ITO 9(2)(2), MUMBAI V. KAYA LTD, MUMBAI

ITA 3175/MUM/2013

• Counselvise Citation: 317519914 RSA 2013
• Duration Of Justice: 1 year(s) 10 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-03-2015
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 04-08-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 25-04-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PADMAJA
• Assessee Lawyers: NITESH JOSHI
• Keywords: Capital asset; Depreciation; Business expenditure; Income from undisclosed sources; Revenue expenditure; Capital expenditure
• Section: 40A(3)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, M UMBAI BEFORE S/SHRI B.R.BASKARAN (AM) AND VIVEK VARMA, ( JM) . . , , ./I.T.A. NO3175/MUM/2013 ( / ASSESSMENT YEAR : 2009-10) INCOME TAX OFFICER 9(2)(2), ROOM NO.225, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 / VS. M/S KAYA LTD., SECOND FLOOR, RANGSHARDA, K C MARG, BANDRA (W), MUMBAI-400050 ( / APPELLANT) .. ( / RESPONDENT) ./I.T.A. NO3286/MUM/2013 ( / ASSESSMENT YEAR : 2009-10) M/S KAYA LTD., SECOND FLOOR, RANGSHARDA, K C MARG, BANDRA (W), MUMBAI-400050 / VS. INCOME TAX OFFICER 9(2)(2), ROOM NO.225, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 ( / APPELLANT) .. ( / RESPONDENT) ./ ! ./PAN/GIR NO. :AACCK1045L ' / APPELLANT BY MS.PADMAJA # ' /RESPONDENT BY SHRI NITESH JOSHI $ % # &' / DATE OF HEARING :2.1.2015 () # &' /DATE OF PRONOUNCEMENT :4.3.2015 ITA. NO.3175/MUM/2013 & 3286/MUM/2013 2 / O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 05-02- 2013 PASSED BY LD CIT(A)-20, MUMBAI AND THEY RELATE TO THE ASSESSMENT YEAR 2009-10. 2. THE ASSESSEE IS IN APPEAL IN RESPECT OF THE F OLLOWING ISSUES:- (A) WHETHER THE EXPENDITURE INCURRED ON ADVERTISEME NT AND SALES PROMOTION IS CAPITAL OR REVENUE IN NATURE? (B) WHETHER THE UNACCOUNTED SERVICE INCOME OF RS.18 .81 CRORES MADE BY THE AO WAS RIGHTLY UPHELD BY LD CIT(A)? 3. THE REVENUE IS IN APPEAL IN RESPECT OF THE FOL LOWING ISSUES:- (A) WHETHER THE LD CIT(A) IS JUSTIFIED IN ALLOWING DEPRECIATION ON ADVERTISEMENT AND SALES PROMOTION EXPENSES TREATI NG THE SAME AS ACQUISITION OF INTANGIBLE RIGHTS, INSTEAD OF TRE ATING IT AS DEFERRED REVENUE EXPENDITURE. (B) WHETHER THE LD CIT(A) WAS JUSTIFIED IN ALLOWIN G DEPRECIATION ON PRE-OPERATIVE EXPENSES CLAIMED TO HAVE BEEN INCURRE D ON SETTING UP OF NEW BRANCHES. (C) WHETHER THE LD CIT(A) WAS JUSTIFIED IN DELETIN G THE DISALLOWANCE MADE U/S 40A(3) OF THE ACT. 4. THE FIRST ISSUE IN BOTH THE PARTIES APPEAL ARISE OUT OF COMMON ISSUE. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF PROVIDING SKIN CARE AND WEIGHT MANAGEMENT SERVICES. IT ALSO SELLS SKIN CARE PRODUCTS. IT HAS ESTABLISHED BRANCHES ALL OVER THE COUNTRY BY NAME KAYA SKIN CLINICS AND KAYA LIFE CENTRES. THE ASSESSEE CLAIMED EXPENDIT URE UNDER THE HEAD ADVERTISING & SALES PROMOTION TO THE TUNE OF RS.1 7.10 CRORES. THE AO TOOK THE VIEW THAT THE ASSESSEE HAS INCURRED THIS E XPENDITURE ONLY TO BUILD ITS OWN BRAND, WHICH WILL GIVE ENDURING BENEFIT TO THE ASSESSEE. ACCORDINGLY THE AO TOOK THE VIEW THAT THE EXPENDITU RE INCURRED BY THE ASSESSEE SHOULD BE TREATED AS DEFERRED REVENUE EXP ENDITURE. ITA. NO.3175/MUM/2013 & 3286/MUM/2013 3 ACCORDINGLY, THE AO ALLOWED 20% OF THE EXPENDITURE AND, HOWEVER, DISALLOWED THE BALANCE AMOUNT I.E., RS.13.68 CRORES AS CAPITAL EXPENDITURE INCURRED TOWARDS INTANGIBLE ASSETS KAYA SKIN CLINI C (I.E.,BRAND BUILDING). 5. THE LD CIT(A) ALSO TOOK THE VIEW THAT THE EXPE NSES INCURRED BY THE ASSESSEE ARE NOT PURELY TOWARDS ADVERTISING ITS PRO DUCTS AND SERVICES, BUT THEY HAVE BEEN INCURRED FOR EXPANDING THE BUSINESS BASE BY LAUNCHING NEW CLINICS AND PROPAGATING BRAND NAME KAYA SKIN C LINICS. HE FURTHER OBSERVED THAT, IN EVERY CLINIC CENTRE, THERE IS A B IG GLOW SIGN BOARD DISPLAYING ADVERTISEMENT OF KAYA SKIN CLINICS, WHIC H MEANS THE BRAND NAME IS BEING ADVERTISED AND NOT THE LATENT FEATURE OF SERVICES. ACCORDINGLY HE HELD THAT THE ASSESSING OFFICER HAS RIGHTLY POINTED OUT THE FACT THAT, BASICALLY, THE ASSESSEE PROMOTES THE BRA ND NAME INSTEAD OF SERVICES AND PRODUCTS. IT WAS SEEN THAT THE ASSESSE E HAS BEEN PROMOTING ITS BRAND NAME THROUGH ITS BRAND AMBASSADOR, BEING A MODEL NAMED RIDDHHIMA KAPOOR AND HENCE THE LD CIT(A) HELD THA T THE ASSESSEE HAS ONLY PROMOTED THE BRAND AS ITS BUSINESS STRATEGY. HE ALSO TOOK THE VIEW THAT THE BIG GLOW SIGN BOARD DISPLAYING THE NAME OF KAYA SKIN CLINIC CANNOT BE PRESUMED TO BE HAVING TEMPORARY BENEFITS. ACCORDINGLY, THE LD CIT(A) HELD THAT THE ASSESSING OFFICER WAS RIGHT IN HOLDING THAT THE PUBLICITY IS NOTHING BUT BRAND DEVELOPMENT INVOLVING ENDURING BENEFIT TO THE ASSESSEE. ACCORDINGLY HE HELD THAT THE EXPENDITURE INCURRED ON BRAND BUILDING IS TO BE CONSIDERED AS CAPITAL EXPENDITURE . 6. SINCE THE LD CIT(A) HELD THE ADVERTISEMENT EXPE NSES HAVE BEEN INCURRED TOWARDS BRAND BUILDING AND THE SAME CONSTI TUTES CAPITAL EXPENDITURE, HE ALSO HELD THAT THE SAME CONSTITUTES INTANGIBLE ASSET ELIGIBLE FOR DEPRECIATION @ 25%. ACCORDINGLY HE DI RECTED THE AO TO ALLOW DEPRECIATION @ 25%. 7. THE MAIN SUBMISSION OF THE ASSESSEE WAS THAT IT WAS REQUIRED TO INCUR ADVERTISEMENT AND SALES PROMOTION EXPENSES CO NTINUOUSLY EVERY ITA. NO.3175/MUM/2013 & 3286/MUM/2013 4 YEAR. HE FURTHER SUBMITTED THAT THE ASSESSEE HAS B EEN INCURRING THE EXPENDITURE ON ADVERTISEMENT AND SALES PROMOTION SI NCE ITS INCEPTION, I.E., SINCE THE ASSESSMENT YEAR 2004-05 ONWARDS. HE FURT HER SUBMITTED THAT THE EXPENDITURE INCURRED IN AY 2004-05 CONSTITUTED 41.63% OF THE TURNOVER, WHEREAS DURING THE YEAR UNDER CONSIDERATI ON, IT HAS COME DOWN TO 18.05%. THE LD A.R ALSO INVITED OUR ATTENTION T O A TABLE, WHEREIN THE ASSESSEE HAD ANALYSED THE PERCENTAGE OF ADVERTISEME NT EXPENDITURE OVER THE AMOUNT OF TURNOVER FROM AY 2004-05 TO 2014-15. HE FURTHER SUBMITTED THAT THE CONCEPT OF DEFERRED REVENUE EXPE NDITURE IS NOT APPLICABLE WHILE COMPUTING THE TOTAL INCOME UNDER T HE INCOME TAX ACT, AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF MA DRAS INDUSTRIAL INVESTMENT CORPORATION LTD VS. CIT REPORTED IN 225 ITR 802(SC). HE FURTHER SUBMITTED THAT THE TAX AUTHORITIES ARE NOT CORRECT IN PRESUMING THAT THE ADVERTISEMENT EXPENSES INCURRED BY THE ASSESSEE HAS RESULTED IN BRAND BUILDING, SINCE THE RESULT OF ADVERTISEMENT C OULD NOT BE MEASURED IN A SCIENTIFIC MANNER. HE FURTHER SUBMITTED THAT THE RE IS UNCERTAINTY OVER THE PERIOD FOR WHICH THE SAID ADVERTISEMENT PROGRAM ME SHALL HAVE EFFECT. THE LD A.R ALSO FURNISHED FOLLOWING CONTENTIONS IN THE WRITTEN SUBMISSIONS GIVEN TO US:- (A) THE ASSESSEE SUBMITS THAT THE EXPENDITURE ON A DVERTISEMENT AND SALES PROMOTION INCURRED BY IT IS REVENUE IN NA TURE AND HAS BEEN INCURRED IN THE ORDINARY COURSE OF ITS BUSINES S. THE EXPENDITURE HAS BEEN INCURRED TOWARDS ADVERTISEMENTS OF THE SER VICES OFFERED BY IT IN TV, RADIO, PRINT MEDIA AND ART WORK CHARGES E TC. A BARE PERUSAL OF THE SAMPLE ADVERTISEMENTS PLACED AT PAGES 135 TO 137 OF THE PAPER BOOK AND SAMPLE INVOICES AT PAGES 123 TO 134 SHOWS THAT THE ADVERTISEMENTS ARE FOCUSED TOWARDS PROMOTION OF THE SERVICES RELATING TO SKIN TREATMENT AND WEIGHT MANAGEMENT PR OVIDED BY THE ASSESSEE. FURTHER, NO ENDURING BENEFIT IS DERIVED F ROM SUCH ADVERTISEMENTS AS SUCH EXPENDITURE HAS TO BE INCURR ED ON A REGULAR BASIS YEAR AFTER YEAR. (B) THE EXPENDITURE ON ADVERTISEMENT AND SALES PROM OTION IS NOT FOR THE PURPOSES OF CREATION OF ANY BRAND NAME AS: ITA. NO.3175/MUM/2013 & 3286/MUM/2013 5 (I) THE ASSESSEE'S BRAND HAS ALREADY BEEN CREATED IN TH E EARLIER YEARS AS, AS AT 3 1.03.2009 IT HAD KAYA SKI N CLINICS FUNCTIONING AT 74 LOCATIONS AND KAYA LIFE CENTRES A T 4 LOCATIONS IN INDIA. FURTHER, FOR THE YEAR UNDER CON SIDERATION ITS TURNOVER FROM BUSINESS STOOD AT RS. 118.37 CROR ES. IT HAS A CUSTOMER BASE OF OVER 50,000. (II) THE MATTER OF THE ADVERTISEMENT IS THE SERVICE RENDERED BY THE ASSESSEE AND NOT BRAND CREATION (SE E SAMPLE ADVERTISEMENTS AT PAGES 135 TO 137 OF THE PA PER BOOK) AND AUDIO VISUAL CLIP OF AN ADVERTISEMENT ON THE TELEVISION SEPARATELY PROVIDED ON A CD AFTER THE HE ARING ON 04.08.2014; (III) APPOINTMENT OF A BRAND AMBASSADOR FOR ADVERTISING I TS PRODUCTS AND SERVICES DOES NOT MEAN THAT THE NATURE OF THE EXPENDITURE INCURRED IS FOR CREATION OF BRAND. BRAN D AMBASSADOR IS CHOSEN BECAUSE OF HER BEAUTY AND SKIN WHICH CO-RELATES TO THE ASSESSEES BUSINESS. (IV) DISPLAYING THE GLOW SIGN BOARD KAYA SKIN CLINI C OUTSIDE ITS OUTLET DOES NOT LEAD TO THE CONCLUSION THAT THE ASSESSEE IS CREATING THE BRAND NAME; (V) ADVERTISEMENT AND SALES PROMOTION EXERCISE PROV IDES A STIMULUS TO THE POTENTIAL CUSTOMER TO BUY SERVICES AND PRODUCTS OFFERED BY THE ASSESSEE. HOWEVER, THE ADVERTISEMENT MAY FAIL TO INDUCE THE DESIRED BEHAVI OUR AND, HENCE, IT IS APPROPRIATE TO CHARGE THE SAME OFF AS REVENUE EXPENDITURE. (VI) SALT BRAND SOLUTIONS WAS APPOINTED FOR THE PUR POSES OF EXPANDING THE AWARENESS AMONGST THE PEOPLE OF THE S ERVICES BEING OFFERED BY THE ASSESSEE. ENGAGING SUCH SERVIC ES CANNOT BE REGARDED AS CREATION OF BRAND IMAGE. IN ANY EVEN T, THE SERVICES OF SALT BRAND SOLUTIONS WERE ENGAGED IN MA Y, 2011 AND HAVE NO RELEVANCE TO THE YEAR UNDER CONSIDERATI ON. (C) ASSUMING WITHOUT ADMITTING THAT BENEFIT RESULTI NG FROM THE ADVERTISEMENT AND SALES PROMOTION EXPENSES ENDURES OVER A PERIOD BEYOND ONE YEAR, THE ASSESSEE SUBMITS THAT THE PERI OD OF SUCH BENEFIT CANNOT BE ASCERTAINED. THEREFORE, DEDUCTION FOR EXPENDITURE CANNOT BE SPREAD OVER A NUMBER OF Y EARS. IT IS AN ADMITTED POSITION THAT EXPENDITURE ON ADVERTI SEMENT ITA. NO.3175/MUM/2013 & 3286/MUM/2013 6 AND SALES PROMOTION IS REVENUE IN NATURE. IN THE GR OUNDS OF APPEAL FILED BY THE REVENUE BEFORE THE TRIBUNAL THE Y ARE URGING THAT THE EXPENDITURE SHOULD BE SPREAD OVER A ND NOT DEPRECIATED AS A CAPITAL ASSET. ONCE, IT IS ACC EPTED THAT THE EXPENDITURE IS REVENUE IN NATURE IT IS WELL SET TLED, IN AS FAR AS INCOME-TAX IS CONCERNED, THAT THERE IS NO CONCEP T OF DEFERRED REVENUE EXPENDITURE (SEE CIT V. CASIO INDIA LTD. 33 5 ITR 196 (DEL.), CIT V. CITI FINANCIAL CONSUMER FINANCE LTD. 335 ITR 29 (DEL.), HINDUSTAN COMMERCIAL BANK LTD., IN RE 21 ITR 353 (A LL.) AND DCIT V. CORE HEALTHCARE LTD. 308 ITR 263 (GUJ.). IN ANY EVENT, SUCH EXPENDITURE CANNOT BE DEFERRED AS THE PERIOD FOR WH ICH THE BENEFIT MAY FLOW IS NOT ASCERTAINABLE. IT IS ALSO P OSSIBLE THAT THE ADVERTISEMENT MAY FAIL TO HAVE THE DESIRED RESULT. (D) ASSUMING WITHOUT ADMITTING THAT THE EXPENDITURE ON ADVERTISEMENT AND SALES PROMOTION IS FOR THE PURPOS ES OF CREATION OF BRAND NAME THE ASSESSEE SUBMITS THAT IN VIEW OF THE FOLLOWING DECISIONS SUCH EXPENDITURE EVEN ON CREATION OF BRAN D NAME HAS TO BE ALLOWED AS A REVENUE DEDUCTION . ASIAN PAINTS LTD. VS. ADDL. CIT [(MUMBAI ITAT) ITA 7801/MUM/2010] FINE JEWELLERY (I) LTD. VS. ACIT [(MUMBAI ITAT) 19 ITR 746] ACIT VS. WARNER LAMBERT INDIA LTD. [(MUMBAI ITAT) ITA 954 & 3063/MUM/2006] ITO VS. SPICE COMMUNICATIONS LTD. [(DELHI ITAT) 35 SOT 78]CIT V. MODI REVLON PVT. LTD. 78 DTR 342 (DEL.) (E) IF IT IS HELD THAT EXPENDITURE INCURRED BY THE ASSESSEE ON ADVERTISEMENT AND SALES PROMOTION IS TO BE REGARDED AS CAPITAL IN NATURE, THEN, THE ASSESSEE SUBMITS THAT, THE CIT(A) HAS RIGHTLY TREATED IT AS A DEPRECIABLE ASSET AND ALLOWED DEPRE CIATION ON THE SAME. 8. DURING THE COURSE OF HEARING, THE LD A.R ALS O PLACED RELIANCE ON THE FOLLOWING CASE LAW:- (A) ITO VS. SPICE COMMUNICATION (35 SOT 78)(DELH I) (B) CIT VS. GEOFFREY MANNER AND CO. LTD (315 ITR 134)(BOM) (C) WARNER LAMBER INDIA (ITA NO.954 & 3063/MUM/2 006) (D) ASIAN PAINTS LTD (2013)(37 CCH 177)(MUM) (E) FINE JEWELLERY (56 SOT 220)(MUM) ITA. NO.3175/MUM/2013 & 3286/MUM/2013 7 9. ON THE CONTRARY, THE LD D.R SUBMITTED THAT T HE BRAND NAME IS AN INTANGIBLE ASSET AND THE SAID VIEW FINDS SUPPORT FR OM AS-26, I.E., THE ACCOUNTING STANDARD ISSUED BY THE INSTITUTE OF CHAR TERED ACCOUNTANTS OF INDIA. HE FURTHER SUBMITTED THAT THE ASSESSEE HAS ADVERTISED ONLY THE NAME KAYA SKIN CARE CLINIC AND NOT ANY PARTICULAR PRODUCT/SERVICE AND HENCE THE LD CIT(A) WAS JUSTIFIED IN UPHOLDING THE VIEW TAKEN BY THE AO THAT THE ASSESSEE HAS INCURRED ADVERTISEMENT EXPENS ES TOWARDS BRAND BUILDING ONLY. HE FURTHER SUBMITTED THAT THE BRAND SHALL HAVE ENDURING BENEFIT TO THE ASSESSEE. HE ALSO SUBMITTED THAT TH E ASSESSEE HAS ENGAGED A BRAND AMBASSADOR TO MARKET ITS BRAND KAYA SKIN CLINIC. HE FURTHER SUBMITTED THAT THE CASE LAW RELIED UPON BY THE ASSE SSEE ARE DISTINGUISHABLE AND HENCE THE RATIO OF THOSE DECISI ONS IS NOT APPLICABLE TO THE FACTS OF THE INSTANT CASE. 10. WE HEARD THE PARTIES AND PERUSED THE RECORD. BEFORE US, THE LD A.R PLACED RELIANCE ON THE DECISION RENDERED BY DELHI B ENCH OF ITAT IN THE CASE OF SPICE COMMUNICATION (SUPRA). THE HEAD NOTE S GIVEN FOR THAT DECISION READS AS UNDER:- BUSINESS EXPENDITURECAPITAL OR REVENUE EXPENDITUR E ADVERTISING AND SALES PROMOTION EXPENDITUREEXPENDI TURE INCURRED PARTLY TOWARDS BRAND BUILDING IN BRAND BUI LDING AND, HENCE, AN ACQUISITION OF AN INTANGIBLE ASSETAO ADD ING 10 PER CENT OF THE EXPENDITURE, I.E., RS. 3,50,50,300 TO T HE INCOME OF THE ASSESSEE ON ACCOUNT OF DISALLOWANCE WHICH IS OF CAPITAL NATURE AS BEING RELATABLE TO BRAND BUILDINGASSESSE E HAS NOT ACQUIRED ANY BRAND FROM ANY OUTSIDE PARTYNO JUSTIF ICATION FOR THE ADDITION HELD : IT IS NOT IN DISPUTE THAT THE ASSESSEE IS IN THE BU SINESS OF PROVIDING CELLULAR MOBILE SERVICES UNDER ITS OWN SELF-GENERAT ED BRAND 'SPICE' SINCE 1997. THE ASSESSEES BUSINESS OF PROVIDING CE LLULAR MOBILE SERVICES IS UNDOUBTEDLY A HIGHLY COMPETITIVE BUSINE SS, AND ASSESSEE HAS TO PROVIDE SERVICES IN A COMPETITIVE ENVIRONMEN T. THIS IS ALSO NOT IN ITA. NO.3175/MUM/2013 & 3286/MUM/2013 8 DISPUTE THAT THE ASSESSEE HAS INCURRED EXPENDITURE TOWARDS ADVERTISEMENT AND SALES PROMOTION IN COURSE OF CARR YING ON ITS BUSINESS ACTIVITIES. THE AO HAS ALLOWED 90 PER CENT OF THE EXPENSES AS REVENUE EXPENDITURE AND ALLOCATED 10 PER CENT TOWAR DS CAPITAL BY OBSERVING THAT 10 PER CENT OF EXPENSES HAVE BEEN IN CURRED TOWARDS BRAND BUILDING. THE AO HAS NOT BEEN ABLE TO JUSTIFY AS TO HOW THE 10 PER CENT OF THE TOTAL ADVERTISEMENT AND SALES PROMO TION EXPENSES CAN BE ALLOCATED TOWARDS CAPITAL EXPENDITURE WHEN THE A SSESSEE HAS NOT ACQUIRED ANY BRAND FROM ANY OUTSIDE PARTY. THE EXPE NDITURE ON ADVERTISEMENT AND SALES PROMOTION CONSTITUTED EXPEN DITURE INCURRED ON PRESS ADVERTISEMENT, HOARDINGS, NEON SIGNS, BROCHUR ES, ETC. THE PRESS ADVERTISEMENTS COULD NOT BE CONSIDERED AS CAPITAL A SSET ACQUIRED BY THE ASSESSEE. SIMILARLY, PUTTING HOARDINGS AND NEON SIGNS COULD NOT ALSO BE CONSIDERED ON CAPITAL FIELD. THESE EXPENDIT URES DO NOT LEAD TO CREATE ANY CAPITAL ASSET TO THE ASSESSEE. EVEN THER E IS NO BENEFIT OF ENDURING NATURE SO TO TREAT THE EXPENSES AS CAPITAL EXPENDITURE. SINCE BY INCURRING EXPENDITURE ON ADVERTISEMENT AND SALES PROMOTION, THE ASSESSEE HAS NOT ACQUIRED ANY FIXED CAPITAL ASSET, BUT THESE EXPENDITURES WERE INCURRED FOR EARNING BETTER PROFI TS, AND FOR FACILITATING ASSESSEES OPERATION OF PROVIDING CELL ULAR MOBILE SERVICES, THERE EXIST DIRECT NEXUS BETWEEN THE ADVERTISEMENT AND SALES PROMOTION EXPENSES AND THE CARRYING OUT OF THE BUSI NESS ACTIVITY OF THE ASSESSEE. THERE IS NOT ANY JUSTIFICATION IN INTERFE RING WITH THE ORDER OF THE CIT(A) IN DELETING THE DISALLOWANCE OF 10 PER C ENT OF EXPENSES TOWARDS ADVERTISEMENTS AND SALES PROMOTION INCURRED BY THE ASSESSEE FOR SMOOTH FUNCTIONING AND CARRYING ON ASSESSEES B USINESS EFFECTIVELY, PROFICIENTLY AND PROFITABILITY. THE ORDER OF THE CI T(A) IS, THUS, UPHELD ON THIS ISSUE. THOUGH THE LD D.R TRIED TO DISTINGUISH THIS DECISIO N BY SUBMITTING THAT THE AO, THEREIN, HAD TAKEN ONLY 10% OF THE EXPENSES IN THE CAPITAL FIELD, YET WE ARE OF THE VIEW, THE RATIO OF THE ABOVE SAID DEC ISION SQUARELY APPLIES TO THE INSTANT CASE. 11. IT IS ALSO PERTINENT TO NOTE THAT THE HONBL E JURISDICTIONAL BOMBAY HIGH COURT IN THE CASE OF GEOFFREY MANNER AND CO. L TD (SUPRA) HAS LAID DOWN THE FOLLOWING RATIO TO DETERMINE THE NATURE OF ADVERTISEMENT EXPENSES:- 5. IN OUR OPINION THE CORRECT TEST TO BE APPLIED IN S UCH A CASE WOULD BE, THAT IF THE EXPENDITURE IS IN RESPECT OF AN ONG OING BUSINESS OF THE ASSESSEE AND THERE IS NO ENDURING BENEFIT IT CAN BE TREATED AS REVENUE ITA. NO.3175/MUM/2013 & 3286/MUM/2013 9 EXPENDITURE. IF, HOWEVER, AND IF IT IS IN RESPECT O F BUSINESS WHICH IS YET TO COMMENCE THEN THE SAME CANNOT BE TREATED AS REVE NUE EXPENDITURE AS EXPENDITURE IS ON A PRODUCT YET TO BE MARKETED. CONSIDERING THE ABOVE, IN OUR OPINION THE JUDGMENT IN PATEL INTERNA TIONAL FILM LTD. (SUPRA) IS CLEARLY DISTINGUISHABLE. THE CIT(A) AND THE TRIBUNAL ON THE FACTS OF THIS CASE WERE CLEARLY WITHIN THEIR JURISD ICTION IN HOLDING THAT THE EXPENDITURE WAS BY WAY OF REVENUE EXPENDITURE A S IT WAS IN RESPECT OF PROMOTING ONGOING PRODUCTS OF THE ASSESS EE HEREIN. IN THE INSTANT CASE, THERE IS NO DISPUTE BETWEEN TH E PARTIES THAT THE ASSESSEE HAS STARTED BUSINESS IN AY 2004-05 AND HEN CE THE EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE FOR AN ONGOING BU SINESS. 12. THE HONBLE PUNJAB AND HARYANA HIGH COURT H AS ALSO CONSIDERED AN IDENTICAL ISSUE IN THE CASE OF CIT VS. LIBERTY GROU P MARKETING DIVISION (315 ITR 125) AND THE RATIO OF THE SAID DECISION WAS FOL LOWED BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF GEOFFREY M ANNER & CO. LTD (SUPRA). FOR THE SAKE OF CONVENIENCE, THE HEAD NOTES GIVEN B Y THE ITR IN THE CASE OF LIBERTY GROUP MARKETING DIVISION ARE EXTRACTED B ELOW:- BUSINESS EXPENDITURECAPITAL OR REVENUE EXPENDITUR E ADVERTISEMENT EXPENDITURE ON GLOW SIGN BOARDSEXPEN DITURE INCURRED BY THE ASSESSEE ON GLOW SIGN BOARDS DOES N OT BRING INTO EXISTENCE AN ASSET OR ADVANTAGE FOR THE ENDURI NG BENEFIT OF THE BUSINESSGLOW SIGN BOARD IS NOT AN ASSET OF PERMANENT NATURE BUT REQUIRES FREQUENT REPLACEMENTEXPENDITUR E ON GLOW SIGN BOARDS IS MADE BY ASSESSEE WITH AN OBJECT TO FACILITATE THE BUSINESS OPERATIONHENCE, EXPENDITUR E IS ALLOWABLE REVENUE EXPENDITURE HELD : THE EXPENDITURE INCURRED BY THE ASSESSEE ON GLOW SI GN BOARDS DOES NOT BRING INTO EXISTENCE AN ASSET OR ADVANTAGE FOR THE ENDURING BENEFIT OF THE BUSINESS, WHICH IS ATTRIBUTABLE TO THE CAPIT AL. THE GLOW SIGN BOARD IS NOT AN ASSET OF PERMANENT NATURE. IT HAS A SHORT LIFE. THE MATERIALS USED IN THE GLOW SIGN BOARDS DECAY WITH T HE EFFECT OF WEATHER. THEREFORE, IT REQUIRES FREQUENT REPLACEMEN T. THE TRIBUNAL HAS ALSO RECORDED A FINDING THAT THE ASSESSEE HAS TO IN CUR EXPENDITURE ON GLOW SIGN BOARDS REGULARLY IN ALMOST EACH YEAR. THI S FACT ITSELF SHOWS ITA. NO.3175/MUM/2013 & 3286/MUM/2013 10 THAT THE ADVANTAGE ACCRUED FROM THE USE OF THE GLOW SIGN BOARDS IS NOT OF ENDURING NATURE. THUS, THE EXPENDITURE BY THE AS SESSEE ON THESE GLOW SIGN BOARDS DID NOT BRING INTO EXISTENCE ANY A SSET OR ADVANTAGE FOR THE ENDURING BENEFIT OF THE BUSINESS. THE ASSES SEE HAS SPENT THE EXPENDITURE ON THE GLOW SIGN BOARDS WITH AN OBJECT TO FACILITATE THE BUSINESS OPERATION AND NOT WITH AN OBJECT TO ACQUIR E ASSET OF ENDURING NATURE. THEREFORE, THE SAID EXPENDITURE WAS OF REVE NUE NATURE AND THE TRIBUNAL HAS RIGHTLY TREATED THE SAME AS OF REVENUE NATURE. CIT VS. MADRAS AUTO SERVICE (P) LTD. (1998) 148 CTR (SC) 398 : (1998) 233 ITR 468 (SC) APPLIED. 13. IN ALL THE ABOVE SAID CASES, IT HAS BEEN HELD THAT THE EXPENDITURE INCURRED IN ORDER TO FACILITATE THE BUSINESS OPERAT ION AND NOT WITH THE OBJECT OF ACQUIRING ASSET OF ENDURING NATURE IS ALL OWABLE AS REVENUE EXPENDITURE. IN THE INSTANT CASE, WE HAVE ALREADY SEEN THAT THE ASSESSEE HAS BEEN INCURRING EXPENDITURE AND SALES PROMOTION SINCE AY 2004-05, MEANING THEREBY, THE ASSESSEE WAS REQUIRED TO INCUR THOSE EXPENSES EVERY YEAR IN ORDER TO RETAIN ITS POSITION IN THE MARKET. THERE SHOULD NOT BE ANY DISPUTE THAT THE ASSESSEE IS CONDUCTING ITS BUSINES S IN A COMPETITIVE ENVIRONMENT. FURTHER, THERE IS MERIT IN THE SUBMIS SION OF LD A.R THAT IT IS DIFFICULT TO ASSESS THE PERIOD OF BENEFIT DERIVED F ROM ADVERTISEMENT AND FURTHER IT IS ALSO DIFFICULT TO ASCERTAIN AS TO WHE THER ANY BRAND NAME WAS CREATED. HENCE, WE ARE OF THE VIEW THAT THE LD CIT (A) WAS NOT CORRECT IN LAW IN HOLDING THAT THE ASSESSEE HAS SPENT THE EXPE NDITURE ON ADVERTISEMENT AND SALES PROMOTION FOR BRAND BUILDIN G PURPOSE. IN OUR VIEW, THE ASSESSEE WAS RIGHT IN LAW IN CLAIMING THI S EXPENDITURE AS REVENUE EXPENDITURE. ACCORDINGLY, WE SET ASIDE THE ORDER O F LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO ALLOW THE ENTIRE AMOUNT SPENT ON ADVERTISEMENT AND SALES PROMOTION AS REVENUE EXPENDITURE. 14. SINCE WE HAVE UPHELD THE VIEW OF THE ASSESSEE , THE EXAMINATION OF THE QUESTIONS AS TO WHETHER THE SAME CONSTITUTES D EFERRED REVENUE EXPENDITURE OR CAPITAL ASSET, BEING INTANGIBLE AS SET ELIGIBLE FOR DEPRECIATION DO NOT ARISE. ITA. NO.3175/MUM/2013 & 3286/MUM/2013 11 15. THE NEXT URGED BY THE ASSESSEE RELATES TO THE A SSESSMENT OF UNACCOUNTED SERVICE INCOME OF RS.18.81 CRORES. THE AO NOTICED THAT THE ASSESSEE HAS BEEN CONSUMING ITS OWN PRODUCTS (CAPTI VE CONSUMPTION) WHILE PROVIDING SERVICES TO ITS CLIENTS. HENCE, TH E AO ASCERTAINED THE RATIO OF CAPTIVE CONSUMPTION WITH THE SERVICE CHARGES INC OME GENERATED BY IT. IN THE IMMEDIATELY PRECEDING YEAR, THE SERVICE INCO ME SHOWN BY THE ASSESSEE WAS 3100 TIMES OF THE VALUE OF CAPTIVE CON SUMPTION, WHEREAS DURING THE YEAR UNDER CONSIDERATION IT WAS ONLY 261 4 TIMES. HENCE, THE AO COMPUTED THE SERVICE CHARGES INCOME OF THE INSTA NT YEAR AT 3100 TIMES OF THE CAPTIVE CONSUMPTION AT RS.119.86 CRORES. TH E ASSESSEE HAD DECLARED THE SERVICE CHARGES INCOME AT RS.101.05 CR ORES. HENCE THE AO TREATED THE DIFFERENCE AMOUNT OF RS.18.81 CRORES AS UNACCOUNTED INCOME OF THE ASSESSEE. THE LD CIT(A) ALSO CONFIRMED THE SAID ADDITION. 16. THE LD A.R SUBMITTED THAT THE ASSESSEE IS PROV IDING 562 DIFFERENT TYPES OF SERVICES USING DIFFERENT TYPES OF ITS PROD UCTS. HE FURTHER SUBMITTED THAT THE ASSESSEE IS MANUFACTURING 48 TYP ES OF PRODUCTS AND THE COST OF ITEMS RANGE FROM RS.5/-PER UNIT TO RS.930/- PER UNIT. THE SERVICE CHARGES COLLECTED WOULD DEPEND UPON TYPES OF SERVIC ES RENDERED AND THE ALSO THE TYPES OF PRODUCTS USED. THE TYPE OF TREAT MENT TO BE GIVEN TO A CLIENT WOULD ALSO DEPEND UPON THE SKIN CHARACTERIST ICS. HE FURTHER SUBMITTED THERE IS NO STANDARD BILL OF MATERIAL A S NORMALLY AVAILABLE WITH THE MANUFACTURING CONCERNS. ACCORDINGLY HE SUBMITT ED THAT THERE IS NO ONE TO ONE CORRELATION BETWEEN THE QUANTITY OF ITEM S OF BEAUTY CARE PRODUCTS CONSUMED AND THE SERVICES RENDERED BY THE ASSESSEE. HE ALSO SUBMITTED THAT THE ASSESSEE IS HAVING ADEQUATE INTE RNAL CONTROLS AND CHECKS IN PLACE ON THE CONSUMPTION OF MATERIALS AND BOOKING OF SERVICE INCOME, SINCE ALL THE CLINICS ARE FOLLOWING DETAILE D STANDARD PROCEDURES RIGHT FROM CONTACTING THE CLIENT TILL THE COMPLETIO N OF THE TREATMENT. HE FURTHER SUBMITTED THAT THE ASSESSEE IS GENERATING A DEQUATE DOCUMENTATION ITA. NO.3175/MUM/2013 & 3286/MUM/2013 12 AT EACH STAGE AND HENCE THERE IS NO SCOPE FOR SUPPR ESSION OF INCOME. HE FURTHER SUBMITTED THAT THE ASSESSEE, AS A PART OF I TS SALES PROMOTION SCHEME, WOULD OFFER CERTAIN FREE AND DISCOUNTED SER VICES SCHEME. SUCH TYPES OF SCHEMES WOULD ALSO CONSUME BEAUTY PRODUCTS AND THE SAME WOULD NOT RESULT IN RECEIPT OF SERVICE CHARGES. AC CORDINGLY, HE SUBMITTED THAT THE TAX AUTHORITIES ARE NOT JUSTIFIED IN PRESU MING THAT THE SERVICE CHARGES INCOME ARE DIRECTLY PROPORTIONAL TO THE COS T OF CAPTIVE CONSUMPTION OF BEAUTY MATERIALS. 17. THE LD D.R, ON THE CONTRARY, SUBMITTED THAT THE SERVICE INCOME REPORTED BY THE ASSESSEE DURING THE CURRENT YEAR WA S LOWER IN PROPORTION THAN THAT DISCLOSED IN THE IMMEDIATELY PRECEDING YE AR. HE SUBMITTED THAT THE ASSESSEE COULD NOT PROPERLY EXPLAIN THE SAID DI FFERENCE AND HENCE THE LD CIT(A) WAS JUSTIFIED IN CONFIRMING THE ADDITION MADE IN THE SERVICE INCOME. 18. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE RECORD. THE MAIN CONTENTION OF THE ASSESSEE IS THAT THE CONSUMP TION OF MATERIALS WOULD DEPEND UPON THE TYPES OF SERVICES OFFERED, I. E, THE PRODUCT MIX WOULD DEPEND UPON THE TYPE OF SERVICE. THUS, ACCOR DING TO THE ASSESSEE, THE CAPTIVE CONSUMPTION OF MATERIALS CANNOT BE AT S TANDARD PROPORTION OF SERVICE INCOME RECEIPTS. ANOTHER SUBMISSION MADE W AS THAT THE ASSESSEE HAS OFFERED DISCOUNTS AND FREE TRIALS DURING THE YE AR UNDER CONSIDERATION. HOWEVER, THE LD CIT(A) HAS OBSERVED THAT THE ASSESS EE HAS NOT SUBSTANTIATED ITS CLAIM OF DISCOUNTS AND FREE TRIAL S. FURTHER THE AO HAS POINTED OUT THAT THE INVOICES WERE NOT SIGNED OR AU THENTICATED BY ANY OF THE CLIENTS AND HENCE THOSE VOUCHERS WERE SELF SERV ING INVOICES. IT APPEARS THAT THE ASSESSEE HAS CLAIMED THAT IT IS HA VING QUANTITATIVE DETAILS FOR CAPTIVE CONSUMPTION. HOWEVER, THE LD CIT(A) HA S OBSERVED AS UNDER IN THIS REGARD:- ITA. NO.3175/MUM/2013 & 3286/MUM/2013 13 FURTHER I FIND NO FORCE IN THE ARGUMENT THAT THERE IS QUANTITATIVE DETAILS OF CAPTIVE CONSUMPTION BECAUSE THERE IS NO DETAILS ON RECORD WHICH CAN BE ONE TO ONE CORRELATED. WHEN THERE IS COMPLETE FAILURE ON THE PART OF THE ASSESSEE TO CORRELATE THE CONSUMPTI ON WITH RECEIPTS, THERE IS NO PROPRIETY TO CLAIM THAT THERE IS OPENIN G BALANCE, PRODUCTION, PURCHASE, SALE AND CLOSING STOCK. DURING THE COURSE OF APPELLATE PROCEEDINGS BEFORE L D CIT(A), IT APPEARS THAT THE ASSESSEE HAS FURNISHED DETAILS OF 17 TYPES OF SERVICES (CLAIMED TO BE MAJOR SERVICES). HOWEVER, THE LD CIT(A) HAS TAK EN THE VIEW THAT THE FURNISHING OF DETAILS OF 17 SERVICES OUT OF 562 SER VICES CANNOT EXPLAIN THE DIFFERENCE IN RECEIPTS. 19. HOWEVER, WE ARE OF THE VIEW THAT THERE APPEAR S TO BE SOME MERIT IN THE CONTENTIONS OF THE ASSESSEE. NORMALLY THE SERV ICE RECEIPTS ARE DETERMINED ON THE BASIS OF FIXED COSTS, VARIABLE CO STS AND PROFIT ELEMENT. THE MATERIAL COST WOULD FALL IN THE CATEGORY OF VAR IABLE COSTS. ACCORDINGLY, THE COST OF PARTICULAR SERVICE WOULD NORMALLY BE DE TERMINED AT FIXED COST + VARIABLE COST + PROFIT AMOUNT. HENCE, COMPARISON O F THE VARIABLE COST TO THE TOTAL SERVICE RECEIPTS, IN OUR VIEW, MAY NOT BE RIGHT METHOD OF APPROACHING ISSUE. FURTHER, WHEN THE ASSESSEE IS OF FERING 562 TYPES OF SERVICES AND SINCE THERE IS A POSSIBILITY THAT ONE UNIT OF PRODUCT SHALL BE USED TO MANY CLIENTS, IT WOULD ALSO BE DIFFICULT TO ESTABLISH ONE TO ONE CORRELATION BETWEEN THE CONSUMPTION AND THE SERVICE RECEIPT. HENCE THE REJECTION OF BOOKS OF ACCOUNT AND CONSEQUENT ESTIMA TE OF INCOME UNDER THESE SET OF FACTS, IN OUR VIEW, IS NOT JUSTIFIED. ON THE CONTRARY, THE CLAIM OF CAPTIVE CONSUMPTION NEEDS TO BE EXAMINED ON AN O VERALL BASIS, I.E., BY MAKING TEST CHECKS. 20. THE ASSESSEE HAS CLAIMED TO HAVE MAINTAINED QU ANTITY DETAILS OF VARIOUS PRODUCTS. HENCE, ON A TEST CHECK BASIS, TH E SAID DETAILS CAN BE VERIFIED AND A DECISION CAN BE TAKEN. HENCE, WE AR E OF THE VIEW THAT THIS ISSUE NEEDS TO BE RESTORED TO THE FILE OF THE AO WI TH THE DIRECTION TO ITA. NO.3175/MUM/2013 & 3286/MUM/2013 14 EXAMINE THE CLAIM OF CAPTIVE CONSUMPTION. ACCORDIN GLY, WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE AND RESTORE THIS I SSUE TO THE FILE OF THE AO WITH THE DIRECTION TO EXAMINE THE CLAIM OF CAPTIVE CONSUMPTION ON A TEST CHECK BASIS AND TAKE APPROPRIATE DECISION IN ACCORD ANCE WITH THE LAW. 21. THE NEXT ISSUE URGED BY THE REVENUE RELATES TO THE ELIGIBILITY OF THE ASSESSEE TO CLAIM DEPRECIATION ON THE PRE-OPERATIVE EXPENSES. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD CAPITALI ZED EXPENSES TO THE TUNE OF RS.2.23 CRORES AND CLAIMED DEPRECIATION THE REON. THE SAID EXPENDITURE CONSISTED OF RENT, AUDIT FEE, SALARY, P ROFESSIONAL FEES, TRAVEL, DESIGNING ETC. THE AO TOOK THE VIEW THAT THESE EXP ENSES NEITHER FORM PART OF ASSETS NOR THEY CAN, PER SE, BE CONSIDERED TO BE FIXED ASSET. ACCORDINGLY HE DISALLOWED THE DEPRECIATION CLAIMED BY THE ASSESSEE. THE LD CIT(A), HOWEVER, ALLOWED THE DEPRECIATION. HENC E, THE REVENUE IS AGGRIEVED BY HIS DECISION. 22. WE HEARD THE PARTIES ON THIS ISSUE AND PERUS ED THE RECORD. THE LD CIT(A) HAS ALLOWED THE CLAIM OF THE ASSESSEE WITH T HE FOLLOWING OBSERVATIONS:- 6.3 I HAVE CONSIDERED THE FINDING OF THE AO AND RI VAL SUBMISSION OF THE APPELLANT CAREFULLY. I FIND THAT AO HAS WR ONGLY DISALLOWED DEPRECIATION WITHOUT ANY VALID REASONS WHEN IT IS E STABLISH THAT THERE IS SOME EXPENDITURE WHICH ARE PREOPERATIVE EXPENSES THEN SAME ARE TO BE AMORTIZED OR IT HAS TO BE CAPITALIZED IN RESPECTIVE ASSETS. AO HAS NOT PROVED BEYOND DOUBT AS TO HOW SUCH EXPEN SES ARE NOT RELATED TO ACQUISITION OF SUCH ASSETS. THERE IS NO PROPER REASONING IN PARA 7.4 OF THE ASSESSMENT ORDER HENCE SAME CAN NOT BE UPHELD. ON THE CONTRARY, LD. AR HAS RIGHTLY ARGUED THAT SUC H EXPENSES ARE ATTRIBUTABLE TO THE COST OF BRINGING THE ASSETS TO ITS WORKING CONDITION FOR ITS USE. THE RELIANCE PLACED IN THE CASES OF CHALLAPALLI SUGARS LTD. V. CIT 98 ITR 167(SC). GUJARAT HIGH CO URT IN ARVIND MILLS LTD. V. CIT 112 ITR 64(GUJ) BOMBAY HIGH COUR T IN CIT V. POLYCHEM LTD. 98 ITR 574 (BOM), CIT V/S NIRLON SYNTHETIC FIBRES & CHEMICALS LTD 137 ITR 1 (BOM) AND CIT V/S J.M.A. IN DUSTRIES LTD 129 ITR 373( DELHI) SUPPORTS THE CONTENTION OF THE APPELLANT. IF SUCH EXPENDITURE IS NOT TO BE CAPITALIZED THEN IT WOULD BE ALLOWED AS ITA. NO.3175/MUM/2013 & 3286/MUM/2013 15 REVENUE EXPENDITURE. AO HAS NOT CLARIFIED AS TO HOW THESE ARE NOT GENUINE EXPENDITURE, THEREFORE THE FINDING OF THE A O IS WITHOUT ANY LEG. THUS, CONSIDERING THE FACTS OF THE CASE AO IS DIRECTED TO ALLOW THE DEPRECIATION ON VARIOUS EXPENSES AFTER CAPITALI ZING THE SAME TO BE APPROPRIATE ACCOUNT OF ASSETS. IN VIEW OF THESE THE ALTERNATIVE GROUNDS BECOME INFRUCTUOUS. ON PERUSAL OF THE ORDER OF LD CIT(A) ON THIS ISSUE, WE NOTICE THAT THE FIRST APPELLATE AUTHORITY HAS FOLLOWED THE DECISION OF HO NBLE SUPREME COURT RENDERED IN THE CASE OF CHALLAPALLI SUGARS LTD (SUP RA). ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN THE DECISION OF LD CIT(A) ON THIS ISSUE. 23. THE NEXT ISSUE URGED BY THE REVENUE RELATES T O THE DISALLOWANCE MADE U/S 40A(3) OF THE ACT. THE AO NOTICED THAT TH E ASSESSEES SISTER CONCERN NAMED M/S MARICO LTD HAD INCURRED CERTAIN E XPENSES ON BEHALF OF THE ASSESSEE HEREIN. ACCORDINGLY, THE ASSESSEE HAD ACCOUNTED FOR THE EXPENSES BY CREDITING THE ACCOUNT OF M/S MARICO LTD , I.E., THROUGH JOURNAL ENTRIES. THE AO TOOK THE VIEW THE EXPENDITURE INCU RRED THROUGH JOURNAL ENTRIES DOES NOT FALL IN ANY OF THE EXEMPTIONS PROV IDED UNDER RULE 6DD OF THE IT RULES. HE FURTHER OBSERVED THAT THE ASSESSE E HAS NOT PROVED THAT M/S MARICO LTD HAD INCURRED EXPENSES OTHERWISE THAN THE ACCOUNT PAYEE CHEQUES OR THROUGH DEMAND DRAFTS OR RTGS. ACCORDIN GLY, HE DISALLOWED THE EXPENSES INCURRED UNDER THE HEAD SECONDED EMPL OYEES AMOUNTING TO RS.8.44 CRORES AND OTHER EXPENSES AMOUNTING TO RS.44.98 LAKHS, BY INVOKING THE PROVISIONS OF SEC. 40A(3) OF THE ACT. THE LD CIT(A) HOWEVER, DIRECTED THE AO TO DELETE THE DISALLOWANCE OF EXPEN DITURE U/S 40A(3) OF THE ACT. THE REVENUE IS AGGRIEVED BY HIS DECISION. 24. WE HEARD THE PARTIES AND PERUSED THE RECORD. THE TOTAL ADDITION MADE BY THE ASSESSING OFFICER WAS RS.8.89 CRORES. ACCORDING TO THE ASSESSEE, THERE WAS TOTALING ERROR OF RS.1.08 CRORE S AND FURTHER A SUM OF RS.2.00 CRORE WAS LOAN TRANSACTION. THUS, THE REMA INING EXPENSES ITA. NO.3175/MUM/2013 & 3286/MUM/2013 16 INCURRED BY M/S MARICO LTD ON BEHALF OF THE ASSESSE E WERE CLAIMED TO BE AS GIVEN BELOW:- ON ACCOUNT OF GENERAL EXPENSES 44,98,450 ON ACCOUNT OF SECONDMENT EMPLOYEES 5,35,53,850 ACCORDING TO LD CIT(A), THE SALARY WAS GIVEN TO THE EMPLOYEES BY DIRECT CREDIT TO THEIR BANK ACCOUNTS. HOWEVER, THE LD CIT (A) DID NOT REFER TO ANY MATERIAL IN SUPPORT OF THIS CONCLUSION. HE HAS FUR THER EXPRESSED THE VIEW THAT THE PAYMENTS MADE THROUGH JOURNAL VOUCHERS ARE NOT HIT BY THE PROVISIONS OF SEC. 40A(3) OF THE ACT. WE ARE UNABL E TO ACCEPT THE SAID VIEW. WHEN MARICO LTD WAS INCURRING EXPENSES ON BE HALF OF THE ASSESSEE, IT IS REQUIRED TO COMPLY WITH THE PROVISIONS OF SEC . 40A(3) OF THE ACT. OTHERWISE, THE ASSESSEE IS REQUIRED TO SHOW THAT TH E PAYMENTS ARE COVERED BY THE EXCEPTIONS GIVEN IN RULE 6DD OF IT R ULES. SINCE THE ASSESSEE HAS CLAIMED THAT M/S MARICO LTD HAS INCURR ED EXPENSES THROUGH CHEQUE PAYMENTS WHEREVER NECESSARY, INCLUDING THE S ALARY PAYMENT MADE TO SECONDED EMPLOYEES, WE ARE OF THE VIEW THIS ISSU E REQUIRES FRESH EXAMINATION AT THE END OF THE ASSESSING OFFICER. A CCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE AND RESTORE TH E SAME TO THE FILE OF THE ASSESSING OFFICER FOR FRESH EXAMINATION. 25. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TREATED AS ALLOWED AND THE APPEAL OF THE REVENUE IS TREATED AS PARTLY ALLO WED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 4TH MAR, 2015. () $ * +, 4TH MAR, 2015 ) # -% . SD SD ( / VIVEK VARMA) ( . . / B.R. BASKARAN) / JUDICIAL MEMBER / ACCOUNTANT MEMBER $ % MUMBAI:4TH MAR,2015. ITA. NO.3175/MUM/2013 & 3286/MUM/2013 17 . . ./ SRL , SR. PS !'#$ %$&' / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. $ 0 & ( ) / THE CIT(A)- CONCERNED 4. $ 1& / CIT CONCERNED 5. 2- &3 , ' 3 , $ % / DR, ITAT, MUMBAI CONCERNED 6. -4 5% / GUARD FILE. 6 $ / BY ORDER, TRUE COPY 7 (ASSTT. REGISTRAR) ' 3 , $ % /ITAT, MUMBAI