ITO 11(1)(1), MUMBAI V. IDEACOUNT EDUCATION P. LTD ( FORMELRY KNOWNA S M.S, FRAMEBOXX ANIMATION &, MUMBAI

ITA 3495/MUM/2012

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 71164 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-09-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 05-09-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 17-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ISHWAR RATHI
• Assessee Lawyers: O P SINGH
• Keywords: Depreciation; Revised return; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH, MUMBAI ! ! ! ! !'##%&' ( ) ) ) ) BEFORE SHRI VIJAY PAL RAO, JM AND SHRI N.K.BILLAIYA , AM ./ I.T.A. NO. 3174 /MUM/2012 ( ' * ' * ' * ' * +* +* +* +* / ASSESSMENT YEAR : 2008-09) M/S IDEACOUNT EDUCATION PVT. LTD. 101/108 1 ST FLOOR, SHOOPPERS POINT, S.V.ROAD, ANDHERI(W), MUMBAI-400059 ' ' ' ' / VS. INCOME - TAX OFFICER,11(1)(1), ROOM NO.436A, AAYAKAR BHAVAN, M.K.MARG, MUMBAI-400020 , ( ./ PAN : AABCF1631Q ( ,- / APPELLANT ) .. ( ./,- / RESPONDENT ) ./ I.T.A. NO. 3495 /MUM/2012 ( ' * ' * ' * ' * +* +* +* +* / ASSESSMENT YEAR : 2008-09) INCOME - TAX OFFICER,11(1)(1), ROOM NO.436A, AAYAKAR BHAVAN, M.K.MARG, MUMBAI-400020 ' ' ' ' / VS. M/S IDEACOUNT EDUCATION PVT. LTD. 101/108 1 ST FLOOR, SHOOPPERS POINT, S.V.ROAD, ANDHERI(W), MUMBAI-400059 , ( ./ PAN : AABCF1631Q ( ,- / APPELLANT ) .. ( ./,- / RESPONDENT ) 0 1 / REVENUE BY : SHRI O.P.SINGH ,- 0 1 / APPELLANT BY : SHRI ISHWAR RATHI ' 0 2( / DATE OF HEARING : 05-09-2013 34+ 0 2( / DATE OF PRONOUNCEMENT : 18 -09-2013 5 / O R D E R 2 ITA NO.3174/MUM/2012& 3495/MUM/2012 IDEACOUNT EDUCATION PVT. LTD. PER N.K. BILLAIYA, AM: THESE CROSS APPEALS BY THE ASSESSEE AND THE REVENUE ARE DIRECTED AGAINST THE VERY SAME ORDER OF CIT(A)-3, MUMBAI, DATED 17.0 2.2011. AS BOTH THESE APPEALS INVOLVE COMMON ISSUES THEREFORE THEY WERE H EARD TOGETHER AND DISPOSED OFF BY THIS COMMON ORDER FOR THE SAKE OF C ONVENIENCE AND BREVITY. ITA NO.3174/MUM/2012 2. FIRST WE SHALL TAKE UP ASSESSEES APPEAL. ASSESSEE HAS RAISED TWO SUBSTANTIVE GROUNDS OF THE APPEAL AND RELATES TO TH E CONFIRMATION OF THE DISALLOWANCE OF 1/3 RD OF DEPRECIATION. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT THE ASSESSEE HAS FILED A REVISED RETURN OF INCOME TO CAPITALIZE THE FRANCHISE DEVELOPMENT RIGH TS OF RS.1.50 CRORES, WHICH WAS ORIGINALLY RETURNED AS THE REVENUE EXPENDITURE IN THE ORIGINAL RETURN. THE AO FURTHER OBSERVED THAT THE ASSESSEE HAS CLAIMED D EPRECIATION OF RS.18,75,000/- AT THE RATE OF 25%. THE AO DISALLOW ED THE ENTIRE DEPRECIATION HOLDING THAT THE ASSESSEE HAS NOT SUBSTANTIATED ITS CLAIM WITH ANY EXPLANATION OR PROOF OR EVIDENCE AS TO THE NATURE OF THE FRANCH ISE DEVELOPMENT CHARGES PAID. THE AO FURTHER STATED THAT SINCE THE RECIPIE NT, I.E. THE DIRECTOR OF THE COMPANY, HAS SHOWN FRANCHISE DEVELOPMENT FEE AS A R EVENUE RECEIPT, THEREFORE, THE SAME CANNOT BE TREATED AS CAPITAL IN THE HANDS OF THE ASSESSEE. 3. ASSESSEE CARRIED THE MATTER BEFORE THE CIT(A) AN D EXPLAINED THE FACTS OF THE CASE. IT WAS STRONGLY CONTENDED THAT THE ASSES SEE ENTERED INTO BUSINESS OF TRANSFER AND NON-COMPETE AGREEMENT DATED 28.03.2008 WITH THE DIRECTOR OF THE COMPANY, WHO IS THE SELLER OF THE SAID BUSINESS. I T WAS EXPLAINED THAT IN THE AGREEMENT WITH THE SELLER (DIRECTOR) IT WAS ALSO A GREED TO PAY A NON-COMPETITION FEE SO THAT THE DIRECTOR IS REFRAINED FROM DOING TH E SAME BUSINESS. IT WAS FURTHER EXPLAINED THAT WHAT HAS BEEN TRANSFERRED BY THE ASSESSEE FOR A CONSIDERATION OF RS.1.50 CRORES IS A BUSINESS OF ED UCATIONAL COURSES IN ANIMATION AND THE NETWORK OF FRANCHISE AS WELL AS N ON-COMPETE FEE. 3 ITA NO.3174/MUM/2012& 3495/MUM/2012 IDEACOUNT EDUCATION PVT. LTD. 4. AFTER CONSIDERING THE FACTS AND THE SUBMISSIONS MADE BY THE ASSESSEE, THE CIT(A) WAS CONVINCED THAT THE ASSESSEE HAS PURC HASED A RUNNING BUSINESS, TRADEMARK, NETWORK, 127 FRANCHISE BUSINESS RIGHTS. TRADEMARK RIGHTS WHICH ARE IN THE NATURE OF INTANGIBLE ASSET AND ALSO CAPI TAL OF THE BUSINESS. THE CIT(A) FURTHER OBSERVED THAT AS PER PROVISIONS OF T HE ACT, DEPRECIATION IS ALLOWABLE ON THE INTANGIBLE ASSET AND GOODWILL. HO WEVER, AT THE SAME TIME, THE CIT(A) WAS OF THE OPINION THAT THE ASSESSEE HAS NOT GIVEN ANY BIFURCATION RELATING TO HOW MUCH CONSIDERATION RELATES TO RUNNI NG BUSINESS AND HOW MUCH IS PAID FOR NON-COMPETITION AGREEMENT. THE CIT(A) WENT ON TO APPORTION THE TOTAL CONSIDERATION OF RS.1.5 CRORE AND CAME TO THE CONCLUSION THAT RS.50,00,000/- IS ATTRIBUTABLE TO THE NON-COMPETE F EES . HAVING HELD, SO, THE CIT(A) DISALLOWED THE DEPRECIATION ON NON-COMPETE F EE ESTIMATED AT RS.50 LAKHS AND DIRECTED THE AO TO RECALCULATE THE ALLOWABLE DE PRECIATION ON RS.1 CRORE. AGGRIEVED BY THIS, ASSESSEE IS BEFORE US. 5. THE COUNSEL FOR THE ASSESSEE REITERATED WHAT HAS BEEN SUBMITTED BEFORE THE LOWER AUTHORITIES. THE LD. DR STRONGLY SUPPORT ED THE ASSESSMENT ORDER. 6. WE HAVE CAREFULLY PERUSED THE ORDER OF THE LOWE R AUTHORITIES AND THE RELEVANT MATERIAL, EVIDENCE BROUGHT ON RECORD IN TH E FORM OF A PAPER-BOOK. WE FIND THAT THE AGREEMENT ENTERED IS DATED 28.03.2 008. A PERUSAL OF THE SAID AGREEMENT SHOWS THAT THE SELLER DESIRES OF TRANSFER RING THE BUSINESS TO THE PURCHASERS FOR A CONSIDERATION OF RS.1.50 CRORE. W E ALSO FIND THAT SUBSEQUENT TO THE TRANSFER OF BUSINESS TO THE PURCHASER, THE S ELLER WILL NOT COMPETE WITH THE PURCHASER IN ANY MANNER. A PLAIN READING OF THE SE TWO CLAUSES SHOWS THAT THE NON-COMPETE FEE IS PART OF THE SALE CONSIDERATI ON. ASSESSEE HAS NOT CLAIMED THIS NON-COMPETE FEE AS A REVENUE EXPENDITU RE. ACCORDINGLY, IT CAN BE SAFELY PRESUMED THAT IT IS PART OF THE ENTIRE SALE CONSIDERATION PAID FOR ACQUIRING A RUNNING BUSINESS. ONCE THE CIT(A) HAS A CCEPTED THAT THE ASSESSEE HAS PURCHASED RUNNING BUSINESS WHICH INCLUDED TRADE MARK, NETWORK OF FRANCHISE BUSINESS RIGHTS, WHICH ARE IN THE NATURE OF INTANGIBLE ASSETS AND ALSO 4 ITA NO.3174/MUM/2012& 3495/MUM/2012 IDEACOUNT EDUCATION PVT. LTD. GOODWILL OF THE BUSINESS, WE DO NOT FIND ANY REAS ON WHY THE DEPRECIATION SHOULD NOT BE ALLOWED ON THE ENTIRE AMOUNT. ACCORD INGLY, MODIFYING THE FINDINGS OF THE CIT(A), WE DIRECT THE AO TO ALLOW T HE CLAIM OF DEPRECIATION AS PER THE PROVISION OF LAW ON THE ENTIRE AMOUNT OF RS.1.5 0CRORE. THIS GROUND IS ALLOWED. 7. GROUND 2 RELATES TO THE DISALLOWANCE OF ADVERTIS ING EXPENSES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTED THAT THE ASSESSEE HAS CLAIMED ADVERTISEMENT EXPENSES OF RS.40,97,476/-. THE AO F URTHER OBSERVED THAT THE ASSESSEE DID NOT FURNISH ANY INVOICE OR BILLS TO SU BSTANTIATE ITS CLAIM. THE AO WAS OF THE OPINION THAT SINCE THE ASSESSEE HAS STAR TED BUSINESS FROM DECEMBER 2007, THEREFORE, THE OPERATIONS WERE FOR ONLY FOR A PERIOD OF 4 MONTHS. ACCORDING TO THE AO, THE ENTIRE ADVERTISEMENT EXPEN DITURE CANNOT BE ALLOWED. THE AO ALLOWED ONLY 25% OF THE EXPENDITURE AND DISA LLOWED BALANCE OF 75%. 8. BEFORE THE CIT(A), THE ASSESSEE CLAIMED THAT THE ENTIRE EXPENDITURE SHOULD HAVE BEEN ALLOWED AS IT RELATES TO THE BUSIN ESS OF THE ASSESSEE. IT WAS STRONGLY CONTENDED BEFORE THE CIT(A) THAT ADVERTISE MENT EXPENDITURE DOES NOT HAVE ANY SPECIFIC ENDURING BENEFITS. AFTER CONSIDE RING THE FACTS AND SUBMISSIONS MADE BY THE ASSESSEE, THE CIT(A) OBSERV ED THAT SINCE THE ASSESSEE HAS STARTED THE BUSINESS FROM DECEMBER 2007, THE AO WAS RIGHT IN DISALLOWING 75% OF THE ADVERTISEMENT EXPENSES. 9. AGGRIEVED BY THIS FINDING, THE ASSESSEE IS BEFOR E US. THE LD. COUNSEL FOR THE ASSESSEE REITERATED WHAT HAS BEEN ARGUED BEFORE THE LOWER AUTHORITIES. THE LD. DR STRONGLY SUPPORTED THE ORDERS OF THE LOWER A UTHORITIES. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND CA REFULLY PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIAL EV IDENCE BROUGHT ON RECORD. A PERUSAL OF THE DETAILS OF THE ADVERTISEMENT EXPENSE S, AS EXHIBITED ON PAGE 4 TO 5 OF THE PAPER-BOOK, SHOW THAT THE ADVERTISEMENT EX PENSES HAVE BEEN INCURRED 5 ITA NO.3174/MUM/2012& 3495/MUM/2012 IDEACOUNT EDUCATION PVT. LTD. FOR ADVERTISEMENT IN NEWSPAPER STARTING FROM 7 TH JANUARY 2008 TILL 31 ST MARCH 2008. SINCE, THE ADVERTISEMENT EXPENSES HAVE BEEN INCURRED IN PRINT MEDIA, WE DO NOT FIND ANY REASON TO UPHOLD THAT IT MAY GIV E AN ENDURING BENEFIT TO THE ASSESSEE. FURTHER, THERE IS NO PROVISION UNDER THE ACT TO CONSIDER DEFERRED REVENUE EXPENDITURE. AN EXPENDITURE CAN EITHER BE A REVENUE EXPENDITURE OR A CAPITAL EXPENDITURE. THEREFORE, IN OUR CONSIDERED VIEW, BOTH THE LOWER AUTHORITIES HAVE ERRED IN ALLOWING THE EXPENDITURE ONLY TO THE EXTENT OF THE 25%. ACCORDINGLY, WE DIRECT THE AO TO ALLOW THE EN TIRE EXPENDITURE INCURRED ON ADVERTISEMENT. 11. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLOWED. ITA NO.3495/MUM/2012 12. THE GRIEVANCE OF THE REVENUE IS DIRECTLY RELATE D TO GROUND NO. 1 TAKEN BY THE ASSESSEE IN ITS APPEAL. AS WE HAVE ALLOWED DEPR ECIATION IN ASSESSEES APPEAL, REVENUES APPEAL FAILS. 13. IN THE RESULT, THE REVENUES APPEAL IS DISMISSE D. 14. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED AND APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 18/0 9/2013 5 0 34+ ( 6' 18 /09/2013 , 4 0 7 SD/- (VIJAY PAL RAO) SD/- (N.K.BILLAIYA) / JUDICIAL MEMBER ( / ACCOUNTANT MEMBER MUMBAI; 6 ITA NO.3174/MUM/2012& 3495/MUM/2012 IDEACOUNT EDUCATION PVT. LTD. 6' /DATED : 18 TH SEPTEMBER, 2013. SHEKHAR. P.S. 5 5 5 5 0 00 0 .28 .28 .28 .28 9+2 9+2 9+2 9+2 / COPY OF THE ORDER FORWARDED TO : 1. ,- / THE APPELLANT 2. ./,- / THE RESPONDENT. 3. : ( ) / THE CIT- , MUMBAI. 4. : / CIT(A)- , MUMBAI 5. ;7 .2' , , / DR, ITAT, MUMBAI 6. 7<* = / GUARD FILE. 5' 5' 5' 5' / BY ORDER, /2 .2 //TRUE COPY// > >> > / ? ? ? ? (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI