THE issues before the HC are - Whether when the assessee incurs certain expenditure on an aborted business venture, to claim it as part of the existing business, the assessee is necessarily required to satisfy that the new business had common elements like unified administration, resource sharing and common funding - Whether when the new business was not even permitted and the JV partner is unknown, even then expenditure incurred in this connection can be claimed as expenditure of the existing business - Whether the liability arising out of the Provident Fund, ESI arrears etc can be allowed as deduction u/s 43B if the liability accrued in the AY though the mode and manner of payment was deferred. And the verdict partly goes in favour of the Revenue.
Facts of the case
The assessee is engaged in the business of printing and publishing of newspapers, periodicals and also production of
The assessee is engaged in the business of printing and publishing of newspapers, periodicals and also production of
video cassettes. For the AY, 2001-02, 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 AY 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. 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 AY 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 AO, in respect of all these as well as in respect of other matters disallowed the claim.
The assessee’s appeals were allowed by the ITAT. It was held that the proposed insurance business expenditure amounted to expenditure in respect of an existing business. The Tribunal relied upon the judgment reported as CIT v. Tata Chemicals 256 ITR 395; Produce Exchange Corporation Ltd. v. Commissioner of Income-tax 77 ITR 739; Jay Engineering Works Ltd. v. CIT 212 CTR 562 and CIT v. Monnet Industries Limited (2008-TIOL-586-HC-DEL-IT ). The Tribunal, therefore, held that the total amount of Rs. 43,78,607/- (Rs. 38,01,632/- business expenditure and Rs. 5,76,975/-) paid by the assessee as its share of the joint venture towards proposed insurance business could be properly allowed as deduction. Likewise, as regards the sum of Rs. 5,76,975/- incurred towards market research report fee, the Tribunal followed its reasoning with regard to expenditure towards existing business and also relied upon the judgment of this Court in CIT v. Relaxo Footwears Limited 293 ITR 231 = (2007-TIOL-221-HC-DEL-IT). Similarly, so far as the liability to make payments towards arrears and liability arising out of the Provident Fund, ESI arrears etc were concerned, the Tribunal held that the liability accrued in the AY under consideration since the award had been made in that year even though the mode and manner of payment was deferred; in other words, the liability accrued in the AY in question. The assessee had relied upon the decision of the Andhra Pradesh High Court in S. Subba Rao & Co. v. Union of India 173 ITR 708. Following that and the Special Bench ruling of the Tribunal in Dy. CIT v. Glaxo Smith Kline Consumer Healthcare Ltd. (2007-TIOL-284-ITAT-CHD-SB ), it was held that the entire amount of Rs. 60 lakhs could be allowed.
On appeal by the Revenue, the High Court held that,
++ to be part of an existing business, the assessee has to satisfy that the business proposed, or undertaken involves common elements, such as unified administration and management, resource sharing, personnel sharing and common funding. If these are satisfied, the quest ends, and the business activity being looked into (to consider if it is new) would be deemed as part of the existing business;
++ in this case, the existing business of the assessee was in newspapers and publication. It examined the feasibility of starting life insurance business. There are no details as to whether that business could have involved the same personnel, or there were other commonalities, besides common funding. The commercial activities are different; the laws applicable are also different. An amendment to the law enabled foreign investment opportunity to the extent of 26% in any given domestic company (by an overseas company) in the insurance sector. This amendment was made in 2000 to the Insurance Act, 1938. The assessee apparently entered into a joint venture with some other concern. Its share of expenses to set up that joint venture, and the share of expenses for feasibility report, was held to be deductible, as it constituted part of an existing business;
++ there can be no dispute about the fact that the issue or question of whether a commercial activity or business is part of an existing business is essentially one of fact. The record reveals no document showing that the new activity was even permitted at the relevant time; if so, whether the assessee had obtained any license in this regard. Further, there could not be any assumption that there would be a common place of business, or that common staff and personnel would be used. Indeed, the business was not even that of the assessee; it was a joint venture; the identity of the other partner is unknown. Having regard to these, the question of interconnection had to be seen in the light of the facts as they presented themselves in this case;
++ the mere circumstance that common funding of the (proposed) business existed, and there was a management which conceived the start of the new business activity, did not make the proposed joint venture business an “existing business” for the expenditure to qualify as revenue expenditure. For these reasons, the rulings relied upon by the assessee are distinguishable. The same reasoning would apply for feasibility study report fee. The market survey appears to be of a different kind. These expenses, in the court’s opinion (joint venture share reimbursement, joint venture agreement drafting fee, market survey report fees) are pre-start up expenses in respect of an aborted activity, which would fall within the proscribed category spelt out in Challapalli Sugars Ltd. V Commissioner of Income-tax ( 2002-TIOL-593-SC-IT );
++ as far as this question goes, the ITAT allowed all the heads of expenditure. The argument of the revenue here is that commitments or liabilities arising out of the Wage award were not “payable” and their being shown as accrued liabilities had to be seen in the context of the fact that the employer assessee had to pay these arrears in three installments. Therefore, the bar under Section 43B was attracted;
++ it would be evident that the provision is an exception to what is “otherwise” deductible in the case of an assessee. Parliamentary intention, in enacting this provision was to preclude assessees from claiming as payable, on mercantile or accrual basis, certain specified categories of liabilities. In such cases, unless payments are actually made, no deduction is admissible. A careful analysis of the main provision would reveal that the nature of expenses, i.e. arrears of salary and other benefits payable to employees, is not covered by Section 43B at all. Such liabilities are not contributions to provident fund, superannuation or any other fund or plan which the employer is obliged to extend to its employees to fulfill its statutory or contractual obligations. The character of the amounts in this case is pure and simple arrears of wages, which were directed to be paid as a result of wage revision exercise mandated by an award. There is no doubt that the liability arose during the year covered by the AY. However, the award itself required payment in installments. It is not as if the assessee voluntarily deposited the amounts, when they were not payable, or claimed it when no such liabilities existed as a matter of fact. Having regard to these facts, the Court is of opinion that the Tribunal was justified in holding that the liabilities arising out of the Monesana Wage Board award were justifiably deductible as expenditure, and not covered by Section 43-B. As regards the other part of its order, the Tribunal itself did not grant relief in respect of contributions to Provident funds, and allowed only such portions as were actually paid. No other ground urged by the assessee was accepted. Therefore, the Court sees no reason to interfere with the order of the ITAT on this aspect;
++ For the above reasons, the first two questions are answered in favour of the Appellant/revenue, and against the assessee; the findings of the Tribunal in respect of the third question framed, are upheld
The assessee’s appeals were allowed by the ITAT. It was held that the proposed insurance business expenditure amounted to expenditure in respect of an existing business. The Tribunal relied upon the judgment reported as CIT v. Tata Chemicals 256 ITR 395; Produce Exchange Corporation Ltd. v. Commissioner of Income-tax 77 ITR 739; Jay Engineering Works Ltd. v. CIT 212 CTR 562 and CIT v. Monnet Industries Limited (2008-TIOL-586-HC-DEL-IT ). The Tribunal, therefore, held that the total amount of Rs. 43,78,607/- (Rs. 38,01,632/- business expenditure and Rs. 5,76,975/-) paid by the assessee as its share of the joint venture towards proposed insurance business could be properly allowed as deduction. Likewise, as regards the sum of Rs. 5,76,975/- incurred towards market research report fee, the Tribunal followed its reasoning with regard to expenditure towards existing business and also relied upon the judgment of this Court in CIT v. Relaxo Footwears Limited 293 ITR 231 = (2007-TIOL-221-HC-DEL-IT). Similarly, so far as the liability to make payments towards arrears and liability arising out of the Provident Fund, ESI arrears etc were concerned, the Tribunal held that the liability accrued in the AY under consideration since the award had been made in that year even though the mode and manner of payment was deferred; in other words, the liability accrued in the AY in question. The assessee had relied upon the decision of the Andhra Pradesh High Court in S. Subba Rao & Co. v. Union of India 173 ITR 708. Following that and the Special Bench ruling of the Tribunal in Dy. CIT v. Glaxo Smith Kline Consumer Healthcare Ltd. (2007-TIOL-284-ITAT-CHD-SB ), it was held that the entire amount of Rs. 60 lakhs could be allowed.
On appeal by the Revenue, the High Court held that,
++ to be part of an existing business, the assessee has to satisfy that the business proposed, or undertaken involves common elements, such as unified administration and management, resource sharing, personnel sharing and common funding. If these are satisfied, the quest ends, and the business activity being looked into (to consider if it is new) would be deemed as part of the existing business;
++ in this case, the existing business of the assessee was in newspapers and publication. It examined the feasibility of starting life insurance business. There are no details as to whether that business could have involved the same personnel, or there were other commonalities, besides common funding. The commercial activities are different; the laws applicable are also different. An amendment to the law enabled foreign investment opportunity to the extent of 26% in any given domestic company (by an overseas company) in the insurance sector. This amendment was made in 2000 to the Insurance Act, 1938. The assessee apparently entered into a joint venture with some other concern. Its share of expenses to set up that joint venture, and the share of expenses for feasibility report, was held to be deductible, as it constituted part of an existing business;
++ there can be no dispute about the fact that the issue or question of whether a commercial activity or business is part of an existing business is essentially one of fact. The record reveals no document showing that the new activity was even permitted at the relevant time; if so, whether the assessee had obtained any license in this regard. Further, there could not be any assumption that there would be a common place of business, or that common staff and personnel would be used. Indeed, the business was not even that of the assessee; it was a joint venture; the identity of the other partner is unknown. Having regard to these, the question of interconnection had to be seen in the light of the facts as they presented themselves in this case;
++ the mere circumstance that common funding of the (proposed) business existed, and there was a management which conceived the start of the new business activity, did not make the proposed joint venture business an “existing business” for the expenditure to qualify as revenue expenditure. For these reasons, the rulings relied upon by the assessee are distinguishable. The same reasoning would apply for feasibility study report fee. The market survey appears to be of a different kind. These expenses, in the court’s opinion (joint venture share reimbursement, joint venture agreement drafting fee, market survey report fees) are pre-start up expenses in respect of an aborted activity, which would fall within the proscribed category spelt out in Challapalli Sugars Ltd. V Commissioner of Income-tax ( 2002-TIOL-593-SC-IT );
++ as far as this question goes, the ITAT allowed all the heads of expenditure. The argument of the revenue here is that commitments or liabilities arising out of the Wage award were not “payable” and their being shown as accrued liabilities had to be seen in the context of the fact that the employer assessee had to pay these arrears in three installments. Therefore, the bar under Section 43B was attracted;
++ it would be evident that the provision is an exception to what is “otherwise” deductible in the case of an assessee. Parliamentary intention, in enacting this provision was to preclude assessees from claiming as payable, on mercantile or accrual basis, certain specified categories of liabilities. In such cases, unless payments are actually made, no deduction is admissible. A careful analysis of the main provision would reveal that the nature of expenses, i.e. arrears of salary and other benefits payable to employees, is not covered by Section 43B at all. Such liabilities are not contributions to provident fund, superannuation or any other fund or plan which the employer is obliged to extend to its employees to fulfill its statutory or contractual obligations. The character of the amounts in this case is pure and simple arrears of wages, which were directed to be paid as a result of wage revision exercise mandated by an award. There is no doubt that the liability arose during the year covered by the AY. However, the award itself required payment in installments. It is not as if the assessee voluntarily deposited the amounts, when they were not payable, or claimed it when no such liabilities existed as a matter of fact. Having regard to these facts, the Court is of opinion that the Tribunal was justified in holding that the liabilities arising out of the Monesana Wage Board award were justifiably deductible as expenditure, and not covered by Section 43-B. As regards the other part of its order, the Tribunal itself did not grant relief in respect of contributions to Provident funds, and allowed only such portions as were actually paid. No other ground urged by the assessee was accepted. Therefore, the Court sees no reason to interfere with the order of the ITAT on this aspect;
++ For the above reasons, the first two questions are answered in favour of the Appellant/revenue, and against the assessee; the findings of the Tribunal in respect of the third question framed, are upheld
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