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ITA 1039/DEL/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 2713 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 4 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 17-07-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 01-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SATPAL SINGH
• Assessee Lawyers: PALLAVI DINODIA
• Keywords: Business expenditure; Royalty expenses; Revenue expenditure; Capital expenditure
• Section: 145; 37

Judgement Text

ITA NO. 1039/DEL/2012 ASSTT.YEAR: 2007-08 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C NEW DELHI BEFORE SHRI J.S. REDDY, ACCOUNTANT MEMBER AND SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER ITA NO. 1039/DEL/2012 ASSESSMENT Y EAR: 2007-08 DY.COMMISSIONER OF INCOME TAX, VS M/S I K INTERN ATIONAL PUBLISHING CIRCLE-11(1), HOUSE P. LTD., S-25, NEW DELHI. GREEN PARK EXTENSION, NEW DELHI-110016 (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI SATPAL SINGH, SR.DR RESPONDENT BY: MS PALLAVI DINODIA O R D E R PER CHANDRA MOHAN GARG, JUDICIAL MEMBER THIS APPEAL HAS BEEN PREFERRED BY THE REVENUE AGAIN ST THE ORDER OF COMMISSIONER OF INCOME TAX(A)-XV, NEW DELHI DATED 1 5.12.2011 IN APPEAL NO.270/09-10/C.I.T.(A)-XV FOR AY 2007-08. 2. GROUND NO. 2 OF THE REVENUE IS GENERAL IN NATURE WHICH NEEDS NO ADJUDICATION AND WE DISMISS THE SAME. THE SOLE GRO UND RAISED BY THE REVENUE IN THIS APPEAL READS AS UNDER:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.16, 83,478/- MADE ON ACCOUNT OF TREATMENT OF PRINTING/BLOCK AND ROYALTY EXPENSES AS CAPITAL IN NATURE. ITA NO. 1039/DEL/2012 ASSTT.YEAR: 2007-08 2 3. BRIEFLY STATED, THE FACTS GIVING RISE TO THI S APPEAL ARE THAT THE APPELLANT IS A PRIVATE LIMITED COMPANY ENGAGED IN T HE BUSINESS OF PUBLISHING OF EDUCATIONAL BOOKS AUTHORED BY FACULTY MEMBERS FROM INDIAN INSTITUTIONS. DURING THE YEAR UNDER CONSIDE RATION, THE ASSESSEE HAD INCURRED ROYALTY EXPENSES OF RS.9,54,897/- WHICH WE RE CALCULATED ON SALES AND THE ASSESSEE ALSO DEBITED RS.11,49,449/- ON ACCOUNT OF PRINTING CHARGES WHICH WERE INCURRED FOR PRINTING OF BOOKS A FTER DEDUCTION OF TDS AT APPROPRIATE RATES. THE ASSESSING OFFICER DE NIED THE DEDUCTION OF PRINTING CHARGES AND ROYALTY EXPENSES AND TREATED T HEM AS ITEMS OF CAPITAL EXPENDITURE ON THE GROUND THAT THESE ITEMS PROVIDE AN ADVANTAGE OF ENDURING NATURE AND THE ASSESSING OFFICER ALLOWED O NLY 20% OF EXPENSES. BEING AGGRIEVED BY THE ACTION OF THE ASS ESSING OFFICER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE COMMISSIONE R OF INCOME TAX(A) AND SUBMITTED AS UNDER:- 'ON THE FACTS OF THE CASE AND LEGAL POSITION THE ROYALTY IS CALCULATED ON THE BASIS OF SALES MADE IN THAT YEAR. AS PER ACCOUNTING STANDARD (AS-1) ISSUED BY INSTITUTE OF CHARTERED ACCOUNTANTS AND NOTIFIED BY CENTRAL GOVERNMENT IN EXERCISE OF THE POWERS CONFERRED BY SUB-SECTION (2) OF SECTION 145 OF THE INCOME TAX ACT, 1961, ONE OF THE FUNDAMENTAL ACCOUNTING ASSUMPTION DEFINE AS 'REVENUES AND COSTS ARE ACCRUED, THAT IS, RECOGNIZED AS THEY ARE EARNED OR INCURRED (AND NOT AS MONEY IS RECEIVED OR PAID) AND RECORDED IN THE ITA NO. 1039/DEL/2012 ASSTT.YEAR: 2007-08 3 FINANCIAL STATEMENTS OF THE PERIODS TO WHICH THEY RELATE.' AS PER FUNDAMENTAL ACCOUNTING PRINCIPLES I.E. MATCHING OF EXPENSES WITH REVENUE, ROYALTY IS CALCULATED AS A PERCENTAGE OF 'SALES' AND WHEN 'SALES' BY ITSELF, HAS BEEN OFFERED TO TAX WHOLLY A ND COMPLETELY DURING THE IMPUGNED ASSESSMENT YEAR, TO ALLOW ROYALTY WHICH IS A FUNCTION OF '(SALES' ON LY ON A PERCENTAGE (20%) BASIS AND THEREFORE DISALLOWING THE BALANCE 80% BY DEFERRING IT, IS AGAINST ALL WELL ESTABLISHED CANNONS OF LAW AND VIOLATIVE OF THE PRINCIPLE OF MATCHING EXPENSES AGAINST, REVENUE. THE APPELLANT COMPANY DOES NOT OWN ANY PRINTING BLOCKS WHATSOEVER. THEREFORE, PRINTING CHARGES ARE TOTALLY REVENUE IN NATURE AND AS PER SECTION 37 THESE SHOULD BE ALLOWED AS REVENUE EXPENDITURE AS THEY ARE EXPENDED TO EARN INCOME (SALES) FOR THAT RELEVANT PREVIOUS YEAR. FURTHER, AS PRINTING EXPENSES INCURRED FOR PRINTING THE BOOKS, FORM PART OF VALUATION OF INVENTORY AND THE BENEFITS OF THESE EXPENSES ALSO EXPIRE IN THE YEAR OF PRODUCTION ITSELF. THE UNEXPIRED PART OF THESE EXPENSES IS CARRIED FORWARD IN THE BALANCE SHEET IN THE FORM OF CLOSING INVENTORY OF BOOKS. IN VIEW OF THIS FACT, AND BY LAW THE EXPENSES MUST BE CHARGED OFF IN THE YEAR IN WHICH THEY OCCURRED. 4. THE COMMISSIONER OF INCOME TAX(A) DECIDED THE IS SUE IN FAVOUR OF THE ASSESSEE BY ALLOWING THE APPEAL WITH FOLLOWING OBSERVATIONS:- 6.1 DURING THE COURSE OF APPELLATE PROCEEDINGS, T HE APPELLANT WAS ASKED TO GIVE THE DETAILS OF ROYALTY PAYMENTS AND PRINTING COST FOR THE LAST 2 YEARS A ND THEIR PERCENTAGE VIS--VIS TURNOVER. THE FOLLOWING DATA ITA NO. 1039/DEL/2012 ASSTT.YEAR: 2007-08 4 WAS SUBMITTED WHICH IS AN EXTRACT FROM THE FINANCIA L ACCOUNTS. S.NO. PARTICULARS AY 2007-08 AY 2006-2007 1 TURNOVER RS. 94,95,888 RS.26,46,247 2 ROYALTY PAID RS. 9,54,897 RS. 1,78,689 3 % OF ROYALTY TO TURNOVER 10% 7% 4 COST OF SALES RS. 50,40,500 RS.18,12,360 5 PRINTING COST RS.14,47,922 RS. 2,82,126 6 % OF PRINTING COST TO COST OF SALES 29% 16% FROM THE PERUSAL OF ABOVE TABLE IT IS SEEN THAT ROYALTY PAYMENTS ARE IN THE VICINITY OF 7% TO 10% O F TURNOVER. SIMILARLY, THE COST OF PRINTING IS ALSO WITHIN THE RANGE OF 16% TO 29%. THIS PROVES WITHOUT ANY IOTA OF DOUBT THAT DURING THE YEAR UNDER CONSIDERATION THAT THE APPELLANT HAS NOT INCURRED ANY EXTRAORDINARY EXPENDITURE, WHICH CAN LEAD TO THE CONCLUSION THAT THE APPELLANT HAS INCURRED ANY CAPITAL EXPENDITURE AND HAS GOT ANY BENEFIT OF ENDURING NATURE. 6.2 HENCE IN VIEW OF THE ABOVE DISCUSSION, I AM NOT INCLINED TO ACCEPT THE ASSESSING OFFICERS DECISION AND THEREFORE DIRECT HIM TO TREAT ROYALTY PAYMENT AND PRINTING CHARGES AS A REGULAR BUSINESS EXPENSES OF REVENUE NATURE. 5. APROPOS THE SOLE GROUND OF THE REVENUE, LD. DR S UBMITTED THAT THE ASSESSING OFFICER RIGHTLY OBSERVED THAT THE EXPENSE S INCURRED BY THE ASSESSEE TOWARDS PRINTING/BLOCK AND ROYALTY PAID TO THE AUTHORS WERE CAPITAL IN NATURE WHICH RENDERED THE BENEFIT OF ENDURING NA TURE FOR THE ASSESSEE. THE DR FURTHER SUBMITTED THAT THE ASSESSING OFFICER RIGHTLY DEFERRED THESE EXPENSES FOR A PERIOD OF FIVE YEARS, HENCE 20% OF T HE TOTAL OF THESE EXPENSES ITA NO. 1039/DEL/2012 ASSTT.YEAR: 2007-08 5 WERE REASONABLY ALLOWED FOR THE ASSESSEE AND BALANC E AMOUNT RIGHTLY STOOD DISALLOWED AND ADDED TO THE TAXABLE INCOME OF THE A SSESSEE. 6. REPLYING TO THE ABOVE, THE AR SUBMITTED THAT SAM E EXPENDITURES WERE ACCEPTED AS REVENUE IN THE PRECEDING YEAR TO THE YE AR UNDER CONSIDERATION I.E. AY 2006-07 AND THE COMMISSIONER OF INCOME TAX(A) RI GHTLY HELD THAT THE EXPENSES WERE NOT EXTRAORDINARY AND WERE NOT OF CAP ITAL IN NATURE BECAUSE THE ASSESSEE HAD NOT GOT ANY BENEFIT OF ENDURING NA TURE BY MAKING THESE EXPENSES. 7. ON CAREFUL CONSIDERATION OF THE FACTUAL MATRIX, RIVAL SUBMISSIONS AND CONTENTIONS OF BOTH THE PARTIES, WE OBSERVE THAT TH E ASSESSING OFFICER ALLOWED SAME EXPENSES AS REVENUE FOR THE AY 2006-07 . DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER SIMPL Y OBSERVED THAT THESE EXPENSES BRING BENEFIT OF ENDURING NATURE FOR THE A SSESSEE, THEREFORE, THE ASSESSING OFFICER HELD THAT THESE ARE CAPITAL IN NA TURE AND ALLOWED 20% OF THE TOTAL EXPENSES AND REMAINING BALANCE WAS DISALL OWED. FROM THE IMPUGNED ORDER, WE OBSERVE THAT THE COMMISSIONER OF INCOME TAX(A) COMPARED THE PAYMENTS OF IMMEDIATELY PRECEDING YEAR FOR THE SAME HEAD OF EXPENSES AND HELD THAT DURING THE YEAR UNDER CONSID ERATION, THE ASSESSEE HAD NOT INCURRED ANY EXTRAORDINARY EXPENDITURE WHICH CO ULD LEAD TO A CONCLUSION THAT THE APPELLANT ASSESSEE HAD INCURRED ANY EXPENS ES WHICH BROUGHT BENEFIT ITA NO. 1039/DEL/2012 ASSTT.YEAR: 2007-08 6 OF ENDURING NATURE FOR THE ASSESSEE. WE ARE UNABLE TO SEE ANY PERVERSITY OR AMBIGUITY IN THE IMPUGNED ORDER IN THIS REGARD. TH EREFORE, WE HAVE NO REASON TO INTERFERE WITH THE SAME. ACCORDINGLY, WE HOLD THAT THE EXPENSES INCURRED BY THE ASSESSEE FOR PRINTING, BLOCKS RELAT ED TO THE AUTHORS OF BOOKS WAS REVENUE IN NATURE AND BY ANY STRETCH OF IMAGINA TION, THESE EXPENSES CANNOT BE HELD AS CAPITAL IN NATURE. THEREFORE, TH IS APPEAL OF THE REVENUE BEING DEVOID OF MERITS IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 25/07/2013. SD/- SD/- ( J.S. REDDY ) (CHANDRA MOHAN GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER DT. 25TH JULY, 2012 GS COPY FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR TRUE CO PY BY ORDER ASSTT. REGISTRAR