M/s Nicks Exports (P) Ltd, Bolangir V. ACIT, Sambalpur

ITA 344/CTK/2011

• Counselvise Citation: 34422114 RSA 2011
• Duration Of Justice: 1 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-08-2011
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 05-08-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 28-06-2011
• Court: TRIBUNAL
• Department Lawyers: A BHATTACHARJEE
• Assessee Lawyers: P K MISHRA
• Keywords: Capital asset; Capital expenditure

Judgement Text

IN THE INCME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK BEFORE : HONBLE SHRI K.K.GUPTA, ACCOUNTANT MEMBER, AND HONBLE SHRI K.S.S.PRASAD RAO, JUDICIAL MEMBER. ITA NO. 344/CTK/2011 (ASSESSMENT YEAR 2006 - 07) M/S.NICKS EXPORTS (P) LTD., AT: RAGHUN ATHPARA, P.O.TITILAGARH, DIST. BOLANGIR, PAN AABCN 3791 P VERSUS ACIT, CIRCLE 2(1), SAMBALPUR. (APPELLANT) (RESPONDENT) FOR THE APPELLANT: SHRI P.K.MISHRA, AR FOR THE RESPONDENT SHRI A.BHATTACHARJEE, DR ORDER SHRI K.K.GUPTA, ACCOUNTANT MEMBER : THIS APPEAL BY THE ASSESSEE IS ON A SOLITARY GROUND AGITATING THE CONFIRMATION OF THE EXPENDITURE DISALLOWED ON ACCOUNT OF FOREIGN TRAVEL INCURRED BY THE MANAGING DIRECTOR OF THE ASSESSEE - COMPANY. 2. THE BRIEF FACTS AS HAVE BEEN BROUGHT ON RECORD ARE THAT THE ASSESSEE COMPANY FILED RETURN OF INCOME FOR THE IMPUGNED ASSESSMENT YEAR DISCLOSING INCOME OF 18,28,288. THE ASSESSING OFFICER IN PROCEEDINGS U/S.143(3) VERIFIED THE DETAILS OF FOREIGN TRAVEL EXPENSES INCURRED BY THE ASSESSEE WHEN HE OBSERVED THAT THE ASSESSEE DEALS IN EXPORT OF WHEAT, SUGAR, PAPER, BROKEN RICE AND CEMENT. IT EXPORTED WHEAT WORTH 1.80 CRORES IN THE IMPUGNED ASSESSMENT YEAR, HOWEVER, DID NOT CLAIM ANY DEDUCTION IN RESPECT OF INCOME THEREFROM, AS THE SAME HAD BEEN DONE AWAY WITH. THE ASSESSING OFFICER VERIFIED THE NEED FOR INCURRING EXPENDITURE ON FOREIGN TRAVEL AMOUNTING TO 13,8 3,156. THE ASSESSING OFFICER WAS SUBMITTED WITH THE DETAILS OF INCURRING EXPENDITURE NAMELY COST OF TICKETS AND THE FOREIGN EXCHANGE ON DAILY ALLOWANCE INCURRED AS SANCTIONED BY THE RESERVE BANK OF INDIA. IT WAS SUBMITTED BY THE ASSESSEE THAT THE COMPANY W ANTED TO EXPAND ITS BUSINESS ACTIVITIES BY ESTABLISHING AN ART GALLERY IN DELHI AND BECAUSE THE MANAGING DIRECTOR HAD VARIED EXPERIENCE PROPOSED TO SET UP AN ART GALLERY IN DELHI ITA NO.344/CTK/2011 2 WHICH APPEARED TO BE MORE LUCRATIVE INSOFAR AS THE ASSESSEE HAD BEEN EXPORTIN G CONSUMABLE ITEMS TO DEVELOPING NATIONS ONLY. THE BUSINESS OF ART GALLERY WOULD FLOURISH IN VIEW OF THE FACT THAT THE WESTERN DEVELOPED COUNTRIES APPRECIATE ART AND INDIAN CULTURE WHICH ARE DEPICTED IN THESE ANCIENT PAINTINGS AND SCULPTURE FOR THE PURPOSE OF EXPANDING ITS BUSINESS. THE ASSESSING OFFICER NEGATED THE CLAIM BY HOLDING THAT THE EXPENDI TURE HAD NO RELEVANCE WITH THE NATURE OF THE ASSESSEES BUSINESS ACTIVITIES. AGGRIEVED THE ASSESSEE APPEALED BEFORE THE FIRST APPELLATE AUTHORITY WHO CONFIRMED T HE ACTION OF THE ASSESSING OFFICER BY HOLDING THAT THE EXPENSES INCURRED ON FOREIGN TRAVEL HAD NO RELEVANCE TO THE EXISTING BUSINESS WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAD BEEN ABLE TO RENDER INCOME FROM ESTABLISHING AN ART GALLERY IN DELHI IN THE ASSESSMENT YEAR 2009 - 10. 3. THE LEARNED COUNSEL FOR THE ASSESSEE , INITIATING HIS ARGUMENTS , SUBMITTED THAT THE EXPORT ACTIVITIES CARRIED OUT BY THE ASSESSEE REQUIRED THE ASSESSEE TO INCUR EXPENDITURE ON FOREIGN TRAVEL WHICH WAS SUBJECTED TO SCRUTINY B Y THE ASSESSING OFFICER. HE POINTED OUT THAT THE EXPENDITURE INCURRED IS NOT DISPUTED INSOFAR AS THE EXPENSES INCURRED ARE FOR THE TRAVEL AND STAY OF THE MANAGING DIRECTOR MRS. VANDANA VARGAB WHO WAS KEEN IN OPENING OF AN ART GALLERY WHICH WAS PART OF ITS MAIN OBJECT OF THE COMPANY AS HAS BEEN INSCRIBED IN THE MEMORANDUM OF ARTICLES OF ASSOCIATION AS PER THE COPY FURNISHED. THEREFORE, THE ACTIVITY OF INCURRING EXPENDITURE IS DIRECTLY RELATED TO THE MAIN OBJECTS OF THE COMPANY WHEN THE ASSESSING OFFICER CHOS E TO HOLD THAT THE EXPORT OF WHEAT, PAPERS, CEMENT DID NOT REQUIRE INCURRING OF FOREIGN TRAVEL EXPENSE. HE POINTED OUT THAT THE ASSESSEE COMPANY COULD UNDERTAKE ANY BUSINESS ACTIVITY INSOFAR AS THE MAIN OBJECT S OF ITS MEMORANDUM & ARTICLES OF ASSOCIATION P ERMITTED IT TO CARRY ON. THE ASSESSEE WAS INVOLVED IN REGISTERING ITSELF FOR SALES TAX AND PERMISSION TO OPEN ART ITA NO.344/CTK/2011 3 GALLERY IN DELHI WHICH INDEED, AS CAN BE PERUSED IN THE PHAMPLET WAS , WHEN THE MANAGING DIRECTOR MRS.VANDANA VARGAB BEING THE CURATOR BECAME A WARE OF THE APPRECIATION AND KEEN INTEREST OF INDULGENCE OF THE DEVELOPING COUNTRIES IN PROMOTING ART AND CULTURE TO THE WESTERN COUNTRIES. THE EXPENDITURE, THEREFORE, INCURRED WAS PART AND PARCEL OF THE BUSINESS, WHICH THE AUTHORITIES BELOW NEGATED THE CL AIM BY HOLDING THAT THE BUSINESS HAD NOT BEGAN THEREFORE COULD NOT BE ALLOWED IN THE IMPUGNED ASSESSMENT YEAR. 4. THE LEARNED COUNSEL FOR THE ASSESSEE VEHEMENTLY ARGUED THAT IT WAS NOT THE CASE OF THE ASSESSING OFFICER TO VISUALIZE THAT THE BUSINESS OF AN ART GALLERY WOULD NOT BEG I N AND THE ACTIVITIES WHICH HAD ALREADY BEEN RENDERED BY THE ASSESSEE DID NOT REQUIRE SUCH EXPENDITURE. IT WAS NOT THE CASE OF THE ASSESSEE TO INDICATE THAT THE FOREIGN TRAVEL HAS BEEN INCURRED FOR THE PURPOSE OF ITS EXPORT BUSINE SS WHEN IT CLEARLY SUBMITTED THAT THE PURPOSE OF THE BUSINESS WAS TO START AN ART GALLERY WHICH HAD PRIOR SANCTION FROM THE MEMORANDUM OF ARTICLES OF ASSOCIATION AS WELL AS THE PROCEDURE FOR OBTAINING RECOGNI TION BY THE VARIOUS GOVERNMENT AGENCIES. HE THER EFORE SUBMITTED THAT NEITHER OF THE AUTHORITIES BELOW COULD GIVE A FINDING THAT WHETHER IT WAS PREMATURE TO INCUR SUCH EXPENDITURE SIMPLY BECAUSE THE TRADING ACTIVITIES DID NOT REQUIRE INCURRING OF FOREIGN TRAVEL EXPENSES WHICH WAS NOT JUSTIFIED ON THE FA CTS AND CIRCUMSTANCES OF THE ASSESSEES CASE. HE POINTED OUT THAT THE ASSESSEE SUBMITTED THE FACT WHICH IN ACCORDING WITH THE PROVISIONS OF THE I.T.ACT COULD NOT BE DENIED WHEN THE ASSESSING OFFICER HAS ACCEPTED THE PROFITS FROM THE BUSINESS OF MAINTAININ G AN ART GALLERY IN THE SUBSEQUENT YEAR. THE LEARNED CIT(A) WAS THEREFORE MISDIRECTED TO HOLD THAT THE EXPENDITURE IN RELATION TO THE ONE BUSINESS CANNOT BE CLAIMED FOR ANOTHER INDEPENDENT BUSINESS. THE ASSESSEE COMPANY HAS BEEN RENDERING VARIOUS INCOMES F ROM VARIOUS ACTIVITIES AS AUTHORIZED IN THE MEMORANDUM OF ARTICLES ITA NO.344/CTK/2011 4 OF ASSOCIATION THEREFORE CLEARLY ENTITLED IT TO CLAIM EXPENSES INCURRED FOR THE ASSESSEES BUSINESS ONLY. 5. THE LEARNED DR SUBMITTED THAT THE AUTHORITIES BELOW H AVE RIGHTLY DISALLOWED THE CLAIM INSOFAR AS THE ASSESSEE HAD NOT CARRIED OUT THE ACTIVITIES OF RENDERING INCOME FROM ART GALLERY IN THE IMPUGNED ASSESSMENT YEAR THEREFORE WAS DISALLOWED WHICH HE PRAYED TO BE CONFIRMED. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. ON OUR CAREFUL CONSIDERATION OF THE FACTS, WE ARE INCLINED TO HOLD THAT IT WAS NOBODYS CASE THAT THE ASSESSEE COULD NOT CARRY OUT ITS EXPORT BUSINESS WITHOUT INCURRING FOREIGN TRAVEL EXPENSES. THE ONLY REASON, THE LEARNED DR, HAS SUBM ITTED FOR DISALLOWANCE IS THAT THE ASSESSEE COULD NOT SUBMIT THE NATURE OF EXPENDITURE INCURRED TO SUBSTANTIATE ITS CLAIM THAT THE ASSESSEE IS SEEKING INDULGENCE FOR ESTABLISHING A BUSINESS OF AN ART GALLERY. THE EXPENSES INCURRED ARE UNDISPUTED INSOFAR AS THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE CLAIM OF EXPENDITURE IS BASICALLY FOR TRAVEL AND THE SAME WAS ALLOWED BY THE RESERVE BANK OF INDIA, EXCHANGE CONTROL DEPARTMENT. THE APPRECIATION OF AN ART CAN ONLY BE BY HUMAN TOUCH WHICH IS APPRECI ATED AS AN EYE ON PROSPECTIVE BUYERS OF ART AND CULTURE. ADOPTION OF THE PARTICULAR METHOD FOR INVOLVING IN AN ART GALLERY BUSINESS THEREFORE REQUIRES PERSONAL INVO LV E MENT WHICH HAS NOT BEEN RULED OUT ON THE SUBMISSION OF THE ASSESSEE BEFORE THE ASSESSING OFFICER AS WELL AS THE LEARNED CIT(A). INCURRING OF FOREIGN TRAVEL EXPENSES IS PART AND PARCEL OF EXPORT BUSINESS. HAVING ACCEPTED THE TURNOVER OF THE ASSESSEE IN EXPORT DID NOT REQUIRE THE ASSESSING OFFICER TO VERIFY THE NATURE OF EXPORT INCURRED WHEN ON THE SUBMISSIONS OF THE ASSESSEE, THE ASSESSING OFFICER HIMSELF REQUIRED THE ASSESSEE TO EXPLAIN HOW ITS BUSINESS OF CARRYING OUT AN ART GALLERY WOULD BE ALLOWABLE WHEN THE ACTUAL BUSINESS CARRIED OUT BY THE ASSESSEE IN THE ITA NO.344/CTK/2011 5 IMPUGNED ASSESSMENT YEAR WAS REST RICTED IN TRADING IN CONSUMABLE ITEMS FOR EXPORT. THE LEARNED CIT(A) FURTHER CONSIDERED THAT THE EXPENDITURE SHOULD BE DIRECTLY RELATED TO EARNING OF INCOME FOR THAT PURPOSE. WE ARE UNABLE TO JUSTIFY THIS FINDING INSOFAR AS THE CLAIMING OF EXPENDITURE WAS ON ACCOUNT OF THE ASSESSEE TRAVELLING ABROAD WITH RESPECT TO ITS EXPORT BUSINESS WHICH IS UNDISPUTED AND ACCEPTED BY THE AUTHORITIES BELOW. IT CANNOT BE SAID THAT THE ASSESSEE INVITED DISALLOWANCE OF THE EXPENDITURE INCURRED WHEN IT SUBMITTED THAT AN ART G ALLERY BUSINESS WOULD COMMENCE FOR WHICH THE ASSESSEE HAD TO NECESSARILY UNDERTAKE THE FOREIGN TRAVEL FOR INVITING PARTICULAR COUNTRIES ATTRACTING FOREIGN CUSTOMERS WHO ARE THE LOVERS OF ART FROM DEVELOPING NATIONS. THEREFORE, THE ASSESSEES OWN SUBMISSION INVITE D DISALLOWANCE WHICH WE ARE UNABLE TO ACCEPT INSOFAR AS THE EXPENSES HAVE BEEN INCURRED FOR FOREIGN TRAVEL FOR INDULGING IN A BUSINESS WHICH WOULD ATTRACT MORE FOREIGN EXCHANGE WAS PERMISSIBLE BY THE ASSESSEES MEMORANDUM & ARTICLES OF ASSOCIATION . SMT. VANDANA VARGAB BEING THE MANAGING DIRECTOR AND CURATOR OF ART WAS TO UNDERTAKEN THIS FOREIGN TRAVEL WHEN SHE ULTIMATELY WAS ABLE TO RENDER INCOME FROM ART GALLERY FOR WHICH SHE WAS AWARDED PRIZE BY THE BIG BRANDS RESEARCH ORGANISATION AS THE MOST ELE GANT ART GALLERY IN SOUTH DELHI. IN OTHER WORDS, THE ASSESSEE HAD INDULGED THE GOVERNMENT AGENCY FOR OBTAINING PERMISSION TO START AN ART GALLERY IN THE NAME OF THE ASSESSEE COMPANY JUSTIFYING ITS ACTION OF DIVERSION IN THE BUSINESS OF ART GALLERY AND PROM OTING ART AND CULTURE FROM DEVELOPING COUNTRIES TO THE WESTERN WORLD HITHERTO SHE HAD BEEN EXPORTING CONSUMABLE ITEMS TO DEVELOPING COUNTRIES. AS RIGHTLY POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE THE REQUIREMENT OF HUMAN HAND IN PROMOTION OF ART COULD NOT BE LOST SIGHT OF INSOFAR AS IT WAS NOT THE CASE OF THE ASSESSING OFFICER AND THE LEARNED CIT(A) TO DISALLOW THE CLAIM AS PREMATURE FOR AMORTIZATION AS CAPITAL EXPENDITURE. IT ITA NO.344/CTK/2011 6 HAS BEEN HELD BY HONBLE PATNA HIGH COURT IN THE CASE OF CHHABIRANI AGR O INDUSTRIAL ENTERPRISES LIMITED V. CIT (191 ITR 226) THAT ALL EXPENDITURE NECESSARY TO BRING CAPITAL ASSETS INTO EXISTENCE AND PUT THEM IN WORKING CONDITION WOULD FORM PART OF THE COST WOULD RENDER IT IRRELEVANT WHETHER THE ASSET WAS ACQUIRED PRIOR TO THE COMMENCEMENT OF THE BUSINESS OR SUBSEQUENT TO SUCH COMMENCEMENT. THE MANAGING DIRECTOR WAS FULLY EMPOWERED TO INCUR SUCH EXPENDITURE INSOFAR AS THE ASSESSEE UNDERTOOK THIS VENTURE OF OPENING AN ART GALLERY WAS PART AND PARCEL OF THE SAME BUSINESS AS INSCR IBED IN THE MEMORANDUM & ARTICLES OF ASSOCIATION OF THE COMPANY. THE EXPENSES THEREFORE HA VE BEEN WRONGLY DISALLOWED INSOFAR AS IT WAS NOBODYS CASE THAT AN ART GALLERY WAS TO BE ESTABLISHED FOR THE PURPOSE OF ASSESSEES BUSINESS ONLY TO BE ALLOWED AS EXPE NDITURE U/S.37(1). ON THE SUBMISSION OF THE ASSESSEE ONLY THE ASSESSING OFFICER TOOK A VIEW THAT THE EXPENDITURE DID NOT PERTAIN TO THE ACTIVITIES FOR WHICH INCOME WAS RENDERED IN THE IMPUGNED YEAR. UNLESS SOME ACTIVITIES ARE CARRIED OUT NO FRUITFUL BUSINE SS CAN BE ESTABLISHED WHICH HAS TAKEN LONGER TIME WITHOUT GIVING IMMEDIATE RETURN HAS NOT BEEN CONSIDERED BY THE ASSESSING AUTHORITIES. THERE IS NO FIXED PERIOD FOR EARNING INCOME AGAINST A PARTICULAR EXPENDITURE INCURRED HAS BEEN LOST SIGHT OF INSOFAR AS THE ASSESSEE HAD BEEN RENDERING INCOME FROM EXPORT BUSINESS AND WAS ENTITLED FOR DEDUCTION AS IN THE PAST YEARS WHICH ALONE WAS DONE AWAY WITH IN THE IMPUGNED ASSESSMENT YEAR. IT WAS NOT THE CASE OF THE ASSESSEE TO INTERCONNECT OR OVERLOAD SUCH EXPENDITURE WITH ANY BUSINESS WHICH IT WOULD UNDERTAKE AT ANY POINT OF TIME LATER . THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE EXPENDITURE WAS UNJUSTIFIABLY DISALLOWED BY THE ASSESSING OFFICER. THE CLAIM OF THE ASSESSEE WAS APPROPRIATE FOR THE BUSINESS OF THE AS SESSEE INSOFAR AS RENDERING OF INCOME FROM A SENSITIVE BUSINESS OF PROMOTING ART CANNOT BE EQUATED WITH TRADING OF CONSUMABLE ITEMS. THE ITA NO.344/CTK/2011 7 ASSESSEE HAS BEEN ABLE TO ESTABLISH THAT THE INCOME WAS FOR ASSESSEES BUSINESS WHICH HAD RENDERED INCOME IN A SUBSEQUE NT YEAR THEREFORE COULD NEVER BE DISALLOWED NOR CONSIDERED AS CAPITAL EXPENDITURE BE WRITE OFF AS PRELIMINARY EXPENSES FOR AMORTIZATION WHEN THE ASSESSEE COMPANY IS NOT A WIDELY HELD COMPANY REQUIRING CERTIFICATE FOR COMMENCEMENT OF ANY BUSINESS. IN THIS V IEW OF THE MATTER, THE ORDER OF THE LEARNED CIT(A) IS SET ASIDE AND THE ASSESSING OFFICER IS DIRECTED TO ALLOW THE CLAIM OF THE ASSESSEE AS RETURNED BY THE ASSESSEE. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. PRONOUNCED IN OPEN COURT ON DT. 12.08.2011 S D / - S D / - (K.S.S.PRASAD RAO) JUDICIAL MEMBER (K.K.GUPTA) ACCOUNTANT MEMBER DATE: 12.08.2011 H.K.PADHEE, SENIOR PRIVATE SECRETARY. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT: M/S.NICKS EXPORTS (P) LTD., AT : RAGHUNATHPARA, P.O.TITILAGARH, DIST. BOLANGIR, 2. THE RESPONDENT: ACIT, CIRCLE 2(1), SAMBALPUR. 3. THE CIT, 4. THE CIT(A), 5. THE DR, CUTTACK 6. GUARD FILE (IN DUPLICATE) TRUE COPY, BY ORDER, S ENIOR PRIVATE SECRETARY.