CREATIVE EYE LTD, MUMBAI V. ADDL CIT 11(1), MUMBAI

ITA 2831/MUM/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 9015 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-01-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 12-05-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M V RAJGURUDR
• Assessee Lawyers: VIMAL PUNMIYAAR
• Keywords: Depreciation; Earning of tax free income
• Section: 143(3); 14A; 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES A MUMBAI BEFORE SHRI MAHAVIR SINGH (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 2830/MUM/2015 ASSESSMENT YEAR: 2009-10 & ITA NO. 2831/MUM/2015 ASSESSMENT YEAR: 2010-11 M/S. CREATIVE EYE LTD. VS. ADDL CIT 11(1) 12-A, KAILASH PLAZA , OPP MAHALAXMI MUMBAI IND. ESTATE, NEW LINK RD. ANDHERI (W) MUMBAI 400053 PAN : AAACC2700Q (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI VIMAL PUNMIYA,AR REVENUE BY: SHRI M.V. RAJGURU,DR DATE OF HEARING : 05/0 1/2017 DATE OF PRONOUNCEMENT: 05/01/2017 ORDER PER N.K. PRADHAN, AM THE CAPTIONED APPEALS FILED BY THE ASSESSEE RELATE TO ASSESSMENT YEAR 2009-10 & 2010-11. THESE ARE DIRECT ED AGAINST THE ORDER OF THE COMMISSIONER (APPEALS) 4, MUMBAI AND ARISE OUT OF THE ORDER UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1 961 (THE ACT). AS COMMON ISSUES ARE INVOLVED, THESE ARE HEARD TOGE THER AND DISPOSED OF BY A COMMON ORDER FOR BREVITY AND CONVE NIENCE. 2. THE 1 ST GROUND RAISED BY THE ASSESSEE IN THESE APPEALS IS THAT THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOW ANCE OF RS. 29,56,464/- FOR THE A.Y. 2009-10 AND RS. 22,17,348/ - FOR THE A.Y. 2010-11 ON ACCOUNT OF DEPRECIATION ON BRANDS U/S 32 (1)(II) BY NOT CONSIDERING THE DECISION OF THE HON'BLE SUPREME COU RT IN THE CASE OF ITA NO. 2830 & 2831/MUM/2015 2 TECHNO SHARES & STOCKS VS. CIT (2010) 193 TAXMAN 248 (SC) AND THE DECISION OF ITAT (MUMBAI BENCH) IN THE CASE OF KEC INTERNATIONAL LTD. VS. ACIT (2010) 41 SOT 43 (MUM). 2.1 THE AO NOTED THAT THE ASSESSEE-COMPANY HAD ACQ UIRED A BRAND FOR RS. 13,50,00,180/- IN THE YEAR 1999-2000 FROM N AMAH SHIVAY ENTERPRISE. THE AO FOLLOWED THE ASSESSMENT ORDER PA SSED FOR THE A.Y. 2005-06 AND DISALLOWED THE CLAIM OF DEPRECIATION OF RS. 29,56,464/- IN THE A.Y. 2009-10 AND RS. 22,17,348/- IN THE A.Y. 2010-11. 2.2 THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LEA RNED CIT(A) AGAINST THE ABOVE ORDER OF THE AO. WE FIND THAT THE LEARNED CIT(A) FOLLOWED THE ORDER OF HIS PREDECESSOR-IN-OFFICE AND CONFIRMED THE DISALLOWANCES MADE BY THE A.O. 2.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT IN THE CASE OF ASS ESSEE FOR THE A.Y. 2005-06 (ITA NO. 6358/M/2012), THE TRIBUNAL HAS HEL D AS UNDER: THE LD. A.R., AT THE OUTSET, HAS BROUGHT OUR ATTEN TION TO THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. G LEN MARK PHARMACEUTICALS LTD. (2013) 30 TAXMAN.COM 167 (BOM.) WHEREIN THE HO NBLE BOMBAY HIGH COURT, IN PARA 7 OF THE ORDER, HAS HELD THAT THE ASSE SSEE IS ENTITLED TO DEPRECIATION ON THE AMOUNT OF ROYALTY FEES AS THE SA ME IS A PART OF THE CONSIDERATION PAID FOR ACQUIRING THE BRAND AND WOULD BE ENTITLED TO DEPRECIATION UNDER SECTION 32 OF THE ACT AS PART OF T HE BRAND. EVEN THE HONBLE BOMBAY HIGH COURT, IN THE CASE OF CIT VS. TECHNO S HARES AND STOCKS LTD. (2009) 184 TAXMAN 103 (BOM.), WHICH AUTHORITY HAS B EEN HEAVILY RELIED UPON BY THE LD. D.R. ALSO, IN PARA 23 OF THE ORDER HAS HEL D THAT FRANCHISING IS KIND OF BUSINESS WHERE FRANCHISER GRANTS A LICENSE TO FRANC HISEE TO USE FRANCHISORS INTELLECTUAL PROPERTY RIGHTS SUCH AS KNOWHOW, TRADE MARKS, BRAND NAME ETC. TO MARKET THE FRANCHISORS PRODUCT OR SERVICES FOR CONS IDERATION. THE HONBLE BOMBAY HIGH COURT HAS HELD THAT THE EXPRESSION LICE NSES IS A VERY WIDE TERM AND IT INCLUDES THE PERMISSION TO CARRY ON ANY TRADE B USINESS, PROFESSION ETC. INCLUDING THE RIGHT TO ACQUIRE THE INTELLECTUAL PROP ERTY. THE CO-ORDINATE BENCH OF THE TRIBUNAL, IN THE CASE OF KEC INTERNATIONAL LTD. VS. ACIT (2010) 41 SOT 43 (BOM.), WHILE RELYING UPON THE SAID DECISION OF T HE HONBLE BOMBAY HIGH COURT HAS HELD THAT BRAND NAME IS AN INTELLECTUAL PRO PERTY RIGHT SIMILAR TO KNOWHOW, PATENTS, TRADEMARKS AND THEREFORE THE SAME IS ELIGIBLE FOR DEPRECIATION UNDER SECTION 32(1)(II). THE LD. A.R. HA S FURTHER BROUGHT OUR ATTENTION TO THE FACT THAT IN EARLIER ASSESSMENT YE ARS RIGHT FROM THE YEAR 2002- 03 UP TO A.Y. 2005-06, THE ASSESSEE HAS BEEN CONSIS TENTLY BEEN ALLOWED DEPRECIATION ON THE BRAND NAME. IN VIEW OF THIS, WE DO NOT FIND ANY JUSTIFICATION ON THE PART OF AUTHORITIES IN DISALLOW ING THE CLAIM OF DEPRECIATION ITA NO. 2830 & 2831/MUM/2015 3 ON THE BRANDS FOR THE YEAR UNDER CONSIDERATION. THIS ISSUE IS ACCORDINGLY DECIDED IN FAVOUR OF THE ASSESSEE. 2.4 AS THE FACTS ARE SAME FOR THE IMPUGNED ASSESSME NT YEAR, THE AO IS DIRECTED TO ALLOW THE CLAIM OF DEPRECIATION M ADE BY THE ASSESSEE OF RS. 29,56,464/- FOR THE A.Y. 2009-10 AN D RS. 22,17,248/- FOR THE A.Y. 2010-11. 3. THE 2 ND GROUND RAISED BY THE ASSESSEE IN THESE APPEALS IS THAT THE LEARNED CIT(A) ERRED IN CONFIRMING DISALLOWANCE OF RS. 17,47,107/- FOR THE A.Y. 2009-10 AND RS. 1,52,633/- FOR THE A.Y . 2010-11 U/S 14A R.W.R. 8D. IT IS FURTHER STATED THAT (I) NOTHING HA S BEEN BROUGHT ON RECORD BY THE AO TO ESTABLISH THE NEXUS BETWEEN EXP ENSES INCURRED WITH THE EARNING OF EXEMPT INCOME, (II) THE AMOUNT INVESTED IN MUTUAL FUNDS ARE NOT FROM THE OVERDRAFT / CASH CRED IT ACCOUNT WHICH HAVE BEEN USED TOWARDS WORKING CAPITAL REQUIREMENTS , (III) NO EXPENSE HAS BEEN INCURRED TO EARN EXEMPT INCOME & ( IV) NO NOTIONAL EXPENDITURE CAN BE APPORTIONED FOR THE PURPOSE OF E ARNING EXEMPT INCOME UNLESS THERE IS AN ACTUAL EXPENDITURE IN REL ATION TO EARNING THE TAX FREE INCOME. 3.1 THE AO NOTICED THAT DURING THE A.Y. 2009-10, TH E ASSESSEE- COMPANY HAD RECEIVED DIVIDEND OF RS. 41,38,923/- AN D PROFIT ON SALE OF MUTUAL FUND OF RS. 11,59,168/- WHICH WERE CLAIME D AS EXEMPT. IN THE A.Y. 2010-11, THE ASSESSEE COMPANY HAS RECEIVED DIVIDEND OF RS. 15,16,328/- WHICH WAS CLAIMED AS EXEMPT. THE AO HAS GIVEN THE REASONS IN HIS ASSESSMENT ORDER FOR INVOKING SECTIO N 14A OF THE ACT. THEN HE WORKED OUT THE DISALLOWANCE AS PER RULE 8D AND IT COMES TO RS. 17,47,107/- FOR THE A.Y. 2009-10 AND RS. 1,52,6 33/- FOR THE A.Y. 2010-11. 3.2 THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LE ARNED CIT(A) AGAINST THE ABOVE DISALLOWANCES MADE BY THE AO. THE LEARNED CIT(A) NOTED THAT THE ASSESSEE HAD NOT GIVEN ANY DETAILS T O WORK OUT THE DIRECT NEXUS OF THE INTEREST EXPENDITURE RELATED TO THE EXEMPT INCOME WHICH WAS NOT INCLUDED IN THE TOTAL TAXABLE INCOME. THE LEARNED CIT(A) ALSO CAME TO A FINDING THAT THE ASSE SSEE COULD NOT ESTABLISH THE NEXUS BETWEEN THE ENTIRE CAPITAL BEIN G INVESTED IN ITA NO. 2830 & 2831/MUM/2015 4 SECURITIES. THEREFORE, HE CONFIRMED THE DISALLOWANC ES MADE BY THE A.O. 3.3 BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE RELIED ON THE ORDER OF THE ITAT D BENCH MUMBAI IN THE CASE OF RAMKUMAR VENUGOPAL INVESTMENTS PVT. LTD. VS. ACIT (ITA NO. 6324/MUM/2012) FOR THE A.Y. 2009-10. 3.4 THE LEARNED DR SUPPORTED THE ORDER PASSED BY TH E LEARNED CIT(A) UPHOLDING THE DISALLOWANCES MADE BY THE AO. 3.5 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT THE LEARNED COUNSE L OF THE ASSESSEE HAS NOT FILED THE RELEVANT DOCUMENTS TO PROVE HIS P OINTS THAT THE AMOUNT INVESTED IN MUTUAL FUNDS ARE NOT FROM THE OV ERDRAFT / CASH CREDIT ACCOUNT WHICH HAVE BEEN USED TOWARDS WORKING CAPITAL REQUIREMENTS. THE LEARNED COUNSEL HAS ALSO NOT FILE D THE RELEVANT DOCUMENTS TO PROVE HIS POINTS THAT NO EXPENSES HAS BEEN INCURRED TO EARN THE EXEMPT INCOME. EVEN A COPY OF THE BALANCE SHEET HAS NOT BEEN FILED BY HIM BEFORE THE TRIBUNAL TO ESTABLISH HIS ARGUMENT. WE ALSO FIND THAT THE LEARNED CIT(A) HAS NOTED THA T THE ASSESSEE HAD NOT GIVEN ANY DETAILS TO WORK OUT THE DIRECT NEXUS OF THE INTEREST EXPENDITURE RELATED TO THE EXEMPT INCOME W HICH WAS NOT INCLUDED IN THE TAXABLE INCOME. FURTHER IT IS FOUND THAT DURING THE A.Y. 2007-08, THE AO HAD MADE ADDITION ON SIMILAR GROUND WHICH WAS DELETED B Y THE LEARNED CIT(A) AND THE ITAT IN FAVOUR OF THE ASSESSEE. HOWE VER, RULE 8D WAS NOTIFIED BY THE IT (FIFTH AMDT.) RULES, 2008 W.E.F. 24-03-2008. THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DY. CIT [2010] 194 TAXMAN 203 (BOM) HAS HELD THAT RULE 8D IS APPLICABLE W.E.F. 2008-2009. WE ARE CONCERNED HERE WITH THE A.Y. 2009-10 AND 2010-11. 3.6 IN VIEW OF THE REASONS GIVEN AT PARA 3.5, WE SE T ASIDE THE ORDER OF THE LEARNED CIT(A) ON DISALLOWANCE MADE U/S 14A R.W.R. 8D AND RESTORE THE SAME TO THE FILE OF THE AO TO MAKE A FR ESH ASSESSMENT AS PER THE PROVISIONS OF THE ACT AFTER GIVING REASONA BLE OPPORTUNITY OF ITA NO. 2830 & 2831/MUM/2015 5 BEING HEARD TO THE ASSESSEE. THE ASSESSEE IS ALSO D IRECTED TO FILE BEFORE THE AO THE RELEVANT DETAILS. THUS THE 2 ND GROUNDS IN THE ABOVE APPEALS ARE ALLOWED FOR STATISTICAL PURPOSES. 4. IN THE RESULT THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 05/01/2017 SD/- SD/- (MAHAVIR SINGH) (N. K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBE R MUMBAI; DATED: 05/01/2017 BISWAJIT, SR. P.S. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI