THE issue before the Bench is - Whether 'hundi discounting charges' can be treated as capital expenditure, when the same was treated as a period cost and charged to revenue account on a year to year basis, for all the previous and subsequent years. NO is the answer.
Facts of the case
A) The assessee is a commercial real estate developer. It had claimed revenue expenditure of Rs.1,15,57,034/- for A.Y 1993-94 while filing its returns. These were charges paid to the assessee's bank, American Express Ltd., towards hundi discounting facilities. In the course of its business operation, the contractors used to submit bills which were discounted on the facilities afforded by the banker. The AO however was of the opinion that this was used to finance its construction work in Qutub Enclave Complex and consequently could not have been treated as revenue expenditure but had to be necessarily capitalised, since it went towards augmenting stock in trade. On appeal, the CIT(A) confirmed the order of AO. On further appeal, the Tribunal was of the opinion that the view taken by the lower authorities was erroneous, because for all previous years and subsequent years the hundi discounting charges were treated as a period cost and charged to revenue account on a year to year basis. The Tribunal also noticed that "hundi discounting charges" was a different nomenclature of "interest paid" which was governed by Section 36(1)(iii).
B) During the A.Y, the assessee had transferred a part of its manufacturing unit to a sister concern and as a consideration allotted shares to the extent of the agreed value. The net fixed value of the assets was Rs.1,39,89,734/- and the net current assets were at Rs.2,02,40,560/-. The total value of the assets thus was Rs.3,42,30,294/-. As against these assets, a secured loan to the extent of Rs.1,01,43,452/- existed in the assessee's books. The consideration, therefore, claimed from the sister concern, in lieu of which shares were allotted, was Rs.2,40,86,842/-. The AO after noticing these facts, took in to account the net current assets of the assessee and also the balance sheets reflecting current assets such as inventories, sundry debits and bank balance. He thereafter concluded that since the transaction was not brought into P&L Account, the net gain was at Rs.1,00,97,108/- which was transferred to the sister concern and was sought to be brought to tax. On appeal, the CIT(A) confirmed this addition. On further appeal, the Tribunal set aside the orders of the lower authorities and deleted the additions.
C) The assessee while filing its return, had also claimed Rs.61,78,414/- as expenditure towards brokerage and commission. The amount was paid to its brokers for booking and sale of certain properties during the A.Y. The AO however, disallowed the same on the ground that during the year, the conveyance of the sale deeds were not executed. On appeal, the CIT(A) as well as the Tribunal accepted the assessee's contentions and set aside the disallowance.
Having heard the parties, the High Court held that,
Hundi discounting charges
++ it is seen that the Tribunal took note of the Supreme Court's judgment in Madhav Prasad Jatia V. CIT, to say that three conditions had to be satisfied to claim deduction in respect of interest on borrowed capital and that the expression "for the purpose of business" u/s 36(1)(iii) and Section 37 is wider than the expression "for the purpose of earning income, profits and gains" u/s 57(iii). Therefore, it was held that interest paid for the purpose of or in the course of carrying on business is allowable in the year in which the liability arose. This Court is also of the opinion that given the dictates of consistency, the view adopted by the ITAT is fair and reasonable. Having regard to the reasoning adopted by the ITAT, this Court finds no cause to interfere with the same, as it is in conformity with the judgment of the Supreme Court. Therefore, the question of law framed has to be answered in favour of the assessee;
Allotment of shares to sister concern
++ it is seen that what appears to have escaped the attention of the AO is that at the stage of valuation of the assets transferred itself, the book value of the fixed assets transferred was taken into consideration. Additionally, the entire net current assets too were valued and transferred. It was the aggregate of the book value and the net current value which constituted the sale price of Rs.2,02,40,560/-towards which shares were in fact allotted. Given these facts, the AO appears to have assumed that the other liabilities and assets too had been transferred, which was an inaccurate assumption. The CIT(A) too appears to have ignored this important feature. Given these factors, no fault can be found with the ITAT's conclusion that regardless of how the assessee treated the transaction, i.e., either reflecting in the P&L account or omitting to do so, in sum, no gain or income arises which can be brought to tax;
Brokerage & commission
++ it is noticed that the assessee's explanation clearly stated that brokerage and commission is not a direct expenses for acquiring to a specific property but it is in fact financial cost/selling expenses and is fully allowable in the year in which the same is incurred. The property brokers who have rendered their services to obtain advances on booking of properties are entitled to the payment of commission in terms of agreement entered into with them. Therefore, the expenses incurred on brokerage and commission on booking of properties being a finance/selling expenses are allowable in full. It is seen that for the A.Y 1983-84, wherein an additional ground taken by the Department for inclusion of the amount of brokerage and commission in the sales promotion expenses u/s 37(2)(a) have been dismissed. It is not disputed by the Revenue that for the other years, the assessee's treatment of such expenses has been in his favour and the Revenue has not chosen to challenge it. Therefore, the question of law is consequently answered in favour of the assessee and against the Revenue.
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