By TIOL News Service

MUMBAI, NOV 22, 2013: THE issues before the Bench are - Whether expenses other than the one related to maintaining of the corporate identity of the company can be allowed when the assessee had closed down the business; Whether interest paid on delayed payment of Custom duty is in the nature of duty only and such payment is allowable and Whether any expenditure incurred in relation to a new project which is ultimately abandoned, is to be construed as capital in nature. And the verdict goes against the assessee.

Facts of the case

The assessee, engaged in manufacturing of silk and trading of textiles, had declared loss of Rs. 14698548/-. The AO noted that the assessee had claimed expenses in P&L Account. The AO observed that the expenses can be allowed only for the purpose of carrying on the business and in this case the auditors report clearly mentioned that the assessee had discontinued the business and, therefore, the AO held that expenses were not allowable. In regard to interest of Rs.1,23,25,000/- on custom duty, AO held that the interest was not allowable as deduction. Similarly the penalty on delayed payment of sales tax of Rs. 86,049/- was also not allowable in terms of Explanation to section 37(1) . The assessee had entered into the technical collaboration agreement with MC for production of International grade bivoltine silk cocoons. The AO disallowed the expenses related to Technology transfer fees. The CIT(A) confirmed the disallowances.

On Appeal before the Tribunal the AR submitted that the assessee had not closed down the business. The assessee no doubt had decided to close down the operations but due to pending claims of creditors and certain other claims of the Government, the assessee had not been able to commence the procedure for winding up the business. It was also submitted that similar expenses had been allowed in the immediate preceding year i.e. A.Y 2003-04 and also in subsequent year. It was further submitted that interest on Custom duty was not penalty and was of the nature of duty which was allowable as deduction. Similarly, the technology transfer fees had been paid in connection with the business of the assessee and were allowable.

Having heard the parties, the Tribunal held that,

++ the assessee had closed down the business and, therefore, only the expenses required for maintaining the corporate identity of the company could be allowed. The major expense is interest on custom duty of Rs.1,23,25,000/-. This expenditure related to the period 10.1.1997 to 31.3.2002 which, therefore, does not relate to this year. Moreover the interest on Custom duty has the same nature as custom duty and therefore it could be allowed on payment basis, but the details show that the payment had not been made this year. The payment had been made in the immediate preceding year and in the subsequent year. Therefore, the interest of Rs.1,23,25,000/- is not allowable even otherwise;

++ as regards the technology transfer fees, the assessee has entered into the technical collaboration agreement with MC for production of International grade bivoltine silk cocoons. The project ultimately became unviable and never started. Therefore, any expenditure incurred in connection with the project such as technical fees etc, has been rightly considered as capital expenditure by the CIT(A).

(See 2013-TIOL-1010-ITAT-MUM)