DCIT, CHENNAI V. Derby Clothing (P) Ltd., CHENNAI

ITA 1164/CHNY/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4634 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-05-2017
• Appeal Filed By: Department
• Bench Allotted: B
• Next Hearing Date: 11-04-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 28-04-2016
• Court: TRIBUNAL
• Keywords: Reopening of assessment; Bad and doubtful debts; Reason to believe; Revenue expenditure
• Section: 143(3); 37(1); 147; 148

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : CHENNAI , . ! '# BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G.PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A.NOS.1404 & 310/MDS./2013 & 1164/MDS./2016 / ASSESSMENT YEARS : 2005-06, 2009-10 & 2011-12 THE DCIT, CORPORAE CIRCLE 1(1), CHENNAI-34. VS. M/S.DERBY CLOTHING (P) LTD., 40, MAYOUR CHITTIBABU STREET, TRIPLICANE, CHENNAI -5. PAN AABCD 4286 H ( $% / APPELLANT) ( &'$% /RESPONDENT) / APPELLANT BY : MR.SUPRIYO PAL, JCIT, DR /RESPONDENT BY : MR.N.DEVANATHAN, ADVOCATE / DATE OF HEARING : 11.04 .2017 !' / DATE OF PRONOUNCEMENT : 11 .05 .2017 ( / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE APPEALS OF THE REVENUE IS DIRECTED AGAINS T THE DIFFERENT ORDERS OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-VI, VIII & I CHENNAI DATED 22.02.2013, 29.11.2012 & 18.02.2 016 PERTAINING TO ASSESSMENT YEARS 2005-06, 2009-10 & 2011-12 RESPECTIVELY. SINCE ISSUES INVOLVED IN THESE APPEALS ARE COMMON IN NATU RE, THESE APPEALS ITA NOS.1404, 310 /MDS./2013 ITA NO.1164/MDS./2016 :- 2 -: ARE CLUBBED TOGETHER, HEARD TOGETHER, DISPOSED OFF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. FIRST, WE TAKE UP APPEAL (ITA NO.1404/MDS./13) 2. THE FIRST GROUND IN ITS APPEAL IS WITH REGARD T O REOPENING OF ASSESSMENT, AND NON-ISSUANCE OF NOTICE U/S.143(2) O F THE ACT BEFORE COMPLETION OF ASSESSMENT . 2.1 THE BRIEF FACTS OF THE ISSUE ARE THAT THE ASSES SEE FILED RETURN OF INCOME FOR ASSESSMENT YEAR 2005-06 ON 30.10.2005 ADMITTING THE INCOME OF ` 5,09,160/-. THE RETURN OF INCOME WAS PROCESSED U/S. 143(1) OF THE ACT ON 14.09.2006. LATER ON VERIFICATION OF RECORDS AND MATERIALS, IT WAS SEEN FROM THE SCHEDULE 26 & P&L A CCOUNT, UNDER ADMINISTRATIVE AND SELLING EXPENSES THAT THE ASSE SSEE COMPANY HAS DEBITED ` 61,82,990/-. ON FURTHER PERUSAL, IT WAS NOTICED THA T NOTES ON ACCOUNTS SERIAL NO.16 STATES THE ADVERTISEMENT EXP ENSES WERE INCURRED WITH AN INTENTION OF CREATING A BRAND IMA GE FOR THE PRODUCT OF THE COMPANY. IN THIS CIRCUMSTANCE, ACCORDING TO AO, THIS EXPENDITURE SHOULD BE TREATED AS DEFERRED REVENUE E XPENDITURE AND AMORTIZED FOR A PERIOD OF 5 YEARS. THE EXCESS EXPE NDITURE OF 4/5 OF THIS AMOUNT COMING TO ` 48,46,392/- (4/5 TH OF ` 61,82,990) IS TO BE CAPITALIZED. THE AO FURTHER FOUND THAT THE ASSESSE E COMPANY IS DOING BUSINESS IN SALE OF FABRICS AND GARMENTS. ON PERUS AL OF RECORDS IN RESPECT OF PAYMENT OF STATUTORY DUES, THE FOLLOWING POINTS ARE NOTED. ITA NOS.1404, 310 /MDS./2013 ITA NO.1164/MDS./2016 :- 3 -: TNGST SALES 3,34,76,984 LESS: SALES RETURN 77,82,492 2,56,94,492 ACCORDINGLY, THE REASONS ARE RECORDED AND NOTICE IS SUED U/S.148 OF THE ACT. THE ASSESSEE HAS NOT FILED ANY RETURN OF INCOM E IN RESPONSE TO NOTICE U/S.148 OF THE ACT. HOWEVER, THE AO ISSUED A LETTER ON 19.10.2009, WHEREIN IT WAS MENTIONED THAT THE CASE WAS POSTED FOR HEARING ON 27.10.2009 ALONG WITH A LETTER STATING R EASONS FOR REOPENING OF ASSESSMENT IS ALSO FURNISHED TO THE AS SESSEE. CONSEQUENT TO THIS, RE-ASSESSMENT ORDER WAS PASSED MAKING VARI OUS ADDITIONS TOWARDS ADDING ADVERTISEMENT EXPENSES AND ADDING EX CESS SALES TAX. AGAINST THIS ORDER OF THE AO, THE ASSESSEE CARRIED THE APPEAL BEFORE THE LD.CIT(A) WHERE CHALLENGING THE RE-OPENING OF A SSESSMENT AND MERIT OF THE ADDITIONS MADE BY THE AO. ON APPEAL, T HE LD.CIT(A) AFTER QUASHING THE RE-ASSESSMENT ORDER WENT ON DECIDING THE MERIT OF THE ADDITIONS AND DELETED THE ADDITIONS ALSO. AGAINST T HIS, THE REVENUE IS IN APPEAL BEFORE US. 3. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. REGARDING RE-OPENING OF ASSESSMENT , LD.D. R SUBMITTED THAT THERE WAS NO ORIGINAL ASSESSMENT AND THE RETURN WA S PROCESS U/S.143(1) OF THE ACT. THE ASSESSMENT WAS RE-OPENE D AFTER RECORDING REASONS FOR RE-OPENING THE ASSESSMENT AND ALSO BY ISSUING THE NOTICE U/S.148 OF THE ACT, SICN ETHE ASSESSEE HAS NOT FILE D ANY RETURN OF ITA NOS.1404, 310 /MDS./2013 ITA NO.1164/MDS./2016 :- 4 -: INCOME IN RESPONSE TO NOTICE U/S.148 OF THE ACT. TH ERE IS NO QUESTION OF ISSUING OF NOTICE U/S.143(2) OF THE ACT. IN OUR OPINION, CONSIDERING THE ESCAPED INCOME TO THE ASSESSMENT WHERE THERE W AS NO ASSESSMENT AND ONLY PROCESSED U/S.143(1) OF THE AC T IS COVERED BY THE PROVISIONS OF THE SECTION 147 OF THE ACT AS SUB STITUTED WITH EFFECT FROM 01.04.1989 AND INITIATED RE-ASSESSMENT PROCEE DINGS. IN CASE, PROCESSING RETURNS WOULD BE COVERED BY THE MAIN PRO VISIONS OF THE SECTION 147 OF THE ACT AND NOT THE PROVISO THEREBY. 3.1 IN OUR OPINION, ONLY CONDITION HAS TO BE SPECI FIED THAT THE AO MUST HAVE RECORDED REASON TO BELIEVE THAT INCOME CH ARGEABLE TO TAX HAVE ESCAPED THE ASSESSMENT AND NEED NOT HAVE REASO N TO BELIEVE THAT SUCH ESCAPEMENT HAS OCCURRED BY A REASON OF EI THER OMISSION OR FAILURE ON THE PART OF ASSESSEE TO DISCLOSE FULLY O R TRULY ALL MATERIAL FACTS NECESSARY FOR ASSESSMENT FOR THAT YEAR. IN THE PRE SENT CASE, THE AO IS WITHIN THIS JURISDICTION TO INITIATE THE PROVISIONS OF THE SECTION 143(3) OF THE ACT ONLY ON SATISFYING THE FIRST CONDITION NOT ED ABOVE AND FAILURE TO TAKE STEPS U/S.143(3) OF THE ACE WILL NOT RENDER TH E AO POWERLESS TO INITIATE THE RE-ASSESSMENT PROCEEDINGS. EVEN WHEN RETURN PROCESSED U/S.143(1) OF THE ACT HAD BEEN ISUSED FOR THIS PURP OSE, WE PLACE RELIANCE ON THE JUDGMENET OF SUPREME COURT IN THE C ASE OF CIT VS. RAJESH JHAVERI STOCK BROKERS P. LTD IN [2007] 291 I TR 500 (SC) WHEREIN HELD THAT THE ASSESSING OFFICER HAD JURISDI CTION TO ISSUE NOTICE ITA NOS.1404, 310 /MDS./2013 ITA NO.1164/MDS./2016 :- 5 -: UNDER SECTION 148 FOR BRINGING TO TAX INCOME ESCAPI NG ASSESSMENT IN AN INTIMATION UNDER SECTION 143(1)(A) ON THE GROUND THAT THE CLAIM FOR BAD DEBTS BY THE ASSESSEE WAS NOT ACCEPTABLE AS THE CONDITIONS FOR ALLOWANCE SPECIFIED IN SECTION 36(1)(VII) AND (2) W ERE NOT FULFILLED. ACCORDINGLY, IN OUR OPINION, RE-OPENING IS VALID IN LAW. REGARDING NON- ISSUE OF NOTICE U/S.143(2) OF THE ACT WHERE WAS NO RETURN FILED BY THE ASSESSEE IN RESPONSE TO NOTICE U/S.148 OF THE ACT AND THE RETURN WAS NOT PENDING FOR ASSESSMENT , THERE IS NO QUESTION O F ISSUING OF NOTICE U/S.143(2) OF THE ACT. BEING SO, WE ARE OF THE OPIN ION THAT THE NON- ISSUE OF NOTICE U/S.143(2) OF THE ACT DOES NOT MAKE THE ASSESSMENT BAD IN LAW. ACCORDINGLY, IN OUR OPINION, THE GROUND REGARDING REOPENING OF ASSESSMENT AND NON ISSUE OF NOTICE U/S .143(2) BY REVENUE IS ALLOWED. 4. THE NEXT COMMON GROUND IN ALL THESE APPEALS IS WITH REGARD TO DISALLOWANCE OF ADVERTISEMENT EXPENSES, MADE BY THE AO. 4.1 ALL THESE ASSESSMENT YEARS UNDER CONSIDERATION , THE AO CONSIDERED THE ADVERTISEMENT EXPENSES AS A DEFERRED REVENUE EXPENDITURE AND ALLOWED ON ONE FIFTH OF THE EXPENDI TURE AMORTIZING THE SAME FOR 5 YEARS. AGAINST THIS, THE ASSESSEE CA RRIED THE APPEAL BEFORE THE LD.CIT(A). ON APPEAL,LD.CIT(A), DECIDED THE ISSUE IN FAVOUR ITA NOS.1404, 310 /MDS./2013 ITA NO.1164/MDS./2016 :- 6 -: OF ASSESSEE HOLDING THAT IT IS A REVENUE EXPENDITU RE. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. SIMILAR ISSUE CAME FOR CONSIDERATION BEFORE THIS TRIBUNAL IN ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2012-13 IN ITA NO.3333/MDS./16 VIDE ORDER DATED 02.02.2017 WHEREIN THE TRIBUNAL HELD HEREIN AS UNDER:- 4. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE ADVERTISEMENT EXPENDITURE INCURRED B Y THE ASSESSEE FOR THE PURPOSE OF CARRYING ON THE BUSINESS OF ASSE SSEE AND NOT INCURRED FOR THE PURPOSE OF SET UP OF THE BUSINESS. ONCE THE EXPENDITURE WAS INCURRED FOR WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF CARRYING ON THE BUSINESS OF ASSESSEE, WHICH IS T O BE CONSIDERED AS REVENUE EXPENDITURE ONLY, THOUGH THE BENEFIT MAY LAST FOR LONGER PERIOD AS HELD BY THE SUPREME COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. VS. CIT IN [ 1997] 225 ITR 802 (SC) HEREUNDER:- 'SEC. 37(1) FURTHER REQUIRES THAT THE EXPENDITURE S HOULD NOT BE OF A CAPITAL NATURE. THE QUESTION WHETHER A PARTICULAR EXPENDITURE IS REVENUE EXPENDITURE INCURRED FOR THE PURPOSE OF BUS INESS MUST BE DETERMINED ON A CONSIDERATION OF ALL THE FACTS AND CIRCUMSTANCES, AND BY THE APPLICATION OF PRINCIPLES OF COMMERCIAL TRADING. THE QUESTION MUST BE VIEWED IN THE LARGER CONTEXT OF BU SINESS NECESSITY OR EXPEDIENCY. IF THE OUTGOING OR EXPENDITURE IS SO RELATED TO THE CARRYING ON OR CONDUCT OF THE BUSINESS, THAT IT MAY BE REGARDED AS AN INTEGRAL PART OF THE PROFIT-MAKING PROCESS AND N OT FOR ACQUISITION OF AN ASSET OR A RIGHT OF A PERMANENT CHARACTER, TH E POSSESSION OF WHICH IS A CONDITION OF THE CARRYING ON OF THE BUSI NESS, THE EXPENDITURE MAY BE REGARDED AS REVENUE EXPENDITURE. ANY LIABILITY INCURRED FOR THE BUSINESS OF OBTAINING A LOAN WOULD BE REVENUE EXPENDITURE. ORDINARILY, REVENUE EXPENDITURE WHICH IS INCURRED ITA NOS.1404, 310 /MDS./2013 ITA NO.1164/MDS./2016 :- 7 -: WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS MUST BE ALLOWED IN ITS ENTIRETY IN THE YEAR IN WHICH IT IS INCURRED. IT CANNOT BE SPREAD OVER A NUMBER OF YEARS EVEN IF THE ASSESS EE HAS WRITTEN IT OFF IN HIS BOOKS, OVER A PERIOD OF YEARS. HOWEVE R, THE FACTS MAY JUSTIFY AN ASSESSEE WHO HAS INCURRED EXPENDITURE IN A PARTICULAR YEAR TO SPREAD AND CLAIM IT OVER A PERIOD OF ENSUIN G YEARS. IN FACT, ALLOWING THE ENTIRE EXPENDITURE IN ONE YEAR MIGHT G IVE A VERY DISTORTED PICTURE OF THE PROFITS OF A PARTICULAR YE AR. ISSUING DEBENTURES IS AN INSTANCE WHERE, ALTHOUGH THE ASSES SEE HAS INCURRED THE LIABILITY TO PAY THE DISCOUNT IN THE Y EAR OF ISSUE OF DEBENTURE, THE PAYMENT IS TO SECURE A BENEFIT OVER A NUMBER OF YEARS. THERE IS A CONTINUING BENEFIT TO THE BUSINES S OF THE COMPANY OVER THE ENTIRE PERIOD. THE LIABILITY SHOULD, THERE FORE, BE SPREAD OVER THE PERIOD OF DEBENTURES. 'FROM THIS JUDGMENT, IT IS VERY CLEAR THAT THOUGH THE ASSESSEE HAS WRITTEN OFF THE EXPEND ITURE IN ITS BOOKS OF ACCOUNT OVER A PERIOD OF FIVE YEARS, IT MU ST BE ALLOWED IN ITS ENTIRETY IN THE YEAR IN WHICH IT WAS INCURRED, IF IT IS REVENUE EXPENDITURE, AND IF IT IS WHOLLY AND EXCLUSIVELY IN CURRED FOR THE PURPOSES OF BUSINESS. THE HON'BLE SUPREME COURT OBS ERVED THAT IN CERTAIN CASES, THE FACTS MAY JUSTIFY THE ASSESSEE T O SPREAD OVER AND CLAIM THE EXPENDITURE OVER A PERIOD OF ENSUING YEAR S.' IN VIEW OF THE ABOVE JUDGMENT, WE ARE INCLINED TO H OLD THAT THE EXPENDITURE INCURRED ON ADVERTISEMENT BEING A REVEN UE EXPENDITURE WAS ALLOWABLE IN FULL. THIS GROUND OF T HE REVENUE IS REJECTED. IN VIEW OF THE ABOVE ORDER OF TRIBUNAL IN ASSESSEE' S OWN CASE, WE ARE INCLINED TO DECIDE THE CASE IN FAVOUR OF THE ASSESS EE. ACCORDINGLY, THE GROUND RAISED BY THE REVENUE IN ALL THESE APPEALS S TAND DISMISSED. 6. THE NEXT COMMON GROUND IN ITA NO.310/MDS./13 & IYA NO.1164/MDS./16 FOR ASSESSMENT YEAR 2009-10 & 2011- 12 RESPECTIVELY IS WITH REGARD TO DISALLOWANCE U/S.40(A)(IA) OF THE ACT WITH REFERENCE TO ITA NOS.1404, 310 /MDS./2013 ITA NO.1164/MDS./2016 :- 8 -: NON-DEDUCTION OF TDS ON INTEREST PAID BYTHE ASSESSE E ON THE LOAN AVAILED FROM THE MBFC. 7. SIMILAR ISSUE CAME FOR CONSIDERATION BEFORE THE HONBLE SUPREME COURT IN M/S.PALAM GAS AGENCIES VS. CIT IN C.A. NO. 5517/2-17 DATED 3/5/2017 WHEREIN HELD THAT THE PROVISIONS OF THE SE CTION 40(A)(IA) IS APPLICABLE TO BOTH PAID AND PAYABLE. HENCE, WE ALLO W THE GROUND TAKEN BY THE REVENUE. 8. IN THE RESULT, ALL THE APPEAL OF THE REVENUE IN ITA NO.1404/MDS./13, ITA NO.310/MDS./13 & 1164/MDS./16 ARE PARTLY ALLOWED. ORDER PRONOUNCED ON 11 TH MAY, 2017, AT CHENNAI. SD/ - SD/ - ( . ) ( G.PAVAN KUMAR ) ! / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER #$ / CHENNAI %& / DATED: 11 TH MAY, 2017. K S SUNDARAM &'(()*( +* / COPY TO: ( 1 . / APPELLANT 3. ( ,(- . / CIT(A) 5. */0 (1 / DR 2. / RESPONDENT 4. ( , / CIT 6. 02(3 / GF