Daikin Airconditioning India (P) Ltd., Gurgaon V. DCIT, New Delhi

ITA 1346/DEL/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 53408 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 8 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-12-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 04-07-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 26-03-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S N KRISHNA
• Assessee Lawyers: S K AGGARWAL; BINOD VERMA CAS
• Keywords: Capital asset; Depreciation; Business expenditure; Revenue expenditure; Capital expenditure
• Section: 143(3); 37(1); 32; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH B : NEW DELHI) BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI B.C. MEENA, ACCOUNTANT MEMBER ITA NO.1346/DEL./2010 (ASSESSMENT YEAR : 2002-03) M/. DAIKIN AIRCONDITIONING INDIA PVT. LTD., VS. DC IT, CIRCLE 10(1), (FORMERLY KNOWN AS DAIKIN SHRIRAM NEW DELHI. AIRCONDITIONING PVT. LTD.), 12 TH FLOOR, TOWER A, DLF CYBER CITY, DLF PHASE III, GURGAON (HARYANA). (PAN : AABCD0971F) ITA NO.1404/DEL./2010 (ASSESSMENT YEAR : 2002-03) DCIT, CIRCLE 10(1), VS. M/S. DAIKIN AIRCONDITIONING INDIA PVT. LTD., NEW DELHI. (FORMERLY KNOWN AS DAIKIN SHRIRAM AIRCONDITIONING PVT. LTD.), 12 TH FLOOR, TOWER A, DLF CYBER CITY, DLF PHASE III, GURGAON (HARYANA). (PAN : AABCD0971F) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI S.K. AGGARWAL & BINOD VERMA, CAS REVENUE BY : SHRI S.N. KRISHNA, CIT DR ORDER PER B.C. MEENA, ACCOUNTANT MEMBER : BOTH THE CROSS APPEALS ARISE OUT OF THE ORDER OF C IT (APPEALS)-XIII, NEW DELHI DATED 25.01.2010. THE GROUNDS OF REVENUE S APPEAL READ AS UNDER:- ITA NO.1346 & 1404/DEL./2010 2 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ORDER OF THE CIT(A) IS WRONG, PERVERSE, ILLEGAL AND AGAINST THE PROVISIONS OF LAW WHICH IS LIABLE TO BE SET ASIDE. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD.CIT(A) HAS ERRED DELETING THE ADDITION OF RS.37, 50,000/- MADE BY THE AO CLAIMED AS GOODWILL' BY THE ASSESSEE ON ACCOUNT OF DEPRECIATION ON WDV PAID TO USHA INTERNATIONAL LTD. FOR ACQUIRING B USINESS AND COMMERCIAL RIGHTS. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD.CIT(A) HAS ERRED IN DELETING DISALLOWANCES ON AC COUNT OF DEPRECIATION OF RS.2,04,93,750/- ON PATENTS, TRADEMARKS AND INTE LLECTUAL PROPERTY RIGHTS ACQUIRED BY IT FROM SEIL AIRCON LTD. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD.CIT(A) HAS ERRED IN ALLOWING 1/3 RD AMOUNT OUT OF ADVERTISEMENT AND PUBLICITY EXPENDITURE FOR LAUNCHING A NEW PRODUCT I NSPITE OF THE FACT THAT THE AO HAS HELD THE SAME AS A CAPITAL EXPENDITURE. 5. THE APPELLANT CRAVES TO LEAVE, TO ADD, ALTER OR AMEND ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF THE HEARING. THE GROUNDS OF ASSESSEES APPEAL READ AS UNDER :- 1. THAT THE LD. CIT (APPEALS) HAS ERRED ON FACTS A ND IN LAW IN NOT ALLOWING DEDUCTION FOR EXPENSES OF RS.1,050,654 TRE ATING AS PRIOR PERIOD EXPENSES. HE HAS FAILED TO APPRECIATE THAT THE LIAB ILITY FOR THE ABOVE EXPENDITURE CRYSTALLIZED DURING THE YEAR AND HENCE, THE DEDUCTION SHOULD HAVE BEEN ALLOWED IN COMPUTING THE INCOME. 2. THAT THE LD. CIT (APPEALS) HAS ERRED ON FACTS AN D IN LAW IN NOT ALLOWING DEDUCTION IN RESPECT OF ENTIRE EXPENDITURE OF RS.39,398,597 INCURRED ON ACCOUNT OF ADVERTISEMENT AND PUBLICITY EXPENSES AND RESTRICTING THE DEDUCTION TO ONE THIRD (1/3) OF THE EXPENSES IN CURRED BY SPREADING THE DEDUCTION OVER A PERIOD OF 3 YEARS. HE HAS FAILED T O APPRECIATE THAT EXPENSES IS ALLOWABLE IN FULL IN THE YEAR IN WHICH SUCH EXPENSES INCURRED FOR THE PURPOSE OF BUSINESS. 3. THAT THE LD. CIT (APPEALS) HAS ERRED ON FACTS AN D IN LAW IN NOT DELETING THE ADDITION OF RS.13,198,642 ON ACCOUNT O F OPENING BALANCE OF ADVERTISEMENT AND PUBLICITY EXPENSES DEFERRED IN TH E BOOKS OF ACCOUNTS WHICH WAS NOT CLAIMED IN THE RETURN OF INCOME. 4. THE ABOVE GROUNDS ARE INDEPENDENT AND WITHOUT PR EJUDICE TO ONE ANOTHER. ITA NO.1346 & 1404/DEL./2010 3 5. THE APPELLANT CRAVES LEAVE TO ADD TO OR ALTER BY DELETION, SUBSTITUTION OR OTHERWISE THE ABOVE GROUNDS OF APPE AL AT ANY TIME BEFORE OR DURING THE HEARING OF THE APPEAL. 2. THE ASSESSEE COMPANY WAS INCORPORATED ON 4 TH APRIL, 2000 UNDER THE COMPANIES ACT, 1956. THE COMPANY IS A SUBSIDIARY O F DAIKIN INDUSTRIES LTD., JAPAN. DURING THE YEAR, THE ASSESSEE COMPANY WAS E NGAGED IN THE BUSINESS OF MANUFACTURING AND MARKETING OF AIR-CONDITIONERS, WA TER COOLERS, ETC. THE RETURN OF INCOME WAS FILED DECLARING LOSS OF RS.5,9 5,60,099/- ON 31.10.2002. IT WAS REVISED ON 31.03.2004 BY INCREASING LOSS TO RS.6,65,72,388/-. THE RETURN WAS PROCESSED UNDER SECTION 143(1). THEREAF TER THE ASSESSMENT ORDER WAS MADE U/S 143(3) ON 31.03.2005 BY ASSESSING LOSS AT RS.1,13,19,255/-. 3. GROUND NOS.1 TO 5 IN REVENUES APPEAL ARE GENERA L IN NATURE AND ALSO NOT PROSECUTED, THEREFORE, DO NOT REQUIRE ANY ADJUD ICATION. THE SAME ARE DISMISSED. 4. IN THE GROUND NO.2 OF REVENUES APPEAL, THE ISSU E INVOLVED IS DELETING THE ADDITION OF RS.37,50,000/- MADE BY THE ASSESSIN G OFFICER CLAIMED AS GOODWILL BY THE ASSESSEE ON ACCOUNT OF DEPRECIATI ON ON WDV PAID TO USHA INTERNATIONAL LTD. FOR ACQUIRING BUSINESS AND COMME RCIAL RIGHTS. 5. LD. DR RELIED ON THE ORDER OF THE ASSESSING OFFI CER. ON THE OTHER HAND, THE LEARNED AR SUBMITTED THAT THE ASSESSEE COMPANY HAS PURCHASED MARKETING RIGHTS ALONG WITH EMPLOYEES AND PREMISES AND ALSO T RADE NAMES ETC. FROM USHA INTERNATIONAL LTD UNDER THE BUSINESS AGREEMENT DATED 1 ST MAY, 2000. AS ITA NO.1346 & 1404/DEL./2010 4 PER THE AGREEMENT, THE USHA INTERNATIONAL LTD. WAS NOT TO COMPETE WITH THE ASSESSEE COMPANY FOR 20 YEARS IN THE MARKETING OF A IRCONDITIONERS AND WATER COOLERS OF M/S. SIEL AIRCON LTD. THE LEARNED AR SU BMITTED THAT THIS AGREEMENT WAS FOR BUSINESS RIGHTS, THEREFORE, ELIGI BLE FOR DEPRECIATION UNDER SECTION 32 OF THE INCOME-TAX ACT AS INTANGIBLE ASSE TS. HE FURTHER PLEADED THAT THE EXCLUSIVE BUSINESS RIGHTS AS DEFINED IN THE AGR EEMENT WERE REPRESENTED AS CARRYING ON THE BUSINESS AS SUCCESSOR TO USHA INTER NATIONAL LTD. WHICH INCLUDE ALL RECORDS OF BUSINESS INCLUDING RECORDS OF SUPPLI ERS AND CUSTOMERS; THE BENEFIT OF THE CURRENT ORDERS; THE BENEFIT OF ALL B IDS AND PROPOSALS THAT HAVE BEEN MADE BY USHA INTERNATIONAL LTD. AND ALL RIGHTS TO USHA INTERNATIONAL LTD. DISTRIBUTION NETWORK FOR THE BUSINESS EXCLUDING USH A INTERNATIONAL LTD.S COMPANY SHOP. THE CONSIDERATION FOR EXCLUSIVE BUSI NESS RIGHTS WAS PAYABLE OF RS.1,73,00,000/-. FOR OTHER BUSINESS AND COMMER CIAL RIGHTS RS.27,00,000/- WAS PAID. THESE AMOUNTS WERE CAPITALIZED AS GOODWI LL IN BOOKS OF ACCOUNTS. THESE AMOUNTS WERE PAID TO USHA INTERNATIONAL LTD. DURING THE PERIOD RELEVANT TO ASSESSMENT YEAR 2001-02. THESE AMOUNTS WERE CAPITALIZED AS GOODWILL IN THE BOOKS OF ACCOUNT. FOR COMPUTING TH E TAXABLE INCOME, DEPRECIATION WAS CLAIMED @ 25% AS PRESCRIBED IN SCH EDULE OF DEPRECIATION RATES IN RESPECT OF THE INTANGIBLE ASSETS. THE DEP RECIATION IN THE YEAR 2001-02 WAS CLAIMED AT RS.50,00,000/- AND IN ASSESSMENT YEA R 2002-03 AT RS.37,50,000/-. FOR THE ASSESSMENT YEAR 2001-02, T HE CIT (A) GRANTED THE ITA NO.1346 & 1404/DEL./2010 5 RELIEF. THE REVENUE WENT IN APPEAL BEFORE THE ITAT WHEREIN THE ITAT HAD DISMISSED THE REVENUES APPEAL BY UPHOLDING THE ORD ER OF THE CIT (A). THE ITAT HAS HELD AS UNDER :- 'A PERUSAL OF THE BUSINESS PURCHASE AGREEMENT ALSO CLEARLY SHOWS THAT UIL AS AGREED TO SELL TO THE ASSESSEE AND THE ASSESSEE AGREED TO PURCHASE THE BUSINESS AND THE GOODWILL AND THE OTHER ASSETS THER EOF. A PERUSAL OF THE CONSIDERATION ALSO CLEARLY SHOWS THAT THE AGREEMENT IS FOR SELLING 3 ITEMS, FIRST ONE BEING THE BUSINESS, SECOND GOODWILL AND T HIRD OTHER ASSETS. THE PURCHASE CONSIDERATION ALSO SHOWS THE COMPUTATION O F SUCH 3 ITEMS BEING THE EXCLUSIVE BUSINESS RIGHTS FOR A CONSIDERATION O F RS.1,73,00,000/-, 27,00,000/- WITHOUT ANY SPECIFICATIONS AND (C) THE TRANSFERABLE DEPOSITS WHICH WOULD HAVE TO BE CONSIDERED AS OTHER ASSETS. THIS BEING AS THE AMOUNT OF RS.27,00,000/- AS SHOWN IN THE PURCHASE P RICE HAS NOT BEEN SHOWN TO BE IN RELATION TO EITHER EXCLUSIVE BUSINES S RIGHTS OR FOR TRANSFERABLE DEPOSITS. THE SAME WOULD HAVE TO BE TREATED AS BEIN G TOWARDS 'GOODWILL'. THIS BEING SO, WE ARE OF THE VIEW THAT THE AMOUNT O F RS.27,00,000/- AS PAID BY THE ASSESSEE WOULD HAVE TO BE TREATED AS GOODWIL L. IN REGARD TO THE BALANCE OF 1.73 CRORES, IT IS FOR THE EXCLUSIVE BUS INESS RIGHTS.' THE ITAT VIDE PARA 7 OF THEIR ORDER HELD AS UNDER: 'IN THESE CIRCUMSTANCES, WE ARE OF THE VIEW THAT T HE LD. CIT(A) WAS RIGHT IN HOLDING THAT THE ASSESSEE WAS ENTITLED TO THE DEPRECIATION IN REGARD TO THE PURCHASE OF THE EXCLUSIVE BUSINESS RIGHTS TO THE EXTENT OF RS.1,73,00,000 AND DIRECTING THE AO TO GRANT DEPREC IATION ON THE SAME. IN REGARD TO THE AMOUNT OF RS.27,00,000 AS PAID BY THE ASSESSEE, AS IT HAS NOT BEEN SHOWN THAT THIS AMOUNT HAD BEEN PAID FOR ANY S PECIFIC RIGHTS, THE SAME WOULD HAVE TO BE TREATED AS GOODWILL AND THE DEPREC IATION ON THE SAME CANNOT BE GRANTED. IN THE CIRCUMSTANCES, THE FINDINGS OF THE LD. CIT( A) ON THIS ISSUE IS MODIFIED TO THE EXTENT THAT THE AO IS DIRECTED TO G RANT THE DEPRECIATION ON THE CONSIDERATION OF RS.173,00,000/- PAID TO UIL FO R THE PURCHASE OF THE EXCLUSIVE BUSINESS RIGHTS WHICH ARE TO BE TREATED A S INTANGIBLE ASSETS. THE ACTION OF THE AO IN DISALLOWING THE DEPRECIATION ON THE GOODWILL TO THE EXTENT OF RS.27,00,000 IS CONFIRMED. LD. AR PLEADED THAT THE FACTS ARE SAME AND THERE IS NO CHANGE IN THE CIRCUMSTANCES, THEREFORE, THE ORDER OF THE CIT (A) MAY BE UPHELD. 6. WE HAVE HEARD BOTH SIDES AND PERUSED THE MATERIA L ON RECORD. SINCE THE ASSESSEE HAS GOT THE RELIEF FROM ITAT IN THE PR ECEDING YEAR, ON THE SAME ITA NO.1346 & 1404/DEL./2010 6 FACTS. THE ISSUE REMAINS THE SAME, THEREFORE, RESP ECTFULLY FOLLOWING THE DECISION OF ITAT, WE DISMISS THIS GROUND OF REVENUE S APPEAL. 7. GROUND NO.3 IN REVENUES APPEAL IS REGARDING DEL ETING THE DISALLOWANCES ON ACCOUNT OF DEPRECIATION OF RS.2,04 ,93,750/- ON PATENTS, TRADEMARKS AND INTELLECTUAL PROPERTY RIGHTS ACQUIRE D BY ITS FROM SIEL AIRCON LTD. 8. THE ASSESSEE COMPANY HAS PURCHASED MANUFACTURING BUSINESS OF M/S. SIEL AIRCON LTD. AS A GOING CONCERN VIDE AGREEMENT DATED 08.08.2000. AS A PART OF THIS AGREEMENT, THE ASSESSEE COMPANY ALSO A CQUIRED INTELLECTUAL PROPERTY RIGHTS WHICH INCLUDE PATENTS, TRADEMARKS, ETC. ETC. AND PAID RS.10,93,00,000/-. THE AMOUNT WAS CAPITALIZED IN B OOKS AS PATENT AND TRADEMARK AND THE SAME