By Jagdish D. Shah
Jagdish T. Punjabi
Chartered Accountants
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New Page 1
part B: unreported decisions
2 KJS India Pvt. Ltd. v.
DCIT
ITAT ‘D’ Bench, Delhi
Before G. E. Veerabhadrappa
(VP) and
Rajpal Yadav (JM)
ITA No. 2422/Del./2007 and
2168/Del./2009
Decided on : 30-7-2010
Counsel for assessee/revenue
: Salil Kapoor & Pankuj Rawat/
Kavita Bhatnagar & H. K. Lal
S. 37(1) of the Income-tax
Act, 1961 — Business expenditure — Payment of severance pay on closure of
manufacturing business and expenditure incurred on market research — Whether
allowable — Held, Yes.
Per Rajpal Yadav :
Facts :
The assessee was in the
business of manufacturing of powdered soft drink in the name and style of TANG.
During the year under appeal it closed down its manufacturing business and paid
the sum of
`93.92 lacs by way of
severance pay to its employees. Its claim to allow such payment as business
expenditure was disallowed by the AO on the following grounds :
(1) As per its Form 3CD
the Board of Directors decided to discontinue the business of production of
powdered soft drink due to non-viability of operations and accordingly, the
assessee had ceased its business operations;
(2) As per its Notes on
Accounts, the assessee had decided to sell its business and hence, its
accounts were not prepared on going-concern basis;
(3) Severance cost was
incurred for closure of the business;
(4) U/s.37 only those
expenditure which are incurred for the running of business was allowable.
Another issue before the
Tribunal was about the allowability of expenditure of
`24.52 lacs incurred on
market research. According to the AO the assessee had incurred the expenses for
developing and designing a new product. Therefore, he disallowed the said
expenditure by treating the same as capital in nature as according to him, the
expenditure had resulted in providing benefit of enduring nature to the assessee.
On appeal the CIT(A) upheld
the order of the AO.
Before the Tribunal the
Revenue supported the orders of the lower authorities and pointed out that even
the directors in their Board meeting had specifically observed that the business
of manufacturing was closed.
Held :
The Tribunal noted that the
assessee besides manufacturing, was also engaged in the business of trading. It
had not closed down the business, but it had only suspended one of the business
activities viz. that of manufacturing of powdered soft drink. It had continued
to carry on its trading business. According to the Tribunal the business cannot
be construed to mean one single activity. Further, relying on the decisions of
the Supreme Court in the cases of Ravindranathan Nair, Sasoon J. David Co. Pvt.
Ltd., Narayan Swadesh, of the Delhi High Court in the cases of DCM Ltd. and
Anita Jain, of the Calcutta High Court in the case of Assam Oil Co. Ltd. and of
the Madras High Court in the case of Simpson & Co. Ltd., it held that the
expenses incurred towards severance cost was an allowable expenditure.
The Tribunal went through
the reports of the market agency and noted that the study was to upgrade sale of
its existing product with the help of market survey. It was not for the
development and design of a new product. Accordingly, relying on the decisions
of the Calcutta High Court in the case of Ananda Bazar Patrika and of the Bombay
High Court in the case of J. K. Chemicals Ltd. it held that the expenditure was
allowable as business expenditre.
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Cases referred to :
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4.
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CIT v. Assam Oil Co. Ltd., 154 ITR 647
(Cal.);
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1.
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Ravindranathan Nair
v. CIT, 247 ITR 178
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5.
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CIT v. Simpson &
Co. Ltd., (Mad.);
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(SC);
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6.
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CIT v. Ananda Bazar
Patrika, 184 ITR 542
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2.
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Sasoon J. David Co.
Pvt. Ltd. v. CIT, 118 ITR
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(Cal.);
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261;
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7.
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CIT v. J. K.
Chemicals Ltd., 207 ITR 985
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3.
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Narayan Swadesh v.
CIT, 26 ITR 765 (SC);
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(Bom.)
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