Kunda Venkateswara Rao, Tiruvuru V. The CIT (A), Kurnool

ITA 433/VIZ/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 4268 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 1 year(s) 9 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-08-2018
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: SMC
• Next Hearing Date: 19-06-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 31-10-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: P S MURTHY
• Assessee Lawyers: B V S CHALAPATHI RAO
• Keywords: Depreciation; Revenue expenditure; Capital expenditure

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , . . , BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI D.S. SUNDER SINGH , ACCOUNTANT MEMBER . / I . T .A.NO. 4 33 /VIZ/ 201 6 ( / ASSESSMENT YEAR: 20 06 - 07 ) KUNDA VENKATESWARA RAO 125 - 273, ASHOK NAGAR TIRUVURU [PAN : AAEHK4876N ] VS. INCOME TAX OFFICER WARD - 1(3) VIJAYAWADA ( / APPELLANT) ( / RESPONDENT) / APPELLANT BY : SHRI B.V.S.CHALAPATHI RAO , A R / RESPONDENT BY : SHRI P.S.MURTHY , D R / DATE OF HEARING : 3 1 . 0 7 . 2018 / DATE OF PRONOUNCEMENT : 03 .0 8 .2018 / O R D E R PER D.S. SUNDER SINGH , ACCOUNTANT MEMBER : THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX ( APPEALS) [CIT(A)] , KURNOOL VIDE I . T . A . NO. 0 077 / CIT(A) / KNL / 2015 - 1 6 DATED 09.08.2016 F OR THE ASSESSMENT YEAR 20 06 - 07 . 2 I TA NO . 433 / V IZ/201 6 KUNDA VENKATESWARA RAO, TIRUVURU 2. ALL THE GROUNDS OF APPEAL ARE RELATED TO THE DISALLOWANCE OF EXPENDITURE OF RS.3,00,000/ - CLAIMED BY THE ASSESSEE AS A REVENUE EXPENDITURE AND CAPITALIZING THE SAME. THE ASSESSEE OWNS THE RICE MILL AND ALSO CARRYING ON THE BUSINESS OF RETAIL OUTLET OF PETROL BUNK. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE CLAIMED A SUM OF RS.3,00,000/ - TOWARDS LICENCE FEE WHICH WAS DISALLOWED BY THE ASSESSING OFFICE R (AO) AND HELD THE EXPENDITURE AS CAPITAL EXPENDITURE. IT IS OBSERVED BY THE AO FROM THE DETAILS THAT THE ASSESSEE HAS GOT A LETTER OF INTENT FOR R ETAIL OUTLET (RO) OF RELIANCE PETROL VIDE LETTER DA TED 27.07.2004 WHICH WAS AGREED, ACCEPTED AND SIGNED BY T HE ASSESSEE ON 13.08.2004 AND PAID THE SUM OF RS.3,00,000/ - TOWARDS SIGNING FEE ON 07.08.2004 AND CLAIMED THE SAME AS LICENCE FEE IN THE PROFIT AND LOSS ACCOUNT FOR THE IMPUGNED A SSESSMENT Y EAR . THE AMOUNT WAS PAID IN THE FINANCIAL YEAR 2004 - 05 BUT NOT DURING THE CURRENT FINANCIAL YEAR OF 2005 - 06. THEREFORE, THE AO HELD THAT THE EXPENDITURE IS NEITHER INCURRED NOR ACCRUED IN THE IMPUGNED ASSESSMENT YEAR, HENCE THE SAME WAS NOT ALLOWABLE AS REV ENUE EXPENDITURE IN THE YEAR UNDER CONSIDERATION. THE LD.AO ALSO OBSERVED THAT THE EXPENDITURE WA S INCURRED FOR THE PURPOSE OF SETTING UP OF R ETAIL OUTLET, THEREFORE, THE EXPENDITURE WAS CAPITAL 3 I TA NO . 433 / V IZ/201 6 KUNDA VENKATESWARA RAO, TIRUVURU IN NATURE, THUS TREATED THE SUM OF RS.3,00,000/ - AS CAPITA L EXPENDITURE AND ALLOWED THE DEPRECIATION @5% AND DISALLOWED THE BALANCE AMOUNT. 3. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE WENT ON APPEAL BEFORE THE CIT(A) AND THE LD.CIT(A) CONFIRMED THE ORDER OF THE AO. 4. AGAINST THE ORDER OF THE LD. CIT(A), THE ASSESSEE CARRIED THE MATTER TO THE TRIBUNAL. DURING THE APPEAL HEARING, THE LD.AR ARGUED THAT THE AMOUNT OF RS.3,00,000/ - WAS PAID TOWARDS SIGN ING FEE TO MEET THE EXPENDITURE TOWARDS TRAINING OF THE DEALER , THE STAFF AND FOR SUPERVISION OF THE COMPANY DURING THE CONSTRUCTION OF RETAIL OUTLET WHICH IS NON - REFUNDABLE AND ONE TIME EXPENDITURE. THOUGH THE ASSESSEE HAS MADE THE PAYMENT ON 13.08.2004, IT WAS THE ADVANCE PAYMENT BUT THE EXPENDITURE WAS RELATABLE TO THE IMPUGNED ASSESSMENT YEAR. THUS, ARGUED THAT THE EXPENDITURE SHOULD BE TRE ATE D AS ACCR UED IN THE IMPUGNED ASSESSMENT YEAR, HENCE ALLOWABLE AS REVENUE EXPENDITURE. THE ASSESSEE ALSO FURNISHED THE COPY OF THE DEALERSHIP AGREEMENT WHICH WAS DATED 25.01.2005 AND ARGU ED THAT S INCE THE AGREEMENT WAS SIGNED ON 25.01.2005 AND THE SIGNING FEE WAS PAID TO MEET THE EXPENSES AS PER THE AGREEMENT SUCH AS TRAINING OF DEALERS AND 4 I TA NO . 433 / V IZ/201 6 KUNDA VENKATESWARA RAO, TIRUVURU HIS STAFF AND SUPERVISION AND COORDINATION OF THE CONSTRUCTION OF THE SAID RETAIL OUTLET, THE SAME I S ALLOWABLE AS REVENUE EXPENDITURE IN THE YEAR UNDER CONSIDERATION. THE ASSESSEE ALSO RELIED ON THE DECISION OF KNIGHT RIDERS SPORTS PRIVATE LIMITED VS. ACIT, CENTRAL CIRCLE - 29, MUMBAI IN ITA NO.1307/MUM/2013 FOR THE ASSESSMENT YEAR 2009 - 10 DATED 29.12.20 17. 5. ON THE OTHER HAND, LD.DR ARGUED THAT THE EXPENDITURE WAS NEITHER INCURRED NOR ACCRUED DURING THE YEAR UNDER CONSIDERATION. THE INCOME HAS TO BE COMPUTED AND ASSESSED EACH YEAR INDEPENDENTLY. IN THIS CASE, THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING .S INCE THE EXPENDITURE CLAIMED TO BE PAID FOR SIGNING FEE , WAS NOT RELATABLE TO THE YEAR UNDER CONSIDERATION, THE EXPENDITURE IS NOT ALLOWABLE AS PER THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE. SECONDLY, THE LD.DR SUBMITTED THAT THE PAYMENT OF RS.3,00,000/ - WAS PAID TOWARDS SIGNING FEE AND AS PER THE AGREEMENT , THE PAYMENT WAS MADE TOWARDS TRAINING OF THE DEALER AND ITS STAFF AND SUPERVISION AND COORDINATION OF THE CONSTRUCTION OF THE RETAIL OUTLET OF PETROL BUNK. THEREFORE, THE EXPENDITURE WAS INCURRED IN CONNECTION WITH THE SETTING UP OF THE RETAIL OUTLET DURING THE PERIOD OF CONSTRUCTION AND BEFORE COMMISSIONING THE UNIT. THEREFORE, THE 5 I TA NO . 433 / V IZ/201 6 KUNDA VENKATESWARA RAO, TIRUVURU EXPENDITURE REQUIRED TO BE CAPITALIZED AND THE AO HAS RIGHTLY CAPITALIZED T HE EXPENDITURE AND ALLOWED THE DEPRECIATION WHICH WAS CONFIRMED BY THE LD.CIT(A). THUS, THE LD.DR ARGUED THAT NO INTERFERENCE IS CALLED FOR IN THE ORDER OF THE LD.CIT(A). 5.1. THE LD.DR FURTHER ARGUED THAT THE CASE LAW RELIED UPON BY THE ASSESSE E IN KNIGHT R IDERS SPORTS PRIVATE LIMITED IS RELATED TO THE PA YMENT OF FR ANCHISE FEE FOR FRANCHISE E RIGHTS OF IPL TEAM WITH HOME GROUND I N ACCORDANCE WITH THE AGREEMENT WITH THE BCCI, FOR OWNING THE IPL TEAM. WHEREAS IN IPL TEAM, THE PAYMENT WAS MADE FOR ANNUAL BENEFI TS, NOT EXTENDING BEYOND ONE YEAR. THE RIGHT TO OPERATE AND MANAGE THE TEAM IS SUBJECT TO PRIOR PAYMENT OF ANNUAL FRANCHISEE FEE. IF THE ASSESSEE FAILS TO MAKE THE PAYMENT, THEN, IT WOULD NOT BE ALLOWED TO PARTICIPATE IN IPL. THEREFORE, THE LD.DR ARGUED THAT THE PAYMENT OF FRANCHISEE FEE IS ANNUAL PAYMENT TO ACQUIRE THE RIGHT TO MANAGE AND OPERATE THE TEAM. WHEREAS IN THE CASE OF THE ASSESSEE, THE PAYMENT IS ONE TIME PAYMENT INCURRED TOWARDS TRAINING OF THE DE ALE RS, ITS STAFF AND SUPERVISION AND COORDIN ATION OF THE CONSTRUCTION OF THE SAID RETAIL OUTLET , W HILE THE FRANCHISEE FEE WAS ANNUAL EXPENDITURE . W HERE AS , IN THE C ASE OF THE ASSESSEE, THE EXPENDITURE WAS ONE TIME PAYMENT FOR SETTING UP OF THE RETAIL OUTLET. THUS, THE FACTS OF 6 I TA NO . 433 / V IZ/201 6 KUNDA VENKATESWARA RAO, TIRUVURU THE CASE OF THE ASSESSEE ARE CLEARLY DISTINGUISHABLE AND HAVE NO APPLICATION IN THE ASSESSEES CASE, HENCE ARGUED THAT THE CASE LAW RELIED UPON BY THE ASSESSEE HAS NO APPLICATION IN THE CASE OF THE ASSESSEE. 6. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATERIAL PLACED ON RECORD. IN THIS CASE, THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING AND THE ASSESSEE HAS PAID THE SUM OF RS.3 LAKHS ON 13.08.2004 AS A SIGNING FEE FOR THE TRAINING OF THE DEALERS AND ITS STAFF AND SUPERVISION AND COORDINATION OF THE CON STRUCTION OF THE RETAIL OUTLET . THE PAYMENT WAS MADE T O THE RELIANCE INDUSTRIES ON 07 . 08 . 2004 RELEVANT TO THE A.Y.200 5 - 06 AND THE EXPENDITURE IS RELATED TO THE SETTING UP OF THE RETAIL OUTLET INCURRED BEFORE COMMENCEMENT OF THE BUSINESS . FOR A QUERY FROM THE BENCH , THE LD.AR SUBMITTED THAT THE RETAIL OUTLET OF THE RELIANCE UNIT WAS COMMISSIONED FROM 01.10.2005, WHEREAS THE EXPENDITUR E WAS INCURRED ON 07.08.2004 AND THE RELEVANT ASSESSMENT YEAR WAS 2005 - 06, BUT NOT THE YEAR UNDER CONSIDERATION. SINCE THE UNIT WAS COMMISSIONED ON 01.10.2005 AND THE EXPENDITURE WAS INCURRED DURING THE CONSTRUCTION PERIOD BEF ORE COMMENCEMENT OF THE BUSINESS , THE SAID EXPENDITURE CANNOT BE RELATED TO THE EXPENDITURE OF THE IMPUGNED ASSESSMENT YEAR. T HE LD.AR DID NOT 7 I TA NO . 433 / V IZ/201 6 KUNDA VENKATESWARA RAO, TIRUVURU PROVIDE DETAILS WITH REGARD TO THE D A TES OF TRAINING GIVEN BY THE RELIANCE INDUSTRIES TO DEALERS AND THE STAFF. SIMILARLY NO BREAK UP OF THE EXPENSES INCURRED FOR THE TRAINING AND CONSTRUCTION RELATED ACTIVITIES WERE SUBMITTED . T HE SIGNING FEE WAS ONE TIME PAYMENT WHICH WAS RELATED TO THE SETTING UP OF CONSTRUCTION OF RELIANCE PETROL PUMP UNIT AND THE EXPENDITURE WAS INCURRED PRIOR TO THE COMMENCEMENT OF THE BUSINESS, THEREFORE, WE ARE UNABLE TO ACCEPT THE CONTENTION OF THE ASSESSEE THAT THE EXPENDITURE BE TREATED AS REV ENUE EXPENDITURE FOR THE YEAR UNDER CONSIDERATION. SINCE THE EXPENDITURE WAS INCURRED BEFORE THE COMMENCEMENT OF BUSINESS, THE EXPENDITURE REQUIRED TO BE CAPITALIZED IN RESPECT OF RELEVANT ASSET AND ALLOW THE DEPRECIATION OR THE SAME SHOULD BE AMORTIZED A S PER SECTION 35D OF THE A CT. THE LD.AR RELIED ON THE DECISION OF HONBLE ITAT MUMBAI, A BENCH IN KNIGHT RIDERS SPORTS PRIVATE LTD. (SUPRA). THE FACTS OF THE CASE ARE DISTINGUISHABLE AS ARGUED BY THE LD.DR AND HAS NO APPLICATION IN THIS CASE. THEREFORE , WE HOLD THAT THE AO HAS RIGHTLY TREATED THE EXPENDITURE AS CAPITAL EXPENDITURE AND ALLOWED THE DEPRECIATION AND WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LD.CIT(A) AND THE SAME IS UPHELD. THE APPEAL OF THE ASSESSEE ON THIS GROUND IS DISMISSED. 8 I TA NO . 433 / V IZ/201 6 KUNDA VENKATESWARA RAO, TIRUVURU 7 . IN THE RESULT, APPEAL OF THE ASSESSEE IS DISMISSED . THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COU RT ON 3 RD AUG , 201 8 . S D/ - S D/ - ( . ) ( . . ) (V. DURGA RAO) ( D.S. SUNDER SINGH ) /JUDICIAL MEMBER /ACCOUNTANT MEMBER /VISAKHAPATNAM /DATED : 03 . 0 8 .2018 L.RAMA, SPS / COPY OF THE ORDER FORWARDED TO: - 1 . / THE ASSESSEE - KUNDA VENKATESWARA RAO , 125 - 273, ASHOK NAGAR TIRUVURU 2 . / THE REVENUE THE ITO, WARD - 1(3), VIJAYAWADA 3 . THE PR. COMMISSIONER OF INCOME TAX , VIJAYAWADA 4. THE COMMISSIONER OF INCOME TAX(APPEALS), KURNOOL 5 . , , / DR, ITAT, VISAKHAPATNAM 6. / GUARD FILE / BY ORDER // TRUE COPY // SR. PRIVATE SECRETARY ITAT, VISAKHAPATNAM