M/s Flipkart India Private Limited , Bangalore V. Assistant Commissioner of Income Tax Circle-3(1)(1), Bangalore

ITA 202/BANG/2018

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 4847 (ITAT-BANGALORE)
• Duration Of Justice: 3 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-04-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2015-2016
• Appeal Filed On: 22-01-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SACRIFICING ITS
• Keywords: Sale consideration of property below Jantri Value; Capital asset; Depreciation; Transfer pricing; Business expenditure; Principle of natural justice; Cost of acquisition; Fair market value; Avoidance of tax; Commercial expediency; Revenue expenditure; Capital expenditure; Capital Gains
• Section: 147; 145; 271(1)(c); 90; 37(1); 13; 145(3); 22; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH A BEFORE SHRI N.V VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER ITA NO.202 /BANG/2018 (ASST. YEAR 2015-16) FLIPKART INDIA PRIVATE LIMITED, ESSAE VAISHNAVI SUMMIT, NO.6/B, 7 TH MAIN, 80 FEET ROAD, 3 RD BLOCK, KORAMANGALA INDUSTRIAL LAYOUT, BANGALORE 560034, PAN: AABCF8078M. . APPELLANT VS. ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE -3(1)(1), BANGALORE .RESPONDENT ITA NO.693 /BANG/2018 (ASST. YEAR 2015-16) (BY REVENUE) REVENUE BY : SHRI C.H. SUNDAR RAO, CIT ASSESSE BY : SHRI PERCY PARDIWALA, ADVOCATE DATE OF HEARING :10-04-2018 DATE OF PRONOUNCEMENT :25 -04-2018 O R D E R PER BENCH: ITA NO.202/BANG/2018 IS AN APPEAL BY THE ASSESSEE A ND ITA NO.693/BANG/2018 IS AN APPEAL BY THE REVENUE. BOTH THE APPEALS ARE DIRECTED ITA NOS.202 & 693/B/18 2 AGAINST THE ORDER DATED 22.12.2017 OF CIT(A)-3, BEN GALURU, RELATING TO AY 2015- 16. 2. THE ASSESSEE IS A COMPANY. DURING THE RELEVANT PREVIOUS YEAR IT WAS ENGAGED IN THE BUSINESS OF WHOLESALE TRADER/DISTRIB UTOR OF BOOKS, MOBILES, COMPUTERS AND RELATED ACCESSORIES. IT FILED A RETU RN OF INCOME FOR AY 2015-16 DECLARING LOSS OF RS.796,34,36,863/-. 3. THE AO NOTICED THAT THE ASSESSEE WAS A WHOLESALE DEALER AND ACQUIRED GOODS FROM VARIOUS PERSONS AND WAS IMMEDIATELY SELL ING THE GOODS TO RETAIL SELLERS LIKE M/S.WS RETAIL SERVICES PVT.LTD. AND OTHERS, WH O SUBSEQUENTLY WOULD SELL THOSE GOODS AS SELLERS ON INTERNET PLATFORM UNDER T HE NAME FLIPKART.COM. THE AO FURTHER NOTICED THAT THE ASSESSEE HAS BEEN PURCH ASING GOODS AT SAY RS.100/- AND SELLING THEM TO THE RETAILERS AT RS.80/-. THE PURCHASES DURING THE RELEVANT PREVIOUS YEAR WAS RS.10335,73,05,882/- AND SALES WA S RS.9351,75,05,319/-. AFTER EXCLUDING CLOSING STOCK OF UNSOLD GOODS, THE PURCHASE AND SALES FIGURE WERE AS FOLLOWS: PURCHASES RS.10335,73,05,882 LESS: STOCK UNSOLD RS. 741,83,06,836 RS. 9593,89,99,046 LESS: SALE VALUE RS. 9351,75,05,319 GROSS LOSS RS. 242,14,93,727 4. THE LOSS IN TERMS OF PERCENTAGE WAS 2.52% OF THE COST OF PURCHASE VALUE. THE AO WAS OF THE VIEW THAT THE ACTION OF THE ASSES SEE IN SELLING GOODS AT LESS THAN COST PRICE WAS NOT A NORMAL BUSINESS PRACTICE. HE THEREFORE CALLED UPON THE ASSESSEE TO EXPLAIN THE PURPOSE OF SELLING GOODS AT LESS THAN COST PRICE. 5. THE ASSESSEE EXPLAINED THAT SALE THROUGH ELECTRO NIC FORM (E-COMMERCE) AS AGAINST THE TRADITIONAL SALE THROUGH RETAIL OUTLETS HAD JUST BEGUN IN 2012. SINCE E- ITA NOS.202 & 693/B/18 3 COMMERCE WAS IN ITS NASCENT STAGE, IT WAS VERY DIFF ICULT TO CREATE TRUST AND AWARENESS OF SALE THROUGH E-COMMERCE. THE VOLUME O F SALES WAS VERY LOW. ONE OF THE WAYS TO INCREASE VOLUME OF SALES AND ATTRACT BUYERS TO E-COMMERCE WAS TO OFFER DISCOUNTED PRICES. HIGHER VOLUME OF SALES WI LL LEAD TO ECONOMIES OF SCALE. 6. ON THE ABOVE SUBMISSION, THE AO OBSERVED THAT TH E VOLUME OF SALES OF THE ASSESSEE WAS RS.199.75 CRORES IN AY 2012-13 AND HAD INCREASED TO RS.9351.75 CRORES IN AY 2015-16. HE OBSERVED THAT THE VOLUME OF INCREASE IN SALES WAS 45 TIMES OVER A PERIOD OF 3 YEARS. HE WAS THEREFORE O F THE VIEW THAT THE PLEA OF THE ASSESSEE THAT SALE AT DISCOUNTED PRICE TO RETAILERS WAS TO INCREASE VOLUME OF SALES CANNOT BE ACCEPTED. 7. THE AO EXAMINED THE SENIOR VICE-PRESIDENT AND FI NANCE CONTROLLER OF THE FLIPKART GROUP SRI.RAJNISH BAWEJA, BY ISSUING SUMMO NS TO HIM BY VIRTUE OF HIS POWER TO SUMMON WITNESS U/S.131 OF THE INCOME TAX A CT, 1961 (ACT). THE SUM AND SUBSTANCE OF THE STATEMENT OF THE VICE-PRESIDEN T ACCORDING TO THE AO WAS THAT THE STRATEGY OF SELLING AT A PRICE LOWER (PRED ATORY PRICING) THAN THE COST PRICE IS TO CAPTURE MARKET SHARE AND TO EARN PROFITS IN T HE LONG RUN. ACCORDING TO THE AO THE BENEFIT TO THE ONLINE BUYER IN THE SHORT RUN IN THE FORM OF LOWER PRICE IS TO CREATE INDIRECT BENEFIT TO THE ASSESSEE IN THE LONG RUN. 8. THE AO THEREAFTER CONCLUDED THAT THE STRATEGY OF SELLING GOODS AT LOWER THAN COST PRICE WAS TO ESTABLISH CUSTOMER GOODWILL AND BRAND VALUE IN THE LONG RUN AND REAP BENEFITS IN THE LATER YEARS. THE AO I N THIS REGARD REFERRED TO THE FACT THAT THE ASSESSEE DURING THE PREVIOUS YEAR RELEVANT TO AY 2015-16 SOLD ITS SHARES AT A HUGE PREMIUM (EQUITY SHARES OF FACE VALUE OF R E.1/- WAS SOLD AT A PREMIUM OF RS.18,999/- PER EQUITY SHARES) BASED ON THE VALU ATION OF THOSE SHARES UNDER THE DISCOUNTED CASH FLOW METHOD(DCF METHOD). THE DCF M ETHOD ESTIMATES THE CASH FLOWS IN FUTURE AND USES APPROPRIATE DISCOUNTI NG FACTORS TO ARRIVE AT THE ITA NOS.202 & 693/B/18 4 CURRENT ENTERPRISE VALUE. THIS WAS ONE REASON FOR T HE AO TO CONCLUDE THAT THE STRATEGY OF INCURRING LOSS IN THE PRESENT WAS TO RE AP BENEFIT AND PROFITS IN FUTURE BY CAPTURING E-COMMERCE MARKET. 9. THE AO THEREAFTER CONCLUDED THAT THE LOSSES INCU RRED BY THE ASSESSEE WAS TO CREATE MARKETING INTANGIBLE ASSETS AND THEREFORE THE LOSS TO THE EXTENT IT IS CREATED DUE TO PREDATORY PRICING SHOULD BE REGARDED AS CAPITAL EXPENDITURE INCURRED BY THE ASSESSEE AND SHOULD BE DISALLOWED. THE AO WAS HOWEVER GRACIOUS IN HOLDING THAT THE VALUE OF MARKETING INT ANGIBLES SHOULD BE CONSIDERED AS AN ASSET USED FOR THE PURPOSE OF BUSINESS FOR WH ICH THE ASSESSEE SHOULD BE ELIGIBLE TO CLAIM DEPRECIATION AT 25%. IN COMING T O THIS CONCLUSION, THE AO MADE THE FOLLOWING OBSERVATIONS IN HIS ORDER.: 3.9. ASSESSEE IS FOLLOWING A BUSINESS MODEL OF CRE ATING MARKETING INTANGIBLE ASSETS FOR LONG-TERM BENEFITS. VARIOUS EVIDENCES OF SAME CAN BE SUMMARIZED AS UNDER: A. ASSESSEE SELLS ITS GOODS AT A PRICE LOWER THAN COST PRICE B. ASSESSEE HAS MADE LOSSES CONSISTENTLY FOR THE LAST 5 YEARS. YET IT HAS A HIGH VALUATION . WHAT COULD BE THE RATIONALE FOR HIGH VALUATION OTHER THAN THE VALUE OF BUSINESS MODEL THE MARKETIN G INTANGIBLE AND CONSUMER GOODWILL. C. ASSESSEE HAS NOT MADE PROFIT EVEN ONCE TILL DATE. ITS EQUITY IS BEING ERODED. YET IT GETS FRESH INVESTMENTS FROM VENTURE AND ANGEL INVESTORS AT A HIGH VALUATION. FUND MANAGERS AND INVESTORS MAKE D ETAILED VERIFICATION AND ANALYSIS OF THE BUSINESS MODEL AND APPROVE A VA LUATION. THESE FUND MANAGERS ACCEPT THAT ASSESSEE INSPITE OF INCURRING LOSSES, HAS GENERATED HUGE MARKETING INTANGIBLE, BRAND. 3.10. AT THIS JUNCTURE IT IS IMPORTANT TO STRESS T HAT THE PREDATORY PRICING STRATEGY OF ASSESSEE IS A LONG TERM STRATEGY AND HE NCE THE CAPITAL ASSET GENERATED HAVE ENDURING BENEFITS FOR THE COMPANY. ASSESSEE HAS TAKEN OVER THE BUSINESS FLIPKART ONLINE PVT.LTD. BY A S LUMP SALE IN FY 2011- 12. BUT PRIOR TO TAKE OVER OF THE BUSINESS, THE BU SINESS HAS BEEN CONSISTENTLY MAKING LOSSES. THE BUSINESS HAS ERODE D ITS EQUITY IN LOSSES; YET HAS ATTRACTED HEAVY INVESTMENTS FROM INDIA AND ABROAD. BY ACCOUNTING STANDARDS AS WELL AS PROVISIONS OF INCOME TAX ACT, EXPENDITURE MADE TOWARDS GENERATION OF CAPITAL ASSETS SHOULD BE CAPI TALIZED. ASSESSEE SHOULD NOT SUCH E XPENDITURE AS REVENUE EXPENDITURE. HENCE THE VALUE OF ITA NOS.202 & 693/B/18 5 MARKETING INTANGIBLES SHOULD BE DISALLOWED AND 25% ONLY SHOULD BE ALLOWED AS DEPRECIATION U/S.32 OF IT ACT, 1961. 10. THE AO CALLED UPON THE ASSESSEE TO EXPLAIN WHY THE DIFFERENCE BETWEEN HIGHER PURCHASE PRICE AND LOWER SELLING PRICE SHOUL D NOT BE INFERRED AS A PRICING STRATEGY LEADING TO ENDURING BENEFITS; AND HENCE LE ADING TO GENERATION OF CAPITAL ASSET. THE ASSESSEE REPLIED THAT NO PART OF PURCHA SES BY AN ENTERPRISE CARRYING ON TRADING BUSINESS CAN BE CONSIDERED AS CAPITAL EXPEN DITURE. THE ASSESSEE SUBMITTED THAT EXPENSES ON PURCHASES IN THE BUSINES S OF WHOLESALE CANNOT AND DOES NOT CREATE ANY ASSET OF AN ENDURING ADVANTAGE. 11. THE AO HOWEVER CONCLUDED THAT THE ASSESSEE FOLL OWED PREDATORY PRICING IN ORDER TO CREATE MARKETING INTANGIBLES AND BRAND. ACCORDING TO HIM THE ENHANCED VALUATIONS AT WHICH VENTURE CAPITALISTS IN VEST IN THE ASSESSEE IS BASED ON INTANGIBLES GENERATED BY ASSESSEE. HENCE, SELLING AT A PRICE BELOW PRICES IS NOT AN IRRATIONAL ECONOMIC BEHAVIOUR. IT IS A CLEARLY THO UGHT STRATEGY TO ESTABLISH A MONOPOLY IN MARKET BY BRAND BUILDING BY GENERATING CONSUMER GOODWILL. THIS STRATEGY NATURALLY LEADS TO GENERATION OF INTANGIBL E ASSETS AND ENDURING BENEFIT. 12. HAVING COME TO A CONCLUSION THAT THE ASSESS EE CREATED INTANGIBLE ASSETS, THE AO THEREAFTER EMBARKED UPON METHOD OF VALUATION OF INTANGIBLES. THE FIRST OBSERVATION OF THE AO WAS THAT E-COMMERCE BUSINESS DOES NOT FOLLOW THE TRADITIONAL METHODS FOR EARNING INCOME AND HENCE AS SESSMENT OF INCOME IN THE CASE OF E-COMMERCE BUSINESS ALSO CANNOT BE DONE BY FOLLOWING TRADITIONAL METHODS. THE AO REFERRED TO THREE APPROACHES OF VA LUATION OF INTANGIBLES PRESCRIBED BY OECD IN ITS CONVENTION OF BASE EROSIO N AND PROFIT SHIFTING (BEPS) VIZ., COST APPROACH, INCOME APPROACH AND MARKET APP ROACH. THE AO ADOPTED COST APPROACH IN WHICH A REASONABLE PROFIT MARGIN IS ATT RIBUTED TO THE COST OF PURCHASES AND TO THE EXTENT THE PROFIT IS FOREGONE BY THE ASS ESSEE WAS TO BE CONSIDERED AS THE VALUE OF INTANGIBLE. THE FOLLOWING WAS THE RELE VANT OBSERVATIONS OF THE AO: ITA NOS.202 & 693/B/18 6 3. 18. FOR THIS PURPOSE, THE CALCULATION OF EXPENS E ON INTANGIBLE ASSETS IS AS UNDER: (A) WHAT WOULD BE THE SALE PRICE OF' GOOD HAD IT NO T FOLLOWED PREDATORY PRICING AND SOLD WITH A PROFIT MOTIVE? HAD ASSESSEE NOT FOLLOWED PREDATORY PRICING, IT WOULD HAVE SOLD THE GOODS AT MARKET PRI CE AND MADE A GROSS PROFIT ON COST OF GOODS. ASSESSEE'S GROSS PROFIT MA RGIN IS (-) 2.52 % ON COST (COST FOR ASSESSEE IS RS. 9593,89,99,046). THE GROS S MARGIN OF COMPARABLE WHOLESALERS IS EXTRACTED FROM PUBLIC DATABASES AND THEIR AVERAGE GROSS MARGIN IS TO BE COMPUTED, SAY IT IS Y % ON COST. AS SESSEE'S SALE PRICE IN A FAIR BUSINESS MARKETING SITUATION WOULD BE COST PLU S + Y% OF RS.9593.89 CRORES. (B) ASSESSEE HAS SHOWN SALES OF RS. 9351,75,05,319. THIS SALE PRICE IS AT A DISCOUNT AND SUBSIDIZES GENERATION OF VALUE FOR MAR KETING INTANGIBLES. THE COST INCURRED BY ASSESSEE IN GENERATION OF MARKETIN G INTANGIBLES IS BASICALLY THE DIFFERENCE IN PRICE BETWEEN 'SALE PRO CEEDS OF ANY NORMAL WHOLESALER IN MARKET' AND SALE PROCEEDS OF ASSESSEE IN THE SAME MARKET'. THIS IS EQUAL TO: COST OF MARKETING INTANGIBLE =(100+Y)* 9593,8 9,99,046/100- RS.9351,75,05,319 13. FOR THE ABOVE PURPOSE THERE WAS A NEED TO FIND OUT AVERAGE GROSS MARGIN ON COST FOR OTHER WHOLESALERS IN THE MARKET. THE A O TOOK THE DATABASE FOR WHOLESALERS DEALING IN CONSUMER AND ELECTRONIC GOOD S. HE TOOK PROFIT MARGINS OF COMPANIES WHOSE TURNOVER WAS ABOVE RS.20 CRORES AND WHOSE REVENUE FROM TRADING WAS MORE THAN 75% OF THE TOTAL REVENUE. TH E SEARCH PROCESS YIELDED AN AVERAGE GROSS PROFIT MARGIN OF 16.95%. THIS WAS CO MPARED WITH ASSESSEES PROFIT MARGIN OF (-2.52%). THE AO THEREAFTER ARRIV ED AT THE TOTAL INCOME OF THE ASSESSEE AS FOLLOWS: 3.20. THE MARKET AVERAGE OF GROSS PROFIT MARGIN FO R WHOLESALERS IS 16.95%. ON PERUSAL OF THE COMPARABLES, IT IS SEEN T HAT NONE OF COMPARABLE HAS AN ABNORMALLY NEGATIVE GROSS PROFIT MARGIN. IT CAN BE CONCLUDED THAT ITA NOS.202 & 693/B/18 7 THESE COMPARABLE WHOLESALERS FOLLOW A PROFIT-BASED BUSINESS MODEL. IN ANY CASE, AVERAGING IRONS OUT THE DIFFERENCES IN THESE MARKET COMPARABLES. HAD ASSESSEE NOT FOLLOWED A PREDATORY PRICING POLICY, I TS (MARKET AVERAGE) SALE PRICE WOULD HAVE BEEN RS.9593,89,99,046 + (16.95% O F RS.9593,89,99,046) I.E. RS. 11220,06,59,384. ASSESSEES REAL SALES IS R S. 9351 ,75,05,3 19. THE REDUCTION IN SALES DUE TO FOLLOWING ASSESSEE'S STRA TEGY OF SELLING AT A PRICE LOWER THAN COST, THE DIFFERENCE OF RS. 1868,3 1,54, 065 BETWEEN THE PRICE AT WHICH THE ASSESSEE IS SELLING AND THE PRICE THE NOR MAL WHOLESALER WOULD HAVE SOLD IS THE VALUE OF EXPENSES INCURRED BY ASSE SSEE TOWARDS COST OF MARKETING INTANGIBLES IN THE YEAR. 3.2 1. ASSESSES HAD CROSS-SUBSIDIZED ITS MARKETING INTANGIBLE AND BRAND VALUE WITH REDUCTION IN SALE PRICE. HOWEVER, AS ALR EADY STATED IN GREAT DETAIL, MARKETING INTANGIBLES AND BRAND VALUE ARE A SSETS. ANY EXPENSE/COST INCURRED DUE ON CREATION OF THE SAME IS CAPITAL EXP ENDITURE AND HAS TO BE CAPITALIZED. HENCE ADDITION TO THE EXTENT OF RS. 18 68.31,54,065 IS MADE ON ACCOUNT OF INTANGIBLES. HENCE DEPRECIATION ON INTAN GIBLES IS ALLOWED 25 % OF THIS AMOUNT. I.E. RS.284.01,49.213/- AND THE BAL ANCE IS ADD THE RETURNED INCOME. HENCE THE ADDITION IS ( RS. 1868,31,54,065 - RS. 467,07,88,5 16) RS. 1401,23,65,549. 4. FURTHER A SIMILAR CAPITALIZATION WAS MADE IN A.Y 2012-13, A.Y 2013 - 14 AND AY 20 1415 THE ASSESSEE COMPANY IS ELIGIBLE FOR DEPRECIATION ON THESE CAPITAL ASSET IN THE CURRENT YEAR AS FOLLOWS. A.Y:2012-13 - RS. 8,18,81.560 A.Y:2013-L4 - RS. 45,14,69,521 A.Y:2014-15 - RS. 143,22,15,931 AFTER ALLOWING THE ABOVE DEDUCTION FOR AN 2012-13, 2013-14 AND 2014-15 THE ADDITION TO BE MADE WORKS OUT AS UNDER: FURTHER AS THE ASSESSEE HAS FURNISHED IN ACCURATE P ARTICULARS OF INCOME PENALTY PROCEEDINGS U/S 271(1)(C) ARE INITIATED SEP ARATELY. ITA NOS.202 & 693/B/18 8 THE AMOUNT OF RS. 1204,67,98,537 AS COMPUTED ABOVE IS ADDED TO ASSESSEE'S DECLARED INCOME AND TAXABLE INCOME OF AS SESSEE COMPANY IS COMPUTED AS UNDER. ISSUE DEMAND NOTICE AND PENALTY NOTICE ACCORDINGLY. 14. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREFERRED APPEAL BEFORE CIT(A). THE CIT(A) CONFIRMED THE ORDER OF THE AO. THE CIT(A) IN EXERCISE OF HIS POWERS OF ENHANCEMENT U/S.251(2) OF THE ACT ALS O WITHDREW DEPRECIATION OF 25% ON THE INTANGIBLE ASSETS ALLOWED BY THE AO WHIL E COMPUTING TOTAL INCOME, FOR THE REASON THAT THOUGH THE ASSESSEE INCURRED EX PENSES FOR CREATING INTANGIBLE ASSETS BUT WAS NOT OWNER OF THE INTANGIBLE. IN DOI NG SO, HE DID NOT GIVE NOTICE TO THE ASSESSEE BEFORE EXERCISING POWER OF ENHANCEMENT WHICH HE WAS BOUND TO DO U/S.251(2) OF THE ACT. FURTHER THE CIT(A) IN COMIN G TO THE AFORESAID CONCLUSION RELIED ON GROUND NO.4( E) RAISED BY THE ASSESSEE IN THE GROUNDS OF APPEAL, WHICH READS THUS: GROUND NO.4 ( E): THE LEARNED AO FAILED TO APPREC IATE THE FACT THAT DURING THE YEAR UNDER CONSIDERATION, THE APPELLANT WAS NOT OWNING ANY BRAND/INTELLECTUAL PROPERTY (TRANSFERRED BY WAY OF SLUM SALE IN FY 2012-13, ALSO DISCLOSED IN THE FINANCIAL STATEMENT FOR AY 20 12-13 THAT ARE AVAILABLE IN THE LEARNED AOS FILES FOR VERIFICATION) AND THE APPELLANT WAS ONLY ENGAGED IN THE BUSINESS OF WHOLESALE TRADING. ITA NOS.202 & 693/B/18 9 15. ACCORDING TO THE CIT(A) IN THE ABOVE GROUND OF APPEAL THE ASSESSEE HAS ADMITTED THAT IT SOLD INTELLECTUAL PROPERTY/BRAND I N A SLUM SALE IN FY 2012-13 TO M/S.FLIPKART INTERNET PVT.LTD. THIS IS A COMPLETE DISTORTION OF FACTS. IF ONE READS GROUND NO.4(E) THERE IS NO ADMISSION OF ANY OWNERSH IP OF INTANGIBLE PROPERTY/BRAND OR ITS TRANSFER IN FY 2012-13 IN A S LUMP SALE. FOR THE SAKE OF READY REFERENCE, WE REPRODUCE PARAGRAPH 6.5 OF THE CIT(A)S ORDER: 6.5 IN RELATION TO GROUND OF APPEAL 4(E), THE APPE LLANT HAS ALSO ARGUED THAT IT DOES NOT OWN ANY BRAND/INTELLECTUAL PROPERTY AS THE SAME WAS TRANSFERRED IN A SLUMP SALE IN FY 2012-13 TO M/S FLIPKART INTER NET PVT LTD. THE SALE INCLUDED BUSINESS RELATING TO INFORMATION TECHNOLOG Y PLATFORM ALONG WITH BRAND NAME, TRADEMARK AND SUPPORT SERVICES. THIS AR GUMENT OF THE APPELLANT WOULD NOT HAVE ANY MATERIAL IMPACT ON THE ISSUE OF DISALLOWANCE MADE BY THE AO IN THE CASE UNDER CONSIDERATION. THE APPELLANT BELONGS TO FLIPKART GROUP AND AS PER APPELLANT THE SALE OF BRA ND ETC IS TO A RELATED PARTY. SINCE THE BRAND INCLUDING FLIPKART GETTING P ROMOTED BY THE BUSINESS STRATEGY OF THE APPELLANT IS NOT OWNED BY THE APPEL LANT AND GOODWILL GENERATED FOR THE SAME IS ALSO NOT ACCRUING TO IT T HEN THE EXPENDITURE TO THAT EXTENT NEEDS TO BE CONSIDERED FOR NON-BUSINESS PURP OSES AS THE INTANGIBLE GENERATED WOULD NOT HE BENEFITTING THE APPELLANT BU T THE OTHER PERSON. IN VIEW OF THIS THE APPELLANT WOULD NOT BE ELIGIBLE TO CLAIM ANY DEPRECIATION ON THE VALUE OF INTANGIBLE GENERATED. 16. THEREAFTER THE CIT(A) GAVE CERTAIN DIRECTIONS I N THE MATTER OF QUANTIFICATION OF THE VALUE OF INTANGIBLE AND THE A DDITION TO BE MADE TO THE TOTAL INCOME. THE REVENUE IS AGGRIEVED BY THESE DIRECTIO NS AS THIS WILL REDUCE THE PROFIT MARGIN ON COST OF PURCHASES WHILE WORKING OUT THE V ALUATION OF INTANGIBLES AND THEREFORE THE REVENUE HAS PREFERRED APPEAL AGAINST THAT PART OF THE CIT(A)S ORDER. THE ASSESSEE IS AGGRIEVED BY THE ORDER OF THE CIT(A ) IN ITS CONCLUSION THAT THE ASSESSEE INCURRED EXPENSES FOR CREATING INTANGIBLES AND THOSE EXPENSES ARE CAPITAL EXPENDITURE AND HAVE TO BE ADDED TO THE TOTAL LOSS DECLARED BY THE ASSESSEE, THE ASSESSEE HAS PREFERRED APPEAL AGAINST THE ORDER OF THE CIT(A). ITA NOS.202 & 693/B/18 10 17. THE HONBLE KARNATAKA HIGH COURT IN W.P.NO.6533 OF 2018 (T-IT) BY ITS ORDER DATED 15.2.2018 HAS DIRECTED THE TRIBUNAL TO HEAR THE APPEAL FILED BY THE ASSESSEE ON 9.4.2018 ITSELF ON WHICH DATE THE APPEA L WAS FIXED FOR FINAL HEARING. THE HONBLE HIGH COURT HAS DIRECTED THE PARTIES NOT TO SEEK ANY ADJOURNMENT OF HEARING AND CONCLUDE THE HEARING ON THE GIVEN DATE. THE HONBLE HIGH COURT HAS ALSO DIRECTED THAT THE TRIBUNAL SHALL DECIDE THE AP PEAL WITHIN 3 MONTHS FROM 15.2.2018. 18. FIRST WE SHALL TAKE UP FOR CONSIDERATION THE AP PEAL BY THE ASSESSEE. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE MANNER IN WHICH THE REVENUE AUTHORITIES HAVE PROCEEDED TO DETERMINE THE TOTAL I NCOME OF THE ASSESSEE IS NOT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. IN THIS REGARD HE SUBMITTED THAT INCOME UNDER THE HEAD INCOME FROM BUSINESS OR PROF ESSION HAS TO BE COMPUTED IN ACCORDANCE WITH SEC.28 TO SEC.44DB OF THE ACT. THE STARTING POINT OF COMPUTATION OF INCOME FROM BUSINESS HAS TO BE THERE FORE THE SALES AS RECORDED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNTS. HE DREW OUR ATTENTION TO THE FACT THAT THE SALES FIGURE AS PER THE BOOKS OF ACCOUNTS OF THE AS SESSEE WAS RS. 9351,75,05,319/-. IT IS NOT THE CASE OF THE AO THA T THE FIGURES DISCLOSED IN THE BOOKS OF ACCOUNTS ARE NOT TRUE OR CORRECT. IT WAS SUBMITTED BY HIM THAT IN SUCH CIRCUMSTANCES, THE AO CANNOT DISREGARD THE BOOKS OF ACCOUNTS AND COMPUTE INCOME. HE SUBMITTED THAT BOOKS OF ACCOUNTS OF THE ASSESSEE HAVE NOT BEEN REJECTED. IN SUCH CIRCUMSTANCES THE AO CANNOT RESO RT TO A PROCESS OF ESTIMATING INCOME OF THE ASSESSEE. 19. THE LEARNED COUNSEL FOR THE ASSESSEE REFERRED TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. SHOORJI VALLAB HDAS & CO. 46 ITR 144 (SC). THE HONBLE SUPREME COURT WAS DEALING WITH A CASE R ELATING TO AY 1948-49 CORRESPONDING TO THE PREVIOUS YEAR ENDING 31.3.1948 . THE ASSESSEE WAS MANAGING AGENT OF TWO SHIPPING COMPANIES AND WAS EN TITLED TO RECEIVE COMMISSION AT 10% OF THE FREIGHT RECEIVED AS COMMIS SION. FOR THE RELEVANT ITA NOS.202 & 693/B/18 11 PREVIOUS YEAR THE BOOKS OF ACCOUNTS WERE CREDITED W ITH THE COMMISSION RECEIVABLE FROM THE TWO SHIPPING COMPANIES. IN 1947, THE ASSE SSEE FLOATED TWO PRIVATE LIMITED COMPANIES. THESE TWO COMPANIES WERE APPOIN TED AS THE MANAGING AGENTS FOR THE TWO SHIPPING COMPANIES FOR WHICH THE ASSESSEE ACTED AS MANAGING AGENTS ON THE SAME TERMS ON WHICH THE ASSESSEE ACTE D AS MANAGING AGENTS. THE SHAREHOLDERS OF THE TWO COMPANIES FOR WHICH THE ASS ESSEE WAS ACTING AS MANAGING AGENTS AGREED TO TWO PRIVATE LIMITED COMPA NIES FLOATED BY THE ASSESSEE BUT AT A REDUCED AGENCY COMMISSION OF 2.50 % OF THE FREIGHT RECEIVED. ON 30.12.1947 THE TWO COMPANIES FOR WHICH THE ASSES SEE ACTED AS MANAGING AGENTS AGREED TO THE TWO PRIVATE LIMITED COMPANIES FLOATED BY THE ASSESSEE TO ACT AS MANAGING AGENTS AT 2.50% COMMISSION ON FREIGHT R ECEIVED. AS A RESULT, THE ASSESSEE- FIRM GAVE UP 75 PER CENT OF ITS EARNINGS DURING THE RELEVANT YEARS OF ACCOUNT. IN THE ASSESSMENT WHICH FOLLOWED, THE ITO AND THE AAC CAME TO THE CONCLUSION THAT THE AMOUNT OF LARGER COMMISSION HAD ALREADY ACCRUED DURING THE PREVIOUS YEAR ENDING 31ST MARCH, 1948, AND WAS THUS ASSESSABLE. ASSESSEE MADE AN ALTERNATE CLAIM THAT THE AMOUNT GIVEN UP WAS ALS O CLAIMED BY THE ASSESSEE-FIRM AS AN EXPENDITURE UNDER S. 10(2)(XV) OF THE INDIAN IT ACT, BUT WAS DISALLOWED. ON APPEAL TO THE TRIBUNAL, THE MAJORITY VIEW OF THE TR IBUNAL WAS THAT EVEN THOUGH THE ACTUAL REDUCTION TOOK PLACE AFTER THE YEAR OF ACCOU NT WAS OVER, THERE WAS, IN FACT, AN AGREEMENT TO REDUCE THE COMMISSION EVEN DURING T HE CURRENCY OF THE ACCOUNT YEAR, AND THE LARGER INCOME NEITHER ACCRUED NOR WAS RECEIVED BY THE ASSESSEE-FIRM. IN ACCORDANCE WITH THE OPINION OF THE PRESIDENT, TH E ASSESSMENT WAS REDUCED BY DELETING THE EXTRA COMMISSION FROM THE COMPUTATION. THE HONBLE HIGH COURT AGREED WITH THE MAJORITY VIEW OF THE TRIBUNAL AND H ELD THAT THE LARGER SUMS CANNOT BE REGARDED AS INCOME OF THE ASSESSEE FOR THE RELEV ANT PREVIOUS YEAR. ON FURTHER APPEAL TO THE HONBLE SUPREME COURT ON A CERTIFICAT E BY THE HONBLE HIGH COURT AS A FIT CASE FOR REFERENCE U/S.66A(2) OF THE INCOM E TAX ACT, 1922 (1922 ACT), THE HONBLE SUPREME COURT HELD INCOME-TAX IS A LEVY ON INCOME. NO DOUBT, THE IT ACT TAKES INTO ACCOUNT TWO POINTS OF TIME AT WHICH THE LIABILITY TO TAX IS ATTRACTED, ITA NOS.202 & 693/B/18 12 VIZ., THE ACCRUAL OF THE INCOME OR ITS RECEIPT; BUT THE SUBSTANCE OF THE MATTER IS THE INCOME. IF INCOME DOES NOT RESULT AT ALL, THERE CAN NOT BE A TAX, EVEN THOUGH IN BOOK- KEEPING, AN ENTRY IS MADE ABOUT A 'HYPOTHETIC AL INCOME', WHICH DOES NOT MATERIALISE. WHERE INCOME HAS, IN FACT, BEEN RECEIV ED AND IS SUBSEQUENTLY GIVEN UP IN SUCH CIRCUMSTANCES THAT IT REMAINS THE INCOME OF THE RECIPIENT, EVEN THOUGH GIVEN UP, THE TAX MAY BE PAYABLE. WHERE, HOWEVER, T HE INCOME CAN BE SAID NOT TO HAVE RESULTED AT ALL, THERE IS OBVIOUSLY NEITHER AC CRUAL NOR RECEIPT OF INCOME, EVEN THOUGH AN ENTRY TO THAT EFFECT MIGHT, IN CERTAIN CI RCUMSTANCES, HAVE BEEN MADE IN THE BOOKS OF ACCOUNT. ACCORDING TO HIM THEREFORE TH E REVENUE CANNOT BRING TO TAX HYPOTHETICAL INCOME BY ASSUMING THAT THE ASSESSEE INCURRED EXPENSES ON CREATION OF INTANGIBLES/BRAND AND THOSE EXPENSES AR E CAPITAL IN NATURE AND CANNOT BE ALLOWED AS DEDUCTION WHILE COMPUTING INCOME. 20. HE PLACED RELIANCE ON THE DECISION OF THE HONB LE SUPREME COURT IN THE CASE OF CIT VS. CALCUTTA DISCOUNT CO. LTD., 91 ITR 8 (SC). IN THE AFORESAID DECISION THE FACTS WERE THAT THE ASSESSEE-COMPANY F LOATED A SUBSIDIARY COMPANY DURING THE RELEVANT PREVIOUS YEAR AND TRANSFERRED T O THAT SUBSIDIARY COMPANY VARIOUS SHARES HELD BY IT. IN RETURN THE SUBSIDIARY COMPANY TRANSFERRED TO THE ASSESSEE-COMPANY ITS SHARES OF THE VALUE OF RS. 1,3 8,81,173. THE BOOK VALUE OF SHARES TRANSFERRED BY THE ASSESSEE-COMPANY TO ITS S UBSIDIARY WAS RS. 1,66,69,391. THUS, THE ASSESSEE-COMPANY SUSTAINED A LOSS OF RS. 27,02,398 BUT IT DID NOT CLAIM THAT LOSS IN THE RETURN ON THE GROUND THAT THE TRAN SFER IN QUESTION WAS MADE TO ITS OWN SUBSIDIARY. THE ITO VALUED THE SHARES TRANSFERR ED BY THE ASSESSEE-COMPANY TO ITS SUBSIDIARY AT THE MARKET RATE AND ON THAT BA SIS CAME TO THE CONCLUSION THAT THE ASSESSEE-COMPANY MUST BE DEEMED TO HAVE MADE A PROFIT OF RS. 1,02,40,546. THE ACTION OF THE REVENUE AUTHORITIES WAS NOT ACCEP TED BY THE TRIBUNAL AND THE HONBLE HIGH COURT. ON FURTHER APPEAL BY THE REVEN UE THE HONBLE SUPREME COURT HELD THAT THE AUTHORITIES UNDER THE ACT HAVE COME TO THE CONCLUSION THAT THE TRANSACTION BETWEEN THE ASSESSEE AND ITS SUBSIDIARY COMPANY WAS A BONA FIDE TRANSACTION AND THE ASSESSEE HAD NOT MADE ANY SECRE T PROFITS OUT OF THE TRANSACTION ITA NOS.202 & 693/B/18 13 IN QUESTION. IT MAY BE THAT THE ASSESSEE HAD TRANSF ERRED ITS VALUABLE SHARES AT COST PRICE TO ITS SUBSIDIARY IN ORDER TO SO ARRANGE ITS AFFAIRS AS TO REDUCE ITS TAX BURDEN. IT IS A WELL ACCEPTED PRINCIPLE OF LAW THAT AN ASSE SSEE CAN SO ARRANGE HIS AFFAIRS AS TO MINIMISE HIS TAX BURDEN. HENCE, IF THE ASSESSEE IN THIS CASE HAS ARRANGED ITS AFFAIRS IN SUCH A MANNER AS TO REDUCE ITS TAX LIABI LITY BY STARTING A SUBSIDIARY COMPANY AND TRANSFERRING ITS SHARES TO THAT SUBSIDI ARY COMPANY AND THUS FORGOING PART OF ITS OWN PROFITS AND AT THE SAME TIME ENABLI NG ITS SUBSIDIARY TO EARN SOME PROFITS, SUCH A COURSE IS NOT IMPERMISSIBLE UNDER L AW. WHEN ONE TRADER TRANSFERS HIS GOODS TO ANOTHER TRADER AT A PRICE LESS THAN TH E MARKET PRICE, THE TAXING AUTHORITY CANNOT TAKE INTO CONSIDERATION THE MARKET PRICE OF THOSE GOODS, IGNORING THE REAL PRICE FETCHED. NOW THIS POSITION OF LAW WILL STAND MODIFIED AFTER INSERTION OF PROVISIONS OF SEC.40A(2)(A) OF THE ACT WHICH LAY S DOWN THAT IF THE PARTIES ARE RELATED TO EACH OTHER THAN THE FAIR PRICE PAID FOR THE GOODS CAN BE SCRUTINIZED BY THE REVENUE. ALSO IT NEEDS TO BE NOTED THAT NONE O F THE TRANSACTIONS OF THE ASSESSEE EITHER PURCHASE OR SALE IS FROM OR TO A RE LATED PARTY. 21. THE LEARNED COUNSEL FOR THE ASSESSEE PLACED REL IANCE ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. A.RAMA N & CO. 67 ITR 11 (SC). THE FACTS IN THE AFORESAID DECISION WAS THAT THE AS SESSEES, M/S A. RAMAN & CO., (A PARTNERSHIP FIRM) WERE DEALERS IN 'MILL STORES'. IN THE COURSE OF THEIR BUSINESS THEY SELL 'MILL STORES' TO OTHER DEALERS INCLUDING TWO CONCERNS TRADING IN THE NAMES OF M/S A.M. SHAH & CO. M/S R. AMBALAL & CO., WHICH ARE OWNED BY THE HUFS, MANAGERS OF WHICH ARE THE ONLY PARTNERS OF TH E ASSESSEES. THE CASE OF THE REVENUE WAS THAT THE ASSESSEES, THEIR PARTNERS AND THEIR INDIVIDUAL HUFS HAD CONTRIVED TO DIVERT PROFITS OF THE ASSESSEES TO THE IR RESPECTIVE HUFS AND HAD TRIED TO 'EVADE PROPER TAXATION'. THE HONBLE SUPREME CO URT HELD: THE PLEA RAISED BY THE ITO IS THAT INCOME WHICH CO ULD HAVE BEEN EARNED BY THE ASSESSEES WAS NOT EARNED, AND A PART OF THAT INCOME WAS EARNED BY THE HUFS. THAT ACCORDING TO THE ITO W AS BROUGHT ABOUT BY 'A SUBTERFUGE OR CONTRIVANCE'. COUNSEL FOR THE CIT ITA NOS.202 & 693/B/18 14 CONTENDED THAT IF BY RESORTING TO A 'DEVICE OR CONT RIVANCE', INCOME WHICH WOULD NORMALLY HAVE BEEN EARNED BY THE ASSESS EE IS DIVIDED BETWEEN THE ASSESSEE AND ANOTHER PERSON, THE ITO WO ULD BE ENTITLED TO BRING THE ENTIRE INCOME TO TAX AS IF IT HAD BEEN EARNED BY HIM. BUT THE LAW DOES NOT OBLIGE A TRADER TO MAKE THE MAXIMU M PROFIT THAT HE CAN OUT OF HIS TRADING TRANSACTIONS. INCOME WHICH ACCRUES TO A TRADER IS TAXABLE IN HIS HANDS : INCOME WHICH HE CO ULD HAVE, BUT HAS NOT EARNED, IS NOT MADE TAXABLE AS INCOME ACCRU ED TO HIM. BY ADOPTING A DEVICE, IF IT IS MADE TO APPEAR THAT INC OME WHICH BELONGED TO THE ASSESSEE HAD BEEN EARNED BY SOME OTHER PERSO N, THAT INCOME MAY BE BROUGHT TO TAX IN THE HANDS OF THE ASSESSEE, AND IF THE INCOME HAS ESCAPED TAX IN A PREVIOUS ASSESSMENT A CASE FOR COMMENCING A PROCEEDING FOR REASSESSMENT UNDER S. 147 (B) MAY BE MADE OUT. AVOIDANCE OF TAX LIABILITY BY SO ARRANGING COMMERCI AL AFFAIRS THAT CHARGE OF TAX IS DISTRIBUTED IS NOT PROHIBITED. A T AXPAYER MAY RESORT TO A DEVICE TO DIVERT THE INCOME BEFORE IT ACCRUES OR ARISES TO HIM. EFFECTIVENESS OF THE DEVICE DEPENDS NOT UPON CONSID ERATIONS OF MORALITY, BUT ON THE OPERATION OF THE IT ACT. LEGIS LATIVE INJUNCTION IN TAXING STATUTES MAY NOT, EXCEPT ON PERIL OF PENALTY , BE VOTED, BUT IT MAY LAWFULLY BE CIRCUMVENTED. (EMPHASIS SUPPLIED) 22. THE LEARNED COUNSEL PLACED RELIANCE ON THE DECI SION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF A.KHADAR BASHA VS. ACIT (2015) 232 TAXMAN 434(KARN.). THIS DECISION WAS RENDERED IN T HE CONTEXT OF PROVISIONS OF SEC.40A(2) OF THE ACT. THE FACTS OF THE CASE WERE THAT THE ASSESSEE PURCHASED 139.24 MT OF RICE BRAN FROM M/S. NICKO AGRO INDUSTR IES, OMALUR FOR A TOTAL SUM OF RS.5,41,695/-. THE AVERAGE PURCHASE PRICE COMES TO RS.3,890/- PER MT. DURING THE SAME YEAR, THE ASSESSEE SOLD 408.495 MT OF RICE BRAN TO M/S. NICKO AGRO INDUSTRIES FOR A SUM OF RS.9,30,080/- AND THE AVERA GE SELLING PRICE COMES TO RS.2,277/- PER MT. THE ASSESSING AUTHORITY WAS OF T HE VIEW THAT THE ASSESSEE PURCHASED RICE BRAN FROM M/S.VENKATA PADMAVATHI PAD DY & RICE, NELLORE AT A HIGHER RATE AND SOLD THE RICE BRAN TO M/S. NICKO AG RO INDUSTRIES AT A VERY LOW RATE. BY SUCH SALES, THE ASSESSEE REDUCED THE PROFIT AND PASSED ON THE BENEFIT TO THIS CONCERN, WHICH ALSO OPERATES FROM THE ADJACENT PREM ISES. THEREFORE, THE ASSESSING AUTHORITY PROCEEDED UNDER SECTION 145(3) OF THE INCOME TAX ACT AND REJECTED THE ACCOUNTS MAINTAINED BY THE ASSESSEE. T HEREAFTER, HE PROCEEDED TO ITA NOS.202 & 693/B/18 15 VALUE 408.495 MT OF RICE BRAN SOLD BY HIM AT THE RA TE OF RS.3,890/- PER MT BASED ON THE AVERAGE PURCHASE PRICE AND THUS THE DIFFEREN CE WAS ARRIVED AT IN A SUM OF RS.6,58,965/- AND THAT WAS TREATED AS AN ADDITIONAL INCOME OF THE ASSESSEE AND TAXED. THE HONBLE KARNATAKA HIGH COURT HELD ON THE CORRECTNESS OF THE ACTION OF THE REVENUE AUTHORITIES AS FOLLOWS: 4. WE HAVE HEARD THE LEARNED COUNSEL APPEARING FOR THE PARTIES. THE APEX COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX, WE ST BENGAL V/S. CALCUTTA DISCOUNT CO. LTD., REPORTED IN 1973(91) IT R 8 HAS HELD THAT WHERE A TRADER TRANSFERS HIS GOODS TO ANOTHER TRAD ER AT A PRICE LESS THAN THE MARKET PRICE AND THE TRANSACTION IS A BONAFIDE ONE, THE TAXING AUTHORITY CANNOT TAKE INTO ACCOUNT THE MARKET PRICE OF THOSE GOODS, IGNORING THE REAL PRICE FETCHED TO ASCERTAIN THE PROFIT FROM THE TRAN SACTION. AN ASSESSEE CAN SO ARRANGE HIS AFFAIRS AS TO MINIMIZE HIS TAX BURDE N. 5. SIMILARLY, THE GUJARAT HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX, GUJARAT VS. KESHAVLAL CHANDULAL REPORTE D IN 1966(LIX) ITR 120 HAS OBSERVED THAT WHERE A PERSON DISPOSES OF H IS GOODS AT A LESSER VALUE THAN THEIR MARKET PRICE, OR AT A CONCESSIONAL PRICE, THERE IS NOTHING IN THE INCOME TAX LAW WHICH COMPELS HIM TO SELL AT A P RICE WHICH IS THE PRICE REALISABLE IN THE MARKET. 6. THE ONLY EXCEPTION IN THIS RULE IS, IF THE GOODS FALL UNDER SECTION 40(A)(2)(A) WHERE THERE EXISTS A RELATIONSHIP AS SE T-OUT IN THE SAID PROVISION BETWEEN THE PARTIES. IT IS NOT THE CASE OF THE DEPA RTMENT THAT THOUGH THE SHOPS ARE ADJOINING EACH OTHER, THEY ARE RELATED IN ANY MANNER. THAT PROVISION IS NOT INVOKED. 23. THE LEARNED COUNSEL FOR THE ASSESSEE POINTED OU T THAT THE FACTS OF THE ASSESSEES CASE ARE IDENTICAL TO THE CASE DECIDED B Y THE HONBLE KARNATAKA HIGH COURT IN AS MUCH AS THE RETAILERS TO WHOM THE ASSES SEE SOLD ITS GOODS WERE UNRELATED PARTIES AND THE PROVISIONS OF SEC.40A(2)( A) OF THE ACT WERE NOT ATTRACTED. 24. HIS SUBMISSION ON THE BASIS OF THE AFORESAID JU DICIAL PRONOUNCEMENTS IS THAT WHAT CAN BE TAXES IS ONLY INCOME THAT ACCRUES OR ARISES AS LAID DOWN IN SEC.5 OF THE ACT. NOTHING BEYOND SEC.5 OF THE ACT CAN BE BROUGHT TO TAX. HIS ITA NOS.202 & 693/B/18 16 SUBMISSION WAS THAT THERE WAS NOTHING TO SHOW ACCRU AL OF INCOME SO AS TO DISREGARD THE LOSS DECLARED BY THE ASSESSEE IN THE RETURN OF INCOME FILED. HIS FURTHER SUBMISSION WAS THAT INDIRECTLY THE AO HAS A TTEMPTED TO APPLY THE PROVISIONS OF SEC.92 OF THE ACT. HE SUBMITTED THAT THE PROVISIONS OF SEC.92 AND CHAPTER X OF THE ACT, APPLIES ONLY TO TRANSACTIONS BETWEEN RELATED PARTIES AND WHERE ONE OF THE PARTY TO THE TRANSACTION IS A NON- RESIDENT. HE POINTED OUT THAT IN THE PRESENT CASE THE RETAILERS TO WHOM THE ASSESSEE SOLD GOODS WERE UNRELATED PARTIES AND THEREFORE THERE WAS NO QUESTION OF INVO KING EITHER THE PROVISIONS OF SEC.92 OR INVOKING THE RATIONALE BEHIND THOSE PROVI SIONS. EVEN DOMESTIC TRANSFER PRICING PROVISIONS U/S.92(2A) OF THE ACT ARE NOT AP PLICABLE AS THE ASSESSEE HAS NOT UNDERTAKEN ANY TRANSACTION WITH A RELATED PARTY AS LAID DOWN IN SEC.40A(2)(B) OF THE ACT. BESIDES THE ABOVE THE DOMESTIC TRANSFER P RICING PROVISIONS ARE APPLICABLE TO THE FOLLOWING DOMESTIC TRANSACTIONS O NLY VIZ., (I) ANY EXPENDITURE U/S 40A(2)(B); (II) ANY TRANSACTIONS REFERRED TO IN S. 80A, (III) TRANSACTIONS REFERRED TO U/S 80IA(8) AND 80IA(10); (IV) TRANSACT IONS REFERRED TO UNDER S.10AA OR (V) ANY OTHERS AS MAYBE PRESCRIBED. IT WAS SUBM ITTED THAT NONE OF THE ABOVE CONDITIONS EXIST IN THE CASE OF THE ASSESSEE AND TH EREFORE THE ACTION OF THE REVENUE AUTHORITIES CANNOT BE SUSTAINED. 25. HIS NEXT SUBMISSION WAS THAT WHEREVER THE LEGIS LATURE WANTED TO TAX INCOME NOT EARNED, IT HAD MADE SPECIFIC PROVISIONS IN THE ACT BY WAY OF DEEMING FICTION. IN THIS REGARD HE DREW ATTENTION TO CERTA IN STATUTORY PROVISIONS. (I) SEC.43CA (1) WHERE THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER BY AN ASSESSEE OF AN ASSET ( OTHER THAN A CAPITAL ASSET), BEING LAND OR BUILDING OR BOTH, IS LESS THAN THE VA LUE ADOPTED OR ASSESSED OR ASSESSABLE BY ANY AUTHORITY OF A STATE GOVERNMENT F OR THE PURPOSE OF PAYMENT OF STAMP DUTY IN RESPECT OF SUCH TRANSFER, THE VALUE SO ADOPTED OR ASSESSED OR ASSESSABLE SHALL, FOR THE PURPOSES OF C OMPUTING PROFITS AND GAINS FROM TRANSFER OF SUCH ASSET, BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF S UCH TRANSFER . ITA NOS.202 & 693/B/18 17 (II) SEC.45(4) THE PROFITS OR GAINS ARISING FROM TH E TRANSFER OF A CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSETS ON THE DIS SOLUTION OF A FIRM OR OTHER ASSOCIATION OF PERSONS OR BODY OF INDIVIDUALS (NOT BEING A COMPANY OR A CO- OPERATIVE SOCIETY) OR OTHERWISE, SHALL BE CHARGEABL E TO TAX AS THE INCOME OF THE FIRM, ASSOCIATION OR BODY, OF THE PREVIOUS YEAR IN WHICH THE SAID TRANSFER TAKES PLACE AND, FOR THE PURPOSES OF SECTION 48, TH E FAIR MARKET VALUE OF THE ASSET ON THE DATE OF SUCH TRANSFER SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF T HE TRANSFER. (III) SECTION 50C(1) SPECIAL PROVISION FOR FULL VAL UE OF CONSIDERATION IN CERTAIN CASES. (1) WHERE THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER BY AN ASSESSEE OF A CAPITAL ASSET, BEING LAND OR BUILDING OR BOTH, IS LESS THAN THE VALUE ADOPTED OR ASSESSED OR ASSESSABLE BY ANY AUTHORITY OF A STATE GOVERNMENT (HEREAFTER IN THIS SECTION REFERRED TO AS THE STAMP VALUATION AUTHORITY) FOR THE PURPOSE OF PAY MENT OF STAMP DUTY IN RESPECT OF SUCH TRANSFER, THE VALUE SO ADOPTED OR A SSESSED OR ASSESSABLE] SHALL, FOR THE PURPOSES OF SECTION 48, BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF S UCH TRANSFER. 26. HIS SUBMISSION WAS THAT IN THE ABSENCE OF SUCH A SPECIFIC DEEMING PROVISION, THE REVENUE AUTHORITIES DO NOT HAVE POWE R TO CONSIDER REVENUE NOT EARNED AS INCOME OF AN ASSESSEE. HIS SUBMISSION WA S THAT WHAT THE REVENUE AUTHORITIES HAVE SOUGHT TO DO IN THE PRESENT CASE W AS TO BRING TO TAX REVENUE WHICH WAS NOT EARNED BY THE ASSESSEE AS INCOME OF THE ASS ESSEE WITHOUT THE AUTHORITY OF LAW. 27. THE LEARNED COUNSEL DREW ATTENTION TO THE DECIS ION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. S.C.KOTHARI 82 ITR 794 (SC) WHEREIN THE HONBLE SUPREME COURT HAS EXPLAINED AS TO HOW THE A O SHOULD COMPUTE INCOME. HE RELIED ON THE FOLLOWING OBSERVATIONS OF THE HON BLE COURT: NOW WHILE S. 10(1) OF THE ACT OF 1922 IMPOSES A CH ARGE ON THE PROFITS OR GAINS OF A BUSINESS IT DOES NOT PROVIDE HOW THESE P ROFITS ARE TO BE COMPUTED. SEC. 10(2) ENUMERATES VARIOUS ITEMS WHICH ARE ADMIS SIBLE AS DEDUCTIONS. THEY ARE, HOWEVER, NOT EXHAUSTIVE OF ALL ALLOWANCES WHICH CAN BE MADE IN ASCERTAINING THE PROFITS OF A BUSINESS TAXABLE UNDE R S. 10(1). IT IS UNDOUBTEDLY TRUE THAT PROFITS AND GAINS WHICH ARE L IABLE TO TO BE TAXED UNDER S. 10(1) ARE WHAT ARE UNDERSTOOD TO BE SUCH UNDER O RDINARY COMMERCIAL PRINCIPLES. THE LOSS FOR WHICH THE DEDUCTION IS CLA IMED MUST BE ONE THAT ITA NOS.202 & 693/B/18 18 SPRINGS DIRECTLY FROM THE CARRYING ON OF THE BUSINE SS AND IS INCIDENTAL TO IT. IF THIS IS ESTABLISHED THE DEDUCTION MUST BE ALLOWE D PROVIDED THAT THERE IS NO PROVISION AGAINST IT, EXPRESS OR IMPLIED, IN THE AC T (SEE BADRIDAS DAGA VS. CIT (1958) 34 ITR 10). IN THAT CASE LOSS SUSTAINED BY THE BUSINESS BY REASON OF EMBEZZLEMENT BY AN EMPLOYEE WAS HELD TO BE AN AD MISSIBLE DEDUCTION UNDER S. 10(1) ALTHOUGH IT DID NOT FALL WITHIN S. 1 0(2)(XI) OF THE ACT OF 1922. INDEED PROFITS CANNOT BE COMPUTED WITHOUT DEDUCTING THE LOSS AND PERMISSIBLE EXPENSES INCURRED FOR THE PURPOSE OF TH E BUSINESS. 28. HIS SUBMISSION WAS THAT THE AO IN THE PRESENT C ASE BY ENHANCING THE SALE PRICE AND REDUCING FROM THE SALE PRICE THE ACTUAL S ALE PRICE HAS ARRIVED AT THE INCOME OF THE ASSESSEE AND IN THE PROCESS HAS COMPL ETELY IGNORED THE DEDUCTIONS WHILE COMPUTING TOTAL INCOME TO WHICH THE ASSESSEE IS ENTITLED TO. 29. HIS NEXT ARGUMENT WAS THAT EVEN ASSUMING THAT T HE ASSESSEE HAS INCURRED EXPENSES IN CREATING INTANGIBLES/BRANDS, THE SAME I S ALLOWABLE AS REVENUE EXPENDITURE AND SUCH EXPENDITURE CANNOT BE REGARDED AS CAPITAL EXPENDITURE. IN THIS REGARD HE RELIED ON THE DECISION OF THE HONBL E KARNATAKA, GUJARAT AND DELHI HIGH COURTS IN THE FOLLOWING CASES WHEREIN A VIEW H AS BEEN TAKEN THAT EXPENSES INCURRED FOR DEVELOPING BRAND IS NOT CAPITAL EXPEND ITURE: (I) ( 2013) 217 TAXMAN 95 (KARN.) CIT VS. INDO NISSIN FOODS LTD. (II) 308 ITR 263 (GUJ.) DCIT VS. CORE HEALTHCARE LTD. (III) (2012) 210 TAXMAN 161 (DELHI)(MAG.) CIT VS. MODI REVLON (P) LTD. 30. IT WAS ALSO SUBMITTED BY HIM THAT THE TEST OF E NDURING BENEFIT WAS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF EMPIRE JUT E CO.LTD. 124 ITR 1(SC) TO BE NOT A CONCLUSIVE TEST TO DETERMINE WHETHER AN EX PENDITURE IS CAPITAL OR REVENUE. THE FACTS OF THE CASE BEFORE THE HONBLE SUPREME CO URT WAS THAT THE ASSESSEE WAS A MANUFACTURER OF JUTE AND A MEMBER OF THE INDI AN JUTE MILLS ASSOCIATION. THE ASSOCIATION RESOLVED THAT ALL MEMBERS OF THE AS SOCIATION WILL WORK ONLY SPECIFIED HOURS. THE ASSOCIATION PERMITTED ALLOWIN G TRANSFER OF WORKING HOURS OR LOOM HOURS AMONG THE SIGNATORIES TO THE AGREEMENT. ASSESSEE PURCHASED LOOM ITA NOS.202 & 693/B/18 19 HOURS FROM FOUR DIFFERENT JUTE MANUFACTURERS. THE QUESTION BEFORE THE COURT WAS AS TO WHETHER THE EXPENDITURE INCURRED ON THE PURCH ASE OF LOOM HOURS WAS CAPITAL EXPENDITURE OR REVENUE EXPENDITURE. THE HONBLE COU RT HELD THAT THE ASSESSEE MERELY OBTAINED AN ADVANTAGE OF MORE WORKING TIME A ND NO ENDURING BENEFIT WAS OBTAINED BY THE ASSESSEE AND THEREFORE THE EXPENDIT URE INCURRED WAS A REVENUE EXPENDITURE. OUR ATTENTION WAS DRAWN TO THE FOLLOW ING PASSAGE OF THE SAID JUDGMENT: THE DECIDED CASES HAVE, FROM TIME TO TIME, EVOLVED VARIOUS TESTS FOR DISTINGUISHING BETWEEN CAPITAL AND REVENUE EXPENDIT URE BUT NO TEST IS PARAMOUNT OR CONCLUSIVE. THERE IS NO ALL-EMBRACING FORMULA WHICH CAN PROVIDE A READY SOLUTION TO THE PROBLEM; NO TOUCHST ONE HAS BEEN DEVISED. EVERY CASE HAS TO BE DECIDED ON ITS OWN FACTS, KEEP ING IN MIND THE BROAD PICTURE OF THE WHOLE OPERATION IN RESPECT OF WHICH THE EXPENDITURE HAS BEEN INCURRED. BUT A FEW TESTS FORMULATED BY THE COURTS MAY BE REFERRED TO AS THEY MIGHT HELP TO ARRIVE AT A CORRECT DECISION OF THE CONTROVERSY BETWEEN THE PARTIES. ONE CELEBRATED TEST IS THAT LAID DOWN BY LORD CAVE L.C. IN ATHERTON VS. BRITISH INSULATED & HELSBY CABLES LTD. (1925) 10 TAX CASES 155 (HL), WHERE THE LEARNED LAW LORD STATED : '....WHEN AN EXPENDITURE IS MADE, NOT ONLY ONCE AND FOR ALL, BUT WITH A VIEW TO BRINGING INTO EXISTENCE AN ASSET OR AN ADVA NTAGE FOR THE ENDURING BENEFIT OF A TRADE, I THINK THAT THERE IS VERY GOOD REASON (IN THE ABSENCE OF SPECIAL CIRCUMSTANCES LEADING TO AN OPPOSITE CONCLUSION) FOR TREATING SUCH AN EXPENDITURE AS PRO PERLY ATTRIBUTABLE NOT TO REVENUE BUT TO CAPITAL.' THIS TEST, AS THE PARENTHETICAL CLAUSE SHOWS, MUST YIELD WHERE THERE ARE SPECIAL CIRCUMSTANCES LEADING TO A CONTRARY CONCLUS ION AND, AS POINTED OUT BY LORD RADCLIFFE IN COMMR. OF TAXES VS. NCHANGA CO NSOLIDATED COPPER MINES LTD. (1965) 58 ITR 241 (PC) : TC16R.991, IT W OULD BE MISLEADING TO SUPPOSE THAT IN ALL CASES, SECURING A BENEFIT FOR T HE BUSINESS WOULD BE, PRIMA FACIE, CAPITAL EXPENDITURE 'SO LONG AS THE BE NEFIT IS NOT SO TRANSITORY AS TO HAVE NO ENDURANCE AT ALL'. THERE MAY BE CASES WHERE EXPENDITURE, EVEN IF INCURRED FOR OBTAINING ADVANTAGE OF ENDURIN G BENEFIT, MAY, NONE THE LESS, BE ON REVENUE ACCOUNT AND THE TEST OF END URING BENEFIT MAY BREAK DOWN. IT IS NOT EVERY ADVANTAGE OF ENDURING NATURE ACQUIRED BY AN ASSESSEE THAT BRINGS THE CASE WITHIN THE PRINCIPLE LAID DOWN IN THIS TEST. WHAT IS MATERIAL TO CONSIDER IS THE NATURE OF THE A DVANTAGE IN A COMMERCIAL SENSE AND IT IS ONLY WHERE THE ADVANTAGE IS IN THE CAPITAL FIELD ITA NOS.202 & 693/B/18 20 THAT THE EXPENDITURE WOULD BE DISALLOWABLE ON AN AP PLICATION OF THIS TEST. IF THE ADVANTAGE CONSISTS MERELY IN FACILITATING TH E ASSESSEE'S TRADING OPERATIONS OR ENABLING THE MANAGEMENT AND CONDUCT O F THE ASSESSEE'S BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY WHILE LEAVING THE FIXED CAPITAL UNTOUCHED, THE EXPENDITURE WOULD BE ON REVENUE ACCOUNT, EVEN THOUGH THE ADVANTAGE MAY ENDURE FOR A N INDEFINITE FUTURE. THE TEST OF ENDURING BENEFIT IS, THEREFORE, NOT A C ERTAIN OR CONCLUSIVE TEST AND IT CANNOT BE APPLIED BLINDLY AND MECHANICALLY W ITHOUT REGARD TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF A GIVEN CASE. BUT EVEN IF THIS TEST WERE APPLIED IN THE PRESENT CASE, IT DOES NOT YIELD A CONCLUSION IN FAVOUR OF THE REVENUE. HERE, BY PURCHASE OF LOOM HOURS NO NEW ASSET HAS BEEN CREATED. THERE IS NO ADDITION TO OR E XPANSION OF THE PROFIT-MAKING APPARATUS OF THE ASSESSEE. THE INCOME-EARNING MACHINE REMAINS WHAT IT WAS PRIO R TO THE PURCHASE OF LOOM HOURS. THE ASSESSEE IS MERELY ENABLED TO OPERATE THE PROFIT MAKING STRUCTURE FOR A LONGER NUMBER OF HOUR S. AND THIS ADVANTAGE IS CLEARLY NOT OF AN ENDURING NATURE. IT IS LIMITED IN ITS DURATION TO SIX MONTHS AND, MOREOVER, THE ADDITIONAL WORKING HOURS PER WEE K TRANSFERRED TO THE ASSESSEE HAVE TO BE UTILISED DURING THE WEEK AND CA NNOT BE CARRIED FORWARD TO THE NEXT WEEK. IT IS, THEREFORE, NOT POSSIBLE TO SAY THAT ANY ADVANTAGE OF ENDURING BENEFIT IN THE CAPITAL FIELD WAS ACQUIRED BY THE ASSESSEE IN PURCHASING LOOM HOURS AND THE TEST OF ENDURING BENE FIT CANNOT HELP THE REVENUE. (EMPHASIS SUPPLIED) 31. ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESS EE, THE EXPENDITURE ON INTANGIBLES/BRAND, EVEN ASSUMING THAT IT WAS INCURR ED BY THE ASSESSEE MERELY FACILITATES THE ASSESSEE CARRYING ON HIS BUSINESS A ND CANNOT BE SAID TO BE ANY ENDURING NATURE SO AS TO SAY THAT THE EXPENDITURE I N QUESTION WAS CAPITAL EXPENDITURE. 32. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO PLACE D RELIANCE ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SA BUIL DERS VS. CIT 288 ITR 1(SC) WHEREIN THE HONBLE SUPREME COURT WAS DEALING WITH A CASE OF DISALLOWANCE OF INTEREST PAID ON LOANS BORROWED WHICH WERE GIVEN TO THE SISTER CONCERN WITHOUT CHARGING INTEREST. THE HONBLE SUPREME COURT HELD THAT THE HIGH COURT AND OTHER AUTHORITIES SHOULD HAVE ENQUIRED AS TO WHETHER THE INTEREST-FREE LOAN WAS GIVEN TO THE SISTER COMPANY (WHICH IS A SUBSIDIARY OF THE AS SESSEE) AS A MEASURE OF COMMERCIAL EXPEDIENCY, AND IF IT WAS, IT SHOULD HAV E BEEN ALLOWED. THE ITA NOS.202 & 693/B/18 21 EXPRESSION 'COMMERCIAL EXPEDIENCY' IS AN EXPRESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURS FO R THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER AN Y LEGAL OBLIGATION, BUT YET IT IS ALLOWABLE AS A BUSINESS EXPENDITURE IF IT WAS IN CURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. WHAT IS COMMERCIAL EXPEDIENC Y IN A GIVEN FACTS AND CIRCUMSTANCES OF A CASE IS THE SOLE DISCRETION OF T HE ASSESSEE AND NOT OF THE REVENUE AUTHORITIES. 33. THE NEXT SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE WAS THAT THERE WAS NO ACQUISITION OF ANY INTANGIBLES NOR WAS THERE ANY OUTFLOW TOWARDS ACQUIRING INTANGIBLES. THE REVENUE AUTHORITIES HAVE PRESUMED THAT THE ASSESSEE HAS INCURRED EXPENDITURE WHEN THERE IS NO BASIS FOR COM ING TO SUCH CONCLUSION. TO SAY THAT AN EXPENDITURE HAS BEEN INCURRED OR ACCRUE D TO AN ASSESSEE THERE SHOULD EITHER BE AN OUTFLOW OF FUNDS OR INCURRING OF A LIA BILITY. THERE WAS NO SUCH OUTFLOW OR ACCRUAL OF LIABILITY DURING THE PREVIOUS YEAR. IT WAS SUBMITTED BY HIM THAT THE FACT THAT THE SALE PRICE OF THE ASSESSEE I S LESS THAN ITS COST PRICE CANNOT BE THE BASIS TO CONCLUDE THAT ANY EXPENDITURE WAS INCU RRED BY THE ASSESSEE. 34. ON THE QUESTION WHETHER THERE WAS ANY ACQUISITI ON OF INTANGIBLES AT ALL BY THE ASSESSEE, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS NOT RECOGNISED THE EXISTENCE OF ANY SUCH GOODWILL O R ANY OTHER INTANGIBLES OR BRAND. OUR ATTENTION WAS DRAWN TO THE FOLLOWING P ASSAGE OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. B.C.SRINIVASA SETTY 128 ITR 294 (SC): A VARIETY OF ELEMENTS GOES INTO ITS MAKING, AND IT S COMPOSITION VARIES IN DIFFERENT TRADES AND IN DIFFERENT BUSINESSES IN THE SAME TRADE, AND WHILE ONE ELEMENT MAY PREPONDERATE IN ONE BUSINESS, ANOTHER M AY DOMINATE IN ANOTHER BUSINESS. AND YET, BECAUSE OF ITS INTANGIBL E NATURE, IT REMAINS INSUBSTANTIAL IN FORM AND NEBULOUS IN CHARACTER. TH OSE FEATURES PROMPTED LORD MACNAGHTEN TO REMARK IN IRC VS. MULLER & CO.'S MARGARINE LTD. (1901) AC 217 (HL), THAT ALTHOUGH GOODWILL WAS EASY TO DESCRIBE, IT WAS NONE THE LESS DIFFICULT TO DEFINE. IN A PROGRESSING BUSINESS GOODWILL TENDS TO SHOW PROGRESSIVE INCREASE. AND IN A FAILING BUSINES S IT MAY BEGIN TO WANE. ITA NOS.202 & 693/B/18 22 ITS VALUE MAY FLUCTUATE FROM ONE MOMENT TO ANOTHER DEPENDING ON CHANGES IN THE REPUTATION OF THE BUSINESS. IT IS AFFECTED B Y EVERYTHING RELATING TO THE BUSINESS, THE PERSONALITY AND BUSINESS RECTITUDE OF THE OWNERS, THE NATURE AND CHARACTER OF THE BUSINESS, ITS NAME AND REPUTAT ION, ITS LOCATION, ITS IMPACT ON THE CONTEMPORARY MARKET, THE PREVAILING S OCIO-ECONOMIC ECOLOGY, INTRODUCTION TO OLD CUSTOMERS AND AGREED ABSENCE OF COMPETITION. THERE CAN BE NO ACCOUNT IN VALUE OF THE FACTORS PRODUCING IT. IT IS ALSO IMPOSSIBLE TO PREDICATE THE MOMENT OF ITS BIRTH. IT COMES SILENTL Y INTO THE WORLD, UNHERALDED AND UNPROCLAIMED AND ITS IMPACT MAY NOT BE VISIBLY FELT FOR AN UNDEFINED PERIOD. IMPERCEPTIBLE AT BIRTH IT EXISTS ENWRAPPED IN A CONCEPT, GROWING OR FLUCTUATING WITH THE NUMEROUS IMPONDERAB LES POURING INTO, AND AFFECTING, THE BUSINESS. 35. OUR ATTENTION WAS ALSO DRAWN TO A DECISION OF T HE HONBLE BOMBAY HIGH COURT IN THE CASE OF EVANS FRASER & CO. VS. CIT 137 ITR 493(BOM) WHICH AGAIN EXPLAINS THE NATURE OF GOODWILL IN THE FOLLOWING TE RMS: DOES THIS, HOWEVER, MAKE ANY DIFFERENCE ? AS WE HA VE SEEN EARLIER, GOODWILL IS A FLUCTUATING THING. IT INCREASES AND I T DECREASES, BUT SUCH INCREASE OR DECREASE IS NOT LIKE THE PERIODIC WAXIN G AND WANING OF THE MOON NOR IS IT LIKE THE TIDE WHICH REGULARLY EBBS AND FL OWS TWICE IN TWENTY-FOUR HOURS. GOODWILL BUILT UP OVER THE YEARS CAN BE DEST ROYED IN A MATTER OF DAYS, IF NOT MUCH LESS. GOODWILL IS NEVER CONSTANT. PROTEUS-LIKE IT CHANGES CONSTANTLY, AND AS GOODWILL CHANGES FROM TIME TO TI ME SO DOES ITS VALUE. IT IS POSSIBLE TO ASCERTAIN THE VALUE OF GOODWILL AT A PA RTICULAR POINT OF TIME, AND THE MODES OF CALCULATING SUCH VALUE CAN EASILY BE F OUND IN ANY STANDARD BOOK ON ACCOUNTANCY. OUR ATTENTION HAS BEEN DRAWN T O SEVERAL OF THEM. IT IS, HOWEVER, NEEDLESS TO BURDEN THE JUDGMENT WITH REFER ENCE TO ANY ONE OF THEM. THAT, HOWEVER, IS NOT DECISIVE OF THE MATTER. MEREL Y BECAUSE GOODWILL OF A BUSINESS WHICH HAD BEEN STARTED BY SOMEONE ELSE HAD BEEN ACQUIRED, AND AT THE TIME OF ACQUISITION ITS VALUE ASCERTAINED, IT D OES NOT MEAN THAT SOME TIME OR SOME YEARS LATER THE GOODWILL ENJOYED BY THAT BU SINESS IN THE HANDS OF THE PURCHASER IS QUALITATIVELY THE SAME GOODWILL WHICH HAD BEEN ENJOYED AT THE MOMENT OF SALE BY THE VENDOR. IF AT THE SUBSEQUENT POINT OF TIME THE VALUE OF THE GOODWILL HAD CHANGED, IT WOULD BE BECAUSE THE G OODWILL ENJOYED BY THAT BUSINESS HAD CHANGED QUALITATIVELY. GOODWILL DIFFER S FROM A TANGIBLE ASSET SUCH AS AN IMMOVABLE PROPERTY OR A SHARE IN A JOINT STOCK COMPANY WHICH RETAINS ITS SHAPE AND FORM BUT OF WHICH THE MARKET VALUE FLUCTUATES. THE MARKET VALUE OF GOODWILL ALSO FLUCTUATES, BUT IT FL UCTUATES BECAUSE OF THE FLUID NATURE OF GOODWILL. JUST AS IT IS IMPOSSIBLE TO PINPOINT WHEN GOODWILL CAME INTO EXISTENCE, SO IT IS EQUALLY IMPOSSIBLE TO PINPOINT THE MOMENT AT WHICH GOODWILL WAXED OR INCREASED OR IT WANED OR DE CREASED, FOR, THE ITA NOS.202 & 693/B/18 23 PROCESS IS IMPERCEPTIBLE; AND JUST AS IN THE CASE O F A NEWLY STARTED BUSINESS IT IS NOT POSSIBLE TO ASCERTAIN IN TERMS OF MONEY T HE COST OF ACQUISITION OF GOODWILL; IT IS EQUALLY IMPOSSIBLE TO ASCERTAIN IN TERMS OF MONEY THE COST OF ADDITION OR ALTERATION TO THE QUALITY OF GOODWILL W HICH LED TO THE INCREASE IN ITS VALUE. IT, THEREFORE, MAKES NO DIFFERENCE WHETHER STARTIN G FROM SCRATCH A BUSINESS BUILDS UP A GOODWILL OF SAY RS. 1,00,000 OR STARTING WITH AN ACQUISITION OF GOODWILL OF A BUSINESS FOR A SUM OF RS. 1,00,000 THE BUSINESS SO PURCHASED BUILDS UP A GOODWILL OF RS. 5,00,000. NEITHER THE SUM OF RS. 1,00,000 IN THE FIRST CASE NOR THE ADDITION OF RS. 4,00,000 IN THE SECOND CASE CAN BE TAKEN EITHER AS FLUCTUATION IN THE MARKET VA LUE OF GOODWILL, WITH THE GOODWILL REMAINING CONSTANT, OR AS THE COST OF IMPR OVING OR ADDING TO THE QUALITY OF THE GOODWILL. SUCH INCREASE IS REALLY DU E TO THE FACT THAT BY FURTHER SELFGENERATION THE GOODWILL HAS INCREASED. THE ARGU MENT OF MR. JOSHI, THAT THE RATIO OF THE SUPREME COURT DECISION IN THE CASE OF B. C. SRINIVASA SETTY (SUPRA) APPLIES ONLY WHERE THERE IS NO COST OF ACQU ISITION IS, THEREFORE, NOT CORRECT AND CANNOT BE ACCEPTED. IN THE JUDGMENT IN THAT CASE THE SUPREME COURT REFERRED TO THE TWO VIEWS WHICH HAD PREVAILED UNTIL IT FINALLY SETTLED THE LAW, THE PREPONDERANCE OF JUDICIAL OPINION BEIN G THE SAME AS THE VIEW TAKEN BY THE SUPREME COURT IN B. C. SRINIVASA SETTY 'S CASE, THE ONLY TWO HIGH COURTS TO HAVE TAKEN A CONTRARY VIEW BEING THE GUJARAT HIGH COURT IN CIT VS. MOHANBHAI PAMABHAI (1973) 91 ITR 393, AND T HE CALCUTTA HIGH COURT IN K. N. DAFTARY VS. CIT 1976 CTR (CAL) 23 : (1977) 106 ITR 998 (CAL). THE SUPREME COURT HAS ALSO MENTIONED IN ITS JUDGMENT THE DECISIONS OF HIGH COURTS WHICH HAD EARLIER TAKEN THE SAME VIE W AS THE SUPREME COURT DID, AND OBVIOUSLY APPROVED OF THE VIEW EXPRESSED B Y THESE HIGH COURTS. AMONGST THEM IS THE DECISION OF THIS HIGH COURT IN CIT VS. HOME INDUSTRIES & CO. (SUPRA), WHICH HAS ALREADY BEEN REFERRED TO B Y US EARLIER IN ANOTHER CONTEXT. IN THAT CASE, TULZAPURKAR, ACTG. C.J. (AS HE THEN WAS), SPEAKING FOR THE COURT, SAID AS FOLLOWS (AT PP. 6312): 'HOWEVER, THE ASPECTS THAT IN THE CASE OF SELF-CREA TED OR SELF- GENERATED GOODWILL IT IS IMPOSSIBLE TO SAY THAT IT HAS BEEN ACQUIRED AT ANY PARTICULAR POINT OF TIME AND THAT THE ACQUIS ITION OF SUCH CAPITAL ASSETS COSTS NOTHING TO THE OWNER OF BUSINE SS IN TERMS OF MONEY SEEM TO US TO BE A VERY IMPORTANT ASPECT WHIC H HAVE A BEARING ON THE QUESTION AS TO WHETHER THE TRANSFER OF SUCH CAPITAL ASSET SHOULD GIVE RISE TO CHARGEABLE CAPITAL GAINS OR NOT. SIMILARLY, THE ASPECT THAT THE CAPITAL ASSET IN QUESTION MUST BE SUCH THAT IT IS CAPABLE OF IMPROVEMENT AT AN ASCERTAINABLE COST IN TERMS OF MONEY WOULD BE EQUALLY IMPORTANT'. (THE EMPHASIS H AS BEEN SUPPLIED BY US.) ITA NOS.202 & 693/B/18 24 36. IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT IN THE LIGHT OF THE NATURE OF GOODWILL OR INTANGIBLE/BRAND AS EXPLA INED ABOVE, IT IS NOT CORRECT ON THE PART OF THE AO TO CONCLUDE THAT THE ASSESSEE IN CURRED EXPENSES TOWARDS CREATING INTANGIBLES/BRAND ETC. OR TO SAY THAT THE PROFITS FOREGONE BY THE ASSESSEE WAS IN EFFECT AN EXPENDITURE INCURRED FOR CREATING INTANGIBLES/BRAND. 37. ON THE ISSUE OF THE CIT(A) DISALLOWING DEPRECIA TION ON INTANGIBLES IN EXERCISE OF HIS POWERS OF ENHANCEMENT U/S.251(2) OF THE ACT, ARGUMENTS WERE SOUGHT TO BE ADVANCED BY THE LEARNED COUNSEL FOR TH E ASSESSEE. THE BENCH HOWEVER EXPRESSED THE VIEW THAT SINCE THERE WAS VIO LATION OF PRINCIPLES OF NATURAL JUSTICE, THE SAID ISSUE SHOULD AT BEST BE RESTORED TO THE AO, IF NECESSARY AND REQUIRED. 38. ARGUMENTS WERE ALSO SOUGHT TO BE RAISED WITH RE GARD TO THE MANNER OF DETERMINATION OF THE PROFIT MARGINS THAT ASSESSEES SIMILARLY PLACED AS THAT OF THE ASSESSEE WOULD HAVE EARNED IN SIMILAR TRANSACTIONS. IT WAS ARGUED THAT THE METHOD ADOPTED BY THE AO IS NOT RECOGNISED BY THE P ROVISIONS OF THE ACT AND ON THIS SCORE THE VALUATION IS LIABLE TO BE HELD BAD I N LAW. ON THIS ISSUE ALSO, IT WAS OPINED BY THE BENCH THAT THE ASSESSEE HAS NOT GIVEN ITS BASIS OF VALUATION AND IF NECESSARY AND REQUIRED THE OBJECTIONS TO THE VALUAT ION AS SET OUT IN THE VARIOUS GROUNDS OF APPEAL COMPRISED IN GR.NO.5 CAN BE DIREC TED TO BE RECONSIDERED BY THE AO/CIT(A). 39. THE LEARNED DR SUBMITTED THAT THE ASSESSEE IS A WHOLESALER. HE SUBMITTED THAT A WHOLESALER BUYS GOODS AT A PRICE AND ADDS TO SUCH PRICE INDIRECT COSTS AND PROFITS AND THE SALE PRICE IS DETERMINED ACCORDINGL Y. THE ASSESSEE IN THE PRESENT CASE INCURS LOSS AT THE GROSS LEVEL. ACCORDING TO HIM SUCH LOSS AT GROSS LEVEL IN THE CASE OF A WHOLESALER IS EXCEPTIONAL. IT CAN HAPPEN ONLY WHEN THE WHOLESALER IS DEALING IN PERISHABLE GOODS AND THE ASSESSEE ADMITT EDLY IS NOT DEALING IN GOODS OF A PERISHABLE NATURE. THE ASSESSEE HAS ITSELF ADMIT TED THAT IT INCURS LOSS AT THE ITA NOS.202 & 693/B/18 25 GROSS PROFIT LEVEL (GROSS LEVEL) ONLY TO CAPTURE MA RKET. THE ASSESSEES PERSONNEL ADMITTED IN HIS STATEMENT THAT THE ASSESSEE INDULGE S IN PREDATORY PRICING ONLY TO CAPTURE MARKET AND HELP ITS RETAILERS TO SURVIVE IN THE RECENTLY DEVELOPING E- COMMERCE. IT WAS FURTHER BROUGHT TO OUR NOTICE THA T OVER AND ABOVE THE SALE PRICE BEING BELOW ITS COST OF PURCHASE, THE ASSESSEE HAS ALSO OFFERED CASH DISCOUNT AT 3% OF ITS SALES. THESE CIRCUMSTANCES ACCORDING TO HIM SHOW THAT THE ASSESSEES BUSINESS MODEL IS NOT NORMAL BUSINESS MODEL. THE A SSESSEE BY SACRIFICING ITS PROFITS BY INDULGING IN PREDATORY PRICING INTENDS T O DEVELOP BRAND FOR ITS BUSINESS AND THIS IS A BUSINESS STRATEGY KNOWINGLY EMPLOYED BY THE ASSESSEE. THE PROFITS FOREGONE TO THE EXTENT IT IS BELOW THE COST OF PURC HASES SHOULD BE REGARDED AS EXPENDITURE INCURRED FOR BUILDING BRAND FOR ITS BUS INESS. THERE IS THEREFORE NOTHING WRONG IN CONCLUDING THAT THE ASSESSEE PASSI VELY INCURRED EXPENDITURE TO BUILD BRAND FOR ITS BUSINESS. 40. THE LEARNED DR WITH THE AFORESAID PRELUDE PUT F ORTH THE FOLLOWING PROPOSITIONS: 1. EVEN ASSUMING THAT THE ASSESSEES STRATEGY IS TO C APTURE MARKET SHARE IN THE LONG RUN, HOW LONG CAN IT BE PERMITTED TO INDUL GE IN THIS STRATEGY. 2. DESPITE MAKING LOSSES, THE ASSESSEES SHARES ARE BE ING PURCHASED BY INVESTORS AT A HIGH PREMIUM. IN THIS REGARD TWO IN STANCES OF PURCHASE BY VENTURE CAPITALISTS OF THE SHARES OF THE ASSESSEE OF RE.1/- IN THE PREVIOUS YEARS RELEVANT TO AY 15-16 AND 14-15 AT A PREMIUM OF RS.1899/- AND RS .595/- RESPECTIVELY WAS BROUGHT TO OUR NOTICE. ACCORDING TO HIM SUCH HIGH SHARE PREMIUM IS JUSTIFIED ONLY BECAUSE OF THE ASSET BASE CREATED BY THE ASSES SEE IN THE FORM OF BRAND VALUE. TO A QUERY FROM THE BENCH AS TO WHETHER THE SHARE V ALUATION IN THE TRANSACTIONS REFERRED TO ABOVE WERE BASED ON ANY VALUE ATTACHED TO ANY INTANGIBLES, THE LEARNED DR REPLIED THAT THERE IS NO SUCH VALUATION ON RECOR D BUT ONLY CAN INFER FROM CIRCUMSTANCES THAT VALUE WOULD HAVE BEEN ATTACHED T O BRAND/GOODWILL OR OTHER INTANGIBLES. 3. HE REITERATED THAT THE BUSINESS MODEL OF THE ASSESS EE BY FOLLOWING PREDATORY PRICING WAS TO CREATE ASSET BASE OF CUSTO MERS AND BUILD BRAND VALUE/GOODWILL OR ANY OTHER FORM OF INTANGIBLES. H E DREW ATTENTION OF THE BENCH TO THE PROFIT AND LOSS ACCOUNT AND SUBMITTED THAT T HE ADVERTISING AND SALES ITA NOS.202 & 693/B/18 26 PROMOTION EXPENSES INCURRED BY THE ASSESSEE WAS A P ALTRY SUM OF RS.78,79,113/- COMPARED TO ITS HUGE TURNOVER. THAT SHOWS THAT PRE DATORY PRICING IS ITS MAIN ADVERTISING AND SALES PROMOTION. 4. HIS NEXT SUBMISSION WAS THAT IT SOLD ITS WEB PORTAL FLIPKART.COM TO M/S.FLIPKART INTERNET (P) LTD., IN PREVIOUS YEAR RE LEVANT TO AY 14-15 AND EVEN AFTER SUCH SALE IT CONTINUED TO INDULGE IN PREDATOR Y PRICING. THE BENEFIT OF SUCH PREDATORY PRICING AFTER SUCH SALE BENEFITTED A THIR D PARTY AND NOT THE ASSESSEE AND THEREFORE EVEN ON THIS BASIS, THE MANNER OF DETERMI NATION OF TOTAL INCOME OF THE ASSESSEE AS DONE BY THE AO IS JUSTIFIED. 5. ON THE ARGUMENT OF THE LEARNED COUNSEL FOR THE ASSE SSEE REGARDING METHODOLOGY OF DETERMINING INCOME, THE LEARNED DR S UBMITTED THAT WHEN PREDATORY PRICING METHODOLOGY IS EMPLOYED TO CREATE INTANGIBLES FOR AN ASSESSEE THERE IS NOTHING WRONG IN TREATING THE PROFITS FORE GONE AS AN EXPENDITURE INCURRED FOR CREATING INTANGIBLES AND REGARDING THE SAME AS CAPITAL EXPENDITURE. IN THIS REGARD IT WAS ARGUED BY THE LEARNED DR THAT THE TES TS LAID DOWN IN THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF EMPIRE JUT E CASE (SUPRA) WOULD BE SATISFIED IN THE PRESENT CASE. ACCORDING TO HIM I NDULGING IN PREDATORY PRICING EXPANDS THE PROFIT MAKING APPARATUS AND THEREFORE T HE PROFITS FOREGONE CAN BE REGARDED AS CAPITAL EXPENDITURE. 41. THE LEARNED DR THEREFORE SUBMITTED THAT THE APP ROACH ADOPTED BY THE AO WAS JUSTIFIED IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND WAS WELL WITHIN HIS POWERS WHILE DETERMINING TOTAL INCOME UNDER THE ACT . 42. WITH REGARD TO THE MANNER OF DETERMINATION OF V ALUATION OF INTANGIBLES AND DEPRECIATION ON INTANGIBLES ALLOWED BY THE AO BUT W ITHDRAWN BY THE CIT(A), HE RELIED ON THE ORDERS OF THE AO AND CIT(A) RESPECTIV ELY. ACCORDING TO HIM THE MANNER OF DETERMINATION OF VALUE OF INTANGIBLES AS DONE BY THE AO WAS REASONABLE AND HAS TO BE UPHELD. 43. IN REJOINDER THE LEARNED COUNSEL FOR THE ASSESS EE SUBMITTED THAT THE AO IS NOT EMPOWERED UNDER THE ACT TO TAMPER WITH MY COST OF PURCHASE PRICE WHEN HE ADMITS OR DOES NOT DISPUTE THAT SUCH PRICE IS AT MA RKET PRICE. SIMILARLY IF SALE IS AT A PRICE LESS THAN THE PURCHASE PRICE, THE AO IS NOT EMPOWERED UNDER THE ACT TO TAMPER WITH THE SALE PRICE, UNLESS THE PROVISIONS O F SEC.40A(2)(A) IS APPLICABLE ITA NOS.202 & 693/B/18 27 AND ADMITTEDLY THE SALE IS NOT TO A RELATED PARTY A ND THEREFORE THOSE PROVISIONS OR ANY OTHER PROVISIONS OF THE ACT DEALING WITH TRANSA CTIONS WITH RELATED PARTIES ARE NOT ATTRACTED. HE DREW OUR ATTENTION TO DECISION O F THE HONBLE SUPREME COURT IN THE CASE OF VIJAYA BANK LTD. VS. CIT 187 ITR 541(SC ). THE ASSESSEE IN THAT CASE PURCHASED SECURITIES DURING THE RELEVANT PREVI OUS YEAR AND DERIVED INCOME FROM SUCH SECURITIES. WHILE COMPUTING INCOME FROM SECURITIES, THE ASSESSEE BIFURCATED THE PURCHASE PRICE IT PAID FOR PURCHASIN G THE SECURITIES AS COMPRISING OF ITS ACTUAL VALUE AND INTEREST THAT HAD ACCRUED ON T HOSE SECURITIES UPTO THE DATE OF PURCHASE BY THE ASSESSEE. TO THE EXTENT THE PURCHA SE PRICE INCLUDED INTEREST UPTO DATE OF PURCHASE THE ASSESSEE CLAIMED DEDUCTION WHI LE COMPUTING INCOME FROM SECURITIES CONTENDING THAT IT WAS EXPENDITURE INCUR RED TO EARN INCOME FROM SECURITIES. SUCH A PLEA WAS NEGATIVE BY THE HONBL E SUPREME COURT AND IT WAS HELD BY THE HONBLE SUPREME COURT IN THE FOLLOWING WORDS: IT IS CONTENDED THAT THE PRICE PAID FOR THE SECURI TIES WAS DETERMINED WITH REFERENCE TO THEIR ACTUAL VALUE AS WELL AS THE INTE REST WHICH HAD ACCRUED ON THEM TILL THE DATE OF PURCHASE. BUT THE FACT IS, WH ATEVER WAS THE CONSIDERATION WHICH PROMPTED THE ASSESSEE TO PURCHA SE THE SECURITIES, THE PRICE PAID FOR THEM WAS IN THE NATURE OF A CAPITAL OUTLAY, AND NO PART OF IT CAN BE SET OFF AS EXPENDITURE AGAINST INCOME ACCRUI NG ON THOSE SECURITIES. SUBSEQUENTLY WHEN THESE SECURITIES YIELDED INCOME B Y WAY OF INTEREST, SUCH INCOME WAS ATTRACTED BY S. 18. CLAIM FOR DEDUCTION CAN BE SUSTAINED ONLY WHEN THE ASSESSEE IS IN A POSITION TO SHOW THAT ANY REASONABLE EXPENDITURE HAD BEEN INCURRED FOR THE PURPOSE OF REALISING THE INTEREST ON SECURITIES. THE AMOUNTS CLAIMED BY THE ASSESSEE FOR DEDUCTION ARE N OT SHOWN TO HAVE BEEN EXPENDED FOR THE PURPOSE OF REALISING THE INTEREST, AND ARE THEREFORE, NOT ALLOWABLE AS DEDUCTIBLE E XPENDITURE. 44. ACCORDING TO HIM WHAT THE REVENUE HAS SOUGHT TO DO IN THE PRESENT CASE BY BIFURCATING THE DIFFERENCE BETWEEN AN ASSUMED SALE PRICE AND THE ACTUAL SALE PRICE AND ATTRIBUTING THE DIFFERENCE TO AN EXPENDITURE IN CURRED BY THE ASSESSEE ON ACQUIRING INTANGIBLES IS CONTRARY TO THE AFORESAID RULING OF THE HONBLE SUPREME COURT. ITA NOS.202 & 693/B/18 28 45. ON THE ARGUMENT OF THE LEARNED DR ON THE CASH D ISCOUNTS OFFERED BY THE ASSESSEE, IT WAS SUBMITTED BY HIM THAT CASH DISCOUN T ARE REVENUE EXPENSES AND CANNOT BE DISALLOWED. IT WAS SUBMITTED BY HIM THAT PREDATORY PRICING IS A BUSINESS STRATEGY AND TIME WILL TELL WHETHER IT RES ULTS IN GENERATION OF GOODWILL OR BRAND OR ANY OTHER INTANGIBLE. IF THE BUSINESS MOD EL OF THE ASSESSEE FAILS WHERE IS GOODWILL OR BRAND OR OTHER INTANGIBLE THAT HAS COME OR WILL COME INTO EXISTENCE. THEREFORE IT IS PREMATURE TO SAY THAT THE ASSESSEE HAS INCURRED EXPENDITURE TO BUILD GOODWILL OR CREATE INTANGIBLES OR BRAND. 46. WITH REGARD TO THE CONTENTION OF THE LEARNED DR ON SALE OF SHARES OF THE ASSESSEE AT A PREMIUM, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT SHARES ARE ACQUIRED BY THE HOLDING COMPANY. IT IS ONE WAY OF FUNDING SUBSIDIARY. THEREFORE THE FACT THAT HUGE SHARE PREMIUM IS PAID DOES NOT IN ANY WAY HELP THE CASE OF THE REVENUE. BESIDES THE ABOVE THE TRANSAC TION OF PURCHASE OF SHARES HAVE UNDERGONE SCRUTINY BY THE RESERVE BANK OF INDIA AND DOES NOT IN ANY WAY HAVE ANY IMPLICATIONS ON THE CASE OF THE REVENUE IN THE PRESENT APPEAL. 47. WITH REGARD TO THE ARGUMENT OF THE LEARNED DR T HAT THE EXPENDITURE INCURRED BY THE ASSESSEE ACTUALLY BENEFITED A THIRD PARTY, THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SASSON DAVID 118 ITR 261(SC). IT HAS BEEN LAID DOW N IN THE AFORESAID DECISION THAT THE EXPRESSION 'WHOLLY AND EXCLUSIVELY' USED I N SECTION 10(2)(XV) OF THE INDIAN INCOME-TAX ACT, 1922, (CORRESPONDING TO SEC. 37(1) OF THE ACT) DOES NOT MEAN 'NECESSARILY'. ORDINARILY, IT IS FOR THE ASSES SEE 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 PRO FITS, THE ASSESSEE CAN CLAIM DEDUCTION UNDER SECTION 10(2)(XV) OF THE ACT EVEN T HOUGH THERE WAS NO COMPELLING NECESSITY TO INCUR SUCH EXPENDITURE. THE FACT THAT SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITED BY THE EXPENDITURE S HOULD NOT COME IN THE WAY OF AN ITA NOS.202 & 693/B/18 29 EXPENDITURE BEING ALLOWED BY WAY OF DEDUCTION UNDER SECTION 10(2)(XV) OF THE ACT IF IT SATISFIES OTHERWISE THE TESTS LAID DOWN BY LA W. 48. ON THE PLEA OF THE LEARNED DR THAT SINCE THE BU SINESS MODEL OF THE ASSESSEE IS DIFFERENT FROM THE TRADITIONAL BUSINESS MODEL, THE REVENUE CAN RESORT TO A NEW METHOD OF ASSESSMENT OF INCOME, THE LEARNED C OUNSEL FOR THE ASSESSEE SUBMITTED THAT SUCH NEW METHOD OF ASSESSMENT SHOULD BE PERMISSIBLE UNDER THE ACT AND IF THERE IS NO SUCH PROVISION IN THE ACT PE RMITTED A NEW APPROACH THEN THE AO HAS NO AUTHORITY TO RESORT TO SUCH NEW METHOD AN D IT IS FOR THE LEGISLATURE TO INTERVENE, IF IT THINKS FIT. IN THIS REGARD OUR AT TENTION WAS DRAWN TO THE FOLLOWING DECISIONS: (I) UNION OF INDIA VS. AZADI BACHAO ANDOLOAN 263 IT R 706 (SC) WHEREIN IT WAS HELD TREATY SHOPPING' IS A GRAPHIC EXPRESSION USED TO DESCRIBE THE ACT OF A RESIDENT OF A THIRD COUNTRY TAKING ADVANTAGE OF A F ISCAL TREATY BETWEEN TWO CONTRACTING STATES. IT IS RIGHTLY URGED BY THE COUN SEL FOR THE APPELLANTS THAT IF IT WAS INTENDED THAT A NATIONAL OF A THIRD STATE SHOUL D BE PRECLUDED FROM THE BENEFITS OF THE DTAC, THEN A SUITABLE TERM OF LIMITATION TO THAT EFFECT SHOULD HAVE BEEN INCORPORATED THEREIN. ART. 24 OF THE INDO-US TREATY ON AVOIDANCE OF DOUBLE TAXATION SPECIFICALLY PROVIDES THE LIMITATIONS SUBJ ECT TO WHICH THE BENEFITS UNDER THE TREATY CAN BE AVAILED OF. ONE OF THE LIMITATION S IS THAT MORE THAN 50 PER CENT OF THE. BENEFICIAL INTEREST, OR IN THE CASE OF A CO MPANY MORE THAN 50 PER CENT OF THE NUMBER OF SHARES OF EACH CLASS OF THE COMPANY, BE O WNED DIRECTLY OR INDIRECTLY BY ONE OR MORE INDIVIDUAL RESIDENTS OF ONE OF THE CONT RACTING STATES. ART. 24 OF THE INDO-U.S. DTAC IS IN MARKED CONTRAST WITH THE INDO- MAURITIUS DTAC. THE APPELLANTS RIGHTLY CONTEND THAT IN THE ABSENCE OF A LIMITATION CLAUSE, SUCH AS THE ONE CONTAINED IN ART. 24 OF THE INDO-U.S. TREATY, T HERE ARE NO DISABLING OR DISENTITLING CONDITIONS UNDER THE INDO-MAURITIUS TR EATY PROHIBITING THE RESIDENT OF A THIRD NATION FROM DERIVING BENEFITS THEREUNDER. T HEY ALSO URGE THAT MOTIVES WITH WHICH THE RESIDENTS HAVE BEEN INCORPORATED IN MAURI TIUS ARE WHOLLY IRRELEVANT AND ITA NOS.202 & 693/B/18 30 CANNOT IN ANYWAY AFFECT THE LEGALITY OF THE TRANSAC TION. THEY URGE THAT THERE IS NOTHING LIKE EQUITY IN A FISCAL STATUTE. EITHER THE STATUTE APPLIES PROPRIO VIGORE OR IT DOES NOT. THERE IS NO QUESTION OF APPLYING A FISCAL STATUTE BY INTENDMENT, IF THE EXPRESSED WORDS DO NOT APPLY. THIS CONTENTION OF TH E APPELLANTS HAS MERIT AND DESERVES ACCEPTANCE. THERE IS NO DOUBT THAT, WHERE NECESSARY, THE COURTS ARE EMPOWERED TO LIFT THE VEIL OF INCORPORATION WHILE A PPLYING THE DOMESTIC LAW. IN THE SITUATION WHERE THE TERMS OF THE DTAC HAVE BEEN MADE APPLICABLE BY REASON OF S. 90 EVEN IF THEY DEROGATE FROM THE PROVISIONS OF THE IT ACT, IT IS NOT POSSIBLE TO SAY THAT THE PRINCIPLE OF LIFTING THE VEIL OF IN CORPORATION SHOULD BE APPLIED BY THE COURT. THE WHOLE PURPOSE OF THE DTAC IS TO ENSU RE THAT THE BENEFITS THEREUNDER ARE AVAILABLE EVEN IF THEY ARE INCONSIST ENT WITH THE PROVISIONS OF THE INDIAN IT ACT. THEREFORE, THE PRINCIPLE OF PIERCING THE VEIL OF INCORPORATION CAN HARDLY APPLY TO A SITUATION AS THE PRESENT ONE. THE MAXIM 'JUDICIS EST JUS DICERE, NON DARE' PITHILY EXPOUNDS THE DUTY OF THE COURT. I T IS TO DECIDE WHAT THE LAW IS, AND APPLY IT; NOT TO MAKE IT. THE WEIGHTY RECOMMEND ATIONS OF THE WORKING GROUP ON NON-RESIDENT TAXATION ARE AGAIN ABOUT WHAT THE L AW OUGHT TO BE, AND A POINTER TO THE PARLIAMENT AND THE EXECUTIVE FOR INCORPORATI NG SUITABLE LIMITATION PROVISIONS IN THE TREATY ITSELF OR BY DOMESTIC LEGI SLATION. THIS PER SE DOES NOT RENDER AN ATTEMPT BY RESIDENT OF A THIRD PARTY TO T AKE ADVANTAGE OF THE EXISTING PROVISIONS OF THE DTAC ILLEGAL. THE RECOMMENDATIONS OF THE WORKING GROUP OF THE JPC ARE INTENDED FOR PARLIAMENT TO TAKE APPROPR IATE ACTION. THE JPC MIGHT HAVE NOTICED CERTAIN CONSEQUENCES, INTENDED OR UNIN TENDED, FLOWING FROM THE DTAC AND HAS MADE APPROPRIATE RECOMMENDATIONS. BASE D ON THEM, IT IS NOT POSSIBLE TO SAY THAT THE DTAC OR THE IMPUGNED CIRCU LAR ARE CONTRARY TO LAW, NOR WOULD IT BE POSSIBLE TO INTERFERE WITH EITHER OF TH EM ON THE BASIS OF THE REPORT OF THE JPC. (II) DCIT VS. BAKER HUGHES SINGAPORE PTE. (2015) 41 ITR (TRIB) 0212 (DELHI) (TRIB) WHEREIN IT WAS HELD THAT JUDICIAL AUTHORITIE S ARE TO INTERPRET THE LAW AS IT EXISTS AND NOT AS IT OUGHT TO BE IN THE LIGHT OF CE RTAIN UNDERLYING VALUE NOTIONS. ITA NOS.202 & 693/B/18 31 (III) MARUTI SUZUKI INDIA LTD. & ANOTHER VS. CIT 38 1 ITR 117 (DEL) WHEREIN IT WAS HELD IF TRANSFER PRICING PROVISIONS WERE NOT AP PLICABLE TO A TRANSACTION BECAUSE OF THE ABSENCE OF AN INTERNATIONAL TRANSACT ION IN THE MATTER OF INCURRING OF ADVERTISING MARKETING AND PROMOTION EXPENSES (AMP E XPENSES), IT WAS NOT PERMISSIBLE TO INVOKE CHAPTER X OF THE ACT. 49. AS FAR AS THE APPEAL BY THE REVENUE IS CONCERNE D, THE ISSUE INVOLVED IS WITH REGARD TO QUANTIFICATION OF THE PROFIT MARGIN OF CO MPARABLE COMPANIES CHOSEN BY THE AO. ON THE REVENUES APPEAL, THE LEARNED DR REL IED ON THE ORDER OF THE AO AND PLEADED THAT THE COMPUTATION OF EXPENSES ON CRE ATING INTANGIBLES AS DONE BY THE AO SHOULD BE RESTORED. 50. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO T HE RIVAL SUBMISSIONS. AS FAR AS THE ASSESSEES APPEAL IS CONCERNED, THE ISSU E THAT ARISES FOR CONSIDERATION IS AS TO WHETHER THE DETERMINATION OF TOTAL INCOME AS DONE BY THE AO WAS JUSTIFIED IN THE FACTS AND CIRCUMSTANCES OF THE CASE. THE ASSES SEE AS WE HAVE SEEN IS A WHOLESALE TRADER. HE PURCHASES GOODS FOR THE PURPO SE OF TRADING AT SAY RS.100/- FROM UNRELATED PARTIES. HE SELLS IT TO RETAILERS A T RS.80/-. THE RETAILERS ARE ALSO UNRELATED PARTIES. THE RETAILERS SELL THE GOODS TH ROUGH THE ASSESSEES WEB PORTAL FLIPKAR.COM. THE TRADING BY THE RETAILERS TO THE END USER IS THROUGH E- COMMERCE. THE CUSTOMERS BROWSE THE WEBSITE AND SEE THE VARIOUS PRODUCTS AND PLACE ORDERS ELECTRONICALLY. THE PRODUCTS ARE DELI VERED PHYSICALLY TO THE CUSTOMERS AT THEIR DESIRED PLACE. THE PAYMENT IS A LSO MADE ELECTRONICALLY OR BY CASH AT THE POINT OF DELIVER TO THE CUSTOMERS. AS FAR AS THE ASSESSEE IS CONCERNED IT DEALS ONLY WITH RETAILERS. ON SALE TO THE RETAI LERS THE ASSESSEE INCURS LOSS. THE CASE OF THE AO IS THAT A WHOLESALE TRADER NORMALLY SELLS HIS PRODUCTS AT COST + HIS MARK-UP (MARGIN) + INDIRECT COSTS INCURRED IN THE B USINESS OF WHOLESALE TRADING. THE PLEA OF THE ASSESSEE IS THAT E-COMMERCE WAS AT A NASCENT STAGE AND THEREFORE TO ATTRACT CUSTOMERS TO PURCHASE GOODS THROUGH E-CO MMERCE, THE ONLY WAY WAS TO OFFER GOODS AT A LESSER PRICE THAN WHAT THE RETAILE RS IN PHYSICAL MARKET IN SHOW ITA NOS.202 & 693/B/18 32 ROOM OFFER (REFERRED TO AS RETAILERS IN BRICK AND M ORTAR). THE FURTHER PLEA OF THE ASSESSEE WAS THAT BY OFFERING GOODS AT A LESSER PRI CE, THE ASSESSEE IN THE LONG RUN WILL CAPTURE A HUGE MARKET AND GENERATE PROFITS IN THE LONG RUN. ACCORDING TO THE AO THE STRATEGY OF SELLING GOODS AT LOWER THAN COST PRICE WAS TO ESTABLISH CUSTOMER GOODWILL AND BRAND VALUE IN THE LONG RUN A ND REAP BENEFITS IN THE LATER YEARS. THEREFORE THE PROFITS FOREGONE IN THE EARLI ER YEARS BY SELLING GOODS AT LESS THAN COST PRICE WAS TO BE REGARDED AS EXPENDITURE I NCURRED IN CREATING INTANGIBLES/BRAND VALUE OR GOODWILL. SINCE SUCH EX PENDITURE CREATE ASSET IN THE FORM OF INTANGIBLE/BRAND OR GOODWILL, THE EXPENDITU RE HAS TO BE CONSTRUED AS CAPITAL EXPENDITURE AND WOULD GO TO REDUCE THE LOSS DECLARED BY THE ASSESSEE IN THE RETURN OF INCOME. THEREFORE THE LOSS DECLARED BY THE ASSESSEE IN THE RETURN OF INCOME FILED WAS CONVERTED INTO POSITIVE INCOME BY DISALLOWING EXPENDITURE. THE QUANTIFICATION OF EXPENDITURE WAS DONE BY ADDING TO THE COST PRICE, PROFIT MARGIN WHICH ASSESSEES ENGAGED IN SIMILAR BUSINESS WOULD E ARN AND REDUCING THERE FROM THE ACTUAL SALE VALUE REALISED BY THE ASSESSEE. TH E QUESTION IS WHETHER THE COURSE OF ACTION ADOPTED BY THE AO WAS PERMISSIBLE UNDER T HE ACT. 51. THE RELEVANT STATUTORY PROVISIONS OF THE ACT AR E SECTION 4 OF THE ACT WHICH CREATES A CHARGE ON THE TOTAL INCOME OF AN ASSESSEE AND IT LAYS DOWN IN SECTION 4(1) OF THE ACT THAT WHERE ANY CENTRAL ACT ENACTS T HAT INCOME-TAX SHALL BE CHARGED FOR ANY ASSESSMENT YEAR AT ANY RATE OR RATES, INCOM E-TAX AT THAT RATE OR THOSE RATES SHALL BE CHARGED FOR THAT YEAR IN ACCORDANCE WITH, AND SUBJECT TO THE PROVISIONS OF THE ACT IN RESPECT OF THE TOTAL INCOME OF THE PREVI OUS YEAR OF EVERY PERSON. SECTION 5 OF THE ACT LAYS DOWN THE SCOPE OF TOTAL I NCOME UNDER THE ACT AND IT LAYS DOWN THAT TOTAL INCOME OF ANY PREVIOUS YEAR OF A PE RSON WHO IS A RESIDENT INCLUDES ALL INCOME FROM WHATEVER SOURCE DERIVED WHICH(A) IS RECEIVED OR IS DEEMED TO BE RECEIVED IN INDIA IN SUCH YEAR BY OR ON BEHALF OF S UCH PERSON; OR(B) ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARISE TO HIM IN IN DIA DURING SUCH YEAR; OR(C) ACCRUES OR ARISES TO HIM OUTSIDE INDIA DURING SUCH YEAR. SEC.2(24) OF THE ACT DEFINES INCOME BY LAYING DOWN THAT INCOME INCLUDES AND LISTS OUT SEVERAL ITA NOS.202 & 693/B/18 33 CATEGORIES OF RECEIPTS WHICH CAN BE CHARACTERISED A S INCOME. THE DEFINITION IS INCLUSIVE DEFINITION AND THEREFORE WHAT CAN BE REGA RDED BY ORDINARY CONNOTATION OF THE SAID TERM AS INCOME CAN BE REGARDED AS INCOM E EVEN THOUGH THEY DO NOT FALL WITHIN ANY OF THE CATEGORIES OF INCOME SET OUT IN V ARIOUS SUB-CLAUSES OF SEC.2(24) OF THE ACT. THE ASPECT TO BE NOTED IS THAT THERE S HOULD BE INCOME AND ITS RECEIPT OR ACCRUAL BECAUSE IT IS ONLY INCOME WHICH ACCRUES OR ARISES THAT CAN BE SUBJECT MATTER OF TOTAL INCOME U/S.5 OF THE ACT. SEC.14 LA YS DOWN THAT INCOME FOR THE PURPOSE OF COMPUTATION OF TOTAL INCOME HAS TO BE CL ASSIFIED UNDER THE FOLLOWING HEADS OF INCOME VIZ., SALARIES, INCOME FROM HOUSE P ROPERTY, PROFITS AND GAINS OF BUSINESS OR PROFESSION, CAPITAL GAINS AND INCOME FR OM OTHER SOURCES. SEC.28 OF THE ACT LAYS DOWN VARIOUS CATEGORIES OF INCOME THAT SHALL BE CHARGEABLE TO INCOME-TAX UNDER THE HEAD PROFITS AND GAINS OF BUS INESS OR PROFESSION. THE INCOME OF THE ASSESSEE IN THE PRESENT CASE WOULD FA LL WITHIN SEC.28(I) OF THE ACT VIZ., THE PROFITS AND GAINS OF ANY BUSINESS OR PRO FESSION WHICH WAS CARRIED ON BY THE ASSESSEE AT ANY TIME DURING THE PREVIOUS YEAR. SECTION 145 OF THE ACT PROVIDES HOW INCOME CHARGEABLE UNDER THE HEAD PROF ITS AND GAINS OF BUSINESS OR PROFESSION OR INCOME FROM OTHER SOURCES HAS TO B E COMPUTED AND IT LAYS DOWN THAT SUCH INCOME SHALL, SUBJECT TO THE PROVISIONS O F SUB-SECTION (2), BE COMPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. SUB-SECTION (2) OF SECTIO N 145 PROVIDES THAT THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFICIAL GAZET TE FROM TIME TO TIME INCOME COMPUTATION AND DISCLOSURE STANDARDS TO BE FOLLOWED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF INCOME. SUB-SECTION (3) OF SECTION 145 PROVIDES THAT WHERE THE ASSESSING OFFICER IS NOT SATISFIED ABOUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE, OR WHERE THE METHO D OF ACCOUNTING PROVIDED IN SUB-SECTION (1) HAS NOT BEEN REGULARLY FOLLOWED BY THE ASSESSEE, OR INCOME HAS NOT BEEN COMPUTED IN ACCORDANCE WITH THE STANDARDS NOTI FIED UNDER SUB-SECTION (2) , THE ASSESSING OFFICER MAY MAKE AN ASSESSMENT IN THE MANNER PROVIDED IN SECTION 144. IT IS THUS CLEAR FROM THE STATUTORY PROVISIONS THAT THE STARTING POINT OF ITA NOS.202 & 693/B/18 34 COMPUTING OF INCOME FROM BUSINESS IS THE PROFIT OR LOSS AS PER THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE. THE AO CANNOT DISREGARD T HE PROFIT OR LOSS AS DISCLOSED IN THE PROFIT AND LOSS ACCOUNT, UNLESS HE INVOKES T HE PROVISIONS OF SEC.145(3) OF THE ACT. IN THE PRESENT CASE IT IS NOT THE CASE OF THE AO THAT THE PROVISIONS OF SEC.145(3) OF THE ACT ARE APPLICABLE. IN SUCH CIRCU MSTANCES, THE QUESTION IS AS TO WHETHER THE AO HAD POWER TO GO BEYOND THE BOOK RESU LTS. IN OUR VIEW, THE AO WAS NOT EMPOWERED UNDER THE ACT TO DO SO. 52. AS LAID DOWN BY THE HONBLE SUPREME COURT IN TH E CASE OF CALCUTTA DISCOUNT COMPANY(SUPRA), WHEN ONE TRADER TRANSFERS HIS GOODS TO ANOTHER TRADER AT A PRICE LESS THAN THE MARKET PRICE, THE TAXING A UTHORITY CANNOT TAKE INTO CONSIDERATION THE MARKET PRICE OF THOSE GOODS, IGNO RING THE REAL PRICE FETCHED. AS LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF A.RAMAN & CO. (SUPRA), INCOME WHICH HAS ACCRUED OR ARISEN CAN ONLY BE SUBJ ECT MATTER OF TOTAL INCOME AND NOT INCOME WHICH COULD HAVE BEEN EARNED BUT NOT EARNED. THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF A.KHADER BASHA (SUPRA) IS SQUARELY APPLICABLE TO THE FACTS OF THE PRESENT CAS E. THE FACTS OF THE ASSESSEES CASE AND THE FACTS OF THE CASE DECIDED BY THE HONB LE KARNATAKA HIGH COURT WERE IDENTICAL. THE HONBLE KARNATAKA HIGH COURT HELD F OLLOWING HONBLE SUPREME COURT DECISION IN THE CASE OF CALCUTTA DISCOUNT CO. LTD., REPORTED IN 1973(91) ITR 8 (SC) THAT WHERE A TRADER TRANSFERS HIS GOODS TO ANOTHER TRADER AT A PRICE LESS THAN THE MARKET PRICE AND THE TRANSACTION IS A BONA FIDE ONE, THE TAXING AUTHORITY CANNOT TAKE INTO ACCOUNT THE MARKET PRICE OF THOSE GOODS, IGNORING THE REAL PRICE FETCHED TO ASCERTAIN THE PROFIT FROM THE TRANSACTIO N. THE HONBLE COURT EXPLAINED THAT THE ONLY EXCEPTION WAS IF SECTION 40(A)(2)(A) OF THE ACT APPLIES VIZ., WHERE THE PARTIES TO THE TRANSACTION ARE RELATED. FOLLOWI NG THE AFORESAID DECISIONS, WE HOLD THAT THE AO WAS NOT RIGHT IN PROCEEDING TO IGN ORE THE BOOKS RESULTS OF THE ASSESSEE AND RESORTING TO A PROCESS OF ESTIMATING T OTAL INCOME OF THE ASSESSEE IN THE MANNER IN WHICH HE DID. WE FIND FORCE IN THE S UBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT WHAT CAN BE TAXE IS O NLY INCOME THAT ACCRUES OR ITA NOS.202 & 693/B/18 35 ARISES AS LAID DOWN IN SEC.5 OF THE ACT. NOTHING B EYOND SEC.5 OF THE ACT CAN BE BROUGHT TO TAX. AS CONTENDED BY HIM THERE WAS NOTH ING TO SHOW ACCRUAL OF INCOME SO AS TO DISREGARD THE LOSS DECLARED BY THE ASSESSEE IN THE RETURN OF INCOME FILED. AS WE HAVE ALREADY SEEN THERE IS NO PROVISION IN THE ACT BY WHICH THE AO CAN IGNORE THE SALE PRICE DECLARED BY AN ASS ESSEE AND PROCEED TO ENHANCE THE SALE PRICE WITHOUT MATERIAL BEFORE HIM TO SHOW THAT THE ASSESSEE HAS IN FACT REALIZED HIGHER SALE PRICE. AS CONTENDED BY THE LE ARNED COUNSEL FOR THE ASSESSEE, WHEREVER THE LEGISLATURE WANTED TO TAX INCOME NOT E ARNED, IT HAD MADE SPECIFIC PROVISIONS IN THE ACT BY WAY OF DEEMING FICTION LIK E PROVISIONS OF SEC.43CA(1, SEC.45(4) AND SEC.50C(1) OF THE ACT. 53. IN VIEW OF THE ABOVE CONCLUSION, THERE MAY NOT BE ANY NECESSITY TO DEAL FURTHER WITH THE MANNER IN WHICH THE AO HAS PROCEED ED TO COMPUTE TOTAL INCOME OF THE ASSESSEE AND WE CAN CONCLUDE BY HOLDING THAT THE LOSS RETURNED BY THE ASSESSEE HAS TO BE ACCEPTED AND THE MANNER OF DETER MINATION OF TOTAL INCOME AS DONE BY THE AO IS NOT IN ACCORDANCE WITH LAW. NEVE RTHELESS, WE SHALL ALSO ADDRESS THE ISSUE AS TO WHETHER THE CONCLUSIONS OF THE AO THAT THE ASSESSEE INCURRED EXPENSES IN CREATING INTANGIBLES/BRAND OR GOODWILL AND ALSO THE QUESTION WHETHER THE CONCLUSION OF THE AO THAT TO THE EXTENT THE ASSESSEE HAS FOREGONE HIS PROFIT MARGIN, HE CAN BE SAID TO HAVE INCURRED EXPE NDITURE IN CREATING INTANGIBLES/BRAND OR GOODWILL. 54. DID THE ASSESSEE INCUR ANY EXPENDITURE AS HELD BY THE AO IN CREATING INTANGIBLES/BRAND OR GOODWILL? TO SAY THAT AN EXPE NDITURE HAS BEEN INCURRED BY AN ASSESSEE THERE SHOULD BE EITHER ACCRUAL OF LIABILIT Y OR ACTUAL OUTFLOW IN THE FORM OF PAYMENT. THERE WAS NO SUCH ACCRUAL OF LIABILITY OR ACTUAL OUTFLOW IN THE PRESENT CASE. THIS FACT IS ALSO ACKNOWLEDGED BY THE AO. TH E AO HAS HOWEVER PROCEEDED TO DRAW HOLD THAT BECAUSE THE ASSESSEE WAS PURCHASE AT RS.100 AND SELLING THE GOODS TO RETAILERS AT RS.80/- THE RATIONALE FOR INC URRING LOSS BY A WHOLESALE TRADER AT THE GROSS LEVEL WAS VERY PECULIAR. SINCE SUCH A PR ICING WAS DONE KEEPING IN MIND ITA NOS.202 & 693/B/18 36 THE LONG RUN PROFITS OF THE ASSESSEE WHICH WILL GRO W BECAUSE OF THE INTANGIBLE/BRAND OR GOODWILL WHICH WILL BE GENERATE D IN THE LONG RUN. THEREFORE TO THE EXTENT PROFITS ARE FOREGONE BY THE ASSESSEE, TH E ASSESSEE CAN BE DEEMED TO HAVE INCURRED EXPENDITURE ON CREATING INTANGIBLES/B RAND OR GOODWILL AND SUCH EXPENDITURE HAS TO BE REGARDED AS CAPITAL EXPENDITU RE AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 55. WE FIND NO BASIS FOR THE ABOVE CONCLUSIONS OF T HE AO. THE FIRST PRESUMPTION OF THE AO IS THAT THE ASSESSEE HAD INCU RRED EXPENDITURE. AS RIGHTLY CONTENDED BY THE LEARNED COUNSEL FOR THE ASSESSEE T HERE WAS NO ACCRUAL OF ANY LIABILITY ON ACCOUNT OF ANY EXPENDITURE OR ACTUAL O UTFLOW OF FUNDS TOWARDS EXPENDITURE. ONE CANNOT PROCEED ON THE BASIS OF PR ESUMPTION THAT THE PROFIT FOREGONE IS EXPENDITURE INCURRED AND FURTHER THAT E XPENDITURE SO INCURRED WAS FOR ACQUIRING INTANGIBLE ASSETS LIKE BRAND, GOODWILL ET C. AS POINTED BY THE HONBLE SUPREME COURT AND THE HONBLE BOMBAY HIGH COURT IN THE CASE OF B.C.SRINIVASA SETTY (SUPRA) AND EVANS FRAZER(SUPRA), FOR CREATION OF INTANGIBLES LIKE SAY GOODWILL IT IS NOT POSSIBLE TO ASCERTAIN IN TERMS OF MONEY T HE COST OF ACQUISITION OF GOODWILL; IT IS EQUALLY IMPOSSIBLE TO ASCERTAIN IN TERMS OF M ONEY THE COST OF ADDITION OR ALTERATION TO THE QUALITY OF GOODWILL WHICH LED TO THE INCREASE IN ITS VALUE. IT IS THEREFORE NOT POSSIBLE TO SAY THAT PROFITS FOREGONE CREATED GOODWILL OR ANY OTHER INTANGIBLES OR BRAND TO THE ASSESSSEE. THE ARGUMEN T OF THE LEARNED DR ON THE EXISTENCE OF INTANGIBLES/BRANDS OR GOODWILL WAS ON THE BASIS OF PURCHASE OF ASSESSEES SHARES AT A PREMIUM BY INVESTORS. DESPI TE MAKING LOSSES, THE ASSESSEES SHARES WERE PURCHASED BY INVESTORS AT A HIGH PREMIUM. IN THIS REGARD TWO INSTANCES OF PURCHASE BY VENTURE CAPITALISTS OF THE SHARES OF THE ASSESSEE OF RE.1/- IN THE PREVIOUS YEARS RELEVANT TO AY 15-16 A ND 14-15 AT A PREMIUM OF RS.1899/- AND RS.595/- RESPECTIVELY WAS CITED BY HI M. ACCORDING TO HIM SUCH HIGH SHARE PREMIUM WAS JUSTIFIED ONLY BECAUSE OF TH E ASSET BASE CREATED BY THE ASSESSEE IN THE FORM OF BRAND VALUE. THIS AGAIN IS AN ARGUMENT WITHOUT BRINGING ON RECORD ANY MATERIAL TO SUBSTANTIAL THAT VALUATIO N OF SHARES WERE DONE ONLY ITA NOS.202 & 693/B/18 37 BECAUSE OF VALUE BEING ASCRIBED TO BRAND OR GOODWIL L OR ANY INTANGIBLES. THE VALUATION OF SHARES AS PER THE AO WAS ON DCF METHOD AND THERE IS NO MENTION IN THE ORDER OF ASSESSMENT REGARDING VALUES BEING ASCR IBED TO GOODWILL/BRAND OR INTANGIBLES. WE THEREFORE HOLD THAT THERE WAS NO E XPENDITURE INCURRED BY THE ASSESSEE EXCEPT THOSE THAT ARE SET OUT IN THE PROFI T AND LOSS ACCOUNT. THE QUESTION OF INCURRING EXPENDITURE ON CREATING INTANGIBLES DO ES NOT ARISE FOR CONSIDERATION AT ALL. 56. IN VIEW OF OUR CONCLUSIONS THAT THE ACTION OF T HE AO IN DISREGARDING THE BOOKS RESULTS CANNOT BE SUSTAINED AND THE FURTHER C ONCLUSION THAT THE ACTION OF THE AO IN PRESUMING THAT THE ASSESSEE HAD INCURRED EXPE NDITURE FOR CREATING INTANGIBLE ASSETS/BRAND OR GOODWILL IS WITHOUT ANY BASIS, WE DO NOT THINK IT NECESSARY TO DEAL WITH THE ARGUMENTS THAT EVEN ASSU MING THAT EXPENDITURE WAS INCURRED BY THE ASSESSEE THE EXPENDITURE FOR BUILDI NG BRAND OR CREATING INTANGIBLE OR GOODWILL IS REVENUE EXPENDITURE AND ALLOWABLE AS DEDUCTION. IT IS ALSO NOT NECESSARY FOR US TO GO INTO THE QUESTION OF ESTIMAT ION OF QUANTUM OF EXPENDITURE ON CREATING INTANGIBLES, IN VIEW OF THE ABOVE CONCLUSI ONS. 57. FOR THE REASONS GIVEN ABOVE, WE HOLD THAT THE L OSS AS DECLARED BY THE ASSESSEE IN THE RETURN OF INCOME SHOULD BE ACCEPTED BY THE AO AND HIS ACTION IN DISALLOWING EXPENSES AND ARRIVING AT A POSITIVE TOT AL INCOME BY ASSUMING THAT THERE WAS AN EXPENDITURE OF A CAPITAL NATURE INCURRED BY THE ASSESSEE IN ARRIVING AT A LOSS AS DECLARED IN THE RETURN OF INCOME AND FURTHER DIS ALLOWING SUCH EXPENDITURE AND CONSEQUENTLY ARRIVING AT A POSITIVE TOTAL INCOME CH ARGEABLE TO TAX IS WITHOUT ANY BASIS AND NOT IN ACCORDANCE WITH LAW AND THE SAID M ANNER OF DETERMINATION OF TOTAL INCOME IS HEREBY DELETED. ITA NOS.202 & 693/B/18 38 58. IN THE RESULT, APPEAL BY THE ASSESSEE IS ALLOW ED AND THE APPEAL BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 25TH APRIL, 2018 . SD/- SD/- (JASON P.BOAZ) (N. V VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMB ER BANGALORE DATED : 25 /4/2018 VMS 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 SECRETARY , ITAT, BANGALORE