IS TREATED AS INTANGIBLE ASS ETS. THESE INTELLECTUAL PROPERTY RIGHTS HAVE NOT BEEN REGISTERED IN THE NAM E OF ASSESSEE COMPANY. THE ASSESSEE COMPANY CLAIMED DEPRECIATION AS PER SE CTION 32 OF INCOME-TAX ACT READ WITH SCHEDULE FOR DEPRECIATION @ 25%. THE ASSESSING OFFICER DISALLOWED THE SAME BY FOLLOWING THE ORDER OF EARLI ER YEAR. THE CIT (A) HAS GRANTED THE RELIEF TO THE ASSESSEE BY FOLLOWING THE DECISION OF ITAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2001-02 WHE RE THE ITAT HAS HELD AS UNDER :- 'A PERUSAL OF THE PURCHASE PRICE CONSIDERATION AS P ER THE BUSINESS PURCHASE AGREEMENT ENTERED INTO BETWEEN THE ASSESSEE AND SAL SHOWS THAT THE CONSIDERATION HAS BEEN PAID FOR THE INTELLECTUAL PR OPERTY RIGHTS. INTELLECTUAL PROPERTY RIGHTS ARE IMMOVABLE ASSET. IT IS ALSO AN INTANGIBLE ASSET AS PER THE PROVISIONS OF SECTION 32 (1) (II) OF THE ACT. IT IS ALSO UNDISPUTED THAT THE ITA NO.1346 & 1404/DEL./2010 7 ASSESSEE HAS USED THE INTELLECTUAL PROPERTY RIGHTS IN ITS BUSINESS AND THERE HAS BEEN NO CLAIM AGAINST THE ASSESSEE FOR THE USE OF THE SAID TRADEMARKS. IN FACT AS PER THE AGREEMENT IN CLAUSE 8.1 (A)(I) IT H AS BEEN SPECIFICALLY AGREED THAT ON COMPLETION DULY EXECUTED INSTRUMENTS OF TRA NSFER, ASSIGNMENT ETC. AS THE ASSESSEE MAY REASONABLY BE REQUIRED TO COMPLETE THE TRANSFER, ASSIGNMENT AND CONVEYANCE OF THE ASSET IN ACCORDANC E WITH THE PROVISIONS OF THIS AGREEMENT SHALL BE DELIVERED TO THE ASSESSE E AT A PLACE NOMINATED BY THE ASSESSEE. THIS CLEARLY SHOWS THAT ONCE THE COMP LETION OF THE AGREEMENT IS DONE BY PAYMENT OF THE CONSIDERATION AS ON THE C OMPLETION DATE SPECIFIED IN THE AGREEMENT THE ASSESSEE WOULD BE IN POSSESSIO N OF THE DULY EXECUTED INSTRUMENTS OF TRANSFER, ASSIGNMENT AND CONVEYANCES OF THE ASSETS AS SPECIFIED IN THE AGREEMENT WHICH ARE BASICALLY THE INTELLECTUAL PROPERTY RIGHTS AND THE FIXED ASSETS. THIS BEING SO, AS ALSO THE PRINCIPLES AS LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CASE OF MYSORE MINERALS LTD. REFERRED TO SUPRA AND REAFFIRMED THE DECISION OF DALMIA CEME NTS' IT WOULD HAVE TO BE HELD THAT THE ASSESSEE WAS THE OWNER OF THE PROP ERTY AND THE ASSESSEE HAVING USED THE SAME IN ITS BUSINESS WAS ENTITLED T O DEPRECIATION ON THE SAME. IN THE CIRCUMSTANCES THE FINDING OF THE LD. C IT(A) ON THIS ISSUE STANDS CONFIRMED.' SINCE THE REVENUE HAS FAILED TO BROUGHT ON RECORD A NY DISTINCTION OF FACTS FROM THE EARLIER YEAR, I.E., 2001-02, THEREFORE, RESPECT FULLY FOLLOWING THE DECISION OF ITAT, WE DISMISS THIS GROUND OF REVENUES APPEAL AL SO. 9. GROUND NO.4 IN REVENUES APPEAL IS AGAINST ALLOW ING 1/3 RD AMOUNT OUT OF ADVERTISEMENT AND PUBLICITY EXPENDITURE FOR LAUN CHING A NEW PRODUCT INSPITE OF THE FACT THAT THE ASSESSING OFFICER HAS HELD THE SAME AS A CAPITAL EXPENDITURE. GROUND NO.2 OF ASSESSEES APPEAL IS A LSO RELATED TO THIS ISSUE WHEREIN THE ASSESSEE HAS CLAIMED THAT WHOLE OF THE EXPENDITURE OF RS.3,93,98,597/- INCURRED ON ACCOUNT OF ADVERTISEME NT AND PUBLICITY EXPENSES SHOULD HAVE BEEN ALLOWED AND THE CIT (A) IS NOT JUS TIFIED IN RESTRICTING THE DEDUCTION TO 1/3 RD ONLY. GROUND NO.3 IN ASSESSEES APPEAL ALSO DEALS WITH THE CONFIRMING THE ADDITION OF RS.1,31,98,642/- ON ACCO UNT OF OPENING BALANCE OF ITA NO.1346 & 1404/DEL./2010 8 ADVERTISEMENT AND PUBLICITY EXPENSES DEFERRED IN TH E BOOKS OF ACCOUNT WHICH WAS NOT CLAIMED IN THE RETURN OF INCOME. 10. DURING THE YEAR, THE ASSESSEE HAS CLAIMED RS.3, 93,98,597/- ON ACCOUNT OF ADVERTISEMENT AND PUBLICITY. IN THE BOOKS, THE ASSESSEE HAS CLAIMED AS DEFERRED REVENUE EXPENDITURE, THE DETAILS OF WHICH WERE PROVIDED BEFORE THE AUTHORITIES BELOW ARE AS UNDER :- OPENING BALANCE RS.1,31,98,642 ADD : INCURRED DURING THE YEAR RS.3,93,98,597 LESS : WRITTEN OFF DURING THE YEAR RS. 65,22,8 22 CLOSING BALANCE RS.4,60,74,417 A NOTE WAS PROVIDED IN THE FINANCIAL STATEMENT WHER EIN IT IS STATED THAT THE MARKETING COST INCURRED DURING THE PRODUCT CAMPAIGN ARE DEFERRED AND AMORTIZED OVER A PERIOD OF 4 YEARS AND IT WAS CLAIM ED THAT ALTHOUGH THE EXPENSES INCURRED ON ADVERTISEMENT AND PUBLICITY AR E DEFERRED AS PER BOOKS, IN THE COMPUTATION OF INCOME, THE ASSESSEE COMPANY HAS ADDED BACK THIS EXPENDITURE DEBITED IN PROFIT AND LOSS ACCOUNT AND CLAIMED ACTUAL EXPENSES IN ADVERTISEMENT AND PUBLICITY INCURRED DURING THE YEA R AS AN ALLOWABLE EXPENDITURE U/S 37(1) OF THE INCOME-TAX ACT. IT WA S ALSO CLAIMED THAT IN THE PAST YEAR ALSO, SIMILAR ACCOUNTING AND TAX TREATMEN T WAS GIVEN AND THE TAX AUTHORITIES HAVE ACCEPTED THE SAME. RELIANCE WAS P LACED ON THE FOLLOWING DECISIONS :- (I) AMAR RAJA BATTERIES LTD. VS. ACIT 272 ITR 17 (AT)(HYD.-ITAT) (II) HINDUSTAN COMMERCIAL BANK LTD. VS. RE. 21 I TR 353 (ALL.) (III) NATIONAL INDUSTRIAL CORPORATION LTD. 124 TAXMAN 4 13 (DELHI) (IV) CIT VS. BERGER PAINTS (INDIA) LTD. 254 ITR 503 (C AL.) ITA NO.1346 & 1404/DEL./2010 9 (V) CAMPA BEVERAGES (P) LTD. VS. IAC 34 ITD 241 (DELHI TRIBUNAL) THE ASSESSING OFFICER HELD THAT DURING THE YEAR, MA RKETING COST INCURRED ON THE NEW PRODUCT LAUNCH/CAMPAIGN AND NEW BUSINESS. THE ASSESSING OFFICER ALSO HELD THAT THESE WERE THE EXPENDITURE OF BENEFI T OF ENDURING NATURE. THE ASSESSING OFFICER HELD THAT IN VIEW OF THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. MADRAS AUTO SERVICE (P) LTD. , 233 ITR 468, THESE EXPENDITURE ARE CAPITAL IN NATURE AND CANNOT BE ALL OWED AS REVENUE EXPENDITURE AND THE EXPENDITURE INCURRED DURING THE YEAR IS ADDED TO THE INCOME OF THE ASSESSEE. 11. THE CIT (A) HAS ALLOWED ONLY 1/3 RD ADVERTISEMENT EXPENSES BY HOLDING AS UNDER :- 6.13 I HAVE CONSIDERED THE SUBMISSIONS OF THE APP ELLANT AND PERUSED THE RECORDS OF THE CASE. AFTER GOING T HROUGH THE DETAILS OF EXPENSES AND KEEPING IN VIEW THE FACT TH AT APPELLANT COMPANY WAS TRYING TO LAUNCH A NEW BRAND AND NEW PR ODUCT LINE IN INDIA, THE HUGE EXPENSES WERE INCURRED FOR SUCH A LAUNCH. THERE IS NO DENYING THE FACT THAT SUCH A HUGE INITI AL EXPENSES WILL GIVE AN EDGE TO THE COMPANYS PRODUCT AND BRAN D A RECALL VALUE IN TERMS OF TARGET AUDIENCE FOR AT LEAST ADVA NTAGE OF 3 YEARS. THEREFORE, ONLY 1/3 OF THE ADVERTISEMENT EX PENSES WILL BE ALLOWABLE IN THIS YEAR. THE APPEAL IS PARTLY ALLOW ED. 12. LD. AR RELIED ON THE LATEST DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. CITI FINANCIAL CONSUME R FINANCE INDIA LTD. WHEREIN THE HON'BLE HIGH COURT HAS DECIDED THE ISSU E AS UNDER :- ITA NO.1346 & 1404/DEL./2010 10 10. WE ARE UNABLE TO PERSUADE OURSELVES BY THE AFO RESAID SUBMISSION OF THE LEARNED COUNSEL FOR THE REVENUE. IDENTICAL ARGUMENT WAS TAKEN BY THE REVENUE IN IFCI (SUPRA). EXPLAINING THE RATIO OF SUPREME COURT IN MADRAS INDUSTRIAL INVESTMENT CORPN. LTD. (SUPRA), THE ARGUMENT OF THE REVENUE WAS REJECTED IN THE FOLLOWING MANNER:- THE JUDGMENTS ON WHICH RELIANCE IS PLACED BY THE LEARNED COUNSEL FOR THE REVENUE WOULD BE OF NO AVAIL IN THE INSTANT CASE. THE LEARNED COUNSEL FOR THE REVENUE HAD STRONGLY ARGUED THAT MATCHING CONCEPT IS TO BE APPLIED, AS PER WHICH PART OF THE EXPENDITURE HAD TO BE DEFERRED AND CLAIMED IN THE SUBSEQUENT YEARS AND, THEREFORE, APPROACH OF THE AO WAS CORRECT. HOWEVER, THIS ARGUMENT OVERLOOKS THAT EVEN IN MADRAS INDUSTRIAL INVESTMENT CORPORATION (SUPRA), ON WHICH THE RELIANCE WAS PLACED BY MS. BANSAL, THE GENERAL PRINCIPLE STATED WAS THAT ORDINARILY REVENUE EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS CAN BE ALLOWED IN THE YEAR IN WHICH IT IS INCURRED. SOME EXCEPTIONAL CASES CAN JUSTIFY SPREADING THE EXPENDITURE AND CLAIMING IT OVER A PERIOD OF ENSUING YEARS. IT IS IMPORTANT TO NOTE THAT IN THAT JUDGMENT, IT WAS THE ASSESSEE WHO WANTED SPREADING THE EXPENDITURE OVER A PERIOD OF TIME AS WAS JUSTIFYING SUCH SPREAD. IT WAS A CASE OF ISSUIN G DEBENTURES AT DISCOUNT; WHEREAS THE ASSESSEE HAD ACTUALLY INCURRED THE LIABILITY TO PAY THE DISCOUNT IN THE YEAR OF ISSUE OF DEBENTURES ITSELF. THE COURT FOUND THAT THE ASSESSEE COULD STILL BE ALLOWED TO SPREAD THE SAID EXPENDITURE OVER THE ENTIRE PERIOD OF FIVE YEARS, AT THE END OF WHICH THE DEBENTURES WERE TO BE REDEEMED. BY RAISING THE MONEY COLLECTED UNDER THE SAID DEBENTURES, THE ASSESSEE COULD UTILIZE THE SAID AMOUNT AND SECURE THE BENEFI T OVER NUMBER OF YEARS. THIS IS DISCERNIBLE FROM THE FOLLOWING PASSAGE IN THAT JUDGMENT ON WHICH RELIANCE WAS PLACED BY THE LEARNED COUNSEL FOR THE REVENUE HERSELF: ITA NO.1346 & 1404/DEL./2010 11 THE TRIBUNAL, HOWEVER, HELD THAT SINCE THE ENTIRE LIABILITY TO PAY THE DISCOUNT HAD BEEN INCURRED IN THE ACCOUNTING YEAR IN QUESTION, THE ASSESSEE WAS ENTITLED TO DEDUCT THE ENTIRE AMOUNT OF RS. 3,00,00 0 IN THAT ACCOUNTING YEAR. THIS CONCLUSION DOES NOT APPEAR TO BE JUSTIFIED LOOKING TO THE NATURE OF THE LIABILITY. IT IS TRUE THAT THE LIABILITY HAS BEEN INCURRED IN THE ACCOUNTING YEAR. BUT THE LIABILITY IS A CONTINUING LIABILITY WHICH STRETCHES OVER A PERIO D OF 12 YEARS. IT IS, THEREFORE, A LIABILITY SPREAD O VER A PERIOD OF 12 YEARS. ORDINARILY, REVENUE EXPENDITURE WHICH IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS MUST BE ALLOWED IN ITS ENTIRELY IN THE YEAR IN WHICH IT IS INCURRED. IT CANNOT BE SPREAD OVER A NUMBER OF YEARS EVEN IF THE ASSESSEE HAS WRITTEN IT OFF IN HIS BOOKS OVER A PERIOD OF YEARS. HOWEVER, THE FACTS MAY JUSTIFY AN ASSESSEE WHO HAS INCURRED EXPENDITURE IN A PARTICULAR YEAR T O SPREAD AND CLAIM IT OVER A PERIOD OF ENSUING YEARS. IN FACT, ALLOWING THE ENTIRE EXPENDITURE IN ONE YEA R MIGHT GIVE A VERY DISTORTED PICTURE OF THE PROFITS OF A PARTICULAR YEAR. THUS IN THE CASE OF HINDUSTAN ALUMINIUM CORPORATION LTD. V. COMMISSIONER OF INCOME-TAX, CALCUTTA-I (1983) 144 ITR 474, THE CALCUTTA HIGH COURT UPHELD THE CLAIM OF THE ASSESSEE TO SPREAD OUT A LUMP SUM PAYMENT TO SECURE TECHNICAL ASSISTANCE AND TRAINING OVER A NUMBER OF YEARS AND ALLOWED A PROPORTIONATE DEDUCTION IN THE ACCOUNTING YEAR IN QUESTION. ISSUING DEBENTURES AT A DISCOUNT IS ANOTHER SUCH INSTANCE WHERE, ALTHOUGH THE ASSESSEE HAS INCURRED THE LIABILITY TO PAY THE DISCOUNT IN THE YEAR OF IS SUE OF DEBENTURES, THE PAYMENT IS TO SECURE A BENEFIT OVER A NUMBER OF YEARS. THERE IS A CONTINUING BENEFIT TO THE BUSINESS OF THE COMPANY OVER THE ENTIRE PERIOD. THE LIABILITY SHOULD, THEREFORE, BE SPREAD OVER THE PERIOD OF THE DEBENTURES. THUS, THE FIRST THING WHICH IS TO BE NOTICED IS THA T THOUGH THE ENTIRE EXPENDITURE WAS INCURRED IN THAT YEAR, IT WAS THE ASSESSEE WHO WANTED THE SPREAD ITA NO.1346 & 1404/DEL./2010 12 OVER. THE COURT WAS CONSCIOUS OF THE PRINCIPLE THAT NORMALLY REVENUE EXPENDITURE IS TO BE ALLOWED IN THE SAME YEAR IN WHICH IT IS INCURRED, BUT AT THE INSTANCE OF THE ASSESSEE, WHO WANTED SPREADING OVER, THE COURT AGREED TO ALLOW THE ASSESSEE THAT BENEFIT WHEN IT WAS FOUND THAT THERE WAS A CONTINUING BENEFIT TO THE BUSINESS OF THE COMPANY OVER THE ENTIRE PERIOD. 11. THIS COURT, THUS, EXPLAINED IN NO UNCERTAIN TER MS THAT THE NORMAL RULE ACCEPTED BY THE SUPREME COURT IN THE SA ID JUDGMENT WAS THAT THE EXPENDITURE IS TO BE ALLOWED IN THE YE AR IN WHICH IT WAS INCURRED. ONLY AT THE INSTANCE OF THE ASSESSEE WHO WANTED TO SPREAD OVER, THE COURT HAD AGREED TO ALLOW THE ASSE SSEE THE BENEFIT AFTER FINDING THAT THERE WAS A CONTINUING B ENEFIT TO THE COMPANY OVER THE ENTIRE PERIOD. THE RATIO OF THIS J UDGMENT WAS THUS SUMMARIZED IN THE FOLLOWING MANNER:- WHAT FOLLOWS FROM THE ABOVE IS THAT NORMALLY THE ORDINARY RULE IS TO BE APPLIED, NAMELY, REVENUE EXPENDITURE INCURRED IN A PARTICULAR YEAR IS TO BE ALLOWED IN THAT YEAR. THUS, IF THE ASSESSEE CLAIMS THAT EXPENDITURE IN THAT YEAR, THE INCOME TAX DEPARTMENT CANNOT DENY THE SAME. HOWEVER, IN THOSE CASES WHERE THE ASSESSEE HIMSELF WANTS TO SPREAD THE EXPENDITURE OVER A PERIOD OF ENSUING YEARS, IT CAN BE ALLOWED ONLY IF THE PRINCIPLE OF MATCHING CONCEPT IS SATISFIED, WHICH UPTO NOW HAS BEEN RESTRICTED TO THE CASES OF DEBENTURES. 12. AT THIS STAGE, IT WOULD BE OF ADVANTAGE TO DISC USS THE JUDGMENT OF SUPREME COURT IN EMPIRE JUTE (SUPRA) WHICH REPELLED THE THEORY OF EXPENDITURE OF ENDURING NATU RE, IN A GREAT MEASURE. IN THAT CASE, THE SUPREME COURT NOTED THAT BY DECIDED CASES, THE COURTS EVOLVED VARIOUS TESTS FOR DISTING UISHING BETWEEN THE CAPITAL AND REVENUE EXPENDITURE BUT NO TEST IS PARAMOUNT OR CONCLUSIVE. EVERY CASE HAS TO BE DECID ED ON ITS FACTS KEEPING IN MIND THE BROAD PICTURE OF WHOLE OP ERATION IN RESPECT OF WHICH THE EXPENDITURE HAS BEEN INCURRED. AT THE SAME TIME, FEW TESTS FORMULATED BY THE COURTS WERE TAKEN NOTE OF. ONE SUCH TEST WHICH WAS SPECIFICALLY SPELLED-OUT AND MA Y BE RELEVANT FOR OUR PURPOSE WAS WHEN AN EXPENDITURE IS MADE NO T ONLY ONCE ITA NO.1346 & 1404/DEL./2010 13 AND FOR ALL, BUT WITH A VIEW TO BRINGING INTO EXIST ENCE OF AN ADVANTAGE FOR WHICH ENDURING BENEFIT OF A TRADE, TH E EXPENDITURE CAN BE TREATED AS CAPITAL IN NATURE AND NOT ATTRIBU TABLE TO REVENUE. HOWEVER, CAUTIONED THE COURT, IT WOULD BE MISLEADING TO SUPPOSE THAT IN ALL CASES SECURING A BENEFIT FOR BUSINESS EXPENDITURE WOULD BE CAPITAL EXPENDITURE. THE COURT ADDED THE CAUTION IN THE FOLLOWING WORDS:- THERE MAY BE CASES WHERE EXPENDITURE, EVEN IF INCURRED FOR OBTAINING ADVANTAGE, OF ENDURING BENEFIT, MAY, NONE-THE-LESS, BE ON REVENUE ACCOUNT AND THE TEST OF ENDURING BENEFIT MAY BREAK DOWN. IT IS NOT EVERY ADVANTAGE OF ENDURING NATURE ACQUIRED BY AN ASSESSES THAT BRINGS THE CASE WITHIN THE PRINCIPLE LAID DOWN IN THIS TEST. WHAT IS MATERIAL TO CONSIDER IS THE NATURE OF THE ADVANTAGE IN A COMMERCIAL SENSE AND IT IS ONLY WHERE THE ADVANTAGE IS IN THE CAPITAL FIELD THAT THE EXPENDITURE WOULD BE DISALLOWABLE ON AN APPLICATION OF THIS TEST . IF THE ADVANTAGE CONSISTS MERELY IN FACILITATING THE ASSESSEE'S TRADING OPERATIONS OR ENABLING THE MANAGEMENT AND CONDUCT OF THE ASSESSEE'S BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY WHITE LEAVING THE FIXED CAPITAL UNTOUCHED, THE EXPENDITURE WOULD BE ON REVENUE ACCOUNT, EVEN THOUGH THE ADVANTAGE MAY ENDURE FOR AN INDEFINITE FUTURE. THE TEST OF ENDURING BENEFIT IS THEREFORE NOT A CERTAIN OR CONCLUSIVE TEST AND IT CANNOT BE APPLIED BLINDLY AN D MECHANICALLY WITHOUT REGARD TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF A GIVEN CASE. 13. APPLYING THE AFORESAID PRINCIPLE TO THE FACTS O F THIS CASE, IT CLEARLY EMERGES THAT THE EXPENDITURE ON PUBLICITY A ND ADVERTISEMENT IS TO BE TREATED AS REVENUE IN NATURE ALLOWABLE FULLY IN THE YEAR IN WHICH IT WAS INCURRED. CONCEDE DLY, THERE IS NO ADVANTAGE WHICH HAS ACCRUED TO THE ASSESSEE IN T HE CAPITAL FIELD. THE EXPENDITURE WAS INCURRED TO FACILITATE T HE ASSESSEES TRADING OPERATIONS. NO FIXED CAPITAL WAS CREATED BY THIS EXPENDITURE. WE MAY ALSO ADD HERE THAT IN THE INCOM E-TAX LAWS, THERE IS NO CONCEPT OF DEFERRED REVENUE EXPENDITURE . ONCE THE ASSESSEE CLAIMS THE DEDUCTION FOR WHOLE AMOUNT OF S UCH ITA NO.1346 & 1404/DEL./2010 14 EXPENDITURE, EVEN IN THE YEAR IN WHICH IT IS INCURR ED, AND THE EXPENDITURE FULFILLS THE TEST LAID DOWN UNDER SECTI ON 37 OF THE ACT, IT HAS TO BE ALLOWED. ONLY IN EXCEPTIONAL CASE S, THE NATURE MENTIONED IN MADRAS INDUSTRIAL CORPORATION (SUPRA), THE EXPENDITURE CAN BE ALLOWED TO BE SPREAD OVER, THAT TOO, WHEN THE ASSESSEE CHOOSES TO DO SO. 13. LD. DR SUBMITTED THAT THE ASSESSING OFFICER HAS HELD THAT THE EXPENDITURE IS CAPITAL, THEREFORE, THERE IS NO JUST IFICATION FOR ALLOWING 1/3 RD CLAIM DURING THE YEAR BY CIT (A). 14. AFTER CONSIDERING THE PLEADINGS OF BOTH SIDES A ND CASE LAWS RELIED UPON, WE ARE OF THE VIEW THAT THE REVENUE HAS FAILED TO B RING OUT A CASE TO ESTABLISH THAT ANY CAPITAL ASSETS HAD COME INTO EXISTENCE. F URTHER, AS HELD BY THE HON'BLE HIGH COURT, THERE IS NO CONCEPT OF DEFERRED REVENUE EXPENDITURE IN INCOME-TAX LAWS. THE GENUINENESS OF THE EXPENDITUR E HAS NOT BEEN DOUBTED BY THE REVENUE AUTHORITIES. KEEPING ALL THESE FACT S IN VIEW AND FOLLOWING THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT, WE A LLOW THE GROUNDS OF ASSESSEES APPEAL AND DISMISS THE REVENUES GROUND NO.4. 15. THE ISSUE INVOLVED IN THE GROUND NO.1 OF ASSESS EES APPEAL IS FOR NOT ALLOWING THE PRIOR PERIOD EXPENSES. THE ASSESSEE C LAIMED THAT THESE LIABILITIES WERE CRYSTALLIZED DURING THE YEAR, HENCE DEDUCTION SHOULD BE ALLOWED IN COMPUTING THE INCOME OF THE ASSESSEE. THE ASSESSIN G OFFICER DISALLOWED THE CLAIM BY HOLDING THAT ASSESSEE HAS FAILED TO SUBSTA NTIATE ITS CLAIM THAT THE LIABILITY HAD CRYSTALLIZED DURING THE YEAR UNDER CO NSIDERATION. THE SAME IS NOT ALLOWABLE AS THE ASSESSEE IS FOLLOWING MERCANTILE S YSTEM OF ACCOUNTING. THE ITA NO.1346 & 1404/DEL./2010 15 CIT (A) ALSO CONFIRMED THE ADDITION BY HOLDING THAT THE ASSESSEE HAS FAILED TO SHOW THAT THE LIABILITY HAS ACCRUED DURING THE YEAR UNDER CONSIDERATION AND THE SAME IS NOT ALLOWABLE AS PER MERCANTILE SYSTEM OF A CCOUNT. 16. BEFORE US ALSO, THE ASSESSEE HAS FAILED TO ESTA BLISH THAT THIS LIABILITY ACCRUED DURING THE YEAR UNDER CONSIDERATION. THE A SSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING, THEREFORE, THE SAM E IS NOT ALLOWABLE DURING THE YEAR UNDER CONSIDERATION. WE SUSTAIN THE ORDER OF THE CIT (A) AND DISMISS ASSESSEES GROUND NO.1. 17. GROUND NOS.4 & 5 IN ASSESSEES APPEAL ARE GENER AL IN NATURE AND DOES NOT REQUIRE ANY ADJUDICATION. 18. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED WHEREAS THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON THIS 23 RD DAY OF DECEMBER, 2011. SD/- SD/- (RAJPAL YADAV) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 23 RD DAY OF DECEMBER, 2011/TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A)-XIII, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.