The Assessing Officer wants to push my consultancy fee into s.35D and spread it over five years instead of allowing it as revenue expenditure. Can he, just by calling it a survey?
Not without showing the expenditure actually falls within one of the categories in s.35D(2). The Punjab and Haryana High Court rejected the Revenue's attempt to bring a management consultant's fee for a study on reorganisation of the assessee's core business within s.35D(2)(a)(iii), 'conducting market survey or any other survey necessary for the business of the assessee', because nothing in the pleadings or the orders below showed the engagement was aimed at conducting any survey. The Tribunal's finding that the expenditure was revenue was upheld and the appeal dismissed.
Decided by the High Court (J.S. Khehar J and Nawab Singh J) on 2009-01-20, reported as ITA No.109 of 2008, High Court of Punjab and Haryana at Chandigarh; return for the year filed 30 November 1998, assessment order dated 28 March 2001. It bears on section 35D, section 35D(1), section 35D(2), section 35D(2)(a)(iii), section 35D(3), section 37(1), section 260A, section Rule 46A of the Income Tax Act 1961, in Deductions & Disallowances, Assessment & Scrutiny and How Tax Law Is Read matters.
s.35D is a rationing provision and the Revenue uses it as one: if an expenditure can be forced into sub-section (2), a full revenue deduction becomes a one-fifth deduction over five years (one-tenth over ten years before the proviso inserted for expenditure incurred after 31 March 1998), capped by sub-section (3) at five per cent of the cost of the project or, at an Indian company's option, of the capital employed (two and one-half per cent before that proviso). The discipline this judgment imposes is that the officer must identify the specific clause of sub-section (2) and show, from the record, that the expenditure answers it. Two structural points from the section as reproduced in the judgment are worth carrying. Sub-section (1) applies to expenditure incurred before the commencement of business, or after commencement in connection with the extension of an INDUSTRIAL UNDERTAKING or the setting up of a new industrial unit — so for years governed by that text, expenditure on an existing non-industrial business does not enter s.35D at all. And sub-sections (5) and (5A) transfer an unexpired s.35D amortisation to the amalgamated or resulting company and deny it to the amalgamating or demerged company for the year of the amalgamation or demerger, which is the s.35D analogue of s.35DDA(2) to (5).
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee engaged M/s. Coopers and Lybrands to study the performance of the company and to suggest reorganisation of its core business so as to improve market share and profitability, paying Rs 1,62,93,000 (the appeal also refers to a figure of Rs 2,57,41,375). The Assessing Officer, by order dated 28 March 2001, treated the payment as capital expenditure and reduced the losses returned. The Commissioner of Income Tax dismissed the appeal on 10 January 2003. The Tribunal, by order dated 23 January 2007, held the expenditure to be revenue in nature, finding that the business in respect of which the consultants were engaged had been in existence for more than three decades, that the report concerned the existing business, that the consultants gave no information or technique for producing new parts and no technical know-how for any manufacturing, processing or production activity, that the report resulted in economy and efficiency in the working of the company for manufacturing and selling existing items, and that the expenditure merely facilitated the assessee's trading operations and enabled it to manage and conduct the business more efficiently while leaving the fixed capital untouched. The Revenue appealed under s.260A on three questions, the third being that the Tribunal erred in not taking note of ss.35D(1)(ii) and 35D(2)(a)(iii).
The appeal was dismissed and the questions of law raised by the Revenue were held to be bereft of any merit. It was not possible to accept that the expenditure could be considered an expense falling within the purview of s.35D(2)(a)(iii), because the Revenue could not point to anything in the pleadings or in the orders of the revenue authorities from which it could be concluded that the engagement of the consultants was aimed at conducting a market survey or any other survey necessary for the business of the assessee; the questions of law framed showed that the report pertained to reorganisation of the core business and improving market share and profitability.
On the s.35D point, the Court held the Revenue's contention foundered on the record: counsel could not invite attention to any part of the pleadings or of the orders below supporting the characterisation of the engagement as a survey, and the very questions of law framed described the report as pertaining to reorganisation of the core business and improvement of market share and profitability. On the Rule 46A point, no ground had been raised in the appeal assailing the Commissioner (Appeals)'s reception of additional evidence, and in any event the extract from the assessment order relied on did not show that the assessee had placed no material before the Assessing Officer beyond a letter dated 23 September 1996. On the capital-or-revenue point, the Court accepted the five findings of the Tribunal set out above and held that, without controverting those reasons, some of which were purely factual, it was not possible to treat the expense as capital.
it is not possible for us to accept that the expenditure incurred by the respondent - assessee can be considered to be an expense falling within the purview of sub-section (2)(a)(iii) of Section 35(D) of the 1961 Act
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Handle my notice → Ask a CA on WhatsAppNot without showing the expenditure actually falls within one of the categories in s.35D(2). The Punjab and Haryana High Court rejected the Revenue's attempt to bring a management consultant's fee for a study on reorganisation of the assessee's core business within s.35D(2)(a)(iii), 'conducting market survey or any other survey necessary for the business of the assessee', because nothing in the pleadings or the orders below showed the engagement was aimed at conducting any survey. The Tribunal's finding that the expenditure was revenue was upheld and the appeal dismissed. This was decided by the High Court (J.S. Khehar J and Nawab Singh J) and bears on section 35D, section 35D(1), section 35D(2), section 35D(2)(a)(iii), section 35D(3), section 37(1), section 260A, section Rule 46A of the Income Tax Act 1961. It is reported as ITA No.109 of 2008, High Court of Punjab and Haryana at Chandigarh; return for the year filed 30 November 1998, assessment order dated 28 March 2001. s.35D is a rationing provision and the Revenue uses it as one: if an expenditure can be forced into sub-section (2), a full revenue deduction becomes a one-fifth deduction over five years (one-tenth over ten years before the proviso inserted for expenditure incurred after 31 March 1998), capped by sub-section (3) at five per cent of the cost of the project or, at an Indian company's option, of the capital employed (two and one-half per cent before that proviso). The discipline this judgment imposes is that the officer must identify the specific clause of sub-section (2) and show, from the record, that the expenditure answers it. Two structural points from the section as reproduced in the judgment are worth carrying. Sub-section (1) applies to expenditure incurred before the commencement of business, or after commencement in connection with the extension of an INDUSTRIAL UNDERTAKING or the setting up of a new industrial unit — so for years governed by that text, expenditure on an existing non-industrial business does not enter s.35D at all. And sub-sections (5) and (5A) transfer an unexpired s.35D amortisation to the amalgamated or resulting company and deny it to the amalgamating or demerged company for the year of the amalgamation or demerger, which is the s.35D analogue of s.35DDA(2) to (5). If it applies to you, the first step is this: Make the Assessing Officer name the clause of s.35D(2) he is relying on, and test the actual scope of work in the engagement letter and the consultant's report against it.
The assessee engaged M/s. Coopers and Lybrands to study the performance of the company and to suggest reorganisation of its core business so as to improve market share and profitability, paying Rs 1,62,93,000 (the appeal also refers to a figure of Rs 2,57,41,375). The Assessing Officer, by order dated 28 March 2001, treated the payment as capital expenditure and reduced the losses returned. The Commissioner of Income Tax dismissed the appeal on 10 January 2003. The Tribunal, by order dated 23 January 2007, held the expenditure to be revenue in nature, finding that the business in respect of which the consultants were engaged had been in existence for more than three decades, that the report concerned the existing business, that the consultants gave no information or technique for producing new parts and no technical know-how for any manufacturing, processing or production activity, that the report resulted in economy and efficiency in the working of the company for manufacturing and selling existing items, and that the expenditure merely facilitated the assessee's trading operations and enabled it to manage and conduct the business more efficiently while leaving the fixed capital untouched. The Revenue appealed under s.260A on three questions, the third being that the Tribunal erred in not taking note of ss.35D(1)(ii) and 35D(2)(a)(iii). The matter was decided on 2009-01-20 by the High Court (J.S. Khehar J and Nawab Singh J). On those facts the High Court held as follows. The appeal was dismissed and the questions of law raised by the Revenue were held to be bereft of any merit. It was not possible to accept that the expenditure could be considered an expense falling within the purview of s.35D(2)(a)(iii), because the Revenue could not point to anything in the pleadings or in the orders of the revenue authorities from which it could be concluded that the engagement of the consultants was aimed at conducting a market survey or any other survey necessary for the business of the assessee; the questions of law framed showed that the report pertained to reorganisation of the core business and improving market share and profitability.
On the s.35D point, the Court held the Revenue's contention foundered on the record: counsel could not invite attention to any part of the pleadings or of the orders below supporting the characterisation of the engagement as a survey, and the very questions of law framed described the report as pertaining to reorganisation of the core business and improvement of market share and profitability. On the Rule 46A point, no ground had been raised in the appeal assailing the Commissioner (Appeals)'s reception of additional evidence, and in any event the extract from the assessment order relied on did not show that the assessee had placed no material before the Assessing Officer beyond a letter dated 23 September 1996. On the capital-or-revenue point, the Court accepted the five findings of the Tribunal set out above and held that, without controverting those reasons, some of which were purely factual, it was not possible to treat the expense as capital. In the words reproduced by the source cited on this page: "it is not possible for us to accept that the expenditure incurred by the respondent - assessee can be considered to be an expense falling within the purview of sub-section (2)(a)(iii) of Section 35(D) of the 1961 Act"
It was decided by the High Court on 2009-01-20 and is reported as ITA No.109 of 2008, High Court of Punjab and Haryana at Chandigarh; return for the year filed 30 November 1998, assessment order dated 28 March 2001. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 35D, section 35D(1), section 35D(2), section 35D(2)(a)(iii), section 35D(3), section 37(1), section 260A, section Rule 46A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was dismissed and the questions of law raised by the Revenue were held to be bereft of any merit. It was not possible to accept that the expenditure could be considered an expense falling within the purview of s.35D(2)(a)(iii), because the Revenue could not point to anything in the pleadings or in the orders of the revenue authorities from which it could be concluded that the engagement of the consultants was aimed at conducting a market survey or any other survey necessary for the business of the assessee; the questions of law framed showed that the report pertained to reorganisation of the core business and improving market share and profitability. It arises in Deductions & Disallowances, Assessment & Scrutiny and How Tax Law Is Read matters, on section 35D, section 35D(1), section 35D(2), section 35D(2)(a)(iii), section 35D(3), section 37(1), section 260A, section Rule 46A of the Income Tax Act 1961, and was decided by J.S. Khehar J and Nawab Singh J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Take the threshold point under s.35D(1): unless the expenditure was incurred before the business commenced, or in connection with the extension of an industrial undertaking or the setting up of a new industrial unit as the provision stood for the year, s.35D is not in play at all. Show what the report actually did — here, that it concerned an existing business of more than three decades, conveyed no new technique or know-how, produced economy and efficiency in manufacturing and selling existing items, and left the fixed capital untouched. If the deduction does fall into s.35D, compute the sub-section (3) ceiling — five per cent of the cost of the project, or at an Indian company's option of capital employed, for expenditure incurred after 31 March 1998 — and check the definitions of 'cost of the project', 'capital employed' and 'long-term borrowings' in the Explanation. Remember s.35D(6): expenditure allowed under s.35D cannot be claimed again under any other provision, so an alternative s.37(1) claim for the same amount will not survive.
Validity check could not be completed. Later treatment was NOT checked and no citator was consulted. Separately, the version of s.35D reproduced in the judgment is the pre-Finance Act 2008 text, under which sub-section (1)(ii) reaches only extension of an industrial undertaking or setting up of a new industrial unit; the current text of s.35D could not be verified from a current-edition departmental page (see the editor note), so this entry should not be used to state the present scope of s.35D(1) or the present conditions in s.35D(2) and (4). No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment has NO numbered paragraphs — it is a continuous oral judgment — so no paragraph locator is given for the quotation, which is identified by its position instead. The judgment reproduces s.35D in full as it stood at the time of the decision (20 January 2009). That text is PRE-FINANCE ACT 2008 in the relevant respect: sub-section (1)(ii) is confined to the extension of an industrial undertaking or the setting up of a new industrial unit. Do not read the reproduced text as the current section. I could NOT obtain a current-edition departmental page for s.35D: incometaxindia.gov.in/w/section-35d returns the correct heading 'Amortisation of certain preliminary expenses' for the Income-tax Act 1961 but carries a 'Year: 2009' stamp, and probes of /w/section-35d-62 and /w/section-35d-63 both returned 404. The current text of s.35D has therefore NOT been verified for this entry, and nothing in this entry states the current position of s.35D. Also note the judgment records a further Revenue point under Rule 46A of the Income-tax Rules 1962 on additional evidence, which failed because no such ground had been raised in the appeal. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed and the questions of law raised by the Revenue were held to be bereft of any merit. It was not possible to accept that the expenditure could be considered an expense falling within the purview of s.35D(2)(a)(iii), because the Revenue could not point to anything in the pleadings or in the orders of the revenue authorities from which it could be concluded that the engagement of the consultants was aimed at conducting a market survey or any other survey necessary for the business of the assessee; the questions of law framed showed that the report pertained to reorganisation of the core business and improving market share and profitability.
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