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2012 Supreme(Del) 1899
High Court of Delhi
THE HONOURABLE MR. JUSTICE S. RAVINDRA BHAT & THE HONOURABLE MR. JUSTICE R.V. EASWAR
CIT
Versus
Hindustan Times
I.T.A. Nos. 95 & 100 of 2011
Decided on : 14-09-2012
For the Petitioner: Sanjeev Sabharwal, Sr. Standing Counsel.
For the Respondent:Ajay Vohra, with Ms. Kavita Jha, Somnath Shukla, Advocates.
The main legal point established in the judgment is that expenses related to a proposed business activity can be considered part of an existing business if they involve common elements and are of capital nature.
Headnote:
Deduction - Provision for Salary, Provident Fund etc - ITA 2158/Del/2003, ITA 827/Del/2006 - The court discussed the deduction towards provision for salary, Provident Fund etc not actually paid during the assessment year under consideration and held that the expenses were of capital in nature. The court referred to various High Court decisions and held that an abortive capital expenditure is not different from any other capital expenditure. The court also considered the nature of the expenditure and concluded that it was of capital nature.
Fact of the Case:
The assessee claimed business expenses for the Assessment Year 2001-02 and 1999-00, including reimbursement towards its share of joint venture company set-up for life insurance business, branding and re-branding of joint venture agreement, and market research on its proposed insurance project. The Assessing Officer disallowed the claims, and the appellate Commissioner rejected the claims. The ITAT allowed the appeals, holding that the proposed insurance business expenditure amounted to expenditure in respect of an existing business.
Finding of the Court:
The court upheld the ITAT's decision, stating that the expenses were part of the existing business of the assessee. The court also held that the liability accrued in the Assessment year under consideration, and the entire amount could be allowed.
Issues: The issues included the deduction towards provision for salary, Provident Fund etc, reimbursement expenses in joint venture for insurance business, drafting and redrafting of joint venture agreement, and market research on life insurance business in India.
Ratio Decidendi: The court applied the principle that to be part of an existing business, the new business activity must involve common elements such as unified administration and management, resource sharing, personnel sharing, and common funding. The court also considered the nature of the expenses and concluded that they were of capital nature.
Final Decision: The court partly allowed the appeal, adding back the amounts to the income of the assessee and bringing them to tax.
S. Ravindra Bhat, J.
1. The present common judgment arises out of an order of the Income Tax Appellate Tribunal (ITAT) dated 04.09.2009 in ITA 2158/Del/2003 and ITA 827/Del/2006. These two pertain to the Assessment Years 1999-00 and 2000-01.
2. The following questions of law arise for consideration:
i. Did the Tribunal err in law in upholding the deduction towards provision for salary, Provident Fund etc not actually paid during the assessment year under consideration?
ii. Did the Tribunal err in holding that the sum of Rs. 43,01,632/-, paid by the assessee as its share of the joint venture to insurance business, towards business capital and drafting expenses was deductible in its hands, as expenditure?
iii. Did the Tribunal fall into error in holding that the sum of Rs. 5,76,975/-, paid to IMRB for market research on life insurance business in India, was a deductible expenditure?
3. The brief facts necessary to decide the case are that the assessee is engaged in the business of printing and publishing of newspapers, periodicals and also production of video cassettes. For the Assessment Year, 2001-02, it filed a return declaring loss of Rs. 27,41,56,666/-. During this year, it claimed business expense to the tune of Rs. 38,01,632/-and another amount of Rs. 5,75,000/-. This was on account of reimbursement towards its share of joint venture company set-up for the purpose of life insurance business and towards its share for branding and re-branding of joint venture agreement. Likewise, for the Assessment Year 1999-00, the assessee claimed a deduction in the sum of Rs. 5,76,975/-, which had been paid to M/s. IMRB for conducting market research on its propose insurance project. It is a fact that the proposed insurance business was never launched and the commercial or business activity in fact never undertaken by the respondent assessee. Apart from these, for the Assessment Year 2000-01, an amount of Rs. 60,03,453/-had been claimed as payable to the assessee’s staff and employees, under various heads on account of provision made for Monesana Wage Board Award. The Assessing Officer (AO), in respect of all these as well as in respect of other matters disallowed the claim. The assessee could not succeed in the appeal to the Commissioner of Income Tax. The appellate Commissioner, by the two orders, rejected these claims in respect of expenses payable as contribution to the assessee towards the proposed joint venture and the branding/re-branding of joint venture fee, observing as follows:
“5. Reimbursement expenses in Joint Venture for Insurance business and other expenses.
A sum of Rs.38,01,632/-represents reimbursement of expenses to a Joint Venture company set for the life Insurance business. A further sum of Rs.5,75, 000/-is on account of drafting and redrafting of Joint Venture agreement etc. making a total of Rs.43,76,632/-This expenses is not revenue nature and clearly is of capital in nature. This view India further support from the decision of various High Courts, as discussed below
In the case of Kanoria Chemicals & Industries Ltd., Vs. CIT (1995) 78 Taxman 455
(Cal), it was decided that an abortive capital expenditure is not different from any other capital expenditure. The Delhi High Court itself had taken me view mat me expenditure on an abandoned project would be capital expenditure in State Trading Corporation of India Ltd., Vs. CIT (1974) 94 ITR 496 (Delhi). Subsequently the Delhi High Court in Triveni Engineering Works Ltd. Vs. CIT (1998) 232 ITR 639 232 ITR (Del) has held that an expenditure in the nature of capital expenditure cannot be treated as revenue expenditure only because the purpose for which the expenses was incurred could not be fulfilled. It was so held by the Delhi High Court that where the issue related to me claim for expenditure for getting a project report for a project which did not take off, it is the nature of the expenditure that is relevant and not whether the expenditure ultimately resu
