DCIT (OSD) CIR 2(2), MUMBAI V. POLYGEL INDUSTRIES P. LTD, MUMBAI

ITA 3655/MUM/2011

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9394 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 9 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-02-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 21-01-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 06-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N PADMANABAND R
• Assessee Lawyers: VIJAY KOTHARI
• Keywords: Capital asset; Depreciation; Revenue expenditure; Capital expenditure

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES C MUMBAI . . , BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ITA NO.3655/MUM/2011 (A.Y.2007-08) DY. COMMISSIONER OF INCOME - TAX CIRCLE-2(2), AAYAKAR BHAVAN ROOM NO.545, 5 TH FLOOR M.K. ROAD MUMBAI-400 020. GIR NO./PAN : AAACK 4105 F (APPELLANT ) VS. POLYGEL INDUSTRIES PVT. LTD. L-1, 205, D GREAT EASTERN GALLERIES, PLOT NO.20, SECTOR-4 NERUL NAVI MUMBAI-400 706. (RESPONDENT) APPELLANT BY : SHRI N. PADMANABAN-DR RESPONDENT BY : SHRI VI JAY KOTHARI DATE OF HEARING : 16/02/2015 DATE OF PRONOUNCEMENT : 25/02/2015 ORDER PER CHANDRA POOJARI, A.M: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER PASSED BY LD. CIT(A) DATED 16/02/2011 FOR THE ASSESSMENT YEAR 200 7-08. THE ONLY ISSUE FOR OUR CONSIDERATION IS WITH REGARD TO ALLOWABILITY OF EXP ENDITURE INCURRED BY THE ASSESSEE ON BRAND BUILDING TO THE TUNE OF RS.1,67,05,772/-. 2. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE HAS INCURRED AN AMOUNT OF RS.2,22,74,363/- UNDER THE HEAD BRAND BUILDING EXP ENSES. THE AO QUESTIONED THE NATURE OF EXPENDITURE WHETHER CAPITAL OR REVENUE. T HE ASSESSEE REPLIED VIDE LETTER DATED 11/12/2009 STATING THAT THE EXPENDITURE INCUR RED REPRESENTS THE EXPENDITURE INCURRED TOWARDS NEW PRODUCT LAUNCHING AND IT HAS N OT RESULTED IN CREATING ANY NEW ASSET WHETHER TANGIBLE OR INTANGIBLE. THE AO DISAGR EED WITH THE CONTENTION OF THE 2 ITA NO.3655/M /11 ASSESSEE AND TREATED THE ABOVE EXPENDITURE AS CAPIT AL EXPENDITURE AND GRANTED DEPRECIATION ON IT @ 25% WORKED OUT AT RS.55,68,591 /- THEREBY MAKING ADDITION OF RS.1,67,05,772/- TO THE RETURNED INCOME OF THE AS SESSEE . AGAIN,THE ASSESSEE CARRIED THE MATTER BEFORE THE CIT(A). THE CIT(A) WAS OF THE OPINION THAT THE EXPENDITURE WAS IN THE NATURE OF SALES PROMOTION, STAFF WELFARE, DI SCOUNT ALLOWED, TELEPHONE CHARGES, TRAVELLING EXPENSES, SALARY, PRODUCT LAUNCHING, MEE TING EXPENSES, ADVERTISEMENT AND OTHER EXPENSES IN THE RELEVANT FIELD. THIS ACCORDIN G TO CIT(A) ARE ROUTINE OPERATIONAL EXPENSES INEVITABLE FOR LAUNCHING OF ANY PRODUCT AN D HAVE NOTHING TO DO WITH BRAND BUILDING, THOUGH THE ASSESSEE USED THE WORD EXPEND ITURE ON BRAND BUILDING. FURTHER HE OBSERVED THAT THE EXPENDITURE ON LAUNCHING OF A NEW PRODUCT IN AN EXISTING BUSINESS IS FULLY DEDUCTIBLE EVEN THE ASSESSEE HAS TREATED I T AS DEFERRED REVENUE EXPENDITURE. ACCORDINGLY HE OBSERVED THAT THE EXPENDITURE IS TO BE ALLOWED IN ITS ENTIRETY AND ALLOWED THE CLAIM OF THE ASSESSEE. AGAINST THIS, TH E REVENUE IS IN APPEAL BEFORE US. 3. THE LD. DR SUBMITTED THAT THE ASSESSEE ITSELF CL AIMED EXPENSE AS BRAND BUILDING EXPENSES FOR LAUNCHING A NEW PRODUCT AND THE AMOUN T IN QUESTION IS INCURRED BY ASSESSEE IS A HUGE AMOUNT FOR LAUNCHING A NEW PRODU CT AND BY INCURRING THIS EXPENDITURE AT ONE TIME, THE ASSESSEE DERIVES ENDUR ING BENEFIT BY WHICH THE ASSESSEES SALES GET BOOSTED FOR A LONG PERIOD. THEREFORE, THE EXPENSES WHICH RESULTED IN ENDURING BENEFIT SHALL BE TREATED AS CAPITAL EXPENDITURE AND HE ALSO DERIVED SUPPORT FROM SECTION 55(2)(A) OF THE INCOME TAX ACT, WHEREIN BRAND NAME IS ALSO TREATED AS CAPITAL ASSET SO AS TO COMPUTE CAPITAL GAIN ON TRANSFER. HE RELIED O N THE FOLLOWING JUDGMENTS :- 1) ASSAM BENGAL CEMENT CO. LTD. VS. CIT (27 ITR 23) (SC); 2) EMPIRE JUTE CO. LTD. VS. CIT (124 ITR 1)(SC) AND 3) ARVIND MILLS LTD. VS. CIT (197 ITR 432) (SC) 3.1 THUS, HE SUBMITTED THAT THE EXPENDITURE INCURRE D BY THE ASSESSEE WHICH IS IN RELATION TO BRAND BUILDING AND IS HAVING IMPACT ON ASSESSEES BUSINESS IN THE LONG RUN AND SHOULD BE TREATED AS CAPITAL EXPENDITURE AND DE PRECIATION SHOULD BE GRANTED AS DONE BY THE AO. ON THE OTHER HAND THE LD. AR RELIED ON THE ORDER OF CIT(A). 3 ITA NO.3655/M /11 4. WE HAVE HEARD BOTH PARTIES AND PERUSED THE MATER IAL AVAILABLE ON RECORD. IN THIS CASE THE ASSESSEE INCURRED AN AMOUNT OF RS.2,22,74, 363/- UNDER THE HEAD BRAND BUILDING EXPENSES . THE SAME HAS BEEN CLAIMED BY T HE ASSESSEE AS REVENUE EXPENDITURE IN ITS RETURN OF INCOME. THE EXPENDITUR E IS MOSTLY IN THE NATURE OF SALES PROMOTION, STAFF WELFARE, DISCOUNT ALLOWED TO THE D ISTRIBUTOR, PRODUCT LAUNCH, TOWARDS CONSULTANCY AND LEGAL EXPENSES, ADVERTISEMENT, VEHI CLE HEAD CHARGES, TELEPHONE, POSTAL CHARGES, CARPENTER AND CUSTOMER MEETING EXPENSES, TRAVELLING EXPENSES, FREE SAMPLE EXPENSES, SALARY AND CONVEYANCE AND MATERIAL EXPENS ES ETC. THE AO WAS OF THE OPINION THAT EXPENDITURE RESULTED IN ENDURING BENEFIT. THUS , HE DISALLOWED THE CLAIM OF THE ASSESSEE BY TREATING IT AS CAPITAL EXPENDITURE AND DEPRECIATION WAS GRANTED ON IT. ACCORDING TO LD. AR THE EXPENDITURE INCURRED HAS NO T RESULTED IN ACQUIRING ANY TANGIBLE OR INTANGIBLE PROPERTY OR ACQUIRING ANY ASSET OF EN DURING BENEFIT SO AS TO TREAT IT AS CAPITAL EXPENDITURE. BASICALLY, THE EXPENDITURE WOU LD BE CAPITAL IN NATURE IF IT IS MADE WITH A VIEW TO BRING INTO A PROFIT MAKING ASSET OR BUSINESS ADVANTAGE WHICH RESULTED IN BRINGING ENDURING BENEFIT. THE PURPOSE OF INCURRING THE EXPENDITURE IS TO BE SEEN IF THE EXPENDITURE IS INCURRED WITH A VIEW TO BRING INTO E XISTENCE AN ASSET OR ADVANTAGE FOR ENDURING BENEFIT OF THE BUSINESS IT WOULD, UNLESS T HE CIRCUMSTANCES SHOW OTHERWISE, BE IN THE NATURE OF A CAPITAL EXPENDITURE. THE QUANTUM OF THE EXPENDITURE CANNOT BE REASON TO DECIDE NATURE OF EXPENDITURE. THE AMOUNT SPENT NO MATTER, THE NATURE OF THE EXPENDITURE DEPEND UPON THE ACQUISITION OF ASSETS I N PERMANENT NATURE AND IF THE AIM AND OBJECT OF EXPENDITURE IS TO BRING NEW ASSET INT O EXISTENCE OR ON THE OTHER HAND IF IT IS INCURRED FOR RUNNING A BUSINESS OR WORKING IT WI TH A VIEW TO PRODUCE PROFIT IT WOULD BE REVENUE EXPENDITURE. USUALLY, WHILE DECIDING THE NA TURE OF EXPENDITURE ONE HAS TO SEE THE FOLLOWING POINTS:- I) IF THE EXPENDITURE IS WITH THE INTENTION OR FOR ACQ UIRING OR BRINGING INTO EXISTENCE AN ASSET OR ADVANTAGE OF AN ENDURING BENE FIT TO THE BUSINESS I.E. BEING CARRIED ON, OR FOR EXISTENCE OF THE BUSINESS I.E. GOING ON, OR FOR A SUBSTANTIAL REPLACEMENT OF AN EXISTING BUSINESS AS SET IT WOULD BE CAPITAL EXPENDITURE. 4 ITA NO.3655/M /11 II) IF ON THE OTHER HAND, THE EXPENDITURE, ALTHOUGH FO R THE PURPOSE OF ACQUIRING AN ASSET OR ADVANTAGE IS FOR RUNNING OF THE BUSINES S OR FOR WORKING OUT THAT ASSET WITH A VIEW TO PRODUCE PROFIT, IT WOULD BE RE VENUE EXPENDITURE. III) IF THE OUTGOING IS SO RELATED TO THE CARRYING ON OR THE CONDUCT OF THE BUSINESS THAT MAY BE REGARDED AS AN INTEGRAL PART OF THE PRO FIT EARNING PROCESS OR OPERATIONS AND NOT FOR ACQUISITION OF ASSET OF A PE RMANENT NATURE THE CONDITION OF WHICH IS THE PRECEDENT FOR THE RUNNING OF THE BUSINESS THEN IT WOULD BE EXPENDITURE OF A REVENUE NATURE. IV) SPECIAL KNOWLEDGE OR TECHNICAL KNOWLEDGE, OR PATENT OR A TRADE MARK, IS AN ASSET IF IT IS ACQUIRED FOR PAYMENT FOR USE AND EXPLOITA TION FOR A LIMITED PERIOD AND WHAT IS ACQUIRED IS NOT AN ASSET OR ADVANTAGE OF AN ENDURING NATURE AND AT THE END OF THE AGREED PERIOD THAT ADVANTAGE OR ASSET RE VERTS BACK TO THE GIVER OF THAT SPECIAL KNOWLEDGE OR OWNER OR PATENT OR TRADE MARK IT WOULD BE EXPENDITURE OF REVENUE NATURE. V) IF IT IS INTRINSICALLY A CAPITAL ASSET, IT IS IMMAT ERIAL WHETHER THE PRICE FOR IT IS PAID ONCE AND FOR ALL OR PERIODICAL OR WHETHER IT I S PAID OUT OF CAPITAL OR INCOME OR LINKED UP WITH THE NET SALES. THE OUT GOI NG IN SUCH A CASE WOULD BE OF THE NATURE OF CAPITAL EXPENDITURE. VI) IF THE AMOUNT IS INCURRED FOR ACQUISITION OF AN ASS ET OF AN ENDURING NATURE IS IN THE CAPITAL FIELD THOUGH PAYMENT HAS BEEN MADE I N SMALL AMOUNTS OR PERIODICAL INSTALMENTS. VII) A LUMPSUM AMOUNT INCURRED WOULD NOT CEASE TO BE REV ENUE EXPENDITURE OR GET INTO OR CONVERTED INTO CAPITAL EXPENDITURE MER ELY BECAUSE IT IS PAYMENT MADE IN LUMPSUM. IT IS THE INTENTION AND OBJECT WIT H WHICH EXPENDITURE INCURRED AND NOT THE METHOD OR THE MANNER IN WHICH THE PAYMENT IS MADE OR THE SOURCES OF SUCH PAYMENT. VIII) IF THE EXPENDITURE IS RECURRING AND INCURRED DURING THE COURSE OF BUSINESS OR MANUFACTURING IT WOULD BE REVENUE EXPENDITURE. IX) AN ASSET OR ADVANTAGE OF AN ENDURING NATURE DOES NO T MEAN THAT IT MAY LAST FOR EVER. IF THE CAPITAL ASSET, IN ITS NATURE, A SH ORT LIVED ONE, THE EXPENDITURE INCURRED OVER IT DOES NOT, FOR THAT REASON, CEASE T O BE A CAPITAL EXPENDITURE. 5 ITA NO.3655/M /11 X) IT IS NOT THE LAW THAT IF AN ENDURING ADVANTAGE IS OBTAINED THE EXPENDITURE FOR SECURING IT MUST BE TREATED AS CAPITAL EXPENDITURE IF ADVANTAGE ACQUIRED IS TO CARRY ON THE BUSINESS THEN IT WOULD BE REVENUE EXPE NDITURE. 4.1 ON THE ABOVE PROPOSITION, WE FIND THAT THOUGH THE EXPENDITURE INCURRED BY THE ASSESSEE GOT THE BENEFIT TO THE ASSESSEE FOR MORE THAN ONE YEAR THAT EXPENDITURE ITSELF CANNOT BE CALLED/TREATED AS CAPI TAL EXPENDITURE ON THE SIMPLE REASON THAT IT DOES NOT BRING INTO EXISTENCE ANY NE W ASSET IN THE FIELD OF CAPITAL OR IN OTHER WORDS NO NEW BRAND WAS DEVELOPED BY INCURRING THAT EXPENDITURE AND THE ACCOUNTING TREATMENT GIVEN BY THE ASSESSEE CANNOT B E CONCLUSIVE TO TREAT EXPENDITURE AS CAPITAL. IN THIS CASE MOST OF THE EX PENDITURE IN THE FIELD OF ADVERTISEMENT PRESUMABLY WAS TO CREATE PUBLIC AWARE NESS AND CONSCIOUSNESS OF THE ASSESSEE PRODUCT SO AS TO INCREASE THE SALES OF THE ASSESSEE. IT APPEARS THAT FROM THE INCURRING OF THE EXPENDITURE FOR PROMOTION, CON SULTANCY AND LEGAL EXPENDITURE THE FIRM HAS HIRED CONSULTANCY FOR THE PURPOSE OF P RODUCT LAUNCHING. IT IS FOR THIS REASON THAT SUSTAINED AND CONCERTED ADVERTISING CAM PAIGNS ARE GENERALLY UNDERTAKEN. THE OTHER EXPENDITURE INCURRED ARE SALE S PROMOTION, PRINTING OF CATALOGUES, DESIGNS, STATIONERY, VEHICLE HIRE CHAR GES, PRODUCT DISPLAY, TRAVELLING, STAFF WELFARE CHARGES ETC. WHICH ARE ESSENTIALLY AN CILLARY AND TOWARD SUB-SERVING THE BRAND BUILDING EXERCISE THROUGH ADVERTISEMENT CAMPA IGNS. THIS EXPENDITURE STANDS INCURRED FOR THE PURPOSE OF RUNNING THE BUSINESS. I T IS NOT PER SE CAPITAL IN NATURE. BY INCURRING THIS EXPENDITURE IT CANNOT BE SAID THA T ANY CAPITAL ASSET STANDS ACQUIRED BY THE ASSESSEE AND IT WAS INCURRED FOR THE PURPOS E OF RUNNING THE BUSINESS AND SUCH NATURE OF EXPENDITURE CANNOT BE SAID THAT RESU LTED IN ENDURING BENEFIT. THE LD. DR ARGUED THAT THE ASSESSEE HAVING ADMITTEDLY INCUR RED THE EXPENDITURE ON BRAND BUILDING, IT CANNOT BE RETRACTED FROM THE SAME; ITS BOOKS OF ACCOUNTS REFLECTING ITS UNDERSTANDING REPRESENTS ITS CURRENT STATE OF AFFAI RS. HOWEVER, IT IS TO BE NOTED THAT THE ASSESSEE HAS NOT CONSIDERED THE EXPENDITURE IN THE FIELD OF CAPITAL ACCOUNT. THE ASSESSEE HAS TREATED IT AS REVENUE EXPENDITURE ONLY . AS SUCH, THERE IS NO FORCE IN THE ARGUMENT OF THE LD. DR THAT THE BRAND BUILDING EXPENDITURE SHALL BE ALWAYS TREATED AS CAPITAL EXPENDITURE. AS THE EXPENDITURE HAS NOT RESULTED IN CAPITAL ASSET, 6 ITA NO.3655/M /11 SO HAS TO BE RECORDED AS EXPENDITURE IN CAPITAL FIE LD. IT SHOULD BE NOTED THAT THE ASSESSEE HAD TO INCUR THIS KIND OF EXPENDITURE YEAR AFTER YEAR SO AS TO KEEP THE PRODUCT IN MARKET OTHERWISE WHEN THE ADVERTISEMENT WAS NOT FOLLOWED UP SUBSEQUENTLY EVEN THE ADVANTAGE SECURED FROM EARLIE R ADVERTISING WOULD GET DISSIPATED . JUST BECAUSE AN EXPENDITURE IS DEBITED IN BOOKS TOWARDS BRAND BUILDING, WHICH IT PURPORTEDLY IS, AND STATUTORY RECOGNITION HAS SINCE BEEN ACCORDED TO SUCH AN INTANGIBLE ASSET, AS A BRAND WOULD NOT BY ITSE LF IMPLY THAT AN ADVANTAGE IN THE CAPITAL FIELD, OR OF ENDURING VALUE TO THE BUSINESS HAS, ARISEN TO THE ASSESSEE UPON INCURRING THE EXPENDITURE. RATHER, THE BUSINESS BEI NG COMPETITIVE AND PRUDENCE AND CONSERVATISM BEING FUNDAMENTAL ACCOUNTING ASSUMPTIO NS, CAPITALIZATION OF SUCH EXPENSES OR ASCRIBING LASTING ABIDING VALUE TO SUC H EXPENSES, COULD ONLY BE DONE ON SOUND FOOTING AND COGENT BASIS.( ALEMBIC CHEMICAL WORKS VS. CIT (177 ITR 377)(SC) ). IN OUR OPINION THE EXPENDITURE CANNOT BE ATTRIB UTED TO CAPITAL EXPENDITURE ON BRAND BUILDING. ACCORDINGLY, WE ARE INCLINED TO UPHOLD THE ORDER OF THE CIT(A) AND DISMISS THE GROUNDS TAKEN BY REVENUE . 5. IN THE RESULT, THE REVENUE APPEAL IN ITA NO.365 5/11 IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 25/02/2015 !' # $%& 25/02/2015 ! ' SD/- SD/- ( . . / I.P. BANSAL) ( /CHANDRA POOJARI ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; $% DATED 25/02/ 2015 . % . ./JV, SR. PS )*+ )*+ )*+ )*+ ,+'* ,+'* ,+'* ,+'* / COPY OF THE ORDER FORWARDED TO : 1. -. / THE APPELLANT 2. )/-. / THE RESPONDENT. 3. 0 ( ) / THE CIT(A)- 7 ITA NO.3655/M /11 4. 0 / CIT 5. +1' )*% , , / DR, ITAT, MUMBAI 6. '2 3 / GUARD FILE. % % % % / BY ORDER, /+* )* //TRUE COPY// 4 44 4 / 5 5 5 5 6 6 6 6 (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI