M/s Kohler India Corporation (P) Ltd., Bangalore V. ACIT, Bangalore

ITA 1213/BANG/2011

• Counselvise Citation: 121321114 RSA 2011
• Duration Of Justice: 11 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-11-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 30-10-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 05-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHI S K AMBASTHA
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Capital asset; Revenue expenditure; Capital expenditure
• Section: 143(3); 37; 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH A BEFORE SHRI N BARATHVAJA SANKAR, VICE RESIDENT AND SMT. P MADHAVI DEVI, JUDICIAL MEMBER ITA NO.1213/BA NG/2011 (ASST. YEAR - 2006-07) M/S KOHLER INDIA CORPORATION PVT. LTD., 138/6, 1 ST FLOOR, 6 TH A CROSS, 10 TH MAIN, RMV EXTENSION, SADASHIVANAGAR, BANGALORE-560 080. . APPELLANT PAN AABCK 2145E. VS. THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-11(5), BANGALORE. . RESPONDENT APPELLANT BY : SHRI K.R VASUDEVAN, ADVOCATE RESPONDENT BY : SHI S.K AMBASTHA, CIT DATE OF HEARING : 30-10-2012 DATE OF PRONOUNCEMENT : -11-2012 O R D E R SMT. P MADHAVI DEVI, JUDICIAL MEMBER THIS APPEAL IS FILED BY THE ASSESSEE. THE RELEVANT ASSESSMENT YEAR IS 2006-07. THE APPEAL IS DIRECTED AGAINST TH E ORDER OF THE ITA NO.1213/B/11 2 COMMISSIONER OF INCOME-TAX - (APPEALS) I AT BANGA LORE DATED 12.09.2011. THE APPEAL ARISES OUT OF THE ASSESSMEN T COMPLETED U/S 143(3) OF THE INCOME-TAX ACT, 1961. 2. IN THIS APPEAL, THE ASSESSEE IS AGGRIEVED BY THE ORDER OF THE CIT(A) UPHOLDING THE DISALLOWANCE OF RS.1,11,69,38 5/- MADE BY THE AO AS CAPITAL EXPENDITURE. 3. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) ERRED IN UPHOLDING THE DISALLOWANCE OF RS.1,11,69,385/- AS CAPITAL EXPENDITURE. II) THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THAT THE EXPENDITURE INCURRED WAS IN CONNECTION WIT H THE EXPENSE INCURRED FOR EXPANSION OF BUSINESS AND THUS WAS INCIDENTAL TO THE BUSINESS AND WAS LIABLE TO BE ALLOWED AS REVENUE EXPENDITURE. III) ON THE FACTS AND IN THE LIGHT OF THE EVIDENCE PROVIDED AND ALSO IN LIGHT OF THE CASES CITED, THE LEARNED CIT(A) OUGHT TO HAVE ALLOWED THE PROJECT ITA NO.1213/B/11 3 EXPENSES CLAIMED IN RESPECT OF THE PROJECT ABORTED WAS LIABLE TO BE ALLOWED IN FULL. IV) THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THAT THE EXPENDITURE INCURRED DID NOT RESULT IN ACQUISITION OF CAPITAL ASSET OR DID NOT YIELD ENDUR ING BENEFIT TO THE APPELLANT TO JUSTIFY THE DISALLOWANC E V) WITHOUT PREJUDICE, THE DISALLOWANCE OF RS.1,11,69,385/- AS UPHELD BY THE LEARNED CIT(A) I S ARBITRARY, EXCESSIVE AND OUGHT TO BE REDUCED SUBSTANTIALLY. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E COMPANY WHICH IS IN THE BUSINESS OF SALE OF SPARE PARTS AND SERVI CING OF GENSETS AND ALSO IN THE BUSINESS OF TRADING IN SANITARYWARE ITE MS FILED ITS RETURN OF INCOME FOR THE RELEVANT ASSESSMENT YEAR ON 30.11.20 06 DECLARING A LOSS OF RS.2,20,34,690/-. DURING THE ASSESSMENT PR OCEEDINGS U/S 143(3) OF THE INCOME-TAX ACT, THE ASSESSING OFFICER OBSERVED THAT THE ASSESESE HAS WRITTEN OFF AN EXPENDITURE OF RS.1,11, 69.385/- TOWARDS PROJECT EXPENSES. HE OBSERVED FROM THE NOTES ON AC COUNTS THAT THE PROJECT EXPENSES WRITTEN OFF INCLUDES PROFESSIONAL CHARGES, STAFF RECRUITMENT CHARGES AND TRAVEL EXPENSES WHICH IS NO T TRANSLATED INTO ANY CAPITAL ASSETS AND WHERE NO ENDURING BENEFIT WO ULD BE AVAILABLE . ITA NO.1213/B/11 4 IT WAS ALSO OBSERVED THAT THE COMPANY AT THAT POINT OF TIME HAD CONTEMPLATED SETTING UP A MANUFACTURING ENTITY PREF ERABLY IN WESTERN INDIA THROUGH UTILIZATION OF CHEAP LABOR AVAILABLE IN THE COUNTRY IN ORDER TO HELP IN REDUCING COSTS AND FOR THIS PURPO SE, AN EXERCISE WAS CARRIED OUT ENGAGING THE SERVICES OF CERTAIN AGENCI ES TO LOOK INTO THE FEASIBILITY OF SETTING UP A MANUFACTURING ENTITY. HE OBSERVED THAT SUBSEQUENTLY, THAT ASSESSEE WAS OF THE OPINION THAT IT IS NOT FEASIBLE TO CARRY OUT THE PROJECT IN THE IMMEDIATE NEAR FUTURE AND A DECISION WAS TAKEN TO WRITE OFF THE EXPENDITURE INCURRED TOWARDS PROJECT REPORT. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO HOW THE EXP ENDITURE WAS ALLOWABLE AS REVENUE EXPENDITURE. THE ASSESSEE FU RNISHED ITS REPLY VIDE LETTER DATED 28.11.2008. THE ASSESSING OFFICE R WAS HOWEVER NOT CONVINCED WITH THE ASSESSEES CONTENTIONS AND BY PL ACING RELIANCE UPON THE FOLLOWING DECISIONS HELD THAT THE EXPENSE S INCURRED TOWARDS OBTAINING A PROJECT REPORT FOR SETTING UP A UNIT AT DIFFERENT PLACES WOULD BE CAPITAL IN NATURE. 1) CIT VS. J.K CHEMICALS LTD. [1994] 207 ITR 985, BOM. 2) TRIVENI ENGINEERING WORKS LTD. VS. CIT, 232 ITR 639 DEL. 3) VAZUR SYKTAB TIBACCI CI, VS. CIT, 135 TM 406, A.P. 4) CIT V S. SHRI DIGVIJAY CEMENT CO. LTD., 159 ITR 253 , GUJ. ITA NO.1213/B/11 5 HE ACCORDINGLY DISALLOWED THE CLAIM OF THE ASSESSE E U/S 37 OF THE INCOME-TAX ACT. 4. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFO RE THE CIT(A) REITERATING THE SUBMISSIONS MADE BY IT BEFORE THE AO AND ALSO PLACING RELIANCE UPON THE FOLLOWING DECISIONS : 1) KESORAM INDUSTRIES AND COTTON MILLS VS. CIT, 196 IT R 845, CAL 2) B NAGIREDDY VS. CIT, 199 ITR 451, AMD 3) BENGAL AND ASSAM INVESTMENTS LTD. VS. CIT, 142 ITR 156, CAL 4) CIT VS. K.S.I.D.C, 163 ITR 657 5) SETABGANJ SUGAR MILLS LTD. VS. CIT, 41 ITR 272, SC. 6) PRODUCE EXCHANGE CORPORATION LTD. VS. CIT, 77 ITR 7 39 (SC) 7) STANDARD REFINERY AND DISTILLERY LTD. VS. CIT, 91 I TR 589 5. THE CIT(A) AFTER CONSIDERING THE ASSESSEES OBJ ECTIONS AS WELL AS THE FINDING OF THE AO, HELD THAT THE ASSESSEE IS HAVING ONE ITA NO.1213/B/11 6 TRADING UNIT DEALING WITH SANITARYWEARS IN GURGAON, WHILE IT DECIDED TO SET UP ONE MANUFACTURING UNIT IN WESTERN INDIA AND, THEREFORE, THE EXPENDITURE ON PROJECT REPORT, MARKE T SURVEY AND TRAVEL EXPENSES CANNOT BE SAID TO BE FOR EXPANSION OF TRADING BUSINESS OF SANITARYWARE. HE HELD IT TO BE A NEW A ND DISTINCT LINE OF BUSINESS AND, THEREFORE, THE EXPENDITURE INCURRE D BY NO MEANS CAN BE CONSIDERED TO HAVE BEEN INCURRED IN THE ORDI NARY COURSE OF BUSINESS NOR FOR RUNNING OF THE BUSINESS AND, THERE FORE, CANNOT BE HELD AS REVENUE. HE, THEREFORE, HELD THAT THE ASSE SSEE WAS GOING TO SET UP A NEW BUSINESS BY SPENDING ON PROJECT REPOR T AND MARKETING SURVEY AND THAT NOT BEING SUCCESSFUL TO SET UP SUCH A BUSINESS, IT WOULD NOT BE CORRECT TO HOLD SUCH EXPENDITURE AS CA PITAL IN NATURE. THEREAFTER HE PROCEEDED TO CONSIDER THE EXPENDITURE AS A DEAD LOSS BEING PRE- SET UP EXPENDITURE NOT CAPABLE OF BEING SET OFF WITH ANY KIND OF INCOME. HE ACCORDINGLY CONFIRMED THE ADDIT ION AND THE ASSESSEE IS IN SECOND APPEAL BEFORE US. 6. THE LEARNED COUNSEL FOR THE ASSESSEE SHRI K.R VA SUDEVAN, WHILE REITERATING THE ASSESSEES SUBMISSIONS BEFORE THE AUTHORITIES BELOW SUBMITTED THAT THE ASSESSEE BEING IN THE BUSI NESS OF TRADING IN SANITARYWARE, HAD CONTEMPLATED SETTING UP MANUF ACTURING UNIT OF ITA NO.1213/B/11 7 SANITARYWARE IN ORDER TO REDUCE ITS COSTS AND FOR T HIS PURPOSE, IT HAD CONDUCTED MARKETING SURVEY AND IT HAD INCURRED EXPE NDITURE FOR PREPARING PROJECT REPORT. HE SUBMITTED THAT SETTIN G UP OF THE MANUFACTURING UNIT OF SANITARYWARE WHICH THE ASSESS EE WAS ALREADY TRADING IN, WAS IN FACT BACKWARD VERTICAL INTEGRATI ON OF BUSINESS AND, THEREFORE, IT CANNOT BE SAID THAT ASSESSEE WAS VENTURING INTO A NEW LINE OF BUSINESS. ACCORDING TO HIM, AS THE ASS ESSEE WAS INTENDING TO SET UP A DIFFERENT UNIT OF THE SAME LI NE OF BUSINESS, IT CANNOT BE CONSIDERED TO BE A SEPARATE LINE OF BUSIN ESS AND THE EXPENDITURE INCURRED ON OBTAINING THE PROJECT REPOR T WAS VERY MUCH REVENUE IN NATURE. HE DREW OUR ATTENTION TO THE FI NDING OF THE CIT(A) THAT THE SAID EXPENDITURE IS NOT CAPITAL IN NATURE AND SUBMITTED THAT A CLAIM U/S 37 OF THE INCOME-TAX ACT CAN BE DISALLOWED ONLY IF IT FALLS WITHIN ANY OF THE CATEG ORY OF EXPENSES U/S 30 TO 36 OF THE INCOME-TAX ACT OR IF IT WAS CAPITAL OR PERSONAL IN NATURE. HE SUBMITTED THAT EXPENDITURE WHICH DOES N OT FALL IN ANY OF THE ABOVE CATEGORIES HAS TO BE ALLOWED U/S 37 OF TH E INCOME-TAX ACT. HE SUBMITTED THAT THE CIT(A) HAS COINED TERM AS DEAD LOSS WHICH IS UNKNOWN TO THE INCOME-TAX LAW AND, THEREF ORE, THE ORDER OF THE CIT(A) HAS TO BE SET ASIDE AND THE EXPENDITU RE ALLOWED AS REVENUE EXPENDITURE. HE HAS FILED THE COPIES OF TH E FOLLOWING ITA NO.1213/B/11 8 DECISIONS BEFORE US IN SUPPORT OF ITS CONTENTIONS T HAT THE SETTING OF MANUFACTURING UNIT OF SANITARYWEAR IN WHICH IT WAS ALREADY IN BUSINESS OF TRADING IS THE SAME LINE OF BUSINESS AN D ALSO THAT THE EXPENDITURE INCURRED FOR OBTAINING THE PROJECT REPO RT OF BUSINESS IS REVENUE IN NATURE :- 1. CIT VS. INDIAN TELEPHONE INDUSTRIES LTD., 175 ITR 2 15, KAR. 2. ACIT VS. KHODAY INDIA LTD., 32 SOT 373, BANG. TRIBUNAL 3. CIT VS. PRIYA VILLAGE ROADSHOWS LTD., 185 TM 44, DE L. 4. PRODUCE EXCHANGE CORPORATIONS LTD. VS. CIT, 77 ITR 739 SC.. 7. THE LEARNED DR ON THE OTHER HAND SUPPORTED THE O RDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE CIT(A) HAS CONCURRED WITH THE FINDING OF THE AO THAT THE ASSESSEE WAS NOT CAR RYING THE SAME LINE OF BUSINESS AND THE FINDING OF THE CIT(A) THAT EXPENDITURE IS NOT CAPITAL IN NATURE IS ONLY ON THE PECULIAR SET O F FACTS BEFORE US I.E THE ASSESSEE HAS NOT SET UP THE BUSINESS AND, THER EFORE, NO CAPITAL ASSET HAS COME INTO EXISTENCE AND HENCE THE EXPENSE BEING PRE-SET ITA NO.1213/B/11 9 UP BUSINESS CANNOT BE CAPITALIZED AND HENCE CANNOT BE HELD AS CAPITAL EXPENDITURE.. THEREAFTER, HE SUBMITTED THA T THE EXPENDITURE WHICH IS NOT REVENUE IN NATURE CANNOT BE ALLOWED EV EN IF IT IS NOT CAPITAL IN NATURE. IN SUPPORT HIS CONTENTION, HE P LACED RELIANCE UPON THE DECISION OF THE ITAT, AHMEDABAD IN THE CASE OF GUJARAT ALKALIES AND CHEMICALS LTD. VS. DCIT REPORTED IN 82 ITD 135, AHD. 8. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDE RED THEIR RIVAL CONTENTIONS, THE UNDISPUTED FACTS OF THE CASE BEFO RE US ARE THAT THE ASSESSEE IS IN THE BUSINESS OF TRADING IN SANITARYW ARE AND IN ORDER TO REDUCE ITS COSTS INTENDED TO START A MANUFACTURING OF SANITARYWARE AND FOR THIS PURPOSE IT HAD INCURRED EXPENDITURE FO R OBTAINING A PROJECT REPORT ON ITS FEASIBILITY. HOWEVER, THE AS SESSEE DID NOT FIND IT FEASIBLE TO START THE MANUFACTURING UNIT AND THE EXPENDITURE INCURRED BY IT ON THE PROJECT REPORT HAS BEEN CLAIM ED AS REVENUE EXPENDITURE WHAT IS THE NATURE OF THIS EXPENDITURE ? WHETHER IT IS CAPITAL OR REVENUE, IS THE QUESTION BEFORE US. THE CONTENTION OF THE REVENUE IS THAT SETTING UP A MANUFACTURING UNIT OF SANITARYWEAR IS NOT THE SAME BUSINESS AS TRADING IN SANITARYWEAR, W HILE THE CONTENTION OF THE ASSESSEE IS THAT THE SETTING UP O F A MANUFACTURING ITA NO.1213/B/11 10 UNIT IS ONLY BACKWARD VERTICAL INTEGRATION OF THE B USINESS OF TRADING OF SANITARYWEAR AND, THEREFORE,. IT WAS EXTENSION OF SAME BUSINESS AND THE EXPENDITURE IS ALLOWABLE. THERE HAVE BEEN JUDICIAL PRECEDENTS TO THE EFFECT THAT WHERE THE ASSESSEE HA S INCURRED EXPENDITURE FOR EXPANSION OF ITS BUSINESS THEN SUCH EXPENDITURE IS REVENUE IN NATURE. THEREFORE IT IS IMPERATIVE TO E XAMINE AS TO WHETHER THE TRADING IN SANITARYWEAR AND SETTING UP OF A MANUFACTURING UNIT OF SANITARYWEAR IS THE EXTENSION OR EXPANSION OF THE SAME BUSINESS. THE LEARNED COUNSEL FOR THE ASS ESSEE PLACED RELIANCE UPON THE FOLLOWING DECISIONS : 1. CIT VS. INDIAN TELEPHONE INDUSTRIES LTD., 175 ITR 2 15, KAR. 2. ACIT VS. KHODAY INDIA LTD., 32 SOT 373, BANG. TRIBUNAL 3. CIT VS. PRIYA VILLAGE ROADSHOWS LTD., 185 TM 44, DE L. 4. PRODUCE EXCHANGE CORPORATIONS LTD. VS. CIT, 77 ITR 739 SC. 5. SETABGANJ SUGAR MILLS LTD. VS. CIT, 41 ITR 272 (SC) 6. INDO RAMA SYNTHETICS (I) LTD. VS. CIT, 185 TM 277, DEL ITA NO.1213/B/11 11 WHICH ARE TO THE EFFECT THAT WHERE THERE IS A COMM ON MANAGEMENT AND UNITY OF TRADING ORGANIZATION, COMMON EMPLOYEE S, COMMON ADMINISTRATION, A COMMON FUND AND COMMON PLACE OF B USINESS IT WOULD CONSTITUTE A COMMON BUSINESS. AS PER THE DEC ISION OF THE HONBLE SUPREME COURT IN THE CASE OF PRODUCE EXCHA NGE CORPORATION LTD., ( CITED SUPRA), THE DECISIVE TEST FOR DETERMINING WHETHER THE TWO LINES OF BUSINESS CONSTITUTED THE S AME BUSINESS, WAS NOT THE NATURE OF THE TWO BUSINESSES BUT THE U NITY OF CONTROL OF BOTH THE BUSINESSES. FOR COMING TO THIS CONCLUSION , THE HONBLE APEX COURT REFERRED TO ITS DECISION IN THE CASE OF CIT VS. PRITHVI INSURANCE CO. LTD., REPORTED 63 ITR 632 (SC), WHERE IN IT WAS LAID DOWN THAT A FAIRLY ADEQUATE TEST FOR DETERMINING WH ETHER THE TWO CONSTITUTE THE SAME BUSINESS IS FURNISHED BY WHAT R OWLALL J SAID IN SCALES VS. GEORGE THOMPSON & CO. LTD., [1927] 13 TC 83, 89 (KB), WAS THERE ANY INTER-CONNECTIONS, ANY INTERLAC ING ANY INTERDEPENDENCE, ANY UNITY AT ALL EMBRACING THOSE T WO BUSINESSES? THAT INTER-CONNECTION, INTER-LACING, INTERDEPENDENC E AND UNITY ARE FURNISHED BY EXISTENCE OF COMMON MANAGEMENT, COMMON BUSINESS ORGANIZATION, COMMON ADMINISTRATION, COMMON FUND AN D A COMMON PLACE OF BUSINESS. ITA NO.1213/B/11 12 9. IN THE CASE BEFORE US, THE PROJECT HAS NOT TAKEN OFF AND, THEREFORE, IT CANNOT BE SAID THAT THERE IS COMMON A DMINISTRATION OR COMMON PLACE OF BUSINESS BUT THE FACT THAT THERE IS COMMON MANAGEMENT AND COMMON FUND INVOLVED HAS TO BE PRESU MED. FURTHER IT IS ALSO SEEN THAT THE ASSESEE IS ALREADY IN THE BUSINESS OF TRADING IN SANITARYWARE. BY CONDUCTING THE FEASIBI LITY SURVEY, THE ASSESSEE INTENDED TO EXPLORE THE POSSIBILITY OF STA RTING MANUFACTURING OF THE GOODS WHICH IT WAS TRADING IN. THEREFORE, THERE WAS INTER-CONNECTION AND INTERLACING OF BOTH THE BUSINESSES AND THE ASSESSEE BEING THE SOLE ENTITY INTENDING TO DO BOTH THE BUSINESSES THERE IS ALSO UNITY OF CONTROL AND MANAG EMENT. BY CONDUCTING THE MARKET SURVEY AND OBTAINING THE FEAS IBILITY REPORT, THE ASSESSEE WAS TRYING TO EXPLORE THE POSSIBILITY OF REDUCING ITS COSTS OF THE RUNNING BUSINESS AND THUS INCREASE ITS PROFIT BASE WHICH THUS ESTABLISHES THAT THE EXPENDITURE IS FOR THE SA ME BUSINESS THAT THE ASSESSEE WAS ALREADY CARRYING ON. 10. IN THE DECISION OF GUJARATH ALKALIES AND CHEMIC ALS (CITED SUPRA) RELIED UPON BY THE LEARNED DR, THE EXPENDITU RE CLAIMED WAS TECHNICAL KNOW-HOW FEES INCURRED FOR THE PURPOSE OF SETTING UP OF ITA NO.1213/B/11 13 NEW UNITS AND THUS IS DISTINGUISHABLE ON FACTS AND NOT APPLICABLE TO THE FACTS OF THE CASE BEFORE US. 11. IN THE RESULT, WE ARE OF THE OPINION THAT THE E XPENSES FOR OBTAINING A PROJECT REPORT WHICH WAS NOT SET UP BUT WAS FOR THE SAME LINE OF BUSINESS WITH COMMON FUND, COMMON MANA GEMENT, CONTROL AND UNITY IS REVENUE IN NATURE. ASSESSEES APPEAL IS ACCORDINGLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH NOV, 2012. SD/- SD/- (N BARAT HVAJA SANKAR) (P MADHAVI DEVI) VICE PRESIDENT JUDICIAL MEMBER VMS. BANGALORE DATED : 9/11/2012 COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3.THE CIT CONCERNED. 4.THE CIT(A) CONCERNED. 5.DR 6.GF BY ORDER SR. PRIVATE SECRETA RY, ITAT, BANGALORE.