Rohit Ferro Tech Limited, Kolkata vs Assessee

IN THE INCOME TAX APPELLATE TRIBUNAL "A" BENCH: KOLKATA [Before Shri P.K.Bansal, A.M. & Shri Mahavir Singh, J.M.]

I.T.A. No.1052/Kol/2011 : Assessment Year : 2007-08

M/s. Rohit Ferro Tech Limited -Vs- DCIT, Circle-1, Kolkata (Appellant) (PAN:AACCR 1593A) (Respondent)

Date of concluding the hearing : 29.05.2015 Date of pronouncing the Order : 10.06.2015

Appearances :For the Department : Shri Pinaki Mukherjee, Sr.DR :For the Assessee : Shri Manish Tiwari, FCA

ORDER Per Shri P.K.Bansal, A.M.

This appeal has been filed by the assessee against the order of the CIT(A)-I, Kolkata dated 16.05.2011 for the assessment year 2007-08.

2. The a sse ssee has taken as many as four grounds of appeal but since ground nos. 2 and 3 were not pressed, therefore, the same stand dismissed, as not pressed. Now there survive only following two grounds for our adjudication.

"1. That on the facts and in the circumstances of the case, the Ld. CIT(A) is wrong and unjustified in not appreciating the facts for allo wability of Rs.39,67,262/- U/s.35D of I.T. Act, 1961.

4. That on the facts and in the circu mstances of the case, Ld. CIT(A) has proceeded on erroneous belief and misconception of law in confirming the order of Assessing Office r who enhanced the book profit by Rs.15,00,095/- in respect of FD intere st and

1 2 ITA No.1052/Kol/2011 M/s. Rohit Ferro Tech Limited : A. Yr: 2007-08

Rs.7,10,093/- in respect of provisions for gratuity, contrary to Explanation 1 of Section 115JB of I.T. Act, 1961."

3. Ground no.1 relates to the disallowance of rs.39,67,262/- under section 35D of the Income-Tax Act. Brief facts relating to this ground are that the a ssessee has incurred a sum of Rs.39,67,262/- a s share issue expenses in respect of increase in the sha re capital for setting up of a new unit at Jajpur, Orissa. The AO took the view that the expenses retain the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company, following the decision of the Hon'ble Supreme Court in the case of Punjab State Industrial Corporation Ltd. -vs- CIT 225 ITR 792 (SC). When the matter went before the C IT(A), before the CIT(A), the assessee contended that he claimed that the company decided to raise capital by public issue for Jajpur factory unit in the immediate preceding year. The process was completed in the present year and as per Schedule 13 of the balance-sheet, the asse ssee has incurred upto the sha re amounting to Rs.1,98,36,310/- and during the year, the assessee has amortized 1/5 t h of the expenditure amounting to Rs.39,67,262/-, which was claime d under section 35D of the Income-Tax Act, as the expenditure has been incurred for the expansion of the undertaking. The CIT(A) confirmed the order of the AO merely observing that the assessee failed to distinguish the case re lied upon by the AO in the assessment order.

4. We heard the rival submissions and carefully considered the same along with the orders of the ta x authorities below. We noted that the decision of the Hon'ble Supreme Court in the case of 3 ITA No.1052/Kol/2011 M/s. Rohit Ferro Tech Limited : A. Yr: 2007-08

Punjab State Industrial Corporation Ltd. -vs- CIT (supra) relates to the payment of fees to the Registrar of Companies for the issue of the share capital. The said decision has been followed by the Hon'ble Supreme Court in the case of Brook Bond India Ltd. -vs- CIT 225 ITR 798. The decision in the case of Punjab State Industrial Corporation Ltd. -vs- CIT (supra) does not relate to the other expenses related to the issue of share capital. We have perused the provisions of section 35D (2)(c)(iv). We noted that this proviso make the following expenditure to be eligible for deduction, as per the provision of section 35D(2)(c)(iv) "in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus". In view of this specific provision of the expenses re lating to the issue of the sha res for public subscription are eligible for deduction under section 35D, except the fees paid to the Registrar of Companies as that ha s not been specifically included under section 35D(2)(c)(iv). Section 35D(1) allows an a ssessee a deduction of an amount equal to 1/5 t h of the expenditure of each of the five suc cessive previous years, if the expenditure has been incurred by the assessee, after the commencement of his business in co nnection with extension of his undertaking or in connec tion with his setting up a new unit. It i s not denied that the assessee has incurred the said expenditure for the purpose of setting up a new unit at Jajpur, Orissa. Therefore, if the decision of the Hon'ble Supreme Court is read along with the provisions of section 35D where the assessee has incurred the expenditure for the issue of share capital but by way of payment of fees to the Registrar of companies, the fees paid to the Registrar of 4 ITA No.1052/Kol/2011 M/s. Rohit Ferro Tech Limited : A. Yr: 2007-08

Companies shall not be eligible for deduction under section 35D and it is a capital expenditure and cannot be allowed. Provisions of section 35D, in our opinion, are applicable only to those expenditure, which cannot be regarded to be the revenue expenditure but since the fees paid to the Registrar of Companies has not been included under sectio n 35D(2)(c)(iv), therefore, the assessee cannot get deduction for the same, from the details filed by the assessee, which a re available before us, it is not clea r ho w much amount has been paid by the assessee by way of fees to the Registrar of Companies. If this expenditure is incurred as fees paid to the Registrar of Companies, it cannot be allo wed even under section 35D . The rest of the expenditure, in our opinion, can be allowed under section 35D. We, therefore, in the intere st of justice and fair play to both the parties, set aside this issue to the file of the AO with the direction that the AO shall verify, after giving the opportunity to the assessee whether the expenditure incurred by the assessee and claimed as amortization under section 35D comply with the condition that in case the AO finds that these expense s comply with the condition under section 35D and to the extent this expenditure does not include the fees paid to the Registrar of Companies, the AO is directed to allow 1/5 t h of such expenditure to the a ssessee under section 35D of the income-Tax Ac t. Thus, this ground is statistically allo wed.

5. Ground no.5 relate s to the addition of Rs.15,00,095/-in respect of FD interest and Rs.7,10,093/- in respect of provisions fo r gratuity, while computing the book profit under section 115JB. Brief facts relating to this ground are that the AO, while determining the book profit, added the said amount. The assessee 5 ITA No.1052/Kol/2011 M/s. Rohit Ferro Tech Limited : A. Yr: 2007-08

went in appeal before the CIT(A). the CIT(A) confirmed the order of the AO .

6. We heard the rival submissions and carefully considered the same along with the orders of tax authorities below. We have also gone through the provisions of section 115JB. We find substance in the submissions of the ld. AR that the disallo wance made under section 40A(7) by way of provision of gratuity as well as interest income added by the AO on FD amounting to Rs.15,00,095/- does not fall under Explanation 1 to section 115JB. Explanation 1 defines that "book profit" means the profit as sho wn in the profit & loss account for the relevant previous year prepared under sub- section (2) and as increased by the amount of income-tax as are enumerated under clauses (a) to (g) and has to be reduced by the item as given under clauses (i) to 7(i). The disa llo wance made in respect of provision for gratuity does not fall under clauses (a) to

(j), even the interest on FD, which has been added, also does not fall in any of the clause s as given under clauses (a) to (j) to Explanation 1. Sub-section (2) of section 115JB requires that every company, shall, for the purposes of this sec tion, prepare its profit & loss account for the relevant previous year in accordance with provision of part II of Schedule VI to the Companies Act, 1956. It also requires that by preparing the annual accounts including profit and loss account, the accounting policies, accounting standard s adopted for preparing such accounts inc luding the profit and loss account, the method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts included in the profit & loss account and laid before the company at its annual general meeting, 6 ITA No.1052/Kol/2011 M/s. Rohit Ferro Tech Limited : A. Yr: 2007-08

in accordance with the provisions of section 210 of the Companie s Act, 1956. It is not the case of the Revenue that the ac counts ha s not been prepared by the assessee in accordance with Part-II of Schedule-V I to the Companies Act or the assessee has not adopted the accounting policies, accounting standards and the method and rates adopted for calculating the depreciation as laid before the company in its Annual General Meeting. In view of this fact, we delete the addition made by the AO. Therefore, this ground taken by the assessee is allo wed.

7. In the result, the appeal filed by the assessee stands partly allowed for statistical purposes.

Order pronounced in the Open Court on 10.06.2015.

Sd/- Sd/- (Mahavir Singh) (P.K.Bansal) Judicial Member Accountant Member Dated : 10.06.2015

Talukdar(Sr.P.S.)

Copy of the order forwarded to:

1. M/s. Rohit Ferro Tech Limited, 35, C.R. Avenue, Kolkata - 700

012. 2 DCIT, Circle-1, Kolkata

3. The CIT(A),

4. CIT,

5. DR, True Copy, By order,

Asstt. Registrar, ITAT, Kolkata 7 ITA No.1052/Kol/2011 M/s. Rohit Ferro Tech Limited : A. Yr: 2007-08