DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-2(2), BANGALORE V. SARASOULE PVT. LTD., BANGALORE

ITA 180/BANG/2024

AI Insights

The case involves the Revenue's appeal against the CIT(A)'s decision to delete the disallowance of certain Advertisement, Marketing, and Promotion (AMP) expenses claimed by Sarasoule Pvt. Ltd. for the assessment years 2015-16 to 2018-19. The primary contention was whether the expenses, which enhanced the brand value of 'RUOSH' owned by the director of the company, should be disallowed as they indirectly benefited a third party. The AO had initially disallowed 20% of these expenses, viewing them as personal expenditures benefiting the director. However, the CIT(A) reversed this decision, leading to the Revenue's appeal. The Tribunal's decision affirmed the CIT(A)'s ruling, emphasizing that the expenses were incurred for business purposes and any incidental benefit to the director did not warrant disallowance.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 24861 (ITAT-BANGALORE)
• Duration Of Justice: 9 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-11-2024
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 13-11-2024
• Assessment Year: 2015-2016
• Appeal Filed On: 01-02-2024
• Other Referred Cases: Roshan Lal Sanchiti v. Principal Commissioner of Income-tax, Sassoon J. David & Co. Pvt. Ltd. Vs CIT, CIT Vs. Agra Beverages Corporation Pvt. Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SRIDHAR E
• Assessee Lawyers: M MONISH
• Keywords: Business income; Revenue expenditure; Commercial expediency; Capital expenditure
• Section: 153A; 13; 37; 37(1); 20

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH: BANGALORE BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SHRI SOUNDARARAJAN K, JUDICIAL MEMBER ITA Nos. 180 to 183/Bang/2024 Assessment Years: 2015-16 to 2018-19 CO Nos. 13 & 14/Bang/2024 (In ITA Nos. 180 & 181/Bang/2024 Assessment Years: 2015-16 & 2016-17 The Dy. Commissioner of Income Tax, Central Circle – 2(2), Bangalore. Vs. Sarasoule Pvt. Ltd., No.192/1, 2,3, C.K Palya, Sakalawara Post, Bannerghatta Road, Bangalore – 560 083. PAN – AAFCS 4682 N PPELLANT RESPONDENT Assessee by : Shri M Monish, Advocate Revenue by : Shri Sridhar E, CIT (DR) Date of hearing : 13.11.2024 Date of Pronouncement : 26.11.2024 O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: All these appeals and COs filed by the Revenue and the assessee are against the order passed by the ld. CIT(A)–5, Bangalore dated ITA No.180 - 183/Bang/2024 & CO Nos.13 & 14/Bang/2024 Page 2 of 11 . 30/11/2023 and 30/12/2023 for the assessment years 2015-16 to 2018- 19. ITA No. 180/Bang/2024 for the AY 2015-16, an appeal by the Revenue 2. The only issue raised by the revenue is that the ld. CIT(A) erred in deleting the disallowance made by the AO amounting to Rs. 1,82,83,244/- being 20% of Rs. 9,14,16,221/- under the provisions of sec. 37(1) of the Act on account of AMP expenses. 3. Briefly stated facts are that the assessee in the present case is a private limited company and engaged in the business of manufacturing and trading of shoes. The assessee was subject to a search operation u/s 132 of the Act dated 10/1/2018. The AO during the assessment proceedings found that the assessee incurred certain expenses under the head ‘Advertisement, Marketing and Promotion’ (for short AMP) amounting to Rs. 9,66,68,932/- only, which has certainly resulted in the enhancement of the brand value viz. RUOSH which is owned by the Director of the company. Thus, the AO was of the view that the expenditure in dispute has given benefit to the owner of the brand out of the AMP expenses incurred by the assessee. Furthermore, the assessee in the statement furnished u/s 132(4) of the Act has also accepted the fact that certain AMP expenses are relating to the brand building owned by the Director and, therefore, such expenses need to be disallowed. However, the assessee has not disallowed such expense in the return filed u/s 153A of the Act. It was explained by the assessee that the AMP expenses were representing routine marketing expenses ITA No.180 - 183/Bang/2024 & CO Nos.13 & 14/Bang/2024 Page 3 of 11 . and there was no expense incurred specially to contribute to the value of the brand. However, the AO did not agree with the contention of the assessee by observing as under: “6. The Marketing expense comprises of Radio, Newspaper, Mobile Advertising, Photoshoot expense and other advertisement cost attributable to marketing the products under the Brand Name `RUOSH'. There is no doubt that the expenses are incurred for the increase of sales of the product which indirectly is also boosting the Brand image which is eventually helping the brand name to be stronger and stronger. This cannot be denied that indirectly Brand Name `RUOSH' is also getting publicity and brand value is increasing on account of Marketing expenditure incurred by the assessee but the entire expenditure incurred for marketing cannot be disallowed on account of Brand Building and the same will be not justifiable. J 10.7 If the Brand would have been owned by the assessee himself, then the same could have been claimed as revenue expenditure but in this present case the brand is owned by the Director of the Company and not by the company itself. Hence it cannot be denied that there is a component of personal expenditure and the same is not allowed u/s 37(1) of the IT Act, 1961. It will be justifiable to state that 20% of the expenditure incurred as stated above is in the nature of personal expenditure incurred for the purpose of Brand RUOSH building. Hence, 20% of Rs.9,14,16,22 amounting to Rs.1,82,83,244/- is disallowed u/s 37(1) of the IT Act, 1961 added back to the Income for the previous year.” 4. On appeal, the ld. CIT(A) deleted the disallowance made by the AO by observing as under: “4.3 The only way in which it can be ascertained as to whether there was any personal benefit that accrued to the director or not is by looking at the IT Returns of the Director, who is the owner of this brand. A perusal of the return of income shows that the director has no business income, much less any business income attributable to the exploitation of the brand \"ROUSII\". 4.4 On a careful appraisal of facts, it is decided that since it is not in dispute that the said expenditure is revenue in nature and the director who owns the brand has no business income at all, it would be fair to say that there is no clement or component of personal expenditure that is involved. Therefore, it is held that the 20% disallowance that has been made needs to be deleted and is held as such. Therefore, in result the grounds of appeal no. 2, 3 & 4 stands allowed.” ITA No.180 - 183/Bang/2024 & CO Nos.13 & 14/Bang/2024 Page 4 of 11 . 5. Being aggrieved by the order of the ld. CIT(A), the revenue is in appeal before us. 6. The ld. DR before us submitted that the assessee in the statement furnished u/s 132(4) of the Act has admitted making the disallowance of Rs. 5 crores, which is a vital piece of evidence. Therefore, the assessee cannot retract from the same without any plausible reason. The ld. DR in support of his contention relied on the judgment of Hon’ble Supreme Court in the case of Roshan Lal Sanchiti v. Principal Commissioner of Income-tax reported in 150 Taxmann.com 228. The ld. DR further submitted that since brand owns by the Director and, therefore, the benefit out of expenses for building brand value cannot be denied. 7. On the other hand, the ld. AR submitted that the expenses were incurred exclusively for the purposes of business and, therefore, if any incidental benefit goes to a 3rd party out of such expenses, the same cannot be made subject to disallowance. The ld. AR in support of his contention relied on the judgment of Hon’ble Supreme Court in the case of Sassoon J. David & Co. Pvt. Ltd. Vs CIT reported in 118 ITR 261 and the Hon’ble High Court of Delhi in the case of CIT Vs. Agra Beverages Corporation Pvt. Ltd. reported in 11 taxmann.com 350. 8. The ld. AR further submitted that the AO in his order has not considered the disallowance admitted by the assessee in the statement furnished u/s 132(4) of the Act. As such, the AO was also convinced that the statement furnished by the assessee u/s 132(4) of the Act is ITA No.180 - 183/Bang/2024 & CO Nos.13 & 14/Bang/2024 Page 5 of 11 . without any corroborative material and, therefore, based on the statement, no addition is warranted. 9. Both the ld. DR and the ld. AR before us relied on the orders of the authorities below as favourable to them. 10. We have heard the rival contentions of both the parties and perused the materials available on record. In the present case, the assessee has incurred huge amount of expenditure of Rs. 9,66,68,932.00 only under the head Advertisement, Marketing, and Promotion (for short AMP) for the domestic and overseas sales. Out of the impugned expenses, a sum of Rs. 9,14,16,221.00 was incurred relating to domestic sales. According to the AO such expenses are going to enhance the brand value namely “RUOSH” which is owned by the director of the assessee company. Accordingly, the AO was of the view that the expenses incurred by the assessee under the head AMP must be giving benefit to the owner of the brand by adding value to it out of such expenses. Thus, the AO disallowed an expense of Rs. 1,82,83,244/- only being 20% of AMP expenses of Rs. 9,14,16,221.00 (relating to domestic sales only) holding that such expenses were not incurred exclusively for the purpose of the business. However, the ld. CIT-A was pleased to delete the addition made by the AO for the reasons discussed above. Now the controversy arises for our adjudication whether the expenses disallowed by the AO needs to be sustained in the given facts and circumstances as the third party was benefitted out of the impugned expenses. In this regard we note that for claiming the deduction of the expenses under section 37 of the Act, the following conditions should be satisfied: ITA No.180 - 183/Bang/2024 & CO Nos.13 & 14/Bang/2024 Page 6 of 11 . 1. Expenditure should not be covered by the sections 30 to 36 2. It should not be in personal expense of the assessee 3. It should be incurred during the year for the business or profession carried out by the assessee 4. It should not be in the nature of capital expenditure. 10.1 The Hon’ble Supreme Court in the case of Sassoon J. David & Co. Pvt. Ltd. Vs CIT reported in 118 ITR 261 has also observed as under: 20. The next contention urged on behalf of the Department was that since Davids and Tatas were indirectly benefited by the retrench-ment of the services of the employees of the Company and payment of compensation to them and since there was no necessity to retrench the services of all the employees, the expenditure in question could not be treated as an expenditure laid out wholly and exclusively for business purposes of the Company. It has to be observed here that the expression \"wholly and exclusively\" used in section 10(2)(xv) of the Act does not mean \"necessarily\". Ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. It is relevant to refer at this stage to the legislative history of section 37 of the Income-tax Act, 1961 which corresponds to section 10(2)(xv) of the Act. An attempt was made in the Income-tax Bill of 1961 to lay down the \"necessity\" of the expenditure as a condition for claiming deduction under section 37. Section 37(1) in the Bill read \"any expenditure. . . . laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed\" The introduction of the word \"necessarily\" in the above section resulted in public protest. Consequently when section 37 was finally enacted into law, the word \"necessarily\" came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law. This view is in accord with the following observations made by this Court in CIT v. Chandulal Keshavlal & Co. [1960] 3 SCR 38 at page 48: \"Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous ITA No.180 - 183/Bang/2024 & CO Nos.13 & 14/Bang/2024 Page 7 of 11 . or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party—Usher's Wiltshire Brewerv v. Bruce 6 TC 399 (HL). Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business ; and it is immaterial that a third party also benefits thereby — [Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC)]. But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee.\" 10.2 The Hon’ble High Court of Delhi in the case of CIT Vs. Agra Beverages Corporation Pvt. Ltd. reported in 11 taxmann.com 350 has observed as under: 9. The agreement entered into between the assessee and Pepsi shows that the assessee was given a particular territory in Haryana, boundaries whereof are specifically defined in the agreement for the purposes of bottling, selling and distributing of the beverages. This entire territory within which the assessee was to operate, the assessee was not only supposed to bottle the beverages, it was also given rights to sell and distribute the project of the Pepsi in the defined territory during the currency of the said agreement. Naturally, therefore, in order to augment its profits in the said territory, it was the business decision of the assessee to advertise and publicize the product for maximizing its sale. The expenditure was, thus, incurred by the assessee for its own benefit. Clause 18 of the agreement authorized the assessee to undertake appropriate advertising and sales promotion activity for the beverage. If in the process, Pepsi or its trademark also benefited, that would not militate against the assessee as far as claiming the deduction under section 37 of the Act is concerned, once all the characteristics of the said provision stood satisfied. 10.3 In the present case, it is the admitted position that the expense incurred by the assessee is going to give benefit to third party who is ITA No.180 - 183/Bang/2024 & CO Nos.13 & 14/Bang/2024 Page 8 of 11 . also the director of the company but that can’t be a reason or yard stick for making the disallowance of the expenses incurred by the assessee. The AO has nowhere doubted on the genuineness of the expenses discussed above and likewise such expenses were also not capital in nature. In view of the above we are of the opinion that the expenses incurred by the assessee were exclusively for the purpose of the business which satisfies the test laid down by the Hon’ble Court discussed above, therefore, the same cannot be disturbed merely on the reasoning that some incidental benefit is going to the third-party. Admittedly, in the case on hand the brand value is owned by the director which is being used by the company. The director in the company has not charged any royalty against the use of such brand by the assessee. As such the assessee is running its business after exploiting the brand value of the director and in this connection the assessee has incurred the expenses which are incidental to the business of the assessee. Therefore, we are of the view that such expenses can’t be disallowed as alleged by the AO. 10.4 Regarding the contention of the learned DR that the assessee in his statement has accepted to offer an income of ₹ 5 crores furnished under section 132(4) of the Act, it is not out of place to mentioned that even the CBDT by way of instruction bearing number F. No. 286/98/2013-IT(Inv. III) dated 18th December 2014 has discouraged its officers to make any addition based on the statement obtained during survey/search proceedings until and unless it is corroborated by the documentary evidence. The relevant extract of the instruction of the CBDT reads as under: ITA No.180 - 183/Bang/2024 & CO Nos.13 & 14/Bang/2024 Page 9 of 11 . Instances/complaints of undue influence/coercion have come to notice of the CBDT that some assessees were coerced to admit undisclosed income during Searches/Surveys conducted by the Department. It is also seen that many such admissions are retracted in the subsequent proceedings since the same are not backed by credible evidence. Such actions defeat the very purpose of Search/Survey operations as they fail to bring the undisclosed income to tax in a sustainable manner leave alone levy of penalty or launching of prosecution. Further, such actions show the Department as a whole and officers concerned in poor light. 2. I am further directed to invite your attention to the Instructions/Guidelines issued by CBDT from time to time, as referred above, through which the Board has emphasized upon the need to focus on gathering evidences during Search/Survey and to strictly avoid obtaining admission of undisclosed income under coercion/undue influence. 3. In view of the above, while reiterating the aforesaid guidelines of the Board, I am directed to convey that any instance of undue influence/coercion in the recording of the statement during Search/Survey/Other proceeding under the I.T.Act,1961 and/or recording a disclosure of undisclosed income under undue pressure/ coercion shall be viewed by the Board adversely. 4. These guidelines may be brought to the notice of all concerned in your Region for strict compliance. 5. I have been further directed to request you to closely observe/oversee the actions of the officers functioning under you in this regard. 6. This issues with approval of the Chairperson, CBDT. 10.5 Regarding the admission by the assessee for the disallowance of AMP expenses, it is also pertinent to note that the AO himself has not considered such disallowance based on the statement furnished by the assessee in the assessment order. As such the assessee in the statement under section 132(4) of the Act has accepted to make the disallowance of Rs. 5 crores whereas the AO has worked out the disallowance 1.82 crores only. Therefore, we are of the view that no reference can be made to the statement furnished by the assessee during the search proceedings. In view of the above, we hold that there is no infirmity in the order of the ld. CIT-A and thus we uphold the same. Hence, the ground of appeal filed by the revenue is hereby dismissed. ITA No.180 - 183/Bang/2024 & CO Nos.13 & 14/Bang/2024 Page 10 of 11 . 11. In the result, the ground of appeal of the revenue is hereby dismissed. 12. Coming to ITA Nos. 181 to 183/Bang/2024 for the assessment years 2016-17 to 2018-19 13. The facts of the case on hand are identical to the facts of the case discussed above, therefore, respectfully following the same, the appeals of the revenue are hereby dismissed. 14. In the result, all three appeals filed by the revenue are dismissed. 15. Coming to CO Nos. 13 and 14/Bang/2024, filed by the assessee for the assessment years 2015-16 and 2016-17 16. Since the revenue appeals have been dismissed as discussed above, the Cross Objections becomes infructuous and accordingly dismissed. 17. In the combined result, all the appeals of the revenue are dismissed, and Cross Objections are dismissed being infructuous. Order pronounced in court on 26th day of November, 2024 Sd/- Sd/- (SOUNDARARAJAN K) (WASEEM AHMED) Judicial Member Accountant Member Bangalore Dated, 26th November, 2024 ITA No.180 - 183/Bang/2024 & CO Nos.13 & 14/Bang/2024 Page 11 of 11 . / vms / Copy to : 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore "