DCIT, New Delhi V. M/s. Jai Parabolic Springs Ltd, New Delhi

ITA 3435/DEL/2009

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 0839 (ITAT-DELHI)
• Duration Of Justice: 2 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-10-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Assessment Year: 2006-2007
• Appeal Filed On: 04-08-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GAJANAND MEENA
• Assessee Lawyers: O P SAPRA
• Keywords: Capital asset; Depreciation; Revenue expenditure
• Section: 37(1); 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH `I : NEW DELHI) BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER AND SHRI K.D. RANJAN, ACCOUNTANT MEMBER ITA NO.3435/DEL./2009 (ASSESSMENT YEAR : 2006-07) DCIT, CIRCLE 4(1), VS. M/S JAI PARABOIC SPRINGS LTD., NEW DELHI. 2-PARK LANE, BEHIND 3-D, VSANT KUNJ, KISHAN GARH, NEW DELHI. (PAN/GIR NO.AAACJ1830C) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI O.P. SAPRA & SANDEEP SAPRA, REVENUE BY : SHRI GAJANAND MEENA, CIT(DR) ORDER PER K.D. RANJAN: AM THIS APPEAL BY THE REVENUE FOR ASSESSMENT YEAR 2006 -07 ARISES OUT OF THE ORDER OF COMMISSIONER OF INCOME-TAX (APPEALS)-VII, NEW DELHI . THE GROUNDS OF APPEAL ARE REPRODUCED AS UNDER: 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD.COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED I N DELETING THE DISALLOWANCE OF RS.2,59,162 ON ACCOUNT OF DEFERRED REVENUE EXPENDITURE IGNORING THE FACTS AND REASONS AS MENTIONED BY THE ASSESSING OFFICER IN HIS ASSESSMENT ORDER AND NOTWITHSTANDING THAT THE S AID DISALLOWANCE WAS IN CONFORMITY WITH THE ACCOUNTING POLICY ADOPTED BY TH E ASSESSEE COMPANY. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD.COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED I N DELETING RS.10,63,125/- ON ACCOUNT OF DEPRECIATION ON GOODW ILL IGNORING THAT NO INTANGIBLE ASSETS IN THE GUISE OF ANY BRAND, PATENT OR ANY TRADEMARK WAS BEQUEATHED TO THE ASSESSEE COMPANY WHICH COULD BE H ELD AS AN INTANGIBLE ASSET ELIGIBLE FOR THE BENEFIT OF THE PROVISIONS OF SECTION 32 OF I.T. ACT, 1961. MOREOVER, THE LEGISLATURE HAS SPECIFICALLY E XCLUDED SUCH GOODWILL AS A CAPITAL ASSET ELIGIBLE FOR THE BENEFIT OF THE PROVISIONS OF SECTION 32 OF I.T. ACT, 1961. I.T.A. NO.3435/DEL./2009 (A.Y. : 2006-07) 2 2. THE FIRST ISSUE FOR CONSIDERATION RELATERS TO D ELETING THE ADDITION OF RS.2,59,162/- ON ACCOUNT OF DEFERRED REVENUE EXPENDITURE. THE FA CTS OF THE CASE STATED IN BRIEF ARE THAT THE ASSESSEE INCURRED RS.4,56,82,429/- ON ACCOUNT O F SAMPLE DEVELOPMENT EXPENSES DURING THE YEAR UNDER CONSIDERATION. OUT OF SUCH EXPENSES, 1/6 TH AMOUNT WAS WRITTEN OFF AS PER SCHEDULE IX OF THE AUDITED PROFIT AND LOSS A CCOUNT AND THE BALANCE WAS CARRIED FORWARD TO BE WRITTEN OFF IN THE SUBSEQUENT FIVE YE ARS. HOWEVER, IN THE RETURN OF INCOME, THE AMOUNT OF RS.1,62,86,267/- BEING SAMPLE DEVELO PMENT EXPENSES WAS ADDED BACK TO THE INCOME AND TOTAL EXPENDITURE ACTUALLY INCURRED AMOUNTING TO RS.4,22,02,429/- REFLECTED UNDER THE HEAD SAMPLE DEVELOPMENT EXPENS ES DURING THE YEAR WERE CLAIMED AS DEDUCTION. THE ASSESSING OFFICER WAS OF THE VIEW T HAT EXPENDITURE INCURRED ON DEVELOPMENT OF SAMPLES FOR NEW PRODUCTS WAS AN EXPE NDITURE WHICH WAS LIKELY TO BENEFIT THE ASSESSEE FOR A PERIOD BEYOND THE YEAR UNDER CON SIDERATION. IN OTHER WORDS, IT MEANT THAT THE EXPENDITURE ON DEVELOPING NEW PRODUCT WILL NOT ONLY PROVE ADVANTAGEOUS FOR THE COMPANY IN THE YEAR IN WHICH THEY WERE INCURRED, BU T WILL ALSO PROVE BENEFICIAL IN THE YEARS TO FOLLOW AND, THEREFORE, IT WOULD BE INCORRE CT TO CHARGE THE ENTIRE COST ON DEVELOPING NEW PRODUCT IN THE YEAR IN WHICH IT WAS INCURRED. HE WAS, THEREFORE, OF THE VIEW THAT EXPENDITURE INCURRED ON DEVELOPMENT OF SA MPLES RESULTED IN ACQUISITION OF CAPITAL ASSET. HE FURTHER OBSERVED THAT SUCH ASSET S WERE ELIGIBLE FOR DIMINUTION IN SIMILAR MANNER AS PROVIDED IN THE FINANCIAL RESULTS ACCORDI NG TO RECOGNIZED POLICIES OF ACCOUNTING. NO DIFFERENTIAL TREATMENT OF EXPENDITUR E OF SIMILAR NATURE COULD BE ALLOWED IN THE ABSENCE OF SPECIFIC PROVISIONS OF ALLOWANCE OF THE SAME UNDER I.T. ACT, 1961. HE ACCORDINGLY WAS OF THE VIEW THAT ENTIRE EXPENDITURE OF RS.4,56,82,429/- WAS NOT TO BE ALLOWED FOLLOWING THE CONSISTENCY OVER THE YEARS FO R PREPARING ITS FINANCIAL STATEMENTS. HE WAS OF THE VIEW THAT ONLY RS.1,62,86,267/- AS CO MPUTED BY THE ASSESSEE COMPANY AS EXPENSES FOR THE YEAR SHALL BE ALLOWABLE AS DEDUCTI ON. HE ACCORDINGLY DISALLOWED THE AMOUNT OF RS.2,59,16,162/- (RS.4,22,249-1,62,86,267 ). 3. ON APPEAL, THE LD.COMMISSIONER OF INCOME-TAX (AP PEALS) FOLLOWING HIS DECISION FOR ASSESSMENT YEARS 2005-06 & 2002-03 ALLOWED THE CLAIM OF THE ASSESSEE. 4. BEFORE US, LD.CIT(DR) SUPPORTED THE ORDER OF ASS ESSING OFFICER. ON THE OTHER HAND, LD.AR OF THE ASSESSEE RELIED ON THE ORDER OF ITAT FOR ASSESSMENT YEARS 2003-04, I.T.A. NO.3435/DEL./2009 (A.Y. : 2006-07) 3 2004-05 & 2005-06 WHEREIN SIMILAR DELETION OF ADDIT ION BY THE LD.COMMISSIONER OF INCOME-TAX (APPEALS) WAS UPHELD. 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THIS ISSUE IS COVERED BY THE DECISION OF ITAT, DELHI BENCH D IN I.T.A. NOS.3365 & 3335 FOR ASSESSMENT YEARS 2002-03 & 2004 -05 DATED 6.7.2009, CONFIRMED THE ORDER OF LD.COMMISSIONER OF INCOME-TAX (APPEALS ) DELETING THE ADDITION. THE BENCH WHILE DELETING THE ADDITION OBSERVED AS UNDER: 6. HAVING GIVEN OUR CONSIDERATION TO THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN THE LIGHT OF DECISIONS CITED AT THE BAR, WE DO NOT FIND ANY SUBSTANCE IN THESE APPEALS OF THE REVENUE. IT IS WELL SETTLED PREPOSIT ION THAT QUESTION WHETHER CLAIM OF EXPENDITURE IS TO BE ALLOWED OR NOT, HAS TO BE CONS IDERED AS PER STATUTORY PROVISION AND NOT ON THE BASIS OF ENTRY MADE IN THE BOOKS OF ACCOUNT. THE JURISDICTIONAL HIGH COURT AS WELL AS GUJARAT HIGH COURT HAVE TAKEN THE VIEW THAT ASSESSEE CAN BE ALLOWED FULL EXPENSES IN THE YEAR IN WHICH EXPEN SES WERE INCURRED AS REVENUE EXPENSES, NOTWITHSTANDING THE FACT THAT IN THE BOOK S OF ACCOUNT, THESE WERE SHOWN AS DEFERRED REVENUE EXPENDITURE. IN FACT IN THE CAS E OF THE ASSESSEE FOR THE ASSESSMENT YEAR 1990-91, THE ASSESSEE WAS ALLOWED E XPENDITURE NOT CLAIMED IN THE RETURN AS THOSE WERE FOUND TO BE OF REVENUE NATURE. THE DECISION IN THE CASE OF SHREYAS SHIPPING LTD. (SUPRA) CITED BY THE REVENUE IS NOT APPLICABLE AND DISTINGUISHABLE ON FACTS. THE TRIBUNAL AS A FACT FO UND, THE ASSESSEE HAD CARRIED OUT EXTREMELY HEAVY REPAIRS AND FOR THIS REASON IN THE BOOKS OF ACCOUNT, THE EXPENDITURE WAS SPREAD OVER MORE THAN ONE ACCOUNTIN G YEAR. THE TRIBUNAL FURTHER OBSERVED, IN THE INSTANT CASE, IT IS NOT T HE CASE OF THE ASSESSEE THAT THE TREATMENT GIVEN BY IT IN THE BOOKS OF ACCOUNT IS ER RONEOUS. THE SAID CASE, THEREFORE, WAS DECIDED ON PECULIAR FACTS AND IS NOT APPLICABLE HERE. 6.1 THERE IS NO DISPUTE IN THE PRESENT CASE THAT EX PENDITURE IN QUESTION WAS INCURRED FOR DEVELOPMENT OF SAMPLES USED BY THE ASS ESSEE FOR CARRYING ON ITS BUSINESS MORE EFFECTIVELY AND MORE EFFICIENTLY. EXP ENSES WERE INCURRED FOR PURPOSES OF BUSINESS. SAMPLES LIKE ADVERTISEMENT, M AY BE BENEFICIAL TO THE ASSESSEE NOT ONLY IN THE YEAR IN WHICH EXPENSES ARE INCURRED BUT IN OTHER YEARS ALSO. BUT ON THAT ACCOUNT, EXPENSES CANNOT BE TREAT ED AS OF CAPITAL NATURE. THIS PROPOSITION IS NOW WELL ACCEPTED IN THE LIGHT OF DE CISION OF SUPREME COURT NOTED BY LEARNED CIT (APPEALS) IN THE IMPUGNED ORDER. THE RE BEING NO DISPUTE THAT EXPENSES WERE NECESSARY FOR EFFICIENT RUNNING OF BU SINESS AND, THEREFORE, FOR THE PURPOSES OF BUSINESS, THESE WERE REQUIRED TO BE ALL OWED IN TERMS OF SECTION 37(1) OF THE INCOME-TAX ACT. ON FACTS, WE DO NOT FIND ANY ERROR IN THE APPROACH OF LEARNED CIT (APPEALS). THE VIEW OF LEARNED CIT (APP EALS) IN BOTH THE ASSESSMENT YEARS IS HEREBY CONFIRMED AND THE COMMON GROUND RAI SED BY THE REVENUE IS DISMISSED. I.T.A. NO.3435/DEL./2009 (A.Y. : 2006-07) 4 6. RESPECTFULLY FOLLOWING THE PRECEDENT, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD.COMMISSIONER OF INCOME-TAX (APPEALS) DELETIN G THE ADDITION. 7. THE NEXT ISSUE FOR CONSIDERATION RELATES TO DELE TING THE ADDITION OF RS.10,63,125/- ON ACCOUNT OF DEPRECIATION GOODWILL. THE FACTS OF THE CASE RELATING TO THIS GROUND OF APPEAL ARE THAT DURING THE COURSE OF ASSESSMENT PRO CEEDINGS, THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN THE DEPRECIATION CLAIMED ON GOODWILL AT RS.10,63,125/-. IT WAS SUBMITTED BY THE ASSESSEE THAT GOOD WILL REPRESENTE D PURCHASE OF MARKETING AND COMMERCIAL PRICE FORM M/S WELKIN AUTO LTD. IN THE Y EAR 1998-99. IT WAS ASSERTED THAT ANY INTANGIBLE ASSET OF WHICH COMMERCIAL RIGHTS WAS PURCHASED AND, THEREFORE, DEPRECIATION WAS ALLOWABLE AS PER SECTION 32(1)(II) READ WITH EXPLANATION (3) OF THE I.T. ACT. HOWEVER, THE ASSESSING OFFICER DISALLOWED THE CLAIM OF THE ASSESSEE. 8. ON APPEAL, LD.COMMISSIONER OF INCOME-TAX (APPEAL S) FOLLOWING HIS DECISION FOR EARLIER YEARS ALLOWED THE CLAIM OF THE ASSESSEE. 9. BEFORE US, LD.CIT(DR) SUPPORTED THE ORDER OF THE ASSESSING OFFICER. ON THE OTHER HAND, LD.AR OF THE ASSESSEE RELIED ON THE ORD ER OF ITAT FOR ASSESSMENT YEAR 2005- 06 WHEREIN ORDER OF THE LD.COMMISSIONER OF INCOME-T AX (APPEALS) WAS UPHELD DELETING THE SIMILAR ADDITION. 10. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THIS ISSUE IS COVERED BY THE DECISION OF THE ITAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2005-06 IN I.T.A. NO.3336/DEL./2008 DATED 06.07.2009. THE TRIBUNAL CONFIRMED THE ORDER OF LD.COMMISSIONER OF INCOME-TA X (APPEALS) BY OBSERVING AS UNDER: 5. ON CAREFUL CONSIDERATION OF RIVAL SUBMISSIONS, W E ARE OF VIEW THAT LEARNED CIT (APPEALS) HAS RIGHTLY ALLOWED RELIEF TO THE ASS ESSEE AFTER CONSIDERING RELEVANT FACTS AND CIRCUMSTANCES OF THE CASE. THE ASSESSEE H AS NOT CLAIMED DEPRECIATION ON GOODWILL. IT ACQUIRED COMMERCIAL RIGHTS TO SELL PRO DUCTS UNDER THE TRADE NAME AND PAID CONSIDERATION IN DISPUTE FOR ACQUIRING MARKETI NG AND TERRITORIAL RIGHTS TO SELL THROUGH DEALERS AND DISTRIBUTORS I.E. THE NETWORK C REATED BY THE SELLER FOR SALE IN INDIA. UNDER THE AGREEMENT, IT BECAME ENTITLED TO U SE OF INFRASTRUCTURE DEVELOPED BY THE SELLER. RIGHTS WERE ACQUIRED SINCE 1.4.1998 AND THESE RIGHTS HAVE ALL ALONG BEEN TREATED AS AN ASSET ENTITLED TO DEPRECIATION A ND DEPRECIATION WAS ACTUALLY ALLOWED IN THE PAST. THE LEARNED ASSESSING OFFICER, IN OUR VIEW, WAS NOT CORRECT IN MAKING A DEPARTURE FROM THE PAST AND IN HOLDING THA T PAYMENT WAS MADE FOR I.T.A. NO.3435/DEL./2009 (A.Y. : 2006-07) 5 ACQUISITION OF GOODWILL. PAYMENT HAD BEEN MADE FO R ACQUISITION OF COMMERCIAL RIGHTS ON WHICH DEPRECIATION IS PERMISSIBLE. THE AS SESSING OFFICER WAS FURTHER NOT JUSTIFIED IN TREATING ENTRIES IN THE BOOKS OF ACCOU NT AS CONCLUSIVE AND IN TAKING PAYMENT IN DISPUTE AS CONSIDERATION FOR ACQUISITION OF GOODWILL. IT IS NOW MORE OR LESS SETTLED THAT ENTRIES IN BOOKS CANNOT BE TREATE D AS CONCLUSIVE AND TRUE NATURE OF TRANSACTION HAS TO BE DETERMINED WITH REFERENCE TO LAW. THE LEARNED CIT (APPEALS) IN THE IMPUGNED ORDER EXAMINED THE ISSUE WITH REFER ENCE TO AGREEMENT AND FOUND THAT PAYMENT WAS MADE FOR ACQUISITION OF COMMERCIAL RIGHTS. ON FACTS AND CIRCUMSTANCES OF THE CASE, WE DO NOT FIND ANY ERROR IN THE APPROACH OF THE LEARNED CIT (APPEALS). HIS ACTION IS HEREBY CONFIRMED. 11. SINCE IDENTICAL ISSUE IS INVOLVED IN THE YEAR U NDER CONSIDERATION, WE DO NOT FIND ANY REASON TO DIFFER WITH THE DECISION OF THE TRIBU NAL IN ASSESSMENT YEAR 2005-06. RESPECTFULLY FOLLOWING THE PRECEDENT, THIS GROUND O F APPEAL RAISED BY THE REVENUE IS DISMISSED. 12. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. 13. ORDER PRONOUNCED IN OPEN COURT AFTER CONCLUSION OF THE HEARING ON 05.10.2009. SD/- SD/- [A.D. JAIN ] [ K. D. RANJAN ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : OCT. 05, 2009. *SKB* COPY OF THE ORDER FORWARDED TO : - 1. APPELLANT. 2. RESPONDENT. 3. CIT, 4. CIT (APPEALS)-VII, NEW DELHI. 5. CIT(DR), ITAT, NEW DELHI. TRUE COPY. BY ORDER. ASSISTANT REGISTRAR, ITAT. I.T.A. NO.3435/DEL./2009 (A.Y. : 2006-07) 6