THE issues before the Bench are - Whether payment of one time custodian charges to NSDL pursuant to statutory obligation upon the assessee to enter into an agreement with the depository for dematerialization of securities can be allowed as revenue expenditure; Whether, if, the assessee has taken over the liability of the shareholders as a goodwill measure and has paid the said amount as one time custody charges, the said expenditure is not allowable u/s 37(1) of the Act; Whether such expenditure is effective in reducing the administrative expenses of the assessee on the account of handling physical share certificates and Whether such expenses incurred squarely falls within the phrase “laid out or expended wholly and exclusively for the purpose of business”. And the verdict partly goes in favour of the assessee.
F
acts of the case
Assessee is a leading exporter of software. The return was filed which was later taken up for scrutiny and the assessment was finally completed. Several additions were made by the AO, which were appealed by the assessee before the CIT(A). CIT(A) partly allowed the appeal, but majorly confirmed the findings on the aforesaid issues. However, on further appeal filed before the Tribunal, the Tribunal deleted all the additions made by the AO. Aggrieved by the same, the Revenue has filed this appeal before the High Court on the following grounds raised as the substantial questions of law.
Payment of one time custodian charges to NSDL
Assessee paid a sum lakhs to National Security Depository Limited (NSDL) as one time custody charges for shares pursuant to dematerialization of shares. The assessee had taken over the liability of payment as one time custody charges. The AO held that the assessee had paid the said amount as a goodwill measure and therefore the same was not allowable as deduction u/s 37(1). He further held that it cannot be allowed as a revenue expenditure as the assessee was deriving an enduring benefit from one time payment of custody charges and was capital in nature. On appeal, the Tribunal held that the charges paid to NSDL having not brought into existence any capital asset and was for the purpose of efficient functioning of the business.
Donation towards installation of traffic signals
The assessee had installed traffic signals at Bannerghatta Circle in Bangalore which was included in donations and added back to Keonics Unit, the income from which was exempt u/s 10A. The assessee had submitted that the installation of traffic signals was necessary for reducing congestion of traffic problems faced by its office employees on a daily basis, and hence, the signals have been installed to ensure that employees would reach office in time and hence should be allowed as revenue expenses. The AO disallowed this expenditure on the ground that the assessee was not liable to install the signals, further the traffic police was available to handle the situation and the employees did not face as such any traffic congestion problem. It was held that the assessee had donated these traffic signals to State Government which was not allowable as deduction, as donation in kind was not eligible for deduction u/s 80G.
On appeal, the Tribunal held that installation of traffic signals at their cost was prompted solely with a view to benefit its employees who were getting repeatedly involved in traffic jams and other hazards, as such they were a distressed lot and therefore the said expenditure incurred was laid out wholly and exclusively for the purposes of business and therefore allowable as deduction u/s 37(1).
Donation need not be paid out of taxable income
Assessee had made donations and entire amount was debited to Keonics Unit. In the computation of income, entire donations paid were added back to income of Keonics unit and exemption u/s 10A was claimed on the entire income of Keonics unit. The AO observed that the entire gross total income was the income relatable to units other than Keonics unit, from which assessee had claimed deduction u/s 80G. Once donations debited in Profit and Loss Account was added back to Net Profit of Keonics Unit, it became the income of Keonics Unit on which exemption u./s 10A had been allowed. Hence, the AO observed that claiming of deduction u/s 80G from gross total income (which does not include 10A unit’s income) amounted to claiming double deduction for single outgo, beca. Section 80G(5A) provides that, if a deduction is allowed under that Section, no other deduction is allowable under any other provisions of the Act. The contention of the assessee was that the word ‘deduction’ used in the sub-clause does not cover “exemption allowed u/s 10A”. The assessee has further contended that the donation was an application of income and there was no such stipulation in Section 80G that donation was to be made out of taxable income only.
However, the contentions were rejected by the AO. On appeal, the Tribunal held that Section 10A is an exemption Section whereas Section 80G is a deduction Section and therefore there would be no double deduction of the same item, even if a benefit under both the sections have been claimed. It was further held that there has been no double deduction in respect of the same item of expenditure and therefore, the donation of Rs.15 Lakhs qualified for deduction u/s 80G.
Provision to be created on scientific basis and estimate
The assessee debited a sum towards provision for post-sales customers support. The provision was made at 2% of amount billed till year end in respect of outstanding fixed price projects as at the year end. In the subsequent year, the provision was written back to the income statement and fresh provision was created. On being asked, what was the amount of actual expenditure debited in provision account in certain FYs towards post sales customer support, the assessee stated that such expenditure gets accounted under normal heads and there was no specific debit to warranty provision in any year. Since the provision was written back on the first day of the accounting year and actual expenses incurred towards post-sales support were debited to respective heads, it was not possible to give the details called for. The AO disallowed the provision on the ground that was no scientific basis followed but, only an estimate of provision was made at 2% of sale value without any basis. it was also held that the provision made was not ascertainable with reasonable degree of accuracy and was of a contingent nature.
On appeal, the Tribunal held that the provision made for the warranty liability was an ascertained liability and that it could not be treated as a contingent liability. Since the liability was a accrued liability and the estimate was on sound accounting principle, the liability was allowable.
Having heard the parties, the High Court held that,
Payment of one time custodian charges to NSDL
++ from the aforesaid two judgments of the Apex Court, it is clear that if the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring the benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand, it is made not for the purpose of bringing into existence any such asset advantage but for running the business or working it with a view to produce the profits it is a revenue advantage. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely facilitating the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case;
++ in the background of this law, when we look at the facts of this case, the assessee has paid the said amount of Rs.44.43 lakhs as onetime custody charges for 80,08,600 shares to the National Security Depository Limited. Without such payment, after the Act came into force, the assessee shall not make public or rights issue or other for sale of securities. Therefore in law, an obligation was cast on the assessee entering into an agreement with the depository for dematerialization of securities already issued or proposed to be issued to the public or existing shareholders. The advantage which enures to the assessee on account of this depository system is, lot of paper work, manual handling and postage, affixation of stamps would be saved. Transfers are affected through the mechanism provided by the depository system. The expenditure has helped in reducing the cost of handling physical share certificates. The dematerialization has obviated the need for the Board of Directors to meet and approve the share transfers. It has reduced the risk associated with the physical share certificate, i.e., forgery and loss of certificates. The process of getting the shares in demat form has benefited the company in getting the periodic information, for example, FII holding, promoter holding, holding that trigger acquisition of substantial holding for purpose of application takeover code of SEBI, etc., at a much faster pace with less administrative hassles and with a lesser cost. The expenditure has been incurred in the normal course of business. Thus the dematerilization has helped significantly in reducing the administrative costs. Even if certain benefits go to the shareholders, consequently, the assessee has gained good will. Therefore this expenses incurred squarely falls within the phrase “laid out or expended wholly and exclusively for the purpose of business” and therefore it shall be deducted in computing the income chargeable under the head of profits or gain of business or profession. This is precisely what the Tribunal has held. Therefore we do not find any infirmity in the said order passed by the Tribunal. Therefore the said substantial question of law is answered in favour of the assessee and against the Revenue;
Donation towards installation of traffic signals
++ as is clear from the case of Mysore Kirloskar Ltd, the expenditure claimed need not be necessarily spent by the assessee. It might be incurred voluntarily and without any necessity, but it must be for promoting the business. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under Section 37(1) of the Act, if it satisfies otherwise the tests laid down by law. Similarly, the words ‘for the purpose of business’ used in Section 37(1) of the Act, should not be limited to the meaning of earning profit alone. Business expediency or commercial expediency may require providing facilities like schools, hospitals, etc., for the employees or their children or for the children of the ex-employees. The employees of today may become the ex-employees tomorrow. Any expenditure laid out or expended for their benefit, if it satisfied the other requirements, must be allowed as deduction under Section 37(1) of the Act. Expenditure primarily denotes the idea of spending or paying out or away. It is something which is gone irretrievably, but should not be in respect of an unascertained liability of the future. Expenditure in this sense is equal to disbursement which, to use a homely phrase means something which comes out of the traders pocket;
++ therefore in the instant case, admittedly the assessee is having their establishment at Bannerghata Circle. Nearly about 500 employees are working in the said Unit. There was severe traffic congestion. Employees had to wait for longer time to reach the office. It seriously affected the business of the assessee, resulting in delay in completing the project. In order to facilitate its employees to reach their establishment safely and early, the assessee has installed traffic signals at Bannerghata Circle. Though it is the responsibility of the State and in particular, the Police Department either to install the traffic signal or control the traffic, the fact remains that in the absence of traffic signal or traffic police being positioned at Circles, the traffic congestion is a regular phenomenon. It seriously affects the free movement of public and in the instant case, the employees of the assessee. The assesee also has corporate social responsibility. In this background, in order to discharge their corporate social responsibility which also facilitates their business if the employees were to reach the place early, they thought of incurring the expenditure for installing the traffic signal at Bannerghata Circle. This expenditure is laid out or expended wholly and exclusively for the purpose of business. Therefore, the said expenditure incurred is allowable as deduction under Section 37(1) of the Act. That is precisely what the Tribunal has held. The said finding is in accordance with law and based of legal evidence. Therefore no case for interference is made out. Hence the said substantial question of law is answered in favour of the assessee and against the Revenue;
Donation need not be paid out of taxable income
++ the donation of Rs.15 lakhs is paid out of Keonics Unit, the profit of which is exempted under Section 10A of the Act. While computing the profit of Keonics Unit, donation paid is added back, as the same is not allowed to be deducted while computing the profit under Section 10A of the Act. Thus the disallowance in computing the income of Keonic Unit is per the statutory provisions of the Act, the donation being not considered as expenditure incurred wholly and exclusively for the purpose of business. Therefore it cannot be said that the donation paid has been allowed as deduction under the Act. The reason being the entire income incurred from the Keonics was exempted from payment of tax under Section 10A of the Act. There is no stipulation under Section 80G to the extent that donation is to be paid only out of taxable income of the year. Section 10A is an exemption Section whereas, Section 80G is deduction Section and therefore there would be no double deduction in respect of the same item, even if a benefit under both the Sections has been claimed. Section 80G(1) provides that in computing the total income of assessee, an amount equal to whole of the sum or the case may be, 50% of the amount paid by way of donation is to be allowed as deduction. As per sub-section 5A of Section 80G where deduction under this Section is claimed and allowed for any assessment year in respect of any sum specified in sub-section (2) the sum in respect of which deduction is so allowed shall not qualify for deduction under any other provision for the same or any other assessment year;
++ it is not in dispute that the assessee is entitled to the benefit of deduction under Section 80G. He has not claimed benefit twice. As the entire income from the Keonics Unit is exempted from payment of tax, the debiting of donation in the first instance and adding it back subsequently makes no difference. The entire income was exempted. Therefore the deduction under Section 80G is claimed from the total income excluding the income of Kenoics Unit and in law, the assessee is entitled to the said benefit. The disallowance by the lower authority on the ground of double benefit, on the face of it is incorrect and the Tribunal rightly interfered with the said order and allowed the said deduction;
Provision to be created on scientific basis and estimate
++ as the law stands today, as declared by the Apex Court in the case of ROTORK CONTROLS INDIA (P) LTD Vs. COMMISSIONER OF INCOME TAX - (2009-TIOL-64-SC-IT), if a provision for warranty is made on the basis of a sound accounting principle, on scientific basis, the said amount is allowable as deduction;
++ in the instant case, when particulars are sought for by the Assessing Authority to state what is the amount actually debited in provision account for the assessment year 1997-98 and 98-99 towards post sales customer support, the assessee stated that such expenditure gets accounted under normal head and there is no specific debit to warranty provision in any year. In the subsequent year, the provision is written back on the first day of the accounting year and actual expenses incurred towards post sales customer support are debited to respective heads. The assessee states that it is not possible to give the details called for. This aspect has been completely missed by the Tribunal. It proceeds on the assumption that figures given for warranty is based on sound accounting principle. In fact, in the aforesaid judgment of the Apex Court before the assessee could be granted the benefit, he has to establish: (a) an enterprise has a present obligation as a result of a past event, (b) it is probable that an outflow of resources will be required to settle the obligation and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized. For determining an appropriate historical trend, it is important that the company has a proper accounting system for capturing the relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. Thus, the decision on the warranty provision should be based on past experience of the company. A detailed assessment of the warranty provisioning policy is required particularly if the experience suggests that warranty provisions are generally reversed if they remained unutilized at the end of the period prescribed in the warranty. Therefore the company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The warranty provisions for the products should be based on the estimate at year end of future warranty expenses. Such estimates needs reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount;
++ this exercise has not been done. In fact, the assessee has not maintained separate account. He is not able to state what is the total amount spent towards this post sale expenses. In that view of the matter, the finding recorded by the Tribunal cannot be sustained. The proper course would be to set aside the said finding and remand the matter back to the Assessing Authority, giving an opportunity to the assessee to give the information sought for by the Department keeping in mind the law laid down by the Apex Court. On such information being given, the Assessing Authority shall pass appropriate orders on the basis of such information to be furnished by the assessee.
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