Hike Pvt Ltd, Delhi V. ACIT, Circle-11(2), New Delhi

ITA 4314/DEL/2019

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 4316 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 4 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2014-2015
• Appeal Filed On: 12-05-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANJULA JAIN
• Keywords: Revision of order; Depreciation; Set aside
• Section: 32; 37; 263; 28; 195

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI (DELHI BENCH ‘C’ : NEW DELHI) BEFORE SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER AND SHRI ANUBHAV SHARMA, JUDICIAL MEMBER ITA No. 4313/Del/2019, A.Y. 2013-14 ITA No. 4314/Del/2019, A.Y. 2014-15 Hike Private Limited 1, Nelson Mandela Road, Bharti Crecent, Vasant Kunj, Phase - II, New Delhi-110070 PAN : AAHCM5054A Vs. Asstt. Commissioner of Income- tax , Circle-11(2), New Delhi (APPELLANT) (RESPONDENT) Assessee by Shri Anil Bhalla, CA Revenue by Shri Anjula Jain, CIT(DR) Date of hearing: 14.09.2022 Date of Pronouncement: 22.09.2022 ORDER PER SHAMIM YAHYA, ACCOUNTANT MEMBER: These are appeals by the assessee against respective orders of Ld. CIT(A) for the two assessment years as above. Since the issues are common and connected and the appeals were heard together these are being disposed off by this, common order. For the sake of reference, we are referring to grounds of appeal of assessment year 2013-14. 2. The grounds of appeal read as under :- ITA No. 4313 & 4314/Del/2019 2 “1. The learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in confirming the action of learned Assessing officer in re-characterizing the business expenses amounting to Rs. 21,02,30,236/- as capital expenditure allegedly on the ground that the assessee is engaged in brand building and does not presented any revenue model before the learned AO and the learned CIT(A). 2. The learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in confirming the action of learned Assessing officer and not appreciating the fact that the Income Tax law does not provide for any type of self- generated brand as asset under Section 32 of the Act.” 3. The brief facts of the case are that the assessee filed return of income declaring current year loss of Rs. 19,27,53,934/- on 30.09.2013. The assessee has not earned any income from its business activity and shown income from other sources on account of interest on fixed deposits. The AO took the view that the assessee has incurred these expenditures only to build its own brand which will give enduring benefits to the assessee. Accordingly, these expenses should be capitalized. The concluding part of the assessment order is as follows:- “The fact of the case is totally different from the fact of cases relied upon the assessee. In all the above referred cases, efforts have been made to earn income but income could not be realized whereas in this case, the assessee has not started any effort to earn income. It is just in process of making a brand for future utilization of earning income so any expenses thereupon can’t be held to be held in the expenses in the nature of revenue. Moreover, when there is no income chargeable u/s 28, no expenses u/s 30 to 37 can be claimed in this regard. In view of the total expenses claimed in the P&L a/c of Rs. 21,02,03,236/- is hereby disallowed and capitalized.” ITA No. 4313 & 4314/Del/2019 3 4. Upon assessee’s appeal, learned CIT(A) confirmed the AO the action by observing as under :- “I have considered the finding of the AO and submission of the appellant. On going through the expenditure claimed by the appellant such as development fees, SMS and activation cost, management consultancy charges, huge salary expenses to the Professionals, these expenses cannot be termed as pure revenue expense to be allowable u/s 30 to 37 when there is no income chargeable to tax u/s 28 of the Act. No material facts has been brought on record by the Ld.AR substantiate its claim as revenue nature of expenses. The nature and characteristics of these expenses have the element of giving benefit to the appellant for a longer period and of enduring nature. The view of the AO that the assessee has no income which is chargeable under the head 'Profits and gains of business or profession ’ is upheld. Further, as has also been pointed out by the AO, once there is no income which is chargeable under the head ‘Profits and gains of business or profession’, deductions which are specific to the said head on income are not admissible. It is also a fact that the appellant has not tried to evolve a model where income start generating. Even in subsequent years, no income has been generated. These expenditure has not been incurred for ongoing business where revenue has been generated earlier and there is a low on revenue front at present. It is a case where no revenue model has been presented by the appellant even before AO and in appeal. Ld.AR has not shown any model in which revenue is likely to be generated. In view of these facts, I agree with the finding of the AO that the appellant is in the process of making a brand for future utilization of earning income. Brand name is an intangible asset and the said view finds support from AS-26 i.e. Accounting Standard issued by the Institute of Chartered Accountants of India. AO has rightly disallowed these expenses and treated as expense of the capital nature. Further, reliance is placed on the decision of Hon’ble Bombay High Court in the case of ALD Automotive Pvt. Ltd. Vs. DCIT (2018) 254 taxmann 233 & also on the decision of Hon’ble Calcutta High Court in the case of Video Plaza Vs. ITO, 385 ITR 404. The Ground of appeal is dismissed.” 5. Against the above order assessee is in appeal before us. We have heard both the parties and perused the records. Ld. Counsel of the assessee contended that assessee is a tech start-up and there is long gestation period for such ITA No. 4313 & 4314/Del/2019 4 enterprises. He further submitted that the Revenue authorities’ view that earning of income is a precondition for allowing the expenditure is without any basis. He further pleaded that the nature of these expenses is totally revenue. He further submitted that Revenue authorities have not understood the business model of the assessee wherein revenue can be earned at any time during the course of business. He submitted that assessee has already built a messenger app namely ‘hike’ which was used by public in same manner as Whatsapp. He submitted that the presumption that the assessee has not made any effort to earn is misplaced. He further submitted that the case laws relied upon by the Ld. CIT(A) are not at all applicable on the facts of the case. He further submitted that the expenditure incurred after setting up of business is an allowable expense. That the expenditure was accepted and allowed in preceding years. Further, Ld. Counsel of the assessee placed reliance upon several case laws for the proposition that these expenditures are not capital in nature for brand building. He further submitted that there is no provision in law to recognize self-generated intangible asset. Further he relied upon Hon’ble Delhi High Court decision in the case of Maruti Insurance Broking Pvt. Ltd. Vs. DCIT 127 taxman.com 685. Further, he placed reliance upon ITAT decision in assessee’s own case for AY 2012-13 in ITA No.2906/Del/2018 vide order dated 05.07.2022 where while quashing the order passed section 263 ITAT has observed that the view that earning of income is necessary for allowance ITA No. 4313 & 4314/Del/2019 5 expenditure is not sustainable. Per contra ld. DR for the Revenue relied upon the orders of authorities below. 6. Upon careful consideration, we note that assessee’s expenditure were duly allowed in the earlier assessment year. ITAT in assessee’s own case for AY 2012-13 has quashed the order u/s 263 of the Act passed by the ld. Pr.CIT in ITA No.2906/Del/2018 vide order dated 05.07.2022. In the said order ld. Pr.CIT had opined that AO has not done proper inquiry inasmuch as there was no income but assessee has been allowed expenditure. ITAT has duly held that “earning of income is necessary for allowance of expenditure” is not a sustainable proposition. In the present two assessment years, the AO had disallowed the same holding them to be a brand-building exercise. Ld. CIT(A) has also upheld the view. In the background of the ITAT order in assessee’s own case, such views are not sustainable. Assessee’s business was duly set up in AY 2012-13 and expenditure for that year was allowed. Assessee’s nature of business is arising out of Information Technology for developing, marketing and distribution of instant messaging application for mobile user in India. The contention of the assessee that there is long gestation period for tech start-up is duly supported by contemporaneous data. It is not necessary to earn income for allowance of expenditure has been duly upheld by Hon’ble jurisdictional High Court in the case of Maruti Insurance Broking (P.) Ltd. 435 ITR 34 (Del.) as under :- ITA No. 4313 & 4314/Del/2019 6 “It was held in this case that business does not conform to ‘cold start’ doctrine and most cases, there was gap between time a person or entity is ready to do business and when business is conducted and during this period, expenses are incurred towards keeping business primed up and these expenses cannot be capitalized. Hence, it was held that expenditure incurred between setting up and commencement of business could not have been capitalized and was to be allowed as business expenditure.” 7. ITAT in assessee’s own case while referring to the above decision has observed that when we examine the facts of the present case on the touchstone of the above case laws, the Pr.CIT’s inference that AO should make further unspecified enquiries so that assessee should not be allowed expenditure and the depreciation because the assessee has not earned any revenue is not based upon any material whatsoever. We find that the facts in the present case are analogical just because assessee has not earned any income expenditure should be disallowed, is not a correct view. It has also been pointed out by the ld. Counsel of the assessee that assessee has in fact earned some income in 2018. 8. We also note that ld. Counsel of the assessee had pleaded that similar issue was decided by the ITAT in the case Flipkart India (P) Ltd. (2018) 92 taxmann.com 387 (ITAT-Bang.) In the above matter, the assessee sold its product at less than cost price and claimed the difference as expense. However, the learned AO added back the said expense contending that it is brand building expense and hence capitalized the said expense. On appeal, Hon’ble ITAT carefully examined the matter and deleted the addition made by ld. AO in this respect and allowed the said expense claimed by the assessee company on the ITA No. 4313 & 4314/Del/2019 7 ground that no capital asset in the form of any brand has come into existence. This case law is duly applicable on the facts of the assessee’s case here. 9. Furthermore, we note that ld. Counsel of the assessee further placed reliance on the following case laws where Revenue has tried to treat the advertisement expenses as brand building expenses of enduring nature and the courts have duly set aside such proposition :- (i) DCIT vs. Core Healthcare Ltd. (2009) 308 ITR 263; (ii) Adidas India Marketing (P) Ltd. 195 taxman 256 (Del.); (iii) Taparia Tools Ltd – 372 ITR 605 (SC); (iv) CIT vs. Berger Paints (India) Ltd. (No.2) (2002) 254 ITR 503 (Cal) (v) Polygel Industries (P) Ltd. (2015) 56 taxmann.com 198 10. In view of the aforegoing decisions and precedents, it is clear that assessee cannot be disallowed the expenditure on the ground that it is a brand building exercise and is capital in nature. Accordingly, we set aside the orders of the authorities below and decide the issue in favour of the assessee. 11. Our above order applies mutatis mutandis to both the years in appeal before us. 11. In the result, both the appeals are allowed. v Order pronounced in the open court on this 22 nd day of September, 2022. Sd/- sd/- (ANUBHAV SHARMA) (SHAMIM YAHYA ) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated the 22 nd day of September, 2022 TS/Binita ITA No. 4313 & 4314/Del/2019 8 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI