DIAGEO INDIA P. LTD, MUMBAI V. ITO 7(3)(3), MUMBAI

ITA 4060/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 55168 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-09-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2004-2005
• Appeal Filed On: 18-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: C G K NAIR
• Keywords: Business income; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

ITA NO. 4060/MUM./2010 ASSESSMENT YEAR: 2004-05 PAGE 1 OF 5 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI D BENCH, MUMBAI BEFORE SHRI PRAMOD KUMAR , ACCOUNTANT MEMBER, AND SMT ASHA VIJAYARAGHVAN, JUDICIAL MEMBER ITA NO. 4060/MUM./2010 ASSESSMENT YEAR: 2004-05 DIAGEO INDIA PRIVATE LIMITED ...APPELLAN T 4 TH FLOOR, NICHOLS PIRAMAL TOWER PENINSULA CORPORATE PARK GANPATRAO KADAM MARG, LOWER PAREL, MUMBAI 400 013 [PAN : AAACI3378L] VS. INCOME TAX OFFICER RESPONDENT WARD 7(3), MUMBAI 400 020 APPEARANCES: PB CHAPPGAR, ALONGWITH K K VED, FOR THE APPELLANT C G K NAIR, FOR THE RESPONDENT DATE OF HEARING : JUNE 15 ,2011. DATE OF PRONOUNCEMENT : SEPTEMBER 05,2011. O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL , THE ASSESSEE APPELLANT H AS CALLED INTO QUESTION CORRECTNESS OF CIT(A)S ORDER DATED 7 TH JANUARY 2010, IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX ACT 1961, FO R THE ASSESSMENT YEAR 2004- 05. 2. IN THE FIRST GROUND OF APPEAL, THE ASSESSEE IS A GGRIEVED OF THE CIT(A)S CONFIRMING THE DISALLOWANCE OF EXPENSES OF RS 2,36, 88 ON ACCOUNT OF COMPUTER SOFTWARE EXPENSES, BY HOLDING THAT THIS EXPENSE CON STITUTES CAPITAL EXPENDITURE. 3. LEARNED REPRESENTATIVES AGREE THAT IDENTICAL ISS UE, ON THE SAME SET OF FACTS IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2006-07 , CAME UP FOR ADJUDICATION ITA NO. 4060/MUM./2010 ASSESSMENT YEAR: 2004-05 PAGE 2 OF 5 BEFORE, AND WAS HEARD IN DETAIL BY, THIS VERY BENCH ON 7 TH JUNE 2011, AND THAT WHATEVER IS DECIDED IN THE SAID APPEAL WILL APPLY MUTATIS MUTANDI ON THIS APPEAL AS WELL. VIDE OUR ORDER OF EVEN DATE, AND WHILE DIS POSING OF THE APPEAL FOR THE ASSESSMENT YEAR 2006-07, WE HAVE HELD AS THAT THE EXPENDITURE ON SOFTWARE, WHICH HAS BEEN HELD TO BE CAPITAL EXPENDITURE BY TH E ASSESSING OFFICER, IS IN RESPECT OF ROUTINE BUSINESS APPLICATIONS AND ATTEND ANCE RECORDINGS ETC. WE HAVE EXAMINED EACH OF THESE CASES, AND ALL THESE SO FTWARE ARE APPLICATION SOFTWARE , WHICH BECOME OBSOLETE RATHER QUICKLY, AN D THE PAYMENT IS TOWARDS LICENCE FEES FOR USE OF SOFTWARE. KEEPING IN VIEW T HE NATURE OF THE SOFTWARE, AS ALSO THE PRINCIPLE LAID DOWN BY SPECIAL BENCH IN TH E CASE OF AMWAY ENTERPRISES VS DCIT (111 ITD 112), WE UPHOLD THE GRIEVANCE AND DIRECT THE ASSESSING OFFICER TO TREAT ENTIRE EXPENDITURE ON THESE ROUTIN E BUSINESS APPLICATION SOFTWARE AS REVENUE EXPENDITURE AND THUS DELETE THE IMPUGNED DISALLOWANCE WE SEE NO REASONS TO TAKE ANY OTHER VIEW OF THE MAT TER THAN THE VIEW SO TAKEN IN ASSESSEES OWN CASE. RESPECTFULLY FOLLOWING THE SAM E, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO DE LETE THE IMPUGNED DISALLOWANCE OF RS 2,36,808. GROUND NO. 1 IS THUS ALLOWED. 4. IN THE SECOND GROUND OF APPEAL, THE ASSESSEE IS AGGRIEVED OF DISALLOWANCE OF CLUB EXPENSES OF RS 58,930 BEING 50% OF REIMBURSEME NT OF CLUB EXPENSES TO THE EMPLOYEES, WHICH ARE STATED TO HAVE BEEN INCURRED F OR BUSINESS MEETINGS, ON THE GROUND THAT THE AMOUNT DISALLOWED REPRESENTS PERSON AL BENEFIT TO THE ASSESSEE. 5. WE ARE UNABLE TO SEE ANY MERITS IN THIS APPROACH OF THE AUTHORITIES BELOW. ONCE THE EXPENDITURE IS HELD TO BE ALLOWABLE ON THE GROUND THAT BUSINESS MEETINGS TOOK PLACE AT THE CLUB, THERE IS NO GOOD REASON TO DISALLOW PART OF EXPENSES ON THE GROUND THAT THE ASSESSEE MAY HAVE BENEFITED FROM TH E SAME. THIS ISSUE ALSO CAME UP FOR ADJUDICATION BEFORE US IN THE ASSESSMENT YEA R 2006-07 AS WELL. IN THE SAID ASSESSMENT YEAR, HAVING NOTED THAT LEARNED REPRESEN TATIVES AGREE THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY DECISIONS OF T HE COORDINATE BENCHES IN ASSESSEES OWN CASE FOR EARLIER YEARS AND HAVING TA KEN COPIES OF THESE DECISIONS WERE PLACED ON RECORD, WE UPHELD THE GRIEVANCE OF THE ASSESSEE. THE DISALLOWANCE WAS ACCORDINGLY DELETED. WE SEE NO REASONS TO TAKE ANY OTHER VIEW OF THE MATTER IN ITA NO. 4060/MUM./2010 ASSESSMENT YEAR: 2004-05 PAGE 3 OF 5 THIS ASSESSMENT YEAR EITHER. CONSISTENT WITH THE VI EW SO TAKEN FOR THE OTHER ASSESSMENT YEAR, WE UPHOLD THE GRIEVANCE OF THE ASS ESSEE AND DIRECT THE ASSESSING OFFICER TO DELETE THE IMPUGNED DISALLOWAN CE. 6. GROUND NO. 2 IS ALSO THUS ALLOWED. 7. IN GROUND NO. 3, THE ASSESSEE IS AGGRIEVED OF CI T (A) CONFIRMING THE DISALLOWANCE OF RS 39,66,774 ON ACCOUNT OF SEVERANC E PAY PAID ON CLOSURE OF THE UNIT. 8. AS FAR AS THIS DISALLOWANCE IS CONCERNED, THE RE LEVANT MATERIAL FACTS ARE LIKE THIS. IN THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS CLAIMED A DEDUCTION OF RS 39, 66,774 ON ACCOUNT OF TERMINATION PAY. WHEN ASSESSING OFFICER REQUIRED T HE ASSESSEE TO SHOW CAUSE AS TO WHY THIS EXPENDITURE NOT BE TREATED IN THE NATUR E OF A PAYMENT UNDER VOLUNTARY RETIREMENT SCHEME, AND, ACCORDINGLY, AMORTIZED UNDE R SECTION 35 DDA, IT WAS SUBMITTED BY THE ASSESSEE THAT THIS PAYMENT WAS IN THE NATURE OF COMPENSATION IN CONNECTION WITH TERMINATION OF EMPLOYMENT. IT WAS E XPLAINED THAT DUE TO DOMESTIC WHISKEY BUSINESS, SOME EMPLOYEES WERE NOT OFFERED THE JOB BY NEW BUYER, OR THEY DID NOT WANT TO JOIN THE NEW BUYER, AND THESE EMPLOYEES WERE OFFERED SEVERANCE PAY BY THE ASSESSEE. IT WAS ALSO SUBMITTED THAT THE PAYMENTS SO MADE ARE NOT IN ACCORDANCE WITH THE CONDITIONS LAID DOWN UNDER RULE 2 A, AND, AS SUCH, THESE COULD NOT BE TREATED AS VRS PAYMENTS. THE ASSESSING OFFICER, HOWEVER, WAS NOT IMPRESSED BY THESE ARGUMENTS. HE WAS OF THE VIEW THAT THE SEVERANCE PAY WAS OF THE SAME NATURE AS VRS, AND, ACCORDINGLY, PR OVISIONS OF SECTION 35 DDA WILL APPLY HERE AS WELL RESULTING IN AMORTIZATION OF E XPENSES OVER FIVE YEARS. THE ASSESSING OFFICER FURTHER NOTED THAT THE BUSINESS I S ALLOWED FOR THE BUSINESS WHICH IS CARRIED ON BY THE ASSESSEE, AND SINCE BUSI NESS ITSELF HAS COME TO A HALT IN THIS CASE, THE EXPENSES OF SAID BUSINESS CANNOT BE ALLOWED AS DEDUCTION. REFERENCES WERE MADE TO HONBLE SUPREME COURTS JU DGMENT IN THE CASE OF CIT VS GEMINI CASHEW SALES CORPORATION (65 ITR 643), HONB LE MADRAS HIGH COURTS JUDGMENT IN THE CASE OF COIMBTORE PREMIER CORPORAT ION PVT LTD VS CIT (244 ITR 445) AND HON,BLE CALCUTTA HIGH COURTS JUDGMENT IN THE CASE OF BINANI PRINTERS ITA NO. 4060/MUM./2010 ASSESSMENT YEAR: 2004-05 PAGE 4 OF 5 PVT LTD VS CIT (143 ITR 338). IN ESSENCE IT WAS HEL D THAT EXPENSES ON SEVERANCE PAY ARE EXPENSES ON CLOSING DOWN THE BUSINESS WHICH COULD NOT BE ALLOWED AS DEDUCTION IN COMPUTING OF BUSINESS INCOME. AGGRIEVE D BY THE STAND SO TAKE BY THE ASSESSING OFFICER, ASSESSEE CARRIED THE MATTER IN A PPEAL BEFORE THE CIT(A) BUT WITHOUT ANY SUCCESS. THE ASSESSEE IS NOT SATISFIED AND IS IN APPEAL BEFORE US. 9. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING PE RUSED THE MATERIAL ON RECORD, WE ARE INCLINED TO HOLD THAT EXPENDITURE ON SEVERANCE PAY IS A REVENUE EXPENDITURE FOR THE SIMPLE REASON THAT THE AUTHORIT IES BELOW HAVE PROCEEDED ON THE FALLACIOUS ASSUMPTION THAT THE PAYMENT OF SEVER ANCE PAY IS AN EXPENDITURE CONNECTED WITH CLOSING DOWN OF BUSINESS, WHEREAS NO T ONLY ASSESSEE CONTINUES TO CARRY ON THE BUSINESS, BUT HE DOES SO MORE EFFICIEN TLY, BY OUTSOURCING THE PRODUCTION OF ALCOHOLIC BEVERAGES. THE EXPENDITURE INCURRED ON THIS RESTRUCTURING OF BUSINESS MODEL, IN OUR HUMBLE UNDERSTANDING, CAN NOT BE TREATED AT PAR WITH EXPENSES ON CLOSING DOWN THE BUSINESS. THE JUDICIA L PRECEDENTS CITED BY THE AUTHORITIES BELOW DEAL WITH THE SITUATIONS WHERE BU SINESS WAS BEING CLOSED DOWN. THAT IS NOT THE CASE BEFORE US. IN THIS VIEW OF TH E MATTER, THE JUDICIAL PRECEDENTS CITED BY THE AUTHORITIES BELOW ARE NOT REALLY DECIS IVE OF THE ISSUE IN APPEAL BEFORE US. IN OUR CONSIDERED VIEW, THE PAYMENTS FOR SEVER ANCE PAY, IN A SITUATION IN WHICH EMPLOYEES ARE BEING PAID THESE AMOUNTS DUE TO CHANGE IN THE BUSINESS MODEL AND THE ASSESSEE CONTINUES TO REMAIN IN THE S AME BUSINESS EVEN AFTER THESE PAYMENTS, ARE NORMALLY DEDUCTIBLE UNDER SECTION 37( 1) OF THE ACT. HOWEVER, OVERRIDING PROVISIONS OF SECTION 35 DDA (1) W.E.F . 1 ST APRIL 2001 SPECIFICALLY PROVIDE THAT WHERE AN ASSESSEE INCURS ANY EXPENDIT URE IN ANY PREVIOUS YEAR BY WAY OF PAYMENT OF ANY SUM TO AN EMPLOYEE IN CONNEC TION WITH HIS VOLUNTARY RETIREMENT, IN ACCORDANCE WITH ANY SCHEME OR SCHEME S OF VOLUNTARY RETIREMENT, ONE-FIFTH OF THE AMOUNT SO PAID SHALL BE DEDUCTED I N COMPUTING THE PROFITS AND GAINS OF THE BUSINESS FOR THAT PREVIOUS YEAR, AND T HE BALANCE SHALL BE DEDUCTED IN EQUAL INSTALMENTS FOR EACH OF THE FOUR IMMEDIATELY SUCCEEDING PREVIOUS YEARS AND SECTION 35 DDA(6) FURTHER PROVIDES THAT NO DED UCTION SHALL BE ALLOWED IN RESPECT OF THE EXPENDITURE MENTIONED IN SUB-SECTION (1) UNDER ANY OTHER PROVISION OF THIS ACT. IN EFFECT THUS, AS LONG AS A PAYMENT IS WITHIN THE SCOPE OF SECTION 35DDA(1), IT CANNOT BE ALLOWED AS A DEDUCTI ON UNDER SECTION 37(1). THE ITA NO. 4060/MUM./2010 ASSESSMENT YEAR: 2004-05 PAGE 5 OF 5 SCOPE OF SECTION 35DDA (1) IS FAIRLY WIDE AS IT COV ERS NOT ONLY A VRS PAYMENT IN ACCORDANCE WITH AN APPROVED SCHEME, BUT ALSO ANY P AYMENT MADE TO THE EMPLOYEE IN CONNECTION WITH HIS VOLUNTARY RETIREMEN T WHETHER OR NOT IN TERMS OF THE PROVISIONS OF RULE 2 BA. THERE CANNOT BE A D ISPUTE THAT THE SUM PAID TO THE EMPLOYEES, IN ESSENCE, IS A PAYMENT IN CONNECTION W ITH THEIR VOLUNTARY RETIREMENT. IN THIS VIEW OF THE MATTER, EVEN THOUGH THE AMOUNT PAID TO THE EMPLOYEES IS A REVENUE EXPENDITURE, IT IS REQUIRED TO BE AMORTIZED NEVERTHELESS UNDER SECTION 35 DDA OF THE ACT. WE, THEREFORE, HOL D THAT ONLY ONE FIFTH OF THE EXPENDITURE ON SEVERANCE PAY WAS ALLOWABLE IN THIS ASSESSMENT YEAR. THE ASSESSEE WILL, HOWEVER, GET DEDUCTIONS OF SAME AMOU NT IN EACH OF THE FOUR SUBSEQUENT ASSESSMENT YEARS AS WELL. 10. GROUND NO. 3 IS THUS PARTLY ALLOWED IN THE TER MS INDICATED ABOVE. 11. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED IN THE TERMS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT TODAY ON 5 TH DAY OF SEPTEMBER, 2011. SD/- SD/- (ASHA VIJAYARAGHAVAN ) (PRAMOD K UMAR) JUDICIAL MEMBER ACCOUNTANT ME MBER MUMBAI; 5 TH DAY OF SEPTEMBER , 2011 . COPY FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER , MUMBAI 4. DEPARTMENTAL REPRESENTATIVE, BENCH, MUMBAI 5. GUARD FILE TRUE COPY BY ORDER ETC. ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, MUMBAI