ACIT, Karnal V. M/s Liberty Shoes Ltd., Karnal

ITA 3541/DEL/2011

• Counselvise Citation: 354120114 RSA 2011
• Duration Of Justice: 9 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 03-11-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 14-07-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: Y KAKKAR
• Assessee Lawyers: S K GOEL
• Keywords: Depreciation; Business expenditure; Commercial expediency; Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH D NEW DELHI BEFORE SHRI R.P. TOLANI AND SHRI B.C. MEENA ITA NO. 3501/DEL/2011 ASSTT. YR: 2006-07 LIBERTY SHOES LIMITED, VS. DCIT, CEN. CIRCLE, KARNAL. KARNAL. PAN/GIR NO. AAACL3146K AND ITA NO. 3541/DEL/2011 ASSTT. YR: 2006-07 DCIT, CEN. CIRCLE, VS. LIBERTY SHOES LIMITED, KARNAL. KARNAL. (APPELLANT ) ( RESPONDENT ) ASSESSEE BY : SHRI S.K. GOEL ADV. REVENUE BY : MS. Y. KAKKAR, SR. DR O R D E R PER R.P. TOLANI, J.M : THESE ARE CROSS APPEALS, ONE BY ASSESSEE AND OTHER BY REVENUE ARISING OUT OF THE ORDER OF CIT(A) DATED 18-3-2011 FOR AY 2 006-07. RESPECTIVE GROUNDS RAISED ARE AS UNDER: ASSESSEES APPEAL (ITA NO. 3501/DEL/11) : 1. THAT THE ORDER OF THE LEARNED COMMISSIONER OF I NCOME TAX (APPEALS) IS AGAINST LAW AND FACTS. 2. THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE OF THE APPELLANT COMPANY THE ORDER OF THE LEARNED COMMISSI ONER OF INCOME TAX (APPEALS) IN CONFIRMING DISALLOWANCE OF RENOVATION EXPENSES AMOUNTING TO RS. 1366006/- INCU RRED IN RESPECT OF LEASED BUILDING IS HIGHLY ARBITRARY, ILL EGAL, VOID AND UNCALLED FOR. ITA 3501 & 3541/DEL/11 LIBERTY SHOES LTD. 2 3. THAT THE ORDER OF THE LEARNED COMMISSIONER OF IN COME TAX (APPEALS) IN UPHOLDING CAPITALIZATION OF EXPENS ES AMOUNTING TO RS. 629600/- OUT OF BUILDING REPAIRS E XPENSES IS ALTOGETHER ARBITRARY, ILLEGAL, VOID AND UNCALLED FO R. REVENUES APPEAL (ITA NO. 3541/DEL/11) : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, LD. CIT(A) HAS ERRED IN LAW IN TREATING THE EXPENDITU RE OF RS. 4,63,519/- ON ACCOUNT OF GLOW SIGH BOARDS AS REVENU E EXPENDITURE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, LD. CIT(A) HAS ERRED IN LAW IN HOLDING THE EXPENSES O F RS. 13,66,006/- ON ACCOUNT OF OFFICE RENOVATION EXPENSE S TO BE OF CAPITAL NATURE IN THE HAND OF THE ASSESSEE COMPANY. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE OF COMMISSION OF RS. 4,53,538/- BY ENTERTAINING ADDITIONAL EVIDEN CE WITHOUT CONFRONTING THE AO AND ALSO WITHOUT APPRECIATING TH AT T HE ASSESSEE COULD NOT PROVE NEXUS BETWEEN THE COMMISSI ON TO SALES. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, LD. CIT(A) HAS ERRED IN LAW IN DIRECTING TO CAPITALIZ E EXPENDITURE TO THE EXTENT OF RS. 6,29,600/- OUT OF EXPENSES CLA IMED ON BUILDING REPAIR AND MAINTENANCE INSTEAD OF RS. 22,1 5,550/- CAPITALIZED BY THE AO OF COURSE SUBJECT TO ALLOWANC E OF DEPRECIATION. 2. GROUND NO. 2 OF THE ASSESSEES APPEAL AND GROUND NO. 2 OF REVENUE ARE SIMILAR IN NATURE AND RAISE THE SAME ISSUE ABOUT RE IMBURSEMENT OF RENOVATION EXPENSES. 3. LD COUNSEL FOR THE ASSESSEE CONTENDS THAT ASSESS EE ACQUIRED THE ASSETS OF ANOTHER FIRM M/S LIBERTY GROUP MARKETING DIVISIO N (LGMD) W.E.F. 1-4- ITA 3501 & 3541/DEL/11 LIBERTY SHOES LTD. 3 2003, WHICH INCLUDED THE LEASE OF PREMISES, WHICH A RE PART OF GROUP BUILDING. ASSESSEE HAD TO RENOVATE THE PREMISES TO CONFORM TO THE REQUIREMENTS OF MODERN OFFICE OF A SHOE MANUFACTURI NG COMPANY. AS PER AGREEMENT, ASSESSEE REQUESTED LGMD TO CARRY OUT THE RENOVATION WORK OF ITS OFFICE. AO DID NOT RAISE ANY QUESTION ON THE GENUIN ENESS OF THE RENOVATION EXPENDITURE OR ITS BEING REVENUE IN NATURE. AO DIS ALLOWED THESE EXPENSES SUMMARILY HOLDING THAT EXPENDITURE WAS TO BE INCURR ED BY LGMD, BY FOLLOWING OBSERVATIONS. 5. THE ASSESSEE HAS CLAIMED OFFICE RENOVATION EXPE NSES AMOUNTING TO RS. 13,66,006/- ON ACCOUNT OF THE FIRM M/S LIBERTY GROUP MARKETING DIVISION, KARNAL BUSINESS A CTIVITIES OF THAT FIRM ARE TAKEN OVER BY ASSESSEE COMPANY AGAINS T PAYMENT OF ROYALTY ETC. SUCH EXPENSES ARE TO BE INCURRED BY THE FIRM AND NOT BY THE ASSESSEE COMPANY. THE EXPENSES OF RS. 13 ,66,006/- ARE DISALLOWED AND ADDED TO THE INCOME OF THE ASSES SEE. 4. CIT(A) ALSO WITHOUT LOOKING AT THE ACTUAL FACTS UPHELD THE DISALLOWANCE BY FOLLOWING OBSERVATIONS 5.03. THE FACTS ARE THAT THE APPELLANT COMPANY HAS TAKEN OVER THE ENTIRE BUSINESS OPERATION AND ASSETS OF M/S LIB ERTY GROUP MARKETING, KARNAL W.E.F. 1-4-2003 AND CLAIMED TO HA VE INCURRED OFFICE RENOVATION EXPENSES AMOUNTING TO RS. 13,66,0 06/- WHICH WAS DISALLOWED BY THE AO ON THE GROUND THAT THE SAM E WERE TO BE INCURRED BY THE LESSOR AND NOT BY THE ASSESSEE C OMPANY. IN THE WRITTEN SUBMISSIONS, THE APPELLANT SUBMITTED TH AT RENOVATION OF OFFICE WAS CARRIED OUT BY THE LESSOR FIRM AT ITS INSTANCE AND HENCE THE SAME WAS REIMBURSED AND IS ALLOWABLE. THE APPELLANT HAS, HOWEVER NOT BROUGHT ON RECORD ANY EVIDENCE IN THIS REGARD. IN ANY CASE, THE EXPENDITURE INCURRED CAN NOT BE SA ID TO BE INCURRED ON CURRENT REPAIRS BUT ARE OF CAPITAL IN N ATURE. 5. LD COUNSEL VEHEMENTLY CONTENDS THAT AO DISALLOWE D BY HOLDING THAT THE EXPENSES WERE TO BE BORN BY THE LESSEE. CIT(A) CONFIRMED THIS ITA 3501 & 3541/DEL/11 LIBERTY SHOES LTD. 4 OBSERVATION BY HOLDING THAT NO EVIDENCE IS BROUGHT ON RECORD THAT ASSESSEE HAD THE OBLIGATION TO BEAR EXPENSES. IT IS PLEADED THAT THE FINDING IS CONTRARY TO RECORD. REFERENCE IS MADE TO PB 2-11 WHICH IS TH E DETAILED DATE WISE ACCOUNT OF RENOVATION EXPENSES. FRANCHISEE AGREEMEN T DATED 31-3-2003 WHICH IS PLACED ON PB 13-28 IS REFERRED TO, WHICH C LEARS PUTS THE OBLIGATION OF REIMBURSEMENT OF THE RENOVATION EXPENSES ON THE ASSESSEE. THE DETAILS OF EXPENDITURE CLEARLY DEMONSTRATES THAT IT WAS INCUR RED FOR RENOVATION OF THE OFFICE TO MAKE IT COMMERCIALLY SUITABLE FOR ITS BU SINESS. WITH ALL THIS MATERIAL ON RECORD, CIT(A)S FINDING THAT NO EVIDEN CE WAS FURNISHED BY ASSESSEE ARE CONTRARY TO RECORD, THE EXPENDITURE D ISSERVES TO BE ALLOWED. 6. APROPOS ASSESSEES GROUND NO. 3 AND REVENUE GROU ND NO. 4 ABOUT CAPITALIZATION OF BUILDING REPAIR EXPENSES, AO DISA LLOWED PART OF THE SAME BY FOLLOWING OBSERVATION: THE ASSESSEE COMPANY HAS CLAIMED BUILDING REPAIRS A ND MAINTENANCE EXPENSES OF RS. 1,24,99,571/- AND CAPIT ALIZED RS. 21,41,659/- OVER AND ABOVE OF THESE EXPENSES. THE A SSESSEE WAS ASKED TO PRODUCE THE DETAILS OF THESE EXPENSES, WHI CH ARE PRODUCED AND PLACED ON RECORDS. THE PERUSAL OF THE DETAILS REVEAL THAT THE FOLLOWING EXPENSES ARE IN BULK PURC HASES AND ALSO IN RESPECT OF FURNITURE AND FIXTURE AND HOME F URNISHINGS AND CANNOT BE TREAT ED AS REVENUE EXPENDITURE AND A RE CAPITALIZED UNDER THE HEAD BUILDING:- 1. DOLOMITE SLABS RS. 47,224/- 2. UPHOLESTRY FABRIC, TAILORING & EMBROIDERY OF CUSHIONS RS. 40,085 3. WALL FANS RS. 4,020/- 4. SUBMERSIBLE PUMP AND LABOUR RS. 57,132/- ITA 3501 & 3541/DEL/11 LIBERTY SHOES LTD. 5 5. SUBMERSIBLE PUMP RS. 24,000/- 6. SHEETS RS. 67,658/- 7. PAINTING WITH FRAME RS. 27,500/- 8. PROFILE SHEET RS. 9,14,014/- 9. AUTOGLO BOARD RS. 20,800/- 10. P.V.C. PIPE RS. 51,980/- 11. MOTI LAL, LABOUR RS. 60,816/- 12. MOTI LAL, LABOUR RS. 45,000/- 13. GLASS EXPRESSION RS. 1,04,227/- 14. JAIHIND MARMO RS. 1,96,931/- 15. GLASS & METAL RS. 51,827/- 16. MOTI LAL RS. 61,35/- 17. NEW DESIGN CELL P. LTD. RS. 60,000/- 18. GLASS & METAL SHOP RS. 1,18,001/- 19. LABOUR CHARGES ETC. RS. 2,00,000/- TOTAL: RS. 22,15,550/- 7. IN FIRST APPEAL, CIT(A) THOUGH HELD THAT THE EX PENDITURE INCURRED TO PRESERVE AND MAINTAIN AN EXISTING ASSET IS TO BE AL LOWED AS CURRENT REPAIRS. HOWEVER FURTHER HELD THAT ASSESSEE HAS USED THE WOR D REPLACEMENT AND NOT REPAIRS IN THE CHART. ON THE BASIS OF THE WORD RE PLACEMENT, PART DISALLOWANCE OF EXPENDITURE WAS HELD AS CAPITAL IN NATURE ELIGIBLE FOR DEPRECIATION FOLLOWING OBSERVATIONS: 6.05. IN VIEW OF THE LEGAL POSITION DISCUSSED ABOV E, IT IS NOTED THAT THE EXPENDITURE INCURRED TO PRESERVE AND MAIN TAIN AN ITA 3501 & 3541/DEL/11 LIBERTY SHOES LTD. 6 EXISTING ASSET IS TO BE ALLOWED AS CURRENT REPAIRS. FROM THE CHART FURNISHED BY THE APPELLANT WHICH IS REPRODUCED ABOV E, IT IS NOTED THAT THE APPELLANT ADDED THE WORD REPLACEMEN T WITH ALL THE EXPENDITURE AND CLAIMED THAT THE SAME WERE INCU RRED ON ACCOUNT OF CURRENT REPAIRS. THE EXPENDITURE CAPIT ALIZED BY THE AO INCLUDES PAYMENT OF RS. 60,000/- TO M/S NEW DES IGN SALES (P) LTD., WHICH IS STATED TO BE FOR DESIGNING CHARG ES. IT IS DIFFICULT TO APPRECIATE THAT HOW THE EXPENDITURE PA ID FOR DESIGNING CHARGES IS COVERED UNDER CURRENT REPAIRS . THE APPELLANT FURTHER CLAIMED THAT EXPENSES WAS INCURR ED ON REPLACEMENT OF SUBMERSIBLE PUMP, FAN, GRILL. APPARE NTLY, THE EXPENDITURE CANNOT BE SAID TO BE INCURRED TO PRESER VE AND MAINTAIN AN EXISTING ASSET SINCE THE ASSET ITSELF W AS REPLACED BY THE NEW ONE. THE APPELLANT FURTHER PURCHASED PAINTI NGS FOR RS. 27,500/- AND CURTAINS FOR RS. 40,085/- AND CLAIMED THE SAME ALSO EXPENDITURE ON ACCOUNT OF CURRENT REPAIRS BY S PECIFYING THE SAME REPLACEMENT. IN SHORT, THE APPELLANT ADDED T HE WORD REPLACEMENT WITH ALL THE EXPENSES CAPITALIZED BY THE AO TO JUSTIFY THAT THE SAME WERE INCURRED ON A/C OF CURR ENT REPAIR. FURTHER, EXPENSES AMOUNTING TO RS. 1,67,151/- WAS C LAIMED FOR POP AND WHITEWASHING CHARGES. THE SAME CAN ALSO N OT BE SAID FOR CURRENT REPAIRS. IN VIEW OF THE FACTS DISCUSSED ABOVE, THE FOLLOWING EXPENSES, (NATURE OF EXPENSES AS SPECIFIED BY THE A PPELLANT IN THE DETAILS FILED DURING APPEAL PROCEEDINGS) ARE HE LD TO BE EXPENSE NEITHER OF THE NATURE OF THE CURRENT REPAI R NOR OF REVENUE NATURE AND HENCE CAPITALIZATION THEREOF MAD E BY THE AO IS HERBY CONFIRMED:- 1. FOR REPLACEMENT OF CURTAINS RS. 40085 2. FOR REPLACEMENT OF FAN 4020 3. FOR REPLACEMENT OF SUBMERSIBLE PUMP & LABOUR CHARGES THEREON 57132 4. FOR REPLACEMENT OF GRILLS 67658 5. FOR REPLACEMENT OF OLD PAINTINGS 27500 6. FOR POP & WHITEWASHING CHARGES 60816 ITA 3501 & 3541/DEL/11 LIBERTY SHOES LTD. 7 7. FOR POP & WHITEWASHING CHARGES 45000 8. FOR OFFICE CABINS BEING TEMPORARY STRUCTURE 104 227 9. FOR OFFICE CABINS BEING TEMPORARY STRUCTURE 518 27 10. FOR POP & WHITEWASHING CHARGES 61335 11. FOR DESIGN CHARGES 60000 12. FOR LABOUR CHARGES PROPORTIONATE 50000 629600 6.06. IN VIEW OF THE FACTUAL AND LEGAL POSITION DIS CUSSED ABOVE, EXPENSES OF RS. 6,29,600/- OUT OF THE EXPENSES HELD TO BE OF CAPITAL IN NATURE BY THE AO, IS CONFIRMED. DEPRECIA TION @ 10% IS ALSO TO BE ALLOWED ACCORDINGLY ON THIS AMOUNT ON LY 8. LD COUNSEL REFERRED TO THE DESCRIPTION OF ITEMS MENTIONED IN CIT(A)S ORDER AND CONTENDS THAT REPLACEMENT OF CURTAINS, PA INTING, GRILLS, POP, TEMPORARY STRUCTURE AND VARIOUS OTHER LIKE ITEMS AR E PRIMA FACIE REVENUE IN NATURE AND DESERVE TO BE ALLOWED ACCORDINGLY. 9. LD DR RELIES ON THE ORDER OF AO AND CONTENDS THA T THE REIMBURSEMENT OF LEASED OFFICE WAS NOT THE OBLIGATION OF ASSESSEE . IN RESPECT OF BUILDING REPAIR EXPENSES CIT(A) HAS WRONGLY ALLOWED PART THE REOF AS REVENUE EXPENDITURE. APROPOS REVENUE GROUND NO.1- GLOW SI GN BOARDS AND GROUND NO.3 COMMISSIONS EXPENSES, ORDER OF THE AO IS REL IED ON. 10. LEARNED COUNSEL FOR THE ASSESSEE, IN REPLY TO REVENUE GROUNDS NO. 1 I.E. GLOW SIGN BOARDS CONTENDS THAT THEY ARE SMALL GLOW BOARD MADE FOR ADVERTISEMENT PURPOSE. THESE ITEMS SUBJECT TO WEAR AND TEAR, FADING AWAY AND VANDALISING. THEY DO NOT AMOUNT TO FIXED ASSETS AND HAVE BEEN RIGHTLY HELD TO BE TO BE ALLOWABLE AS BUSINESS EXPENDITURE. ITA 3501 & 3541/DEL/11 LIBERTY SHOES LTD. 8 11. APROPOS REVENUE GROUND NO 3 IT IS PLEADED THAT AO DISALLOWED THE COMMISSION EXPENSES ON GENERAL COMPARISON OF PREVIO US YEARS SALES RECEIPTS AND COMMISSION EXPENSES. ASSESSEE FILED CO MPLETE DETAILS OF COMMISSION WHICH IS VERIFIED BY CIT(A). THERE IS NO FINDING OF AO THAT COMMISSION IS NOT GENUINE OR PARTIES ARE NOT IDENT IFIABLE. PARTY WISE COMMISSION ACTUALLY INCURRED AND DEMONSTRATED CANNO T BE DISALLOWED ON THE BASIS OF GENERAL COMPARISON OF SALE AND COMMISSION FIGURES WITH EARLIER YEARS. RELIANCE IS PLACED ON HONBLE SUPREME COURT JUDGMENT IN THE CASE OF S A BUILDERS 288 ITR 1 FOR THE PROPOSITION THAT IF BUSINESS EXPEDIENCY IS DEMONSTRATED, THE EXPENDITURE IS TO BE ALLOWED. 12. WE HAVE HEARD BOTH THE PARTIES ON THE ISSUES . APROPOS COMMON GROUNDS NO 2 OF ASSESSEE & 4 OF REVENUE. ASSESSEE H AS DEMONSTRATED THAT THE RELEVANT EVIDENCE I.E. FRANCHISE AGREEMENT DATED 31 -3-2003 AND DAY TO DAY DETAILS OF OFFICE RENOVATION EXPENSES INCURRED BY T HE LESSSOR LGMD ARE ON THE RECORD. AS PER AGREEMENT THE ASSESSEE WAS UNDER OBLIGATION TO REIMBURSE THE LESSOR FOR THESE EXPENSES. THUS THE RELEVANT EV IDENCE, DETAILS AND GENUINENESS OF EXPENDITURE ARE ON THE RECORD. THE R ENOVATION WAS CARRIED OUT TO MAKE THE OFFICE SUITABLE FOR ASSESSEES BUSI NESS NEEDS, THUS THE COMMERCIAL EXPEDIENCY CAN NOT BE DOUBTED. THE ITEMS OF EXPENDITURE AS EMERGE FROM THE DETAILED ACCOUNT ARE REVENUE IN NAT URE. AO AND LD. CIT(APPEALS) HAVE DISALLOWED WITHOUT APPRECIATING T HE ASSESSEES EXPLANATION AND EVIDENCE ON RECORD. IN CONSIDERATIO N OF ALL THE FACTS AND CIRCUMSTANCES WE HOLD THAT THE EXPENDITURE REIMBURS ED BY THE ASSESSEE TO LGMD IS REVENUE IN NATURE AND IS TO BE ALLOWED AS B USINESS EXPENDITURE. THIS GROUND OF THE ASSESSEE IS ALLOWED AND THAT OF REVENUE DISMISSED. ITA 3501 & 3541/DEL/11 LIBERTY SHOES LTD. 9 13. APROPOS ASSESSEES GROUND 3 AND REVENUE GROUND N O 4, CIT(A) HAS HELD THAT THE EXPENDITURE INCURRED TO PRESERVE AND MAINTAIN AN EXISTING ASSET IS TO BE ALLOWED AS CURRENT REPAIRS. IN OUR VIEW TH E ITEMS OF EXPENDITURE DEMONSTRATED FROM RECORD CLEARLY INDICATE THEM TO B E CURRENT REPAIRS AND REVENUE IN NATURE. THE PART OF EXPENDITURE CAPITALI ZED BY CIT(A) AS DETAILED IN HIS ORDER LIKE REPLACEMENT OF CURTAINS, PAINT, G RILLS, TEMPORARY STRUCTURE AND OTHER HEADS ARE CLEARLY CURRENT REPAIRS IN NAT URE. IN VIEW OF THESE FACTS AND CIRCUMSTANCES WE HOLD THE IMPUGNED EXPENDITURE TO BE CURRENT REPAIRS AND ALLOWABLE AS REVENUE EXPENDITURE. THIS GROUND O F ASSESSEE IS ALLOWED AND THAT OF REVENUE DISMISSED. 14. APROPOS REMAINING REVENUE GROUND NO 1 ABOUT GLO W SIGN BOARDS, THEY ARE CLEARLY ADVERTISEMENT ITEMS PRONE OF WEAR, TEAR REPLACEMENT AND RENEWABLE. WE FIND NO INFIRMITY IN THE ORDER OF CIT (A) ALLOWING THEM AS REVENUE EXPENDITURE. 15. REVENUE GROUND NO 3 ABOUT PAYMENT OF COMMISSION - IN OUR VIEW AO HAS ADOPTED A WRONG APPROACH, WHEN THE ASSESSEE HAS DEMONSTRATED THE GENUINENESS OF COMMISSION, PARTIES ARE OLD AND NO S PECIFIC ITEM OF COMMISSION IS OBJECTED. ONLY ON GENERAL ASSUMPTIONS AND PAST YEARS SUMMARY COMPARISON COMMISSION CAN NOT BE DISALLOWED . BESIDES AO CAN NOT STEP IN TO THE SHOES OF BUSINESSMAN TO DECIDED WHAT EXTENT OF ALLOWABLE COMMISSION. RELIANCE TO HONBLE SUPREME COURT JUDG MENT IN THE CASE OF SA BUILDERS BY ASSESSEE IS WELL PLACED. IN VIEW TH EREOF WE HOLD THAT THE COMMISSION HAS BEEN RIGHTLY ALLOWED BY CIT(A), THIS GROUND OF THE REVENUE IS DISMISSED. ITA 3501 & 3541/DEL/11 LIBERTY SHOES LTD. 10 16. IN THE RESULT ASSESSEES APPEAL IS ALLOWED AND T HAT OF REVENUE DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 27-04-2012. SD/- SD/- ( B.C. MEENA ) ( R.P. TOLANI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 27-04-2012. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR