DCIT, New Delhi V. M/s S Chand & Co. Ltd., New Delhi

ITA 2815/DEL/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4076 (ITAT-DELHI)
• Duration Of Justice: 11 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-05-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 22-03-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 07-06-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KISHORE B
• Keywords: Capital asset; Earning of tax free income; Retrospective amendment; Revenue expenditure; Capital expenditure
• Section: 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH G DELHI) BEFORE SHRI A.D. JAIN AND SHRI SHAMIM YAHYA ITA NO. 2815(DEL)2010 ASSESSMENT YEAR:2006-07 DY.COMMISSIONER OF INCOME TAX, M/S. S. CHAN D & CO. LTD., CIRCLE 7(1), NEW DELHI. V. 7361, RAVINDRA MANSION, RAM NAGAR, NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI KISHORE B. DR RESPONDENT BY: SHRI V.K. BINDAL, CA& SMT.SWEE TY KOTHARI, CA ORDER PER A.D. JAIN, J.M . THIS IS DEPARTMENTS APPEAL FOR THE ASSESSMENT YEAR 2006-07, TAKING THE FOLLOWING GROUNDS:- 1. LD. COMMISSIONER OF INCOME TAX(APPEALS)ERRED, I N LAW AND ON FACTS AND CIRCUMSTANCES OF THE CASE, IN DELETING TH E ADDITION OF ` 13,26,743/- MADE BY THE AO ON ACCOUNT OF ADVERTISEM ENT AND PUBLICITY EXPENSES. 2. LD. CIT(A) ERRED, IN LAW AND ON FACTS AND CIRCUM STANCES OF THE CASE, IN RESTRICTING THE DISALLOWANCE U/S 14A OF TH E I.T. ACT TO ` ` 1,00,000/- AS AGAINST ` 16,88,896/- MADE BY THE AO. 3. LD. CIT(A) ERRED, IN LAW AND ON THE FACTS AND CI RCUMSTANCES OF THE CASE, IN DELETING THE ADDITION OF ` 13,10,143/- MADE BY THE AO ON ACCOUNT OF UNDER VALUATION OF CLOSING STOCK. ITA 2815(DEL)2010 2 4. LD. CIT(A) ERRED, IN LAW AND ON THE FACTS AND CI RCUMSTANCES OF THE CASE, IN DIRECTING THE AO THAT THE VALUE OF CLOSING STOCK AS ON 31.3.2005 SHOULD BE THE VALUE OF OPENING STOCK AS O N 1.4.2005. 5. LD. CIT(A) ERRED, IN LAW AND ON THE FACTS AND CI RCUMSTANCES OF THE CASE, IN HOLDING THAT THE OPENING STOCK AS ON 1.4.2 006 SHOULD BE CONSIDERED AT ` 4,63,66,750/- INSTEAD OF ` 4,50,56,607/- AS DECLARED BY THE ASSESSEE. 2. AS PER GROUND NO.1, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF ` 13,26,743/- , MADE ON ACCOUNT OF ADVERTISEMENT AND PUBLICITY EXPENSES. 3. THE AO OBSERVED THAT A PERUSAL OF THE ASSESSEES PROFIT AND LOSS ACCOUNT SHOWED THAT THE ASSESSEE HAD SHOWN ADVERTIS EMENT AND PUBLICITY AND EXHIBITION CHARGES OF ` 71,62,268/-. THE AO WAS OF THE VIEW THAT ADVERTISEMENT AND PUBLICITY EXPENSES WERE NOT TO BE CAPITALIZED, AS THEY HAD GIVEN THE ASSESSEE BENEFIT FOR MORE THAN ONE YEAR A ND WERE ENDURING IN NATURE. ON QUERY IN THIS REGARD, THE ASSESSEE FIL ED SUBMISSIONS ONLY WITH REGARD TO ADVERTISEMENT EXPENSES. AS PER THE AO N O CONCRETE EVIDENCE WITH REGARD TO THE QUERY AS TO WHY THEY BE TREATED AS CA PITAL IN NATURE, ONLY THE LIST OF EXPENDITURE INCURRED ON ADVERTISEMENT AS ON 31.3 .06, WAS FILED. AS PER THIS LIST, ` 26,91,722/- HAD BEEN PAID TO M/S. GRAPHISADS PVT. LTD., ON ACCOUNT OF ADVERTISEMENT IN NEWS PAPERS FOR BOOKS PUBLICITY , NEW APPOINTMENT ETC., ` 1,30,000/- WAS PAID TO M/S. C.M. PUBLICATION ON ACC OUNT OF ADVERTISEMENT IN ITA 2815(DEL)2010 3 MAGAZINE FOR BOOKS, ` 81,000/- WAS PAID TO ICFAI FOR ADVERTISEMENT IN MAGAZINE FOR BOOKS AND ` 4,88,776/- WAS TAKEN UNDER THE HEAD OF OTHER MISC.EXPENSES, ON ACCOUNT OF ADVERTISEMENT FOR SALE S PROMOTION. THIS AMOUNTED TO A TOTAL OF ` 33,91,498/-. THE AO OBSERVED THAT THE ASSESSEE HAD NOT FILED ANY DETAILS WITH REGARD TO THE EXPENS ES CLAIMED UNDER THE HEAD OF PUBLICITY AND EXHIBITION; THAT AS PER THE FBT RE CONCILIATION PARA 2, I.E., DETAIL REGARDING CONFERENCE EXPENSES, THE EXPENSES ON ADVERTISEMENT, AS PER THE BALANCE SHEET, WERE OF ` 33,91,498/-, THOSE LIABLE TO FBT WERE OF ` 5,28,550/- AND THOSE NOT LIABLE TO FBT, BEING ADVER TISEMENT IN MEDIA, WERE OF ` 28,62,948/-; THAT THE PUBLICITY EXPENSES, AS PER THE BALANCE SHEET WERE OF ` 2,37,843/-, NIL LIABLE TO FBT AND ` 2,37,843/- NOT LIABLE TO FBT; AND THAT EXHIBITION CONFERENCE EXPENSES, AS PER THE BALANCE SHEET WERE OF ` 35,32,928/-, NIL LIABLE TO FBT AND ` 35,32,928/- NOT LIABLE TO FBT. THUS, THE TOTAL CONFERENCE EXPENSES AS PER THE BALANCE SHEET AMOUNTED TO ` 71,62,268/- , THOSE LIABLE TO FBT AMOUNTED TO ` 5,28,550/- AND THOSE NOT LIABLE TO FBT AMOUNTED TO ` 66,33,718/-. THE AO WAS OF THE VIEW THAT THIS SH OWED THAT THE EXPENDITURE HAD BEEN INCURRED ON ADVERTISEMENT IN NEWSPAPER FOR BOOKS, NEW APPOINTMENTS, ETC., ADVERTISEMENT IN MAGAZINES FOR MANAGEMENT BOOKS, ADVERTISEMENT AND PUBLICITY FOR SALES PROMOTION, WH ICH WERE TO PROMOTE THE ITA 2815(DEL)2010 4 ASSESSEES BUSINESS; THAT THE BENEFIT OF PROMOTING THE ASSESSEES BUSINESS WAS A BENEFIT ENDURING IN NATURE, WHICH ACCRUED BEY OND THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR UNDER CONSIDERATION; TH AT IT IS SETTLED THAT WHEN AN EXPENDITURE IS MADE WITH A VIEW TO BRING INTO E XISTENCE AN ASSET OR ADVANTAGE FOR THE ENDURING BENEFIT OF THE BUSINESS , SUCH EXPENDITURE IS NOT REVENUE IN NATURE, BUT A CAPITAL EXPENDITURE; AND T HAT THE AO IS FREE TO MAKE ADJUSTMENT AND EXPENDITURE IS TO BE SPREAD OVER IN MANY YEARS, IF THE CLAIM IS OF A CAPITAL NATURE AND BRINGS AN ENDURING BENEF IT TO THE ASSESSEE. IN THIS MANNER, THE AO TREATED 1/5 TH OF THE EXPENDITURE, AMOUNTING TO ` 13,26,743/- AND ADDED IT BACK TO THE TOTAL INCOME OF THE ASSESS EE. 4. BY VIRTUE OF THE IMPUGNED ORDER, THE LD. CIT(A) DELETED THE ADDITION. WHILE DOING SO, IT WAS OBSERVED THAT THE ADVERTISEM ENT EXPENSES WERE INCURRED FOR BRINGING ADVERTISEMENT IN MAGAZINES, N EWSPAPER, ETC.; THAT AS PER THE ASSESSEE, THE EXPENDITURE ON EXHIBITIONS HA D BEEN INCURRED MAINLY FOR PARTICIPATING IN BOOK FAIRS AND EXHIBITIONS, LIKE NIGERIAN BOOK FAIR, SRI LANKAN BOOK FAIR, KARANCHI BOOK FAIRS, WORLD BOOK F AIR, FRANKFURT BOOK FAIR ETC.; THAT IT HAD ALSO BEEN SUBMITTED BY THE ASSESSEE THAT SOME AMOUNTS HAD BEEN CONTRIBUTED TO SCHOOL MAGAZINES, BY WAY OF ANNUAL SUBSCRIPTION TO FEDERATION OF PUBLISHERS ETC., CONFERENCE EXPENSES WERE INCURRED FOR HOLDING CONFERENCES OF THE MANAGERIAL STAFF FOR POLICY MAKI NG, SALES AGENTS AND WITH ITA 2815(DEL)2010 5 PROSPECTIVE CUSTOMERS ETC.; THAT THE AO HAD NOT POI NTED OUT ANY ITEM DEBITED UNDER THE HEAD ADVERTISEMENT AND PUBLICITY AS CAPIT AL IN NATURE; THAT THESE EXPENSES HAVE BEEN INCURRED BY THE ASSESSEE YEAR AF TER YEAR AND HAD BEEN ALLOWED IN THE PRECEDING YEARS; THAT IN GLAXO SMIT H KLINE CONSUMER HEALTHCARE LTD. V. ACIT, 112 TTJ (CHD)94, THE TRIB UNAL, FOLLOWING EMPIRE JUTE V. CIT, 124 ITR 1(SC), THE TRIBUNAL HAD HELD THAT THE BRAND PROMOTING EXPENSES MAY RESULT INTO AN ENDURING BENE FIT, YET THAT CANNOT BE TERMED AS A CAPITAL EXPENDITURE AND THAT THOSE ARE DEDUCTIBLE AS AND WHEN INCURRED; THAT IN SILICON GRAPHICS SYSTEMS (I)(P) LTD. V. DCIT [2007] 106 TTJ(DEL) 153, IT HAD BEEN HELD THAT ANY EXPENDITURE IS EITHER REVENUE EXPENDITURE OR REVENUE EXPENDITURE OR CAPITAL EXPEN DITURE, AND THAT EXPENDITURE INCURRED IN RELATION TO ADVERTISEMENT, PUBLICITY TRADESHOWS, ETC., DOES NOT BRING INTO EXISTENCE ANY CAPITAL ASSET AND , THEREFORE, LIABLE AS A REVENUE EXPENDITURE; THAT IN CIT V. BRILLIANT TUTO RIALS (P)LTD. [2007] 292 ITR 399(MAD), IT WAS HELD THAT THOUGH BENEFIT OF A DVERTISEMENT IS AVAILABLE IN FUTURE YEARS, THE EXPENDITURE IS DEDUCTIBLE AS R EVENUE EXPENDITURE; THAT FURTHER, THE DISALLOWANCE ON SIMILAR ISSUE HAD BEEN MADE IN THE ASSESSEES CASE, FOR ASSESSMENT YEARS 2004-05 AND 2005-06; THA T THE TRIBUNAL HAD, IN THOSE YEARS, DELETED THE ADDITION MADE TOWARDS ADVE RTISEMENT EXPENSES, HOLDING THE SAME AS REVENUE IN NATURE; THAT THERE W AS NO CHANGE IN THE NATURE ITA 2815(DEL)2010 6 OF EXPENDITURE FOR THE YEAR UNDER CONSIDERATION, AS COMPARE TO ASSESSMENT YEARS 2004-05 AND 2005-06; THAT THEREFORE, THE ISSU E STOOD COVERED BY THE DECISION OF THE TRIBUNAL IN THE ASSESSEE CASE FOR ASSESSMENT YEARS 2004-05 AND 2005-06. 5. THE LD. DR HAS CONTENDED THAT THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF ` 13,26,743/- MADE BY THE AO ON ACCOUNT OF ADVERTI SEMENT AND PUBLICITY EXPENSES, IGNORING THE FACT AS DISCUSSED IN THE ASSESSMENT ORDER, THAT THESE EXPENSES BROUGHT A BENEFIT OF ENDURING N ATURE TO THE ASSESSEE AND THAT BEING SO, THE AO WAS JUSTIFIED IN TREATING 1/5 TH OF THE EXPENDITURE AS CAPITAL EXPENDITURE AND ADDING THE AMOUNT OF ` 13,26,743/- TO THE TOTAL INCOME OF THE ASSESSEE. 6. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTH ER HAND, SUPPORTING THE IMPUGNED ORDER, HAS BROUGHT TO OUR NOTICE THE TRIBU NAL ORDER DATED 29.1.2010 (AUTHORED BY ONE OF US, THE HONBLE VICE PRESIDENT), IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEARS 2004-05 AN D 2005-06. A COPY THEREOF HAS BEEN PLACED AT PAGES 81 TO 93 OF THE AS SESSEES PAPER BOOK. ATTENTION HAS ALSO BEEN DRAWN TO THE TRIBUNAL ORDER DATED 1.12.2009, IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2005-06(COP Y AT APB PAGES 94 - 97) . ITA 2815(DEL)2010 7 7. THE LEARNED COUNSEL CONTENDS THAT THE ISSUE IS S QUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE SAID TRIBUNAL ORDERS AND THAT THE LD. CIT(A) HAS CORRECTLY FOLLOWED THE SAME IN DELETING THE ADDITI ON WRONGLY MADE. 8. HAVING HEARD THE PARTIES ON THIS ISSUE, WE ARE I N AGREEMENT WITH THE AVERMENT ON BEHALF OF THE ASSESSEE THAT THE MATTER STANDS COVERED IN ITS FAVOUR BY THE AFORESAID TRIBUNAL ORDERS. IN THE OR DER DATED 29.1.2010, THE TRIBUNAL HAS OBSERVED AS FOLLOWS:- 11. THE NEXT DISPUTE IN REVENUES APPEAL FOR A.Y. 2004-05 RELATES TO DISALLOWANCE OF 2/3 RD OF ADVERTISEMENT AND PUBLICITY EXPENSES. ACCORDING TO THE ASSESSING OFFICER, THE ASSESSEE HA D SISTER/ ASSOCIATE CONCERNS AND THE BENEFIT OF ADVERTISEMENT IS AVAILA BLE TO OTHER ASSOCIATE CONCERNS I.E. S. CHAND & CO. (FIRM); S. CHAND TECHNOLOGY (P) LTD.; S.CHAND INTERNATIONAL; S. CHAND PRINT MED IA ETC. AND THAT THE BENEFIT OF ADVERTISING IS AVAILABLE FOR MORE TH AN ONE YEAR. THE ASSESSING OFFICER HAD AMORTIZED THE EXPENSES ON ADV ERTISEMENT AND PUBLICITY OVER A PERIOD OF THREE YEARS AND DISALLOW ED 2/3 RD OF THE EXPENSES FOR THE ASSESSMENT YEAR UNDER CONSIDERATIO N. 12. THE LEARNED CIT(A) DELETED THE DISALLOWANCE ON THE GROUND THAT THESE EXPENSES WERE INCURRED YEAR TO YEAR AND SUCH EXPENSES WERE INCURRED FOR THE PURPOSE OF BUSINESS AND THERE WAS NO ELEMENT OF CAPITAL EXPENDITURE IN SUCH EXPENDITURE. ACCORDING TO THE CIT(A), THE ENTIRE EXPENSES ARE ADMISSIBLE AS DEDUCTION IN THE CURRENT YEAR. 13. THE REVENUE IS AGGRIEVED AND HAS STRONGLY RELI ED UPON THE FINDINGS OF THE ASSESSMENT ORDER. 14. THE LEARNED COUNSEL FOR THE ASSESSEE ON THE OTH ER HAND STRONGLY RELIED UPON THE DISCUSSION IN THE ORDER OF THE CIT( A) AND ALSO THE ORDER OF THE ITAT IN ASSESSEES OWN CASE FOR A.Y. 2 005-06. ITA 2815(DEL)2010 8 15. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTI ONS AND GONE THROUGH THE RECORDS. IN OUR VIEW THE ORDER OF THE C IT(A) DOES NOT REQUIRE ANY INTERFERENCE. THE EXPENDITURE INCURRED BY THE ASSESSEE IS IN THE REVENUE FIELD AND DOES NOT INVOLVE ACQUISIT ION OF ANY CAPITAL ASSET. THE EXPENDITURE, AS MENTIONED IN PARA 6.4 O F THE ORDER OF THE CIT(A), HAVE BEEN INCURRED PRIMARILY BY WAY OF ADVE RTISEMENT IN NEWSPAPERS FOR THE SALE OF BOOKS OF BOOKS PUBLISHED BY THE ASSESSEE AND PARTICIPATION IN BOOK FAIRS AND THE SMALL AMOUN TS CONTRIBUTED TO SOME SCHOOLS, CBSE, ANNUAL SUBSCRIPTION TO FEDERATI ON OF PUBLISHERS AND ADVERTISEMENT IN MAGAZINES. NONE OF THESE EXPEN SE COULD BE SAID TO HAVE RESULTED IN ACQUISITION OF ANY CAPITAL ASSE T. THE EXPENDITURE INCURRED IN DIFFERENT YEARS IS ALIKE. TO SAY THE AM OUNT OF EXPENDITURE INCURRED DURING THE YEAR UNDER CONSIDERATION IS JUS T 1.35% OF THE TURNOVER WHEREAS SIMILAR EXPENSES WERE ACCEPTED TO THE EXTENT OF 2.60% IN A.Y. 2002-03; AND 1.69% IN A.Y. 2003-04. I N THE LIGHT OF THIS, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) ON THE ISSUE IN QUESTION. 9. IN ITS ORDER DATED 1.12.09(SUPRA) , THE TRIBUNA L HAS OBSERVED AS FOLLOWS:- 2. THE FIRST ISSUE FOR CONSIDERATION RELATES TO DEL ETING THE DISALLOWANCE OF RS.8,60,931/- MADE BY THE AO ON ACC OUNT OF ADVERTISEMENT EXPENSES. THE FACTS OF THE CASE STAT ED IN BRIEF ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PUBLICAT ION OF BOOKS, DEALING IN SHARES, RUNNING HOTELS AND MAKING INVEST MENTS. THE AO NOTED THAT ASSESSEE HAD INCURRED EXPENDITURE OF RS. 55,79,389/- ON ADVERTISEMENT, PUBLICITY AND EXHIBITION CHARGES. TH E ASSESSEE ON A QUERY RAISED BY THE AO FILED THE DETAILS OF ADVERTI SEMENT AND PUBLICITY EXPENSES AND EXPLAINED THAT EXPENDITURE WAS REVENUE IN NATURE. THE AO WAS OF THE VIEW THAT THE EXPENDITURE INCURRED BY THE ASSESSEE ON ADVERTISEMENT WILL ALSO BENEFIT ASSOCIATE CONCERN O F THE ASSESSEE, NAMELY, S. CHAND PRINT MEDIA AND THE BENEFIT OF THE ADVERTISEMENT WILL ALSO GO ON TO MORE THAN ONE YEAR. THE AO WAS ALSO OF THE VIEW THAT EXPENDITURE INCURRED ON PROMOTING ITS BUSINESS WAS OF ENDURING IN NATURE AND, THEREFORE, THE EXPENDITURE WAS CAPIT AL IN NATURE. HE PLACED RELIANCE ON SEVERAL DECISIONS AND TREATED 1/ 5 TH OF THE EXPENDITURE AS CAPITAL IN NATURE WHICH RESULTED IN DISALLOWANCE OF RS.8,60,931/-. ITA 2815(DEL)2010 9 3. ON APPEAL, THE CIT(A) EXAMINED THE ISSUE IN DETA IL. HE OBSERVED THAT EXPENSES WERE PRIMARILY INCURRED ON A DVERTISEMENT IN NEWSPAPERS FOR THE SALE OF BOOKS PUBLISHED BY THE A SSESSEE, PARTICIPATION IN BOOK FAIRS, SMALL AMOUNTS CONTRIBU TED TO SOME SCHOOLS, CBSE ANNUAL SUBSCRIPTION TO FEDERATION OF PUBLISHERS AND ADVERTISEMENT IN MAGAZINES. THE AO HAD NOT POINTED OUT THAT ANY ITEM DEBITED UNDER ADVERTISEMENT AND PUBLICITY WAS OF CA PITAL EXPENDITURE. HE WAS OF THE VIEW THAT IF THE EXPENSES HAVE BEEN I NCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND THE EXP ENSES WERE NOT PERSONAL OR CAPITAL IN NATURE, THE SAME WAS TO BE A LLOWED AS DEDUCTION. IN THE CASE OF THE ASSESSEE, THE EXPENS ES WERE INCURRED FOR THE PURPOSE OF BUSINESS AND WERE NOT OF CAPITAL IN NATURE. THEREFORE, THE ENTIRE EXPENDITURE INCURRED ON ADVERTISEMENT WA S ALLOWABLE AS DEDUCTION. HE PLACED RELIANCE ON THE DECISION OF I TAT, DELHI BENCH G IN THE CASE OF SILICON GRAPHICS (I) PVT. LTD. V S. DCIT, 17 SOT 29 (DEL.) (URO). HE ACCORDINGLY DELETED THE ADDITION M ADE BY THE AO. ON THE OTHER HAND, LD.SR.DR SUPPORTED THE ORDER OF THE AO. 4. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. THE AO HAS DISALLOWED 1/5 TH OF THE EXPENDITURE INCURRED ON ADVERTISEMENT AND PUBLICITY ON THE GROU ND THAT IT MIGHT HAVE BENEFITED ANOTHER GROUP CONCERN OF THE ASSESSE E, NAMELY, S. CHAND PRINT MEDIA. THE AO HAS TREATED 1/5 TH OF THE EXPENDITURE INCURRED ON ADVERTISEMENT AS CAPITAL IN NATURE WITH OUT BRINGING ANY MATERIAL ON RECORD THAT EXPENDITURE IN NATURE OF CA PITAL WAS INCURRED BY THE ASSESSEE. THE CIT(A) WHILE ALLOWING THE REL IEF HAS EXAMINED THE MATTER IN DETAIL. HE HAS COME TO THE CONCLUSIO N THAT UNLESS THE EXPENDITURE INCURRED IS IN NATURE OF PERSONAL EXPEN DITURE OR CAPITAL IN NATURE, NO DISALLOWANCE U/S 37(1) OF THE ACT CAN BE MADE. THE AO HAS NOT BROUGHT ANY MATERIAL TO SUGGEST THAT THE EX PENDITURE INCURRED WAS CAPITAL IN NATURE. HE HAD MERELY PRESUMED THAT THE EXPENDITURE WAS TO THE BENEFIT OF THE ASSESSEE FOR MORE THAN ON E YEAR. SINCE, THE CIT(A) HAS DELETED THE ADDITION AFTER GOING THROUGH THE ENTIRE MATERIAL ON RECORD BY HOLDING THAT THE EXPENDITURE WAS REVENUE IN NATURE, IN OUR CONSIDERED OPINION, THE CIT(A) IS JU STIFIED IN ALLOWING THE CLAIM OF THE ASSESSEE THAT DISALLOWANCE OF 1/5 TH OF THE EXPENDITURE COULD NOT BE MADE AS CAPITAL EXPENDITURE. ACCORDING LY, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) DELETING T HE ADDITION. ITA 2815(DEL)2010 10 10. NOW, UNDISPUTEDLY, THE FACTS PRESENT FOR THE YE AR UNDER CONSIDERATION ARE NO DIFFERENT FROM THOSE WHICH WERE PRESENT BEF ORE THE TRIBUNAL IN THE ASSESSEES CASE FOR ASSESSMENT YEARS 2004-05 AND 20 05-06. FOR ASSTT.YEAR 2004-05, IT WAS HELD THAT THE EXPENDITURE HAD BEEN INCURRED PRIMARILY BY WAY OF ADVERTISEMENT IN NEWS PAPERS FOR THE SALE OF BOOKS PUBLISHED BY THE ASSESSEE AND IN PARTICIPATION IN BOOK FAIRS AND THE SMALL AMOUNTS CONTRIBUTED TO SOME SCHOOLS, CBSE, ANNUAL SUBSCRIPTION TO FEDER ATION OF PUBLISHERS, AND ADVERTISEMENT IN MAGAZINES; AND THAT NONE OF THESE EXPENSES COULD HAVE BEEN SAID TO HAVE RESULTED IN THE ACQUISITION OF A NY CAPITAL ASSET. FOR ASSESSMENT YEAR 2005-06, IT WAS HELD THAT THE AO HA D NOT BROUGHT ANY MATERIAL ON RECORD TO SUGGEST THAT THE EXPENSES INC URRED WERE CAPITAL IN NATURE OR THAT THE EXPENDITURE WAS PERSONAL IN NATU RE; THAT NO DISALLOWANCE COULD BE MADE U/S 37(1) OF THE ACT; THAT THE AO HAD MERELY PRESUMED THAT THE EXPENDITURE WAS TO THE BENEFIT OF THE ASSESSEE FOR MORE THAN ONE YEAR. 11. IN VIEW OF THE ABOVE, FINDING NO MERIT THEREIN, GROUND NO.1 RAISED BY THE DEPARTMENT IS REJECTED. 12. APROPOS GROUND NO.2, THE AO OBSERVED THAT THE A SSESSEE HAD CLAIMED DIVIDEND INCOME AMOUNTING TO ` 1,06,73,480/- AND HAD CLAIMED THE SAME AS EXEMPT ; THAT AS PER SECTION 14A OF THE I.T. ACT, F OR THE PURPOSE OF ITA 2815(DEL)2010 11 COMPUTING THE CAPITAL INCOME UNDER CHAPTER 4 TH OF THE I.T. ACT, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE INCOME UNDER THE ACT; THAT ACCORDING TO RULE 8 D OF THE I.T. RULES, PROVI DED FOR CALCULATION OF EXPENSES U/S 14A OF THE ACT, THE EXPENDITURE IN REL ATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME SHALL BE AGG REGATED IN ACCORDANCE THEREWITH; THAT RULE 8D OF THE RULES, THOUGH IMPLEM ENTED FROM 24.3.2008, HAS RETROSPECTIVE EFFECT, BEING PROCEDURE. THE AO THUS MADE ADDITION OF ` 16,88,896/-. 13. BY VIRTUE OF THE IMPUGNED ORDER, THE LD. CIT(A) DELETED THE ADDITION OF ` ` 15,88,896/- OUT OF THE ADDITION OF ` 16,88,896/-, THEREBY RESTRICTING THE ADDITION TO ` 1,00,000/-. IN DOING SO, IT WAS OBSERVED, INTER A LIA, THAT THOUGH SECTIONS 14A(2) AND (3) OF THE I.T. ACT HAVE RETROS PECTIVE OPERATION, BUT IN THE CASE OF CIT V. HERO CYCLES LTD. 209 TIOL-604 -HC-P&H-IT, IT HAS BEEN HELD THAT THE AO HAS TO POINT OUT SPECIFIC EXP ENSES INCURRED FOR THE PURPOSE OF EARNING EXEMPT INCOME; THAT IN THE ASSES SEES CASE, THERE WAS NO SUCH MENTION IN THE ASSESSMENT ORDER ABOUT SPECIFIC AMOUNT OF EXPENSES INCURRED FOR THE PURPOSES OF EARNING EXEMPT INCOME, AND THAT THUS, FOLLOWING HERO CYCLES (SUPRA), NO DISCUSSION COULD BE MADE U/S 14A OF THE ACT; AND ITA 2815(DEL)2010 12 THAT IN THE ASSESSEES CASE, FOR ASSTT.YEAR 2005-06 , AN ADDITION OF ` 66,928/- U/S 14A OF THE ACT HAD BEEN CONFIRMED BY THE ITAT. 14. AGGRIEVED, THE DEPARTMENT HAS RAISED GROUND NO. 2 BEFORE US. 15. THE LD. DR HAS CONTENDED THAT THE LD. CIT(A) HA S ERRED IN RESTRICTING THE DISALLOWANCE U/S 14A OF THE ACT TO ` 1,00,000/-, AS AGAINST ` 16,88,896/-, AS MADE BY THE AO. 16. THE LEARNED COUNSEL FOR THE ASSESSEE, SUPPORTIN G THE IMPUGNED ORDER, HAS FURTHER PLACED RELIANCE ON GODREJ & BOYCE MAN UFACTURING CO. LTD. V. DCIT, 234 CTR 1(BOM), HELD THAT RULE 8D OF THE I. T. RULES WERE APPLICABLE FROM ASSESSMENT YEAR 2008-09 AND NOT R ETROSPECTIVELY. 17. GODREJ & BOYCE MANUFACTURING CO. LTD.(SUPRA) , IT IS SEEN, SQUARELY COVERS THIS ISSUE. THIS DECISION WAS RENDERED, OV ERRULING BOMBAY TRIBUNAL DECISION IN THE CASE OF ITO V. DAGA CAPITAL MANAGE MENT P. LTD. 119 TTJ 289(MUMBAI). GODREJ & BOYCE MANUFACTURING CO. LT D.(SUPRA), THEREFORE, THE EXPENDITURE REASONABLY RELATED, IS T O BE DISALLOWED. THIS ISSUE, ACCORDINGLY, IS REMITTED TO THE FILE OF THE AO, TO BE DECIDED AFRESH IN ACCORDANCE WITH LAW, KEEPING IN MIND, PARTICULARLY, GODREJ & BOYCE MANUFACTURING CO. LTD.(SUPRA), ON AFFORDING DUE AN D ADEQUATE OPPORTUNITY TO THE ASSESSEE TO PROVE ITS CASE. ITA 2815(DEL)2010 13 18. ACCORDING TO GROUND NO.3, THE LD. CIT(A) ERRED, IN DELETING THE ADDITION OF ` 13,10,143/- MADE BY THE AO ON ACCOUNT OF UNDER VA LUATION OF CLOSING STOCK. 19. THE ASSESSEE, IN ITS RETURN OF INCOME, HAD SHOW N CLOSING STOCK, AS ON 31.3.06, AT ` 8,14,63,099/-, I.E., ` BOOKS AND PAPERS - 5,02,18,717/- CD STOCK - 48,32,577/- MESSING ITEMS - 26,63,161/- E. SOFTWARE - 1,84,28,220/- SHARES - 53,20,434/- ---- ----------------- 8,14,63,099/- 20. THE AO OBSERVED THAT IN ASSESSMENT YEARS 2004-0 5 AND 2005-06, ADDITION ON ACCOUNT OF VALUATION OF CLOSING STOCK H AD BEEN MADE, AND HAD BEEN SUBSEQUENTLY MODIFIED BY THE CIT(A); THAT THE CIT(A) HAD ADOPTED A CERTAIN PERCENTAGE OF A NUMBER OF BOOKS SOLD IN THE SUBSEQUENT YEAR WAS BASED ON ACTUAL NUMBER OF TITLES, OUT OF WHICH, SO ME WERE SOLD IN THE SUBSEQUENT FINANCIAL YEAR, AS A BASIS FOR VALUATION OF STOCK, AS ON THE VALUATION DATE; THAT THE CIT(A), VALUED BOOKS IN AS STT.YEAR 2004-05, VALUED THE BOOKS BY APPLYING THE SAID PERCENTAGE ON THE PR INTED VALUE; THAT THE VALUATION HAD BEEN DONE BY THE CIT(A) AT 100% OF TH E COST, WHEREVER THE ITA 2815(DEL)2010 14 SAID PERCENTAGE OF THE SALE IN THE NEXT YEAR VALUE D ON GREATER THAN 45%; THAT HOWEVER, IN ASSESSMENT YEAR 2005-06, THE VALUATION HAD BEEN MADE BY THE CIT(A) AT 100% OF THE COST, WHEREIN, THE SALE IN TH E NEXT YEAR WAS OF MORE THAN 30%; THAT THE ASSESSEE HAD SUBMITTED THAT IF A SIMILAR YARDSTICK, I.E., BASED ON THE SALE FIGURE OF THE SUBSEQUENT YEAR, WE RE TO BE APPLIED, THE VALUATION OF STOCK AS ON 31.3.06 WOULD COME TO ` 4,48,71,048/-, WHICH WOULD BE LESS THAN THE VALUE OF STOCK OF BOOKS SHOWN AT ` 4,50,56,607/-IN THE RETURN OF INCOME AND THAT THIS WOULD RESULT IN UNDE R-VALUATION OF BOOKS BY ` 1,85,559/-. THE AO OBSERVED THAT AS PER THE FIRST APPELLATE ORDER FOR ASSESSMENT YEAR 2005-06, AN ADDITION OF ` 2,30,74,300/- HAD BEEN MADE TO THE DECLARED VALUE OF ` 4,67,92,303/-, BY VALUING THE CLOSING STOCK AS ON 31.3.05, AT ` 6,98,66,603/-; THAT THE STOCK VALUE HAD THUS BEEN E NHANCING BY 49.31%; THAT THE ASSESSEE HAD DECLARED AN AMOUNT OF ` 4,50,56,607/- AS VALUE OF BOOKS, AS ON 31.3.06; THAT THE ASSESSEE HAD NOT GIVEN PROPER PROOF OF TITLE- WISE STOCK OF BOOKS AND CATEGORIES TO WHICH DIFFERE NT PERCENTAGES HAD BEEN APPLIED IN ITS WORKING DATED 18.12.2008 AND THAT IN VIEW OF THE DECISION OF THE CIT(A) AND THE FACTS OF THE CASE, THE COST PRIC E OF BOOKS WAS BEING ADOPTED @ 31% OF THE PRINTED PRICE AS ON 31.3.2006, IN ORDER TO COVER UP ANY LEAKAGES ON THIS ACCOUNT, INSTEAD OF 30% AS CLA IMED BY THE ASSESSEE ITA 2815(DEL)2010 15 COMPANY. THE AO, AS SUCH, MADE ADDITION OF ` 13,10,143/-, BY INCREASING THE VALUE OF CLOSING STOCK, ON AN ESTIMATED BASIS. 21. THE LD. CIT(A) DELETED THE ADDITION, GIVING RIS E TO GROUND NO.3 TAKEN BY THE DEPARTMENT. 22. THE LD. DR HAS CONTENDED THAT THE LD. CIT(A) HA S ERRONEOUSLY DELETED THE ADDITION OF ` 13,10,143/- MADE BY THE AO ON ACCOUNT OF UNDER VALU ATION OF CLOSING STOCK, WHILE WRONGLY IGNORING THE ELABOR ATE DISCUSSION MADE BY THE AO IN THE ASSESSMENT ORDER. 23. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OT HER HAND, HAS STRONGLY RELIED ON THE IMPUGNED ORDER. 24. BESIDES, ATTENTION HAS BEEN DRAWN TO THE TRIBUN AL ORDER DATED 29.1.2010(SUPRA). 25. THE MATTER, IT IS SEEN, IS SQUARELY COVERED BY THE AFORESAID TRIBUNAL DECISION IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEARS 2004-05 AND 2005- 06. THEREIN, IT HAS BEEN OBSERVED AS FOLLOWS:- 6. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTI ONS AND GONE THROUGH THE RECORDS. THE ASSESSEE IN ITS WRITTEN SU BMISSIONS HAS FILED DETAILS SHOWING CLOSING STOCK, PROFIT AND TOTAL TAX ABLE INCOME FOR A.Y. 2001-02 TO A.Y. 2007-08 AS UNDER: S.NO. A.Y. CLOSING STOCK NET TAXABLE INCOME DECLARED (AMT. IN RS.) TOTAL TAXES PAID ITA 2815(DEL)2010 16 1. 2001-02 54,674,390 121,189,730 47,574,993 2. 2002-03 57,225,779 124,665,650 44,505,638 3. 2003-04 72,166,850 124,902,700 45,901,742 4. 2004-05 59,411,106 130,810,940 44,879,205 5. 2005-06 69,833,131 136,577,330 49,468,648 6. 2006-07 81,463,099 185,105,010 58,300,415 7. 2007-08 121,386,177 197,196,940 66,049,203 7. THE ABOVE TABLE CLEARLY SHOWS THAT THE ASSESSEE HAS BEEN DECLARING SIGNIFICANT INCOME FROM THE BUSINESS OF PUBLICATION OF BOOKS AND OTHER BUSINESS ACTIVITIES UNDERTAKEN BY T HE ASSESSEE. THE FIGURES CLEARLY SHOW THAT IT IS NOT A CASE WHERE TH E ASSESSEE HAS BEEN SYSTEMATICALLY UNDERVALUING ITS INVENTORY TO GET A N UNDUE TAX ADVANTAGE. THE ASSESSEE IS AFTER ALL IN THE BUSINES S OF PUBLICATION OF TAXED BOOKS. THE TEXTBOOKS PUBLICATION BUSINESS REQ UIRED THE ASSESSEE TO CARRY LARGE VARIETY OF BOOKS IN ITS INVENTORY. I T IS THIS BUSINESS WHICH HAS GENERATED LOT OF SLOW MOVING, DEAD AND DA MAGED STOCK IN ITS INVENTORY BASKET. AFTER ALL THE ASSESSEE FAIRL Y FOLLOWED A PARTICULAR METHOD BY WHICH IT VALUES ITS CLOSING STOCK ON A U NIFORM BASIS FROM YEAR TO YEAR. THE ASSESSEE CLAIMS THAT IT IS BASED ON ITS EXPERIENCE IN THE BUSINESS OF PUBLICATION OF BOOKS. THE DEPARTMEN T HAS ACCEPTED THE VALUATION OFFERED IN RESPECT OF THE FRESH STOCK. WH AT REMAINS IS THE SLOW MOVING AND DEAD STOCK ON WHICH THERE SEEMS TO BE A SIGNIFICANT DIFFERENCE BETWEEN THE VALUATION OFFERED BY THE ASS ESSEE AND DETERMINED BY THE DEPARTMENTAL AUTHORITIES. BUT BOT H THE AUTHORITIES HAVE CONSISTENTLY ACCEPTED THE FACTUAL POSITION OF THE ASSESSEES BUSINESS THAT IT IS GENERATING TO MUCH OF SLOW MOV ING, DEAD AND DAMAGED STOCK IN THE COURSE OF ITS DAY TO DAY BUSIN ESS AND THAT VALUATION IS UNIFORMLY AT A PARTICULAR PERCENTAGE OF MRP. IT IS NOT THE CASE OF THE DEPARTMENT THAT THE ASSESSEE HAS DONE S OME MISTAKE OR MISCHIEF IN VALUING THE CLOSING STOCK ON THE BASIS OF THE AFORESAID PREDETERMINED PRINCIPLE OF VALUATION. AFTER ALL THE VALUATION ITSELF IS AN EXERCISE OF ESTIMATION. THE ASSESSEE HAS ADOPTED SOME PRINCIPLE WHICH THE DEPARTMENT HAS REJECTED AS BEING UNSCIENT IFIC AND WHAT IT IS ADOPTING AS A FAIR AND REASONABLE BASIS ITSELF SUFF ER FOR WANT OF REASONABLENESS AND SCIENTIFICNESS IN ITS APPROACH. THE ASSESSING OFFICER, IN OUR VIEW, WAS NOT JUSTIFIED IN ADOPTING 25% OF THE MRP IN RESPECT OF ITS SLOW MOVING, DEAD OR DAMAGED STOCK, WHEN IN FACT THE ASSESSEES POSSESSION OF STOCK IS MORE IN RESPECT O F THESE CATEGORIES. THE CIT(A) HAS GONE INTO THE FACTUAL INFORMATION O N THE BASIS OF THE ITA 2815(DEL)2010 17 ACTUAL SALE PRICE IN SUBSEQUENT YEARS. IT IS NOT TH E CASE THAT ALL THE DEAD STOCK ARE SOLD IMMEDIATELY IN THE SUBSEQUENT Y EAR. IT IS ONLY FEW ITEMS WHICH COULD BE THE SUBJECT MATTER OF SALE IN SUBSEQUENT YEAR AS DEMONSTRATED BY THE ASSESSEE IN THE WRITTEN SUBMISS IONS. AGAIN, THE CIT(A) HAS GONE INTO SOME DISTORTION OF THE FIGURE S. ANY DISTORTION, EVEN IF IT IS ACCEPTED AS ONE OF SCIENTIFIC NATURE REQUIRES TO BE TREATED AS A COST IN THE SUBSEQUENT YEAR, MEANING T HEREBY, THERE WOULD BE LESS INCOME TO BE ASSESSED IN SUBSEQUENT YEAR. I T IS NOT THE CASE OF THE REVENUE THAT THE SALE PRICE RECORDED BY THE AS SESSEE ARE IN ANY MANNER DEFECTIVE OR ARE NOT BASED ON ACTUAL SALES. OTHERWISE IF THERE IS ARTIFICIAL THING IN THE METHOD OF VALUATION IT W ILL BE IMMEDIATELY SET RIGHT BY THE SUBSEQUENT SALE EVENT. IN FACT ONE MU ST APPRECIATE THE ASSESSEES NATURE OF BUSINESS, WHICH IN THE COURSE OF CARRYING ON INVOLVES ACCUMULATION OF LARGE PART OF ITS STOCK IN THE FORM OF SLOW MOVING, DEAD OR DAMAGED STOCK AND THE ONLY BASIS FO R VALUATION OF SUCH STOCK IS ON THE BASIS OF THE ASSESSEES METHOD OF VALUATION, REGULARLY EMPLOYED. AFTER ALL WHEN A PARTICULAR MET HOD OF VALUATION IS REGULARLY EMPLOYED, IT DOES NOT GIVE ANY DISTORTION OVER A PERIOD OF TIME. IN FACT THE VERY FACT THAT THE ASSESSEE HAS BEEN SHOWING THE SALE OF THE SLOW MOVING, DAMAGED OR DEAD STOCK ETC. SHOW S THAT THE METHOD OF ACCOUNTING EMPLOYED BY THE ASSESSEE DOES NOT REQ UIRE TO BE SERIOUSLY DOUBTED. AS LONG AS THE ASSESSEES METHOD OF VALUATION IS CONSISTENT AND BONA FIDE, THE REVENUE SHOULD NOT T AMPER WITH THE SAME. AFTER ALL NO METHOD CAN BE JUSTIFIED AS SACR OSANCT OR SCIENTIFIC MERELY BECAUSE IN SOME YEARS IT RESULTS IN LITTLE M ORE INCOME. THE DEPARTMENT HAS ACCEPTED THE SAME METHOD OF VALUATIO N OVER THE LAST 4 DECADES. IT COULD NOT BE PERMITTED TO DEPART FROM THIS EARLIER ACCEPTED POSITION. IN OUR VIEW THE ASSESSEES METHO D, HAVING REGARD TO THE ASSESSEES NATURE OF BUSINESS, IS FAIR AND J USTIFIED AND THE ADDITION MADE IN RESPECT OF THE CLOSING STOCK OF IN VENTORY IS BASED ON SURMISES AND SUSPICION AND THE SAME IS ACCORDINGLY DELETED. 26. THE FACTS HEREIN ARE EXACTLY SIMILAR TO THOSE P RESENT BEFORE THE TRIBUNAL IN THE ASSESSEES CASE FOR ASSESSMENT YEAR S 2004-05 AND 2005-06. IT HAS NOT BEEN SHOWN OTHERWISE. THE METHOD OF VA LUATION REGULARLY FOLLOWED BY THE ASSESSEE HAS BEEN FOUND TO BE CONSI STENT AND BONA FIDE. ITA 2815(DEL)2010 18 THE TRIBUNAL HAS, IN SUCH A CIRCUMSTANCE, HELD THA T IT SHOULD NOT BE DISTURBED. AS OBSERVED BY THE LD. CIT(A), NO DI SCREPANCY WAS POINTED OUT BY THE AO, SO AS TO ENABLE THE VALUATION OF THE BOO KS OF THE ASSESSEE TO BE DISTURBED AND TO ADOPT THE COST @ 31% OF THE PRINTE D PRICE AND SO TO MAKE THE ADDITION. 27. IN THIS VIEW OF THE MATTER, THE LD. CIT(A) IS F OUND TO HAVE CORRECTLY OPINED THAT THE METHOD OF VALUATION OF STOCK REGULA RLY FOLLOWED BY THE ASSESSEE DID NOT REQUIRE TO BE DISTURBED, AS THE SA ME WAS CONSISTENT AND BONA FIDE, IN KEEPING WITH THE OBSERVATIONS OF THE TRIBU NAL (SUPRA). 28. THEREFORE, FINDING NO ERROR THEREWITH, THE ACTI ON OF THE LD. CIT(A) IN DELETING THE ADDITION OF ` 13,10,143/-, IS CONFIRMED. GROUND NO.3 IS REJECTED. 29. GROUND NOS. 4&5 ARE CONSEQUENTIAL TO GROUND NO. 3. 30. IN THE RESULT, THE APPEAL FILED BY THE DEPARTME NT IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 10.05.2011. SD/- SD/- (SHAMIM YAHYA) (A.D. JAIN) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 10.05.2011 *RM ITA 2815(DEL)2010 19 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR TRUE COPY BY ORDER DEPUTY REGISTRAR