M/s. Ceeyes Metal Reclamation (P) Ltd., Trichy V. ACIT, Trichy

ITA 245/CHNY/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64318 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 6 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-09-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 12-09-2012
• Assessment Year: 2003-2004
• Appeal Filed On: 02-03-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANIRUDH RAI
• Keywords: Gift; Depreciation; Revenue expenditure; Capital expenditure
• Section: 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI BEFORE DR. O.K. NARAYANAN, VICE PRESIDENT AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER I.T.A. NO. 244 & 245/MDS/2010 ASST. YEAR : 2003-04 M/S. CEEYES METAL RECLAMATION (P) LIMITED, 51&52, SIDCO INDUSTRIAL ESTATE, THUVAKUDI, TIRUCHY-620 015. PAN : AACCC1167D (APPELLANT) V. THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-IV, TIRUCHY (RESPONDENT) APPELLANT BY : SHRI SAROJ KU MAR PARIDA RESPONDENT BY : SHRI ANIRUDH RAI DATE OF HEARING : 12 SEPT. 2012 DATE OF PRONOUNCEMENT : 20 TH SEPT. 2012 O R D E R PER CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER : I.T.A. NO.244/MDS/2010 : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST T HE ORDER OF CIT(APPEALS), TIRUCHIRAPALLI DATED 22.12.2009 IN ITA NO.154/06-07 FOR THE ASST. YEAR 2003-04. THE ONLY ISSUE IN THE GROUNDS OF APPEAL I.T.A. NO.244&245/MDS/2010 2 OF THE ASSESSEE IS THAT THE CIT(APPEALS) ERRED IN C ONFIRMING THE DISALLOWANCE OF DEPRECIATION CLAIMED ON GOOD-WILL W HILE COMPLETING THE ASSESSMENT. BY THE ASSESSING OFFICER 2. AT THE TIME OF HEARING BOTH THE COUNSEL FOR THE ASSESSEE AND THE DEPARTMENTAL REPRESENTATIVE HAVE SUBMITTED THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT V. SMIF SECURITIES LTD., VIDE CIVIL APPEAL NO.5961 OF 2012 DATED 22.08.12. IN THE PRESENT CASE, THE ASSE SSING OFFICER DISALLOWED DEPRECIATION CLAIMED BY THE ASSESSEE ON GOOD-WILL STATING THAT THE PAYMENT IS NOT MADE FOR POSSESSION OF ANY KNOW-HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENCE, FRANCHISE OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. T HEREFORE, NO DEPRECIATION CAN BE ALLOWED ON GOOD-WILL. THE ASSES SING OFFICER WAS OF THE VIEW THAT GOOD-WILL IS NOT A TANGIBLE ASSET. THEREFORE, NO DEPRECIATION CAN BE ALLOWED. ON APPEAL THE CIT(APP EALS) AGREED WITH THE VIEW OF THE ASSESSING OFFICER. AGAINST TH IS ORDER OF THE CIT(APPEALS) THE ASSESSEE IS IN APPEAL BEFORE US. I.T.A. NO.244&245/MDS/2010 3 3. WE HAVE GONE THROUGH THE ORDER OF HONBLE SUPRE ME COURT IN THE CASE OF SMIFS SECURITIES LTD. (SUPRA). THE HONBLE SUPREME COURT WHILE DECIDING THAT GOOD WILL IS AN A SSET FOR THE PURPOSE OF ALLOWING DEPRECIATION HELD AS UNDER :- TH E ASSESSING OFFICER HELD THAT GOODWILL WAS NOT AN ASS ET FALLING UNDER E XPLANATI O N 3 T O SECTION 32 ( 1) OF THE INCOME TA X A CT , 1961 [ ' ACT ' , FOR SHORT] . WE QUOTE HEREIN BELOW EXPLANATI O N 3 TO SECTI O N 32 ( 1 ) OF THE ACT : 'EXPLANATION 3.- - FOR THE PURPOSES OF THIS SUB-SECTION , THE EXPRESSIONS ' ASSETS' AND ' BL O CK OF ASSETS' SHALL MEAN-- [A] TANGIBLE ASSETS , BEING BUILDINGS, MACHINERY , PLANT OR FURNITURE ; [B] INTANGIBLE ASSETS , BEING KNOW-HOW , PATENTS , COPYRIGHTS , TRADEMARKS , LICENCE S, F RANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHT S OF SIMILAR NATURE . ' EX PLANATION 3 STATES THAT THE E X PRE S SION ' ASSET' SHALL MEAN AN INTANGIBLE A S SET , BEING K NOW-HOW , PATENTS , COPYRIGHT S, T RADEMARKS , LICENCES , FRANCHISES OR AN Y OTHER BU S INES S O R C O MMERCIAL RIGHTS OF SIMILAR NATURE . A READING THE WORDS ' AN Y OTHER BUSINE SS O R COMMERCIAL RIGHTS OF SIMILAR NATURE' IN CLAUSE (B ) OF EXPLANATION 3 INDICATES THAT GOODWILL WOULD FALL UNDER THE EXPRESSION ' ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF A SIMILAR NATURE'. THE PRINCIPLE OF EJUSDEM GENERIS WOULD STR ICTLY APPLY WHILE INTERPRETING THE SAID EXPRESSION WHICH FINDS PLACE IN EXPLANATION 3 ( B) . I N TH E CIRCUMSTANCES , W E AR E OF TH E V IE W THAT ' GOOD W ILL ' I S A N ASSET UNDER EX PLANATI O N 3 ( B ) T O SECTION 32 ( 1 ) OF THE A CT . I.T.A. NO.244&245/MDS/2010 4 RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT, WE ALLOW THE APPEAL OF THE ASSESSEE DIRECTING THE ASSE SSING OFFICER TO ALLOW DEPRECIATION ON GOOD-WILL AS CLAIMED BY THE A SSESSEE. THE GROUNDS OF APPEAL OF THE ASSESSEE ARE ALLOWED. ITA NO.245/MDS/2010 : 5. THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE CIT(APPEALS), TIRUCHIRAPALLY DATED 22.12.200 9 IN ITA NO.447/08-09 FOR THE ASST. YEAR 2003-04. THE ASSES SEE HAS RAISED TWO EFFECTIVE ISSUES IN ITS GROUNDS OF APPEAL. THE FIRST ISSUE IS THAT THE CIT(APPEALS) HAS ERRED IN SUSTAINING THE DISALL OWANCE MADE BY THE ASSESSING OFFICER IN RESPECT OF EXPENSES CLAIME D UNDER THE HEAD LIAISON EXPENSES, BUSINESS PROMOTION EXPENSES AND C OMPLEMENTARY EXPENSES. THE SECOND ISSUE IN THE GROUNDS OF APPEA L IS THAT THE CIT(APPEALS) HAS ERRED IN CONFIRMING DISALLOWANCE O F PATROGEN EXPENSES TREATING THE SAID EXPENSES AS CAPITAL EXPE NDITURE. I.T.A. NO.244&245/MDS/2010 5 6. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF RECLAMATION OF WORN-OUT FERROUS AND NON- FERROUS COMPONENTS AND MANUFACTURING OF CAMSHAFTS T O DIESEL/ LOCOMOTIVES. THE ASSESSEE FILED ITS RETURN OF INCO ME FOR THE ASST. YEAR 2003-04 DECLARING INCOME AT M. 9,22,250/-. TH E ASSESSMENT WAS COMPLETED UNDER SEC.143(3) READ WITH SEC.147 OF THE I.T. ACT ON 27.3.2006 DETERMINING INCOME AT M. 27,21,639/-. LA TER, THE ASSESSMENT WAS REVISED ON 24.3.2008 UNDER SEC.263 O F THE ACT BY THE COMMISSIONER OF INCOME TAX AND SET ASIDE THE A SSESSMENT DE NOVO TO EXAMINE THE EXPENSES ALLOWED BY THE ASSESSI NG OFFICER UNDER THE HEADS LIAISON EXPENSES, BUSINESS PROMOTIO N EXPENSES, COMPLEMENTARY EXPENSES, JOB WORK RECEIPTS, PATROGEN EXPENSES ETC. PURSUANT TO THE ORDER OF COMMISSIONER OF INCOME TAX PASSED UNDER SEC.263 OF THE ACT, THE ASSESSING OFFICER COMPLETED THE ASSESSMENT UNDER SEC.143(3) READ WITH SEC.263 OF THE ACT AND W HILE COMPLETING THE ASSESSMENT, THE ASSESSING OFFICER DISALLOWED 80 % OF THE EXPENSES INCURRED BY THE ASSESSEE TOWARDS LIAISON E XPENSES, BUSINESS PROMOTION EXPENSES AND COMPLEMENTARY EXPEN SES. THE ASSESSING OFFICER DISALLOWED ENTIRE EXPENSES INCURR ED BY THE ASSESSEE I.T.A. NO.244&245/MDS/2010 6 TOWARDS PATROGEN EXPENSES (MARKETING AND DEVELOPING EXPENSES) HOLDING THAT THESE EXPENSES WERE INCURRED IN CONNEC TION WITH MARKETING OF NEW PRODUCT AND, THEREFORE, IT CANNOT BE ALLOWED AS REVENUE EXPENDITURE. ON APPEAL, THE CIT(A) SUSTAIN ED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. AGGRIE VED, THE ASSESSEE IS IN APPEAL BEFORE US. 7. THE COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER IS NOT JUSTIFIED IN DISALLOWING 8 0% EXPENSES CLAIMED FOR LIAISON SERVICE, BUSINESS AND COMPLEMENTARY EXP ENSES. THE COUNSEL SUBMITS THAT THE ASSESSEES CUSTOMERS ARE T HE WORKSHOPS OF INDIAN RAILWAYS SPREAD OVER THE COUNTRY. AT EVERY PLACE OF SUPPLY THE ASSESSEE COULD NOT HAVE ITS BRANCHES OR PLACE A FULL TIME REPRESENTATIVE IN VIEW OF COST INVOLVEMENT. HE SUB MITS WITH REGARD TO LIAISON EXPENSES THAT THE ASSESSEE HAD TO DEPEND ON LIAISON SERVICE PROVIDERS AND HAD TO INCUR SOME EXPENDITURE TOWARDS THEIR SERVICES. SUCH LIAISON SERVICES HAVE BEEN UTILIZED FOR PROCURING ORDER, FOLLOW UP, DELIVERY, INSPECTION AND COLLECTION OF B ILLS ETC. WITH REGARD TO BUSINESS PROMOTION AND COMPLEMENTARY EXPENSES IN CURRED BY THE I.T.A. NO.244&245/MDS/2010 7 ASSESSEE, THE COUNSEL FOR THE ASSESSEE SUBMITS THAT EVERY RAILWAY WORK SHOP WHICH THE ASSESSEE DEALS WITH IS A POTENT IAL CUSTOMER FOR THE ASSESSEE. IN ORDER TO SUSTAIN THE BUSINESS AND FOR GAINING CONFIDENCE OVER FUTURE ORDERS, THE ASSESSEE HAD TO INCUR EXPENSES ON ENTERTAINMENT AND OTHER PROMOTIONAL EXPENSES THROUG H THE SALES STAFF, DIRECTOR IN-CHARGE OF SALES ETC., WHENEVER T HEY ARE ON TOUR TO THE CUSTOMERS PLACE. THE COUNSEL FOR THE ASSESSE SUBMITS THAT DURING THE ASST. YEAR 2003-04, THE ASSESSEE HAD ACH IEVED A TURNOVER OF M 103.66 LAKHS WITH A NET PROFIT MARGIN OF M. 32 .68 LAKHS WHICH MEANS A NET PROFIT PERCENTAGE OF 31.52% WHICH WOULD NOT HAVE BEEN POSSIBLE IN THE APPELLANTS LINE OF ACTIVITY BUT FO R THE ASSESSEES SPECIFIC METHOD OF MANUFACTURING PROCESS AND THE GO OD BUSINESS RELATIONS MAINTAINED WITH THE CUSTOMERS. THE COUNS EL FOR THE ASSESSE ALSO SUBMITS THAT THE ASSESSEE HAD TO INCUR CERTAIN EXPENSES FOR BUSINESS PROMOTION IN ORDER TO ACHIEVE HIGH TURNOVE R KEEPING GOOD RELATIONS WITH THE CUSTOMERS. THEREFORE, THE ASSES SING OFFICER IS NOT AT ALL JUSTIFIED IN DISALLOWING 80% OF LIAISON EXPE NSES, BUSINESS PROMOTION AND COMPLEMENTARY EXPENSES WHILE COMPLETI NG THE ASSESSMENT. THE COUNSEL FOR THE ASSESSEE SUBMITS T HAT THE MAIN I.T.A. NO.244&245/MDS/2010 8 REASON FOR DISALLOWANCE OF ASSESSEES EXPENSES WAS THAT THE ASSESSEE COULD NOT PRODUCE SOME OF THE BILLS, AND SOME VOU CHERS WERE SELF MADE. HE SUBMITS THAT THIS CANNOT BE A BASIS FOR DISALLOWING 80% OF THE CLAIM. THE DEPARTMENTAL REPRESENTATIVE SUPPORT ED THE ORDERS OF THE AUTHORITIES BELOW. 8. WE HAVE HEARD BOTH SIDES AND PERUSED THE ORDERS OF LOWER AUTHORITIES. IT IS A FACT THAT THE ASSESSING OFFICER DID NOT DISPUTE THAT THE ASSESSEE HAS NOT INCURRED THESE EX PENSES FOR THE PURPOSE OF ITS BUSINESS. THE ASSESSING OFFICER HAS ESTIMATED THE EXPENSES TO BE ALLOWED UNDER THESE HEADS AT 20% AND DISALLOWED 80% OF THE EXPENSES ON THE PRESUMPTION THAT THESE E XPENSES MIGHT NOT HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS ON VARIOUS REASONS, LIKE THE ASSESSEE HAS MADE SELF-VOUCHERS, DID NOT PRODUCE CERTAIN BILLS FOR THE PURCHASES AND CERTAIN GIFT AR TICLES WERE PURCHASED FOR RAILWAY EMPLOYEES AND EXPENSES WERE INCURRED TO WARDS REFRESHMENTS TO RAILWAY EMPLOYEES ETC. TAKING INTO CONSIDERATION THE TOTALITY OF FACTS AND CIRCUMSTANCES OF THE ASSESSEE S CASE, WE DIRECT I.T.A. NO.244&245/MDS/2010 9 THE ASSESSING OFFICER TO RESTRICT THE DISALLOWANCE TO 40% OF THE EXPENSES INSTEAD OF 80% MADE IN THE ASSESSMENT ORDE R. 9. COMING TO THE ISSUE OF TREATING THE EXPENSES IN CURRED TO PATROGEN EXPENSES (MARKETING AND DEVELOPMENT EXPENS ES) AS CAPITAL EXPENDITURE, THE COUNSEL FOR THE ASSESSEE SUBMITS T HAT PATROGEN IS A CUTTING EQUIPMENT WHICH THE ASSESSEE TRIED TO MARKE T THROUGH DEMONSTRATIONS BY TAKING THE EQUIPMENTS DIRECTLY TO CUSTOMERS SPREAD OVER VARIOUS PARTS OF THE COUNTRY. THE COUN SEL FOR THE ASSESSEE SUBMITS THAT THE ASSESSEE PLANNED DEMO AND ORDER PROCUREMENT PROCESS SIMULTANEOUSLY. HE SUBMITS THA T THE NEW BUSINESS IS ON, ONCE THE DEMO PROCESS COMMENCED. T HE COUNSEL FOR THE ASSESSEE SUBMITS THAT THE PRODUCT HAD MISERABLY FAILED ON TECHNICAL GROUNDS AND THE ASSESSEE HAD INCURRED EXP ENSES FOR TRAVEL AND DEMO PURPOSES. THE COUNSEL FOR THE ASSESSEE SU BMITS THAT ALL THESE EXPENSES HAVE BEEN ACCOUNTED FOR UNDER PATROG EN EXPENSES AND THEY ARE OF REVENUE IN NATURE AND NO PART OF TH E EXPENDITURE WAS TOWARDS PURCHASE OF MACHINERY OR TO CREATE ASSETS O F ENDURING NATURE. THE COUNSEL FOR THE ASSESSEE SUBMITS THAT THIS EXPENDITURE I.T.A. NO.244&245/MDS/2010 10 WAS INCURRED FOR THE PURPOSE OF BUSINESS OF THE ASS ESSEE EVEN THOUGH SUCH EXPENDITURE HAD TURNED OUT TO BE UNREMU NERATIVE. THEREFORE, HE SUBMITS THAT THE ASSESSING OFFICER IS NOT JUSTIFIED IN DISALLOWING THE SAID EXPENDITURE AS CAPITAL EXPENDI TURE. 10. THE DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDERS OF THE LOWER AUTHORITIES. 11. WE HAVE HEARD BOTH SIDES AND GONE THROUGH THE DETAILS FURNISHED BY THE ASSESSEE ON THE EXPENDITURE INCURR ED UNDER THE HEAD PATROGEN EXPENSES. THE ENTIRE EXPENDITURE WAS INCURRED TOWARDS TRAVELLING AND CONVEYANCE, DEMO EXPENSES, L ABOUR CHARGES, TRAINING EXPENSES AND 90% OF THE EXPENDITURE WAS IN CURRED TOWARDS TRAVELLING AND DEMO EXPENSES. WE SEE THAT ALL THES E EXPENSES WERE IN THE NATURE OF REVENUE AND NO PART OF THE EXPENDI TURE WAS INCURRED TOWARDS PURCHASE OF ANY MACHINERY SO AS TO TREAT TH E EXPENDITURE AS CAPITAL EXPENDITURE. THE ASSESSEE INCURRED ALL THE SE EXPENSES FOR MARKETING ITS PRODUCT THOUGH A NEW ONE, AND MARKET ING EXPENSES IE. TRAVELLING, CONVEYANCE, DEMO EXPENSES ETC., CAN NEV ER BE TREATED AS I.T.A. NO.244&245/MDS/2010 11 CAPITAL EXPENDITURE. THE CASE LAW RELIED ON BY THE LOWER AUTHORITIES HAS NO APPLICATION TO THE FACTS OF ASSESSEES CASE SINCE THE FACTS IN THAT CASE ARE THAT THE ASSESSEE INCURRED CERTAIN EX PENDITURE IN CONNECTION WITH STARTING NEW PROJECT WHICH WAS ABAN DONED LATTER. IN THE CIRCUMSTANCES, IT WAS HELD THAT THE SAID EXPEND ITURE INCURRED TOWARDS NEW PROJECT IS CAPITAL IN NATURE. IN THE A SSESSEES CASE, THE ASSESSEE TRIED TO MARKET ITS PRODUCT AND INCURRED C ERTAIN EXPENSES TOWARDS TRAVEL, DEMO ETC., AND, THEREFORE, IN OUR V IEW SUCH EXPENDITURE CANNOT BE TREATED AS CAPITAL EXPENDITUR E. IN THE CIRCUMSTANCES, WE DIRECT THE ASSESSING OFFICER TO T REAT PATROGEN EXPENSES AS REVENUE EXPENDITURE AND ALLOW THE SAID EXPENSES AS DEDUCTION WHILE COMPUTING INCOME OF THE ASSESSEE FO R THE ASST. YEAR 2003-04. GROUNDS OF APPEAL OF THE ASSESSEE ARE ALL OWED ON THIS ISSUE. I.T.A. NO.244&245/MDS/2010 12 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN ITA NO.244/MDS/2010 IS ALLOWED AND ITA NO.245/MDS/2010 IS PARTLY ALLOWED. 13. ORDER PRONOUNCED ON THURSDAY, THE 20 T DAY OF SEPTEMBER 2012. SD/- SD/- (DR. O.K. NARAYANAN) (CHALLA NAGENDRA PR ASAD) VICE PRESIDENT JUDICIAL MEMBER CHENNAI, DATED : 20 TH SEPTEMBER 2012. JLS. COPY TO :- 1) ASSESSEE 2) RESPONDENT 3) CIT(APPEALS) 4) C.I.T. (5) D.R., 6) GUARD FILE.