DCIT, New Delhi V. M/s KJS India Pvt. Ltd., New Delhi

ITA 2735/DEL/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 3443 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 1 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 19-05-2010
• Assessment Year: 2003-2004
• Appeal Filed On: 04-06-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PANKUJ RAWAT
• Assessee Lawyers: H K LAL SR DR ITA N
• Keywords: Depreciation; Business expenditure; Carry forward of business losses; Unabsorbed depreciation; Revenue expenditure; Set aside
• Section: 271(1)(c); 143(3); 195; 143(2); 207; 32; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : D NEW DELHI BEFORE SHRI G.E. VEERABHADRAPPA, VICE PRESIDENT AN D SHRI RAJPAL YADAV, JUDICIAL MEMEBR I.T.A NOS. 2422/DEL/07,2168/DEL/09 ASSTT. YEAR 2003-04 M/S. KJS INDIA PVT. LTD. 13 TH FLOOR, DOCTOR GOPAL DAS BHAWAN, 28, BARAKHAMBA ROAD, NEW DELHI -1 VS. DCIT, CIRCLE 5 (1) NEW DELHI. AND I.T.A NO. 2735/DEL/09 ASSTT. YEAR 2003-04 DCIT, CIRCLE 5 (1), NEW DELHI. VS. KJS INDIA PVT. LTD. 13 TH GOPAL BHAWAN, 28, BARAKHAMBA ROAD, NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI SALIL KAPOOR, ADVOCATE, & SH. PANKUJ RAWAT, CA RESPONDENT BY: SMT. KAVITA BHATNAGAR, CIT(DR) & SHRI H.K. LAL, SR. DR. ITA NOS. 2422/DEL/2007,2168,2735/DEL/2009 ASST T. YEAR 2003-04 2 ORDER PER RAJPAL YADAV, JM: ITA NO. 2422/DEL/07 IS DIRECTED AT THE INSTANCE OF ASSESSEE AGAINST THE ORDER OF LD. CIT(A) DATED 13.1.2007 PAS SED FOR ASSESSMENT YEAR 2003-04. THIS APPEAL HAS ARISEN FROM AN ASSESS MENT ORDER PASSED U/S 143(3) OF THE INCOME TAX ACT. ITA NO. 2168/DEL/ 09 AND 2735/DEL/09 ARE CROSS APPEALS OF ASSESSEE AND REVENUE RESPECTIV ELY AGAINST THE ORDER OF LD. CIT(A) DATED 23 RD MARCH 2009 PASSED IN ASSTT. YEAR 2003- 04. THESE APPEALS HAVE ARISEN FROM A PENALTY ORDER PASSED U/S 271 (1)(C) BY THE AO. SINCE THE ISSUES AGITATED IN ALL THE APPEALS BY THE PARTIES ARE COMMON THEREFORE WE HEARD THEM TOGETHER AND DEEM IT APPROPRIATE TO DISPOSE OFF THEM BY THIS COMMON ORDE R. 2. FIRST WE TAKE ITA NO. 2422/DEL/07. IN THIS APPEA L THE FIRST GRIEVANCE OF ASSESSEE IS THAT LD. CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 93,91,706/- WHICH HAS BEEN CLAI MED BY THE ASSESSEE AS REVENUE EXPENSES ON THE GROUND THAT IT IS PAID TO THE EMPLOYEE AS SEVERANCE COST. ITA NOS. 2422/DEL/2007,2168,2735/DEL/2009 ASST T. YEAR 2003-04 3 3. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE CO MPANY WAS INCORPORATED ON 6 TH JULY, 1999 AS PER THE COMPANIES ACT 1956. THE COMPANY HAD STARTED MANUFACTURING OF POWDERED SOFT DRINK IN THE NAME AND STYLE OF TANG. IT HAS FILED ITS RETURN OF INC OME FOR ASSTT. YEAR 2003- 04 ON 2 ND DECEMBER, 2003 DECLARING A LOSS OF RS. 12,37,31,51 0/-. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSE SSMENT AND STATUTORY NOTICES U/S 143(2) (1) WERE ISSUED AND SE RVED UPON THE ASSESSEE. AS PER THE OBSERVATION OF THE AO IN THE A SSTT. ORDER, IN RESPONSE TO THE NOTICES SHRI NAVEEN KAPOOR, FCA APP EARED ON BEHALF OF THE ASSESSEE FROM TIME TO TIME AND SUBMITTED THE DE TAILS. ON SCRUTINY OF THE ACCOUNTS IT REVEALED TO THE AO THAT ASSESSEE HA S DEBITED AN AMOUNT OF RS. 93,91,706/- IN THE P & L ACCOUNT TOWARDS SEV ERANCE COST OF EMPLOYEES. THE AO INVITED THE EXPLANATION OF THE AS SESSEE TO SHOW AS TO WHY THIS AMOUNT SHOULD NOT BE CAPITALIZED BEING CAPITAL IN NATURE. IN RESPONSE TO THE QUERY OF AO ASSESSEE HAS SUBMITTED THAT IT IS AN ALLOWABLE EXPENSES U/S 37 OF THE INCOME TAX ACT. TH E BOARD OF DIRECTORS IN THEIR MEETING HELD ON 27 TH NOVEMBER, 2002 DISCUSSED ABOUT THE LONG TERM COMMERCIAL VIABILITY OF THE POWDERED SOFT DRINK AND WERE OF THE OPINION THAT IT DOES NOT OFFER LONG TERM COMMER CIAL VIABILITY. THEREFORE, IT WAS DECIDED TO PHASE OUT THE PRODUCTI ON ACTIVITY OVER A ITA NOS. 2422/DEL/2007,2168,2735/DEL/2009 ASST T. YEAR 2003-04 4 PERIOD. A RESOLUTION TO THIS EFFECT WAS PASSED WHIC H WAS SUBJECT TO THE APPROVAL OF SHARE HOLDERS OF THE COMPANY IN ITS GEN ERAL MEETING. THE AO WAS NOT SATISFIED WITH THE EXPLANATION OF ASSESSEE AND HE REJECTED ITS CLAIM. THE AO HAS ASSIGNED FOLLOWING REASONS FOR RE JECTION OF THE CLAIM OF ASSESSEE IN PARAGRAPH NO. 4 OF THE ASSTT. ORDER. THE BRIEF REASONS ASSIGNED BY THE LD. AO IN THIS CONNECTION READ AS U NDER :- I. THE AUDIT REPORT HAS EXPLICITLY MENTIONED IN FOR M NO. 3CD THAT THE BOARD OF DIRECTORS VIDE MEETING HELD ON 27 .11.2002 DECIDED TO DISCONTINUE THE BUSINESS OF PRODUCTION O F POWDERED SOFT DRINK DUE TO NON-VIABILITY OF OPERATI ONS AND ACCORDINGLY, THE COMPANY HAS CEASED ITS BUSINESS OPERATIONS DURING THE YEAR. II. IT IS ALSO MENTIONED IN THE NOTES TO ACCOUNTS T HAT THE COMPANY HAS CEASED ITS BUSINESS OPERATIONS AND IT W AS DECIDED TO SELL THE BUSINESS AND ASSETS OF THE COMP ANY AND HENCE, THESE FINANCIAL STATEMENTS ARE NOT PREPARED ON A GOING CONCERN BASIS. III. IT IS VERY CLEAR FROM THE ABOVE THAT THE BUSIN ESS IS NO MORE IN OPERATION. IV. IN FACT, THE SEVERANCE COSTS HAVE BEEN INCURRED NOT FOR THE RUNNING OF THE BUSINESS, BUT FOR THE CLOSURE OF THE BUSINESS. V. ANY EXPENDITURE FOR THE CLOSURE OF THE BUSINESS CANNOT BE ALLOWED U/S 37 OF THE IT ACT AS EXPENSES INCURRED F OR THE RUNNING OF BUSINESS ONLY IS COVERED U/S 37. 4. APPEAL TO THE LD. CIT (A) DID NOT BRING ANY RELI EF TO THE ASSESSEE. ITA NOS. 2422/DEL/2007,2168,2735/DEL/2009 ASST T. YEAR 2003-04 5 5. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT ASSE SSEE HAS NOT CLOSED DOWN THE BUSINESS. IT HAS ONLY SUSPENDED THE MANUFACTURING ACTIVITY. IT HAS BEEN RETAINING ITS BRAND TANG. U NDER THIS VERY BRAND ASSESSEE GOT MANUFACTURES THE POWDERED SOFT DRINK I N THE SUBSEQUENT YEAR AND TRADED THE PRODUCT. THE EXPENSES INCURRED FOR DISPENSING WITH THE SERVICES OF EMPLOYEES DURING THE LULL PERIOD IS AN ALLOWABLE BUSINESS EXPENSES U/S 37 OF THE INCOME TAX ACT. HE FURTHER C ONTENDED THAT AO HAS GRANTED ALL OTHER EXPENDITURE CLAIMED BY THE AS SESSEE FOR MAINTAINING ITS CORPORATE STATUS MEANING THEREBY, A O HAS NOT CONSTRUED THAT BUSINESS OF THE ASSESSEE HAS TOTALLY BEEN CLOS ED DOWN. FOR BUTTERACING HIS CONTENTION HE DREW OUR ATTENTION TO WARDS THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF RAVINDRANATHAN NAIR VS. CIT REPORTED IN 247 ITR 178. IN THIS CASE ASSESSEE WAS AN INDIVIDUAL , CARRIED ON THE BUSINESS OF PROCESSING CASHEWNUTS I N TEN UNITS. FOUR OF THESE UNITS WERE SITUATED IN KERALA. OF THESE FOUR UNITS, TWO WERE OWNED BY THE ASSESSEE AND TWO WERE TAKEN ON LEASE. HE FAC ED LABOUR PROBLEM IN KERALA, CONSEQUENT UPON WHICH HE ORDERED A LOCK OUT OF THE FOUR UNITS THERE. ULTIMATELY HE SURRENDERED TWO UNITS WHICH WE RE TAKEN ON LEASE AND TWO UNITS WERE TRANSFERRED TO A COMPANY WHERE H E AND HIS WIFE WERE ONLY THE SHARE HOLDERS. ON ACCOUNT OF CLOSURE OF TH ESE FOUR UNITS HE ITA NOS. 2422/DEL/2007,2168,2735/DEL/2009 ASST T. YEAR 2003-04 6 MADE A SETTLEMENT WITH THE LABOURS AND PAID SUM OF RS. 4,18,107/-. HE CLAIMED THE DEDUCTION OF THIS AMOUNT IN ASSTT. YEAR 1972-73 U/S 37 OF THE INCOME TAX ACT. THIS WAS DISALLOWED TO THE ASSESSEE BY THE AO. HOWEVER IT WAS ALLOWED BY THE LD. CIT(A). THE APPEA L OF THE REVENUE WAS DISMISSED BY THE TRIBUNAL. THE HONBLE HIGH CO URT ON A REFERENCE ANSWERED THE QUESTION AGAINST THE ASSESSEE AND ULTI MATELY DISPUTE TRAVELED UP TO THE HONBLE SUPREME COURT. THE HONB LE SUPREME COURT WHILE UPHOLDING THE VIEW OF THE TRIBUNAL AS WELL A S OF LD. CIT(A) HAS OBSERVED THAT IF AS A MATTER OF FACT IT WAS FOUND T HAT THESE FOUR UNITS CONSTITUTED A SEPARATE BUSINESS THEN IT COULD BE A CLOSURE OF THE BUSINESS. ACCORDING TO THE HONBLE SUPREME COURT TH ESE FOUR UNITS IS PART AND PARCEL OF ONE BUSINESS OF 10 UNITS. THE CL OSURE OF THESE FOUR UNITS WOULD NOT BE CONSTRUED AS CLOSURE OF BUSINESS BY THE ASSESSEE. HENCE EXPENSES WERE ALLOWABLE TO THE ASSESSEE. LD. COUNSEL FOR THE ASSESSEE THEREAFTER RELIED UPON THE DECISION OF HON BLE SUPREME COURT IN THE CASE OF SASOON J DAVID & CO. PVT. LTD. VS. C IT REPORTED IN 118 ITR 261. THE HONBLE SUPREME COURT IN THIS CASE HAS ALLOWED THE EXPENSES INCURRED BY THE ASSESSEE IN PAYING REASON ABLE SUMS BY WAY OF GRATUITY, BONUS, RETRENCHMENT COMPENSATION. LD. COUNSEL FOR THE ASSESSEE FURTHER PLACED RELIANCE UPON THE DECISION OF DELHI HIGH COURT ITA NOS. 2422/DEL/2007,2168,2735/DEL/2009 ASST T. YEAR 2003-04 7 IN THE CASE OF CIT VS. DCM LTD. RENDERED IN ITA NO. 987 / 2007. THIS JUDGMENT HAS BEEN PRONOUNCED ON 13 TH JANUARY, 2009. HE PLACED ON RECORD COPY OF THE JUDGMENT. HE ALSO RELIED UPON TH E DECISIONS OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. ANI TA JAIN, CIT VS. ASSAM OIL CO. LTD. 154 ITR 647 (CALCUTTA HIGH COURT ), CIT VS. SIMPSON AND CO. LTD. 230 ITR 794 (MADRAS HIGHS COURT). ON T HE STRENGTH OF THESE DECISIONS HE CONTENDED THAT EXPENSES ARE ALLOWABLE TO THE ASSESSEE. LD. DR ON THE OTHER HAND OPPOSED THE PRAYER OF ASSE SSEE. HE FURTHER POINTED OUT THAT THE DIRECTORS IN THEIR MEETING SPE CIFICALLY OBSERVED THAT BUSINESS OF MANUFACTURING IS TO BE CLOSED. AO HAS RIGHTLY CONSIDERED THAT BUSINESS HAS BEEN CLOSED AND THEREFORE THESE E XPENSES ARE NOT ALLOWABLE TO THE ASSESSEE. 6. WE HAVE DULY CONSIDERED THE RIVAL CONTENTION AND GONE THROUGH THE RECORD CAREFULLY. WE THINK, IT IS NOT NECESSARY TO RECAPITULATE AND RECITE ALL THE DECISIONS PLACED BY THE ASSESSEE IN THE PAPER BOOK AND DISCUSSED WHILE HEARING ON THIS LEGAL ASPECT, BUT S UFFICE TO SAY THAT IF ASSESSEE HAS NOT CLOSED DOWN ITS BUSINESS ACTIVITY TOTALLY THAN ON RETRENCHMENT OF EMPLOYEES SEVERANCE COST IS TO BE A LLOWED . IN OTHER WORDS IF AN ASSESSEE HAS CLOSED DOWN ONE UNIT OUT O F MANY UNITS AND INCURRED SEVERANCE COST ON ACCOUNT OF TERMINATION O F SERVICES OF ITA NOS. 2422/DEL/2007,2168,2735/DEL/2009 ASST T. YEAR 2003-04 8 EMPLOYEES THEN SUCH EXPENSE WOULD BE ALLOWABLE TO T HE ASSESSEE. THE MAIN EMPHASIS OF THE ASSESSEE IS THAT IT HAS NOT CL OSED DOWN THE BUSINESS ACTIVITY. IT HAS SUSPENDED ONE OF THE ACTI VITY I.E. MANUFACTURING OF POWDERED SOFT DRINK. IT WAS NOT ONLY ENGAGED IN THE MANUFACTURING OF POWDERED SOFT DRINKS RATHER IT WAS TRADING ALSO IN THIS SOFT DRINK. THE TRADING ACTIVITY HAS BEEN RETAINED BY THE ASSESSEE AND IT HAS PURSUED IT IN THE SUBSEQUENT ASSTT. YEAR. LD. COUNSEL FOR THE ASSESSEE AT THE TIME OF HEARING BROUGHT TO OUR NOTICE THAT TURN OVER O F THE ASSESSEE IN ASSTT. YEAR 2005-06 BECOME NIL BUT IN ASSTT. YEAR 2006-07 IT IS AGAIN RS. 3,02,15,240/- WHICH INCREASED TO RS. 15,06,25,852/- IN ASSTT. YEAR 2007- 08. ACCORDING TO THE ASSESSEE IT INDICATE THAT IT W AS JUST SUSPENSION OF ONE ACTIVITY. ONE HAS TO BEAR IT MIND THAT BUSINESS CANNOT BE CONSTRUED TO MEAN ANY SINGLE ACTIVITY. RATHER IT DENOTES A CO NTINUITY OF TRANSACTION WHICH CAN BE GENERAL NATURE. THE EXPRESSION BUSINE SS HAS FALLEN FOR CONSIDERATION BEFORE HONBLE HIGH COURT AS WELL AS HONBLE SUPREME COURT ON DIFFERENT OCCASION. THE HONBLE SUPREME CO URT IN THE CASE OF NARAYAN SWADESH VS. CIT 26 ITR 765 HAS OBSERVE TH AT BUSINESS CONNOTES SOME REAL SUBSTANTIAL SYSTEMIC AND ORGANI ZED COURSE OF ACTIVITY OR A CONDUCT WITH A SET PURPOSE. IN THE L IGHT OF RATIO LAID DOWN IN THE JUDGMENTS RELIED UPON BY THE ASSESSEE DURING TH E COURSE OF HEARING ITA NOS. 2422/DEL/2007,2168,2735/DEL/2009 ASST T. YEAR 2003-04 9 IT EMERGES OUT THAT IF ASSESSEE IS DOING BUSINESS O F MANUFACTURING AND TRADING AND HE CLOSES ONE OF ITS ACTIVITY THAT WOUL D NOT AMOUNT TO CLOSURE OF THE TOTAL BUSINESS. IN THE PRESENT CASE, ASSESSE E HAS NOT CLOSED DOWN ITS TRADING ACTIVITY AND THEREFORE IT IS NOT THE CA SE OF CLOSURE OF THE BUSINESS. THE EXPENSES INCURRED BY THE ASSESSEE TOW ARDS SEVERANCE COST IS AN ALLOWABLE NATURE AND ACCORDINGLY WE ALLO W THIS GROUND OF APPEAL AND DELETE THE DISALLOWANCE. 7. IN THE NEXT GROUND OF APPEAL IT IS PLEADED BY TH E ASSESSEE THAT LD. CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 9,77,025/- AND RS. 14,75,191/- INCURRED BY THE ASSESSEE ON MARKET RESEARCH STUDY. 8. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE HA S DEBITED A SUM OF RS. 29,14,242/- TOWARDS MARKET RESEARCH EXPENSES. T HE LD. AO HAS INVITED THE EXPLANATION OF ASSESSEE TO SHOW CAUSE A S TO WHY THESE EXPENSES SHOULD NOT BE TREATED AS CAPITAL EXPENSES. IN RESPONSE TO THE QUERY OF AO IT WAS CONTENDED THAT ASSESSEE HAS STAR TED COMMERCIAL PRODUCTION OF SOFT DRINK TANG FOR THE FIRST TIME ON 6 TH DECEMBER, 2001. IT WAS SUPPOSED TO KEEP A TRACK ON THE COMMERCIAL V IABILITY OF THE PRODUCT; THEREFORE, IT HAS TO INCUR EXPENSES ON MAR KET RESEARCH. ACCORDING TO THE ASSESSEE THESE EXPENSES ARE OF REV ENUE IN NATURE. LD. AO HAS ALLOWED THE CLAIM BY OBSERVING AS UNDER :- ITA NOS. 2422/DEL/2007,2168,2735/DEL/2009 ASST T. YEAR 2003-04 10 A. THE MARKET RESEARCH EXPENSES HAVE BEEN SPECIFICA LLY INCURRED FOR DEVELOPING AND DESIGNING A NEW PRODUCT FOR THE FIRST TIME. THUS, THIS IS CAPITAL IN NATURE GIVING RISE TO ENDURING BENEFIT TO THE ASSESSEE. B. THESE EXPENSES ARE ONE TIME EXPENDITURE INCURRED IN DEVELOPING AND PERFECTING A NEW PRODUCT AND THE BEN EFITS ARISING OUT OF IT WILL BE ENJOYED OVER A LONG PERIO D OF TIME. C. IN HYLAM LTD. VS. (1973) 87 ITR 310 (AP), THE HO NBLE HIGH COURT OF ANDHRA PRADESH DECREED THAT IF THE EXPENDI TURE IS FOR THE INITIAL OUTLAY OR FOR ACQUIRING OR BRINGING INTO EXISTENCE AN ASSET OR ADVANTAGE OF AN ENDURING BENEFIT TO THE BUSINESS THAT IS BEING CARRIED ON, THE EXPENDITURE WOULD BE CAPITAL IN NATURE. D. ALTERNATIVELY, EVEN IF THE EXPENDITURE IS CONSID ERED AS REVENUE EXPENDITURE, ALLOWING THE ENTIRE EXPENDITUR E IN ONE YEAR MIGHT GIVE A VERY DISTORTED PICTURE OF THE PRO FITS OF A PARTICULAR YEAR-VIDE MADRAS INDUSTRIAL INVESTMENT CORPORATION LIMITED VS. CIT (1997) 225 ITR 802 (SC) . 9. DISSATISFIED WITH THE ACTION OF AO ASSESSES CARR IED THE DISPUTE IN APPEAL BEFORE THE LD. CIT(A). IT HAS FILED THE BREA K UP OF THE EXPENSES. THESE EXPENSES WERE INCURRED UNDER SEVEN HEADS NAME LY FREIGHT CHARGES, LABELING, ARTWORK FOR PACKING MATERIAL ETC . LD. CIT(A) HAS ALLOWED THE EXPENSES INCURRED BY THE ASSESSEE UNDER ALL OTHER HEADS EXCEPT FOR MARKET STUDY EXPENSES AND PRODUCT DEVELO PMENT CHARGES. UNDER THESE TWO HEADS ASSESSEE HAS DEBITED A SUM OF RS. 9,77,325/-, RS. 14,75,191/- RESPECTIVELY. ITA NOS. 2422/DEL/2007,2168,2735/DEL/2009 ASST T. YEAR 2003-04 11 10. LD. COUNSEL FOR THE ASSESSEE WHILE IMPUGNING TH E ORDER OF LD. CIT(A) CONTENDED THAT DURING THE YEAR ASSESSEE COMP ANY HAS INCURRED VARIOUS EXPENSES ON ACCOUNT OF MARKET STUDY, PRODUC T DEVELOPMENT. THE EXPENSES HAVE BEEN INCURRED TO KNOW THE MARKET SHARE OF ITS SOFT DRINK. THE EXPENSES INCURRED FOR TESTING THE SOFT D RINK EDIBLE GRADE ETC. ON THE STRENGTH OF HONBLE SUPREME COURT DECISION I N THE CASE OF EMPIRE JUTE 124 ITR 1 AND IN THE CASE OF CIT VS. AN ANDA BAZAR PATRIKA 184 ITR 542 (CALCUTTA HIGH COURT), CIT VS. JK CHEM ICALS 207 ITR 915 (BOMBAY HIGH COURT). HE CONTENDED THAT EXPENSES WER E INCURRED BY THE ASSESSEE IN ORDER TO DETERMINE THE TRADE OF TANGS BRAND PERFORMANCE WITH PRICE, TO GAUGE THE CONSUMER DEMAND OF ITS BRA ND AT THE CURRENT PRICE OR A LOWER PRICE OR TO UNDERSTAND WHETHER TAN G CAN ADOPT A DIFFERENT PRICING BETWEEN THE BASE FLAVOURS AND THE NEW FLAVOURS. THE ASSESSEE HAD AVAILED THE SERVICES OF VARIOUS OUTSID E PROFESSIONAL AGENCIES IN ORDER TO OBTAIN SUCH REPORTS. IT HAS NO T ACQUIRED ANY NEW PRODUCT HAVING ENDURING NATURE WITH THE HELP OF THE SE MARKET STUDIES. THE ASSESSEE TOOK THE SERVICES OF AC NIELSON A LEAD ING PROFESSIONAL AGENCY AND THE REPORT ON PRICING AVAILABLE ON 173 P AGE OF THE PAPER BOOK. LD. COUNSEL FOR THE ASSESSEE FURTHER RELIED U PON THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF GUJARAT S MALL SCALE INDUSTRIES ITA NOS. 2422/DEL/2007,2168,2735/DEL/2009 ASST T. YEAR 2003-04 12 CORPORATE LTD. VS. CIT REPORTED IN 142 ITR 35. LD . DR ON THE OTHER HAND RELIED UPON THE ORDER OF LD. CIT(A). 11. WE HAVE DULY CONSIDERED THE RIVAL CONTENTION AN D GONE THOUGH THE RECORD CAREFULLY. THE REASONS ASSIGNED BY THE AO FO R CAPITALISING THE MARKET RESEARCH EXPENSES INCURRED BY THE ASSESSEE H AVE BEEN EXTRACTED BY US IN THE FOREGOING PARAGRAPH. IN BRIE F THE CASE OF AO IS THAT ASSESSEE HAS INCURRED THE EXPENSES FOR DEVELOP ING AND DESIGNING A NEW PRODUCT FOR THE FIRST TIME. THUS IT IS A CAPITA L IN NATURE. HIS SECOND REASON IS THAT BENEFIT ACCRUING TO THE ASSESSEE ON ACCOUNT OF INCURRENCE OF SUCH EXPENSES WOULD BRING A NEW PRODUCT WHICH IT WILL EMPLOY OVER THE LONG PERIOD OF TIME. IN OTHER WORDS AO IS OF TH E OPINION THAT THE BENEFIT BY VIRTUE OF INCURRENCE OF SUCH EXPENSES IS OF ENDURING NATURE. THEREFORE, THESE ARE TO BE TREATED AS CAPITAL EXPEN SES. THE ASSESSEE HAS PLACED ON RECORD THE REPORT ON PRICING FOR PRO DUCTS AND THE REPORT OF ADVERTISEMENT DIAGNOSTICS. THESE MATERIALS HAVE BEE N PLACED ON PAGES NUMBER 173 - 194 AND 195 TO 270 IN ANNEXURES 18 19. ANNEXURE 18 IS A REPORT WHICH WAS PREPARED BY AC NIELSEN FOR THE A SSESSEE IN AUGUST 2002. THE OBJECTS FOR OBTAINING THIS REPORT WERE THREE IN NATURE NAMELY THE RESEARCHER WAS REQUIRED TO DETERMINE THE TRADE OF TANGS BRAND PERFORMANCE WITH PRICE. 2. GAUGE THE CONSUME R DEMAND OF TANG ITA NOS. 2422/DEL/2007,2168,2735/DEL/2009 ASST T. YEAR 2003-04 13 AT THE CURRENT PRICE VS A LOW PRICE 3. IF TANG CAN ADOPT A DIFFERENTIAL PRICING BETWEEN THE BASE FLAVOURS AND THE NEW FLAVO URS. AC NIELSEN HAS SUBMITTED A COMPREHENSIVE REPORT. SIMILARLY AC NIELSEN HAS SUBMITTED A REPORT ON ADVERTISING DIAGNOSTICS. THE REPORT DEPICTS THE COMPARATIVE STUDY OF DIFFERENT SOFT DRINKS I.E. TRO PICANA, REAL, RASNA, TANG ETC. IF THE ADVERTISEMENT WAS MADE WITH DIFFER ENT MODES I.E ONE PROMOTED WITH PICTURES ONE PROMOTED WITH STILLS ETC . IT IS A REPORT OF EXPERT ABOUT MARKETING AND GUIDANCE FOR ANY ASSESSE E TO MARKET ITS CONSUMER ITEMS. AFTER GOING THROUGH THESE TWO REPO RTS WITH THE ASSISTANCE OF LD. REPRESENTATIVE, WE FAIL TO UNDERS TAND WHICH NEW PRODUCT HAS BEEN DEVELOPED AND DESIGNED BY THE ASSE SSEE. THE ENDEAVOUR OF THE ASSESSEE IS TO UPGRADE SALE OF ITS TANG BRAND OF SOFT DRINK WITH THE HELP OF MARKET SURVEY EXHIBITING THE INTEREST OF THE CONSUMERS ETC. IN THE CASE OF ANANDA BAZAR PATRIKA HONBLE CALCUTTA HIGH COURT HAS OBSERVED THAT ANY MARKET SURVEY GIVE S AN ASSESSEE A BETTER KNOWLEDGE OF THE MARKET AND THE ASSESSEE MAY EMPLOY PROFIT MAKING APPARATUS TO A BETTER ADVANTAGE WITH THE KN OWLEDGE DERIVED FROM THE MARKET SURVEY. THE MARKET IS CONSISTENTLY CHANGING. THE PERSONS WHO READ A NEWSPAPER IN A PARTICULAR YEAR M AY CEASE TO READ IT IN THE VERY NEXT YEAR. THUS ACCORDING TO THE HONBL E HIGH COURT THE ITA NOS. 2422/DEL/2007,2168,2735/DEL/2009 ASST T. YEAR 2003-04 14 MARKET SURVEY GIVES INFORMATION ABOUT CIRCULATION O F THE NEWSPAPER AT A GIVEN POINT OF TIME AND IT IS NOT NECESSARY THAT RE ADERSHIP WILL REMAIN CONSTANT OVER A LARGE NUMBER OF YEARS. HONBLE HIGH COURT HAS OBSERVED THAT DEPARTMENT IS UNABLE TO SHOW HOW THE ASSESSEE WILL DERIVE ANY ENDURING BENEFIT FROM THE MARKET SURVEY. THE EXPEND ITURE INCURRED WAS INCIDENTAL TO THE CARRYING ON OF THE BUSINESS. THE EXPENSES INCURRED MARKET SURVEY WAS ALLOWED TO ASSESSEE AS A REVENUE EXPENDITURE. SIMILARLY THE HONBLE BOMBAY HIGH COURT HAS CONSID ERED THIS ASPECT IN THE CASE OF CIT VS. J K CHEMICALS LIMITED 207 ITR 9 85. THE ASSESSEE IN THAT CASE WAS CARRYING ON THE BUSINESS OF MANUFA CTURING FERTILIZERS, A MARKET SURVEY RELATING TO THE DEMAND FOR FERTILISER S INCLUDING SINGLE SUPER PHOSPHATE WHICH THE ASSESSEE WAS ALREADY MANUFACTUR ING AND TRIPLE SUPER PHOSPHATE WHICH WAS PROPOSED TO BE MANUFACTUR ED WAS CARRIED OUT. THE HONBLE COURT TOOK A VIEW THAT SUCH EXPENS ES WERE INCURRED BY THE ASSESSEE ON MARKET SURVEY ARE TO BE LOOKED WITH AN ANGLE THAT SUCH EXPENSES WOULD ENABLE THE ASSESSEE TO CONDUCT ITS E XISTING BUSINESS MORE EFFICIENTLY. FROM PERUSAL OF THE NATURE OF EXP ENSES AND THE NATURE OF ASSESSEE BUSINESS WE ARE OF THE OPINION THAT EXP ENSES WERE NOT INCURRED FOR EXPLORING THE MARKET OF A NEW PRODUCT RATHER EXPENSES WERE INCURRED FOR EXPLORING THE CIRCUMSTANCES AS TO HOW ASSESSEE CAN CARRY ITA NOS. 2422/DEL/2007,2168,2735/DEL/2009 ASST T. YEAR 2003-04 15 OUT ITS BUSINESS MORE POTENTIALLY WITH DIFFERENT FL AVOURS. THEREFORE, WE ALLOW THE GROUND OF APPEAL RAISED BY THE ASSESSEE A ND DELETE THE DISALLOWANCE. 12. IN THE NEXT GROUND OF APPEAL GRIEVANCE OF THE A SSESSEE IS THAT LD. CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF CARRY FORWARD OF BUSINESS LOSSES AND UNABSORBED DEPRECIATION AMOUNTI NG TO RS. 34,87,18,783/-. THE LD. AO HAS DISALLOWED THE CLAIM OF ASSESSEE BY OBSERVING AS UNDER :- AS IS EVIDENT FROM THE AUDIT REPORT, THE ASSESSEE H AS CEASED ITS BUSINESS OPERATIONS IN THE F.Y. UNDER CONSIDERATION . PROVISIONS OF SECTION 32(2) ARE SUBJECT TO THE PROV ISIONS OF SECTION 72(2) AND 73(3) AND THESE SECTIONS MANDATE THAT THE BUSINESS MUST BE IN EXISTENCE FOR ALLOWABILITY OF THESE UNAB SORBED DEPRECIATION / LOSSES. WHEN THE BUSINESS IS NO MORE IN EXISTENCE, THE QUES TION OF CARRY FORWARD OF UNABSORBED DEPRECIATION AND LOSS DOES NO T ARISE AT ALL. THERE MUST NOT BE A CHANGE IN THE ASSESSEE SUFFERIN G THE CARRIED FORWARD LOSS AND CLAIMING ITS SET OFF. CONTINUITY OF THE BUSINESS IS A SINE QUA NON FOR CL AIMING THE CARRY FORWARD AND SET OFF OF LOSS AND DEPRECIATION. THE LOSSES AND DEPRECIATION NOT ABSORBED IN THE C URRENT YEAR ARE RESULTS OF THE CARRYING OUT OF MANUFACTURING OF SO FT DRINKS BY THE ASSESSEE. BUT THIS VERY BUSINESS, HAS BEEN CEASED BY THE ASSESSEE, HENCE THE QUESTION OFF CARRY FORWARD AND SET OFF DOES NOT ARISE AT ALL AS THE BUSINESS IT SELF HAS CLOSE D DOWN. ITA NOS. 2422/DEL/2007,2168,2735/DEL/2009 ASST T. YEAR 2003-04 16 THE ASSESSEE HAS ALSO TAKEN A DECISION IN ITS BOARD MEETING TO SELL THE BUSINESS AND ASSETS. THE VERY FOUNDATION O F THE LOSS AND DEPRECIATION IS THE BUSINESS AND THE BUSINESS ASSET S. BY THE COMPLETE ANNIHILATION OF BOTH THESE THINGS, THE ASS ESSEE HAS FORFEITED ITS RIGHT TO CARRY FORWARD THE SAME. THE AUDITORS HAVE QUALIFIED THAT THE FINANCIAL STAT EMENTS HAVE BEEN PREPARED NOT ON A GOING CONCERN BASIS. NO INTERNAL AUDITOR WAS APPOINTED DURING THE YEAR A S THE COMPANY HAD TAKEN A DECISION TO CLOSE DOWN THE COMPANYS OP ERATIONS. THE COMPANY HAS ALSO TERMINATED ITS DISTRIBUTION AG REEMENT ENTERED TO WITH DABUR INDIA LTD. CONSEQUENT TO THE DECISION TO SELL THE BUSINESS AND ASSETS. THE COMPANY HAS ALSO INTIMATED THE SALES TAX, GOVER NMENT OF ANDHRA PRADESH OF ITS DECISION TO SELL THE BUSINESS AND ASSETS. 13. THE APPEAL TO THE LD. CIT(A) DID NOT BRING TO A NY RELIEF TO THE ASSESSEE. 14. ASSESSEE HAS PLEADED BEFORE US THAT NO OPPORTUN ITY WAS PROVIDED BY THE AO WHILE MAKING THE DISALLOWANCE. LD. COUNSE L HAS FURTHER CONTENDED THAT AO HAS DISALLOWED TO CARRY FORWARD T HE LOSSES ON THE GROUND THAT ASSESSEE HAS DISCONTINUED ITS BUSINESS DURING THE YEAR. THE AO FAILED TO APPRECIATE THAT ASSESSEE HAS NOT DISCO NTINUED ITS BUSINESS. IT HAS ONLY SUSPENDED THE MANUFACTURING ACTIVITY DU RING THE YEAR. HE FURTHER CONTENDED THAT AS FAR AS DISALLOWANCE OF DE PRECIATION IS CONCERNED THERE IS NO CONDITION THAT SAME BUSINESS SHOULD CONTINUE. ITA NOS. 2422/DEL/2007,2168,2735/DEL/2009 ASST T. YEAR 2003-04 17 ASSESSEE IS ENGAGED IN THE TRADING OF TANG POWDER A ND THEREFORE THE DEPRECIATION OUGHT TO HAVE BEEN ALLOWED. HE ALSO EM PHASISED THAT CONTINUATION OF BUSINESS IS NOT A SINE QUA NON FOR ELIGIBILITY OF CARRY FORWARD AND SET OFF OF UNABSORBED DEPRECIATION. ACC ORDING TO THE LD. COUNSEL FOR THE ASSESSEE IF AN ASSESSEE HAD DISCONT INUED ONE BUSINESS TO CARRY ON ANOTHER, THE UNABSORBED DEPRECIATION OF PAST YEAR PERTAINING TO THE DISCONTINUED BUSINESS CAN BE CARRIED FORWARD AND SET OFF AGAINST THE PROFIT OF THE BUSINESS WHICH IS OPERATIONAL. HE RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CI T VS. VIRMANI INDUSTRIES 216 ITR 607. HE ALSO RELIED UPON THE ORD ER OF LD. CIT IN THE CASE OF SWATI SYNTHETICS LTD. VS. ITO IN ITA NO. 1165/MUMBAI/ 2006. HE PLACED ON RECORD COPY OF THE TRIBUNALS ORDER. I N THAT CASE THE ASSESSEE HAD TWO DIVISIONS ONE AT DOMBIWELI AND TH E OTHER DIVISION AT SURAT. THE DIVISION AT SURAT WAS CLOSED. SINCE TWO THREE YEARS. THE ASSESSEE CLAIMED DEPRECIATION ON THE ASSET ON SURAT DIVISION WHICH WAS REJECTED BY THE AO AND VIEW OF THE AO WAS UPHELD BY THE LD. CIT(A). IT WAS DISALLOWED BY THE AO ON THE GROUND THAT EXPRESS ION USED IS EMPLOYED IN SECTION 32 AND ASSESSEE HAS NOT USED TH E ASSET FOR BUSINESS PURPOSE. THEREFORE DEPRECIATION IS NOT ADM ISSIBLE. LD. COUNSEL POINTED OUT THAT DEPRECIATION WAS ALLOWED TO THE AS SESSEE ON THE GROUND ITA NOS. 2422/DEL/2007,2168,2735/DEL/2009 ASST T. YEAR 2003-04 18 THAT ASSET AT SURAT WAS PERFORMING THE PART OF THE BLOCK ASSET AND THE DEPRECIATION WAS TO BE CONSIDERED ON THE BLOCK OF A SSETS OF COMMON BUSINESS HAVING DIFFERENT DIVISIONS. WITH REGARD TO BROUGHT FORWARD LOSSES HE CONTENDED THAT PRIOR TO FIRST APRIL 2001 THERE WAS A PROVISO WITH SECTION 72 (1)(I) OF THE ACT WHICH CONTEMPLATES THA T CARRY FORWARD AND SET OFF OF BUSINESS LOSSES SHALL BE AVAILABLE TO AN ASS ESSEE IF ONLY THE BUSINESS IN WHICH THE LOSSES WERE INCURRED IS CONTI NUED BY THE ASSESSEE. HOWEVER THIS PROVISION HAS BEEN DELETED B Y THE FINANCE ACT 1999 W.E.F. 1 ST APRIL, 2000. LD. COUNSEL FOR THE ASSESSEE TOOK US THROUGH BOTH THE PROVISIONS. HE FURTHER SUBMITTED THAT TRIB UNAL IN THE CASE OF EFUNDS INTERNATIONAL (P) LTD. VS. DCIT REPORTED IN 310 ITR 54 HAS CONSIDERED THIS ASPECT AND HELD THAT ASSESSEE IS EN TITLED TO CARRY FORWARD ITS BUSINESS LOSSES TO THE SUBSEQUENT YEAR AND THAT THE FURTHER REQUIREMENT OF THE BUSINESS IN WHICH LOSS HAS BEEN SUFFERED MUST ALSO BE CONTINUED TO BE CARRY FORWARD HAS BEEN DELETED. LD. DR ON THE OTHER HAND RELIED UPON THE ORDER OF AO. 15. WE HAVE DULY CONSIDERED THE RIVAL CONTENTION AN D GONE THROUGH THE RECORD CAREFULLY. THE AO HAS NOT CONFRONTED THI S ISSUE TO THE ASSESSEE DURING THE ASSTT. PROCEEDING AND THEREFORE ASSESSEE COULD NOT BRING THE ARGUMENTS RAISED BEFORE US TO THE NOTICE OF THE AO. THE MAIN ITA NOS. 2422/DEL/2007,2168,2735/DEL/2009 ASST T. YEAR 2003-04 19 EMPHASIS OF THE AO IS THAT ASSESSEE HAS CEASED ITS BUSINESS OPERATION IN THE YEAR UNDER CONSIDERATION, THEREFORE, HE REFU SED TO PERMIT THE ASSESSEE TO CARRY FORWARD UNABSORBED DEPRECIATION A ND LOSSES. WHILE DEALING WITH GROUND NO. 1, WE HAVE HELD THAT ASSES SEE HAS TEMPORARILY SUSPENDED THE MANUFACTURING ACTIVITY WHO HAS NOT CL OSED DOWN ITS BUSINESS. CONSIDERING ALL THESE ASPECTS WE DEEM IT APPROPRIATE TO SET ASIDE THIS ISSUE TO FILE OF AO FOR READJUDICATION B ECAUSE THE AO HAS NOT GRANTED PROPER OPPORTUNITY OF HEARING TO THE ASSESS EE. IT COULD NOT BRING THE FACTUAL DETAILS TO THE NOTICE OF AO WITH REGARD TO BLOCK OF ASSETS. THE AMENDMENT IN SECTION 72 (1)(I) WHEREBY IT HAS BEEN DELETED THAT IN ORDER TO CLAIM CARRY FORWARD THE BUSINESS LOSS, IT IS NOT NECESSARY FOR THE ASSESSEE TO CONTINUE THE SAME FORM OF BUSINESS. ALL THESE ISSUES ARE REQUIRED TO BE LOOKED INTO BEFORE ADJUDICATING THIS ISSUE. THE LD. AO SHALL READJUDICATE THIS ISSUE AFTER PROVIDING DUE O PPORTUNITY OF HEARING TO THE ASSESSEE. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 16. AS FAR AS PENALTY APPEALS ARE CONCERNED WE FIND THAT AO HAS LEVIED PENALTY U/S 271(1)(C) ON TWO ITEMS I.E. ON A DDITION OF RS. 93,91,706/- WHICH HAS BEEN ADDED BY TREATING THE AB OVE EXPENSES AS CAPITAL IN NATURE AND THE EXPENSES OF RS. 29,14,242 /-. THESE EXPENSES ITA NOS. 2422/DEL/2007,2168,2735/DEL/2009 ASST T. YEAR 2003-04 20 WERE CLAIMED BY THE ASSESSEE TOWARDS MARKET RESEARC H EXPENSES. AO HAS TREATED THESE EXPENSES AS CAPITAL IN NATURE. ON APPEAL LD. CIT(A) CONFIRMED THE PENALTY QUA ADDITION OF RS. 93,91,706 /- AND DELETED THE PENALTY QUA DISALLOWANCE OF MARKETING RESEARCH EXPE NSES. WHILE DISPOSING OFF THE QUANTUM APPEAL OF THE ASSESSEE WE HAVE DELETED BOTH THESE ADDITIONS. THEREFORE, NO PENALTY IS SUSTAINAB LE, IN VIEW OF OUR ORDER IN THE QUANTUM APPEAL. CONSEQUENTLY THE APPEAL OF T HE ASSESSEE IS ALLOWED AND THAT OF REVENUE IS DISMISSED. WE SUMMAR IZE THE RESULT AS UNDER :- 1. ITA NO. 2422/DEL/2007 IS ALLOWED FOR STATISTICA L PURPOSES 2. ITA NO. 2168/DEL/2009, THE APPEAL OF THE ASSESSE E IS ALLOWED 3. ITA NO. 2735/DEL/2009, THE APPEAL OF THE RE VENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 30.7.2010. SD/- [G.E. VEERABHADRAPPA] [RAJPAL YADAV] VICE PRESIDENT JUDICIAL MEMBER DATED: 30.7.2010 VEENA ITA NOS. 2422/DEL/2007,2168,2735/DEL/2009 ASST T. YEAR 2003-04 21 COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, DEPUTY REGISTRAR, ITAT