NIIT Online Learning Ltd., V. ACIT, Circle-13(1),

ITA 647/DEL/2005

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 3362 (ITAT-DELHI)
• Duration Of Justice: 12 year(s) 9 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-11-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 19-04-2017
• Assessment Year: 2001-2002
• Appeal Filed On: 10-02-2005
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Retrospective amendment; Wholly owned subsidiary; Royalty expenses; Revenue expenditure; Capital expenditure
• Section: 143(3); 37

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH A NEW DELHI BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO. 647/DEL/2005 AY: 20 01-02 M/S NIIT ONLINE LEARNING LTD., VS ASSTT.COMMISSI ONER OF INCOME TAX, B-234, OKHLA INDUSTRIAL AREA, CIRCLE 13(1 ), PHASE-1, NEW DELHI. NEW DELHI-110020 (PAN: AABCN1113B) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI AJAY VOHRA, SR. ADV. SHRI GAURAV JAIN, ADV. RESPONDENT BY : SHRI R.C. DANDAY, SR. DR PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE AGA INST THE ORDER DATED 23.11.2004 PASSED BY THE LD. CIT(A)-XV I, NEW DELHI AND PERTAINS TO AY 2001-02. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF EDUCATION AND TRAINING T HROUGH A WEBSITE NAMELY NETVARSITY.COM. THE COMPANY WAS I NCORPORATED ON 26.5.2000 WITH THE MAIN OBJECTIVE OF PROVIDING O NLINE EDUCATION SERVICES TO THE STUDENTS. PRIOR TO THE A SSESSEES INCORPORATION, THIS ACTIVITY WAS CARRIED ON BY NIIT LTD. BUT IN ORDER TO EXPLOIT THE RISING DEMAND OF ONLINE LEARNI NG, THE NIIT LTD. DECIDED TO SEGREGATE THE ONLINE EDUCATION SERVICES AND MAKE IT AN ITA 647/DEL/2005 ASSESSMENT YEAR 2001-02 2 INDEPENDENT BUSINESS ACTIVITY. THE DECISION TO TRA NSFER THE ONLINE LEARNING BUSINESS TO THE ASSESSEE WAS APPROVED BY T HE BOARD OF DIRECTORS OF NIIT LTD. IN DECEMBER, 2000 WHICH WAS SUBSEQUