over a period of time. Thus, the expenditure incurred for removal of the existing machinery only to make way for installation of new machinery, therefore, in our opinion, cannot be allowed under Section 37(1) of the Act. In other words, the expenditure incurred for removal of old machinery for installation of new machinery within the same premises, in our opinion, would not amount to revenue expenditure such as repair of existing machinery. It is not in dispute that the existing machinery which was removed to make way for the short mix plant installation was again reinstalled. Having regard to the admitted facts, in our opinion, the view taken by the tribunal is unsustainable in law and deserves to be set-aside. Order accordingly. The question of law A-1 is thus answered against the assessee and in favour of revenue.
23. That takes us to consider the next question of law A2. This question and the question of law A6 in ITA No.68/2007 are similar and hence can be considered and decided together. The Assessing Officer disallowed the deduction, under Sections 80HH and 80-I of the IT Act, claimed by the respondent-assessee in respect of industrial vanaspathi unit for the assessment years 1986-87 and 1987-88. In the appeal carried by the respondent-assessee against the order of AO, the Appellate Authority confirmed the order of the AO. The Tribunal, however, reversed the findings recorded by the authorities below based on the order of the Tribunal in M.P.No.238/Mum/03 and ITA No.7849/Bom/1989 dated 15.6.2006 and 28.4.2003 respectively, passed in case of the very same respondent-assessee for the assessment year 1985-86. It is against that order, the revenue has filed the present appeal.
24. Learned counsel appearing for the revenue placed heavy reliance upon the judgment of this Court dated 7.4.2010 in ITA No. 128/2007 whereby the orders dated 15.6.2006 and 28.4.2003 in M.P.No.238/Mum/03 and ITA No.7849/Bom/1989 came to be set aside. The respondent-assessee had claimed deduction under Sections 80HH and 80-I of the IT Act for the assessment years 1986-87 and 1987-88 on similar ground namely that it had established a new factory for manufacturing industrial vanaspathi. The AO and so also the appellate authority held that the assessee did not establish any new industrial unit and had only improved the existing vanaspathi unit by adding new machineries. The Division Bench of this Court, while dealing with the similar challenge in ITA No.128/2007 for the assessment year 1985-86 in paragraphs 11 and 17 has observed thus:
“11. Having heard the counsel on both sides what is required to be considered by us in this appeal is (a) Whether the assessee has established a new industrial unit in the present assessment year (b) Even if new Industrial Unit is not established, it has modernized the existing unit and if new plant and machineries are erected whether the assessee is entitled to claim deduction under Sections 80HH and 80-I, (c) If the assessee had purchased the machinery in the earlier assessment year and erected the same, whether the assessee can claim benefit of section 80HH in the next assessment year and whether such machineries can be considered as new machineries.
17. By reading of para 5 of the order it is clear that the Tribunal has not given details about the new plant and machineries installed during the relevant assessment year. On the contrary it has accepted that the plant and machineries purchased were erected in the earlier year of assessment. If such plant and machineries were erected earlier to the present assessment year, those machineries cannot be considered as new machineries in order to claim deduction under Sections 80HH & 80-I. If really the assessee was interested to claim depreciation under Sections 80HH & 80-I it should have made out claim during assessment year when new plants and machineries purchased during relevant assessment year. When the assessee had purchased the new machineries in the earlier assessment year and has installed the same, such unit cannot be treated as new unit for the present assessment year. According to us when new plant and machineries are erected during such relevant assessment year, such unit can be considered as newly established unit. This distinction has not been considered by the Tribunal. Therefore, we are of the view that the question of law framed in the present are to be answered in favour of the revenue and against the assessee.”
25. On the basis of the judgment of this Court, learned counsel appearing for the revenue vehement submitted that the respondent-assessee did not bring any material on record in support of their case, seeking deduction under Sections 80HH and 80-I of the IT Act to show as to how they complied the conditions mentioned in Section 80HH. He, further, submitted that the respondent-assessee did not bring on record any material to distinguish their case for the assessment year 1985-86 from the assessment years 1986-87 and 1987-88. He submitted that it was open for the respondent-assessee to bring such material on record so as to satisfy the conditions laid out under Section 80HH for the assessment years 1986-87, 1987-88 and having failed to do so, it is not open for them to seek deduction under these provisions.
26. On theother hand, learned counsel appearing for the respondent-assessee submitted that the judgment of this Court in ITA No.128/07 would not come in their way in claiming deduction for the assessment years 1986-87 and 1987-88. She invited our attention to paragraphs-11 and 17 to contend that the question that was under consideration before the Division Bench whether the assessee had established a new industrial unit in the assessment year i.e., 1985-86, was answered against the assessee. She submitted that merely because claim of assessee in respect of a new unit for manufacturing industrial vanaspathi was rejected for the assessment year 1985-86, cannot be the ground to reject their claim for the subsequent years i.e., 1986-87 and 1987-88. The authorities below have failed to consider the case of the assessee independently for the assessment years 1986-87 and 1987-88 and therefore, she prayed for remand of the case to the AO to consider this question of law afresh, allowing the parties to lead evidence in support of their case.
27. At the outset, we reject the prayer made by learned counsel for the respondent-assessee seeking remand of the matter to examine their claim in respect of new industrial unit in the Assessment Years 1986-87, 1987-88 at this length of time. It was open to the respondent-assessee to establish their claim/case for seeking deduction of such huge amounts before the AO by producing/adducing materials/evidence in support thereof.
For the relevant years, they did not either place any materials or adduce any evidence before the authorities below nor did they ask for any such opportunity at any point of time till the present appeals were argued before this Court for final disposal.
28. Even from perusal of the orders passed by the AOs and the Appellate Authorities in both the appeals, we do not find that any case is made out by the respondent-assessee for seeking deductions. The Tribunal reversed the orders passed by the AOs and the appellate authorities solely on the basis of the orders passed by the Appellate Tribunal dated 15.6.2006 and 28.4.2003, which were set aside by this Court in ITA 128/07. In view thereof, the order passed by the Tribunal, in our opinion, is legally unsustainable. Thus, the questions of law A-2 and A-6 in the present appeal and in ITA No.68/2007, respectively, are answered in favour of the revenue and against the assessee.
29. Question of law-A3 as framed in this appeal needs to be reframed. As a matter of fact, the question of law-A3 framed in the appeal does not arise and, as it stand has already been concluded by the Assessing officer. We have perused the order passed by the Authorities below and we are satisfied that question of law A-3 needs to be reframed as follows:
“Whether the Tribunal was correct in holding that bad and doubtful debts are written-off or in principle allowable deduction?”
30. As per the returns filed by the assessee, a sum of Rs.39,555/- had been debited to profit and loss account in respect of bad and doubtful debts. The breakup was examined by the Assessing Officer and he found that the expenditure for taking legal steps to recover the said amount would be more and in view thereof, he disallowed the bad debts claimed in respect of the parties, who were obliged to pay less than Rs. 1,000/-. The Assessing Officer also observed that the assessee could not establish that the outstanding amounts had rendered as bad and doubtful debts. In the circumstances, he disallowed the deduction to the extent of Rs.28,166/- only. The order of the Assessing Officer was confirmed by the Tribunal in appeal under Section 253 of the Act. However, having considered its order in respect of the assessee for the assessment years 1990-91 to 1997-98, the Tribunal allowed the deduction of Rs.28,166/-.
31. Learned counsel appearing for the Revenue invited our attention to Clause (vii) in Section 36(1) of the Act, as it stood in the year 1986-87 and submitted that no efforts were made by the assessee of whatsoever nature to establish that the debt to the extent of Rs.28,166/- had rendered bad. Clause (vii) of sub-section (1) of Section 36 of the Act was amended in 1987 w.e.f 1.4.1989. It would be relevant to reproduce Clause (vii) in sub-section (1) of Section 36 of the Act as it stood before the amendment, which reads thus:
“(vii) subject to the provisions of sub-section (2), the amount of any debt or part thereof, which is established to have become a bad debt in the previous year, which is written-off.”
On the basis of the provision contained in Clause (vii) of sub-section (1) of Section 36 as it stood in 1986-87, it appears that it was necessary for the assessee to establish before the Assessing Officer that any debt or part thereof had become a bad debt in the previous year. In view thereof, learned counsel appearing for the Revenue submitted that no such efforts were made by the assessee by producing any material/evidence on record. He also invited our attention to the observations made by the Tribunal in para-14.1 to contend that the Assessing Officer never made any reference to filing of a suit for recovery. Filing of suit, according to Sri K.V. Aravind, learned counsel appearing for the Revenue, was not the requirement under the said provision and it was necessary to only establish that any debt or part thereof had become bad debt. Since this burden was not discharged, the order passed by the Tribunal is wrong.
32. We have perused the order passed by the Tribunal, in the light of the observations made by the two Authorities below. Whether the assessee could establish before the Assessing Officer that the debt of Rs.28,166/- in the previous year had become bad is a matter of appreciation. It appears that the debt had become bad and they had written-off in the books of account. It is not in dispute that the books of account for the relevant year were placed before the Assessing Officer. Thus, it is clear the Tribunal allowed to write off Rs.28,166/- as bad debt for the previous year on the basis of materials placed on record. The findings recorded by the Assessing Officer and the First Appellate Authority on this question of law, being findings of fact, are liable to be set aside. The question of law A-3, accordingly stands answered in favour of the assessee and against the Revenue.
ITA No. 67 of 2007
33. The AO while dealing with the question A4 in this appeal treated the donation made by the assessee to the Khandesh Education Society as a contribution contemplated by Section 40A(9) of the Act. In other words, the AO disallowed the deduction of the donation made to Khandesh Education Society holding it as a contribution contemplated by Section 40A(9) of the Act. This view was confirmed by the appellate authority. The Tribunal, however, set aside the findings recorded by the authorities below on this question holding that the donation was made by the assessee to the Khandesh Education Society as a welfare measure for the assessee’s employees in the factory at Amalner.
34. We have perused sub-section (9) of Section 40A of the Act, which states that no deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) or clause (iva) or clause (v) of sub-section (1) of section 36, or as required by or under any other law for the time being in force.
In the light of this provision, we have examined the facts of the present case. It has come on record that the donation to Khandesh Education Society made by the respondent-assessee was for providing financial assistance to the society for setting up a technical wing in its school at Amalner where the respondents-assessee have its factory premises. Such donation was given by the assessee, on a condition, which the Society had agreed, that they shall not charge admission fees or donation, from the children of the employees of the assessee. The Society had also agreed to provide free education for at least five children of the employees of the assessee. It is not in dispute that the Society already had its school/establishment at Amalner and it is not the case that the school itself was established/set up by the Society on the basis of the funds/donation given by the assessee. It is also not in dispute that apart from giving donation to the Society, the assessee has no connection with the Society. There doesn’t appear to be any dispute that Amalner, where the assessee’s factory premises situate, is a backward area. Having regard to the facts of the present case and having considered the provisions contained in sub-section (9) of Section 40A of the Act, we have no manner of doubt that the donation given by the assessee would not be a donation/contribution contemplated by sub-section (9) of Section 40A of the Act. It cannot be stated that the assessee gave donation or contributed for setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act or other institution. In our opinion, the donation given by the asseessee for the purpose, as reflected in the forgoing paragraph, was wholly and exclusively for the welfare of its employees and also for carrying on business of the assessee more efficiently by having contended labour force. In any case, the donation is not covered under Section 40A(9) of the Act. In applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the assessee’s business, reasonableness of the expenditure has to be judged from the point of view of businessman. It is pertinent to note that the AO or the appellate authority do not hold that the alleged payment of donation was not real and that it was not incurred by the assessee in the character of a trader or it was not laid out wholly or exclusively for the purpose of business of the assessee. In this view of the matter, we confirm the findings recorded by the Tribunal on the question of law A4. The question of law is accordingly answered in favour of the assessee and against the revenue.
ITA No. 68/2007
35. In this appeal, the first question of law -A5 will have to be reframed in view of the fact that learned counsel appearing for the revenue confined challenge to the amount of Rs.21,485/- only spent on purchase of paintings. Thus, the question of law – A5 is reframed as under:
“Whether the Tribunal was correct in holding that a sum of Rs. 21,485/- spent on purchase of paintings is a revenue expenditure and no depreciation is allowable over the same in view of the judgment of the Apex Court in ‘s case?”
The AO and the Appellate Authority did not allow the expenditure of Rs.21,485/- spent on purchase of paintings as contemplated by Section 37(1) of the Act. The Tribunal, however, held that paintings/works of art improve atheistic and working environment and it enables to carry on business with more efficiency. The Tribunal, thus held that the expenditure for purchasing the paintings is allowable revenue expenditure. The revenue relied upon the judgment of the Supreme Court in Sitalpur Sugar Works Ltd. (supra) to contend that the expenditure towards painting cannot be treated as revenue expenditure. We have already considered the judgment of the Supreme Court in Sitalpur. We have also quoted paragraph-3 of the report in the earlier part of the judgment. From bare perusal of this judgment, in particular, paragraph-3 thereof, it is clear that the expenditure was for shifting of the factory and setting it up at different place and in view thereof, it was held that the expenditure incurred was a capital expenditure and not a revenue expenditure. In our opinion, this judgment is of no avail to the revenue. As has been rightly held by the Tribunal that the expenditure incurred by the assessee for atheistic purpose or for having better working environment cannot be treated as capital expenditure. We find no reasons to interfere with the finding of the Tribunal on the question of law and hence we answer this question of law in favour of the assessee and against the revenue.
36. That takes us to the last question-A7. The AO and the AA, on this question of law, held against the assessee. The Tribunal, however, for the reasons recorded in paragraph 10.2 reversed the findings. For considering this question of law, it would be necessary to look into the relevant provisions of the Act. Section 32 of the Act deals with depreciation. For our purpose, the following portion of Section 32 is relevant, which reads thus:
“32. Depreciation (1) In respect of depreciation of —
(i) buildings, machinery, plant or furniture, being tangible assets;
(ii)know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession.”
This section was substituted. The relevant portion of Section 32(1) as it stood prior to the amendment vide Finance (No.2) Act, 1996, w.e.f. 1.4.1997 reads thus:
“32. Depreciation (1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession.”
The amendment made in 1997 was admittedly prospective in nature and it does not cover the present case wherein we are concerned for the assessment year 1987-88. If the amended provision, as it stands today, is applied, an assessee, such as the respondent would be entitled for seeking depreciation in respect of goodwill. Though clause 2 of sub-section (1) of Section 32 of the Act does not refer to goodwill, the Supreme Court in CIT v. Smifs Securities Ltd. [2012] 348 ITR 302/210 Taxman 428/24 taxmann.com 222 held that goodwill is also an asset within the meaning of Section 32 of the Act, it being an intangible asset and therefore depreciation on goodwill is allowable under the said section. This provision was not available for the assessment year 1987-88. The Legislature amended the provisions of Section 32(1) in 1997 and brought in force, by introducing clause (ii) allowing depreciation on intangible assets. This amendment itself, in our opinion, shows that it was not intended for the period prior to the amendment of 1997 and allow depreciation on goodwill. In view thereof, it cannot be stated that depreciation on goodwill was allowable prior to 1997 amendment.
37. Learned counsel appearing for the assessee invited our attention to Section 43 of the Act wherein the expression on “actual cost” is defined. The actual cost as defined therein means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. Proviso and explanations to the definition is not relevant for our purpose. As a matter of fact, learned counsel appearing for the respondent-assessee relied only on the first line of the definition to contend that actual cost means the actual cost of the assets to an assessee. She submitted that the total cost that was paid by the assessee in the present case was the cost which the assessee had to incur for purchasing the business. In other words, she submitted that the actual cost for the assessee was the total cost consisting of the cost paid for goodwill and therefore, the Tribunal has rightly spread over the amount of Rs.25,000/- paid for goodwill on other assets acquired are allowed depreciation thereon. We are unable to accede to the submission advanced by learned counsel for the assessee. Having regard to the intent of the Legislature, as observed earlier, goodwill was not covered for depreciation under Section 32 of the Act. The definition of actual cost under Section 43(1) of the Act cannot be read to cover goodwill as an asset for which the assessee had to pay and which can be termed as actual cost of the assets to the assessee. The Tribunal apportioned the cost of goodwill to various other assets acquired by the assessee thereby increasing the cost of other assets and allowing depreciation thereon, which, in our opinion, is not legally sustainable. In the circumstances, we set aside the findings recorded by the Tribunal on this question of law and answer the same in favour of the revenue and against the assessee.
In the result, the appeals are partly allowed and disposed of in terms of this order.
[Citation : 360 ITR 658]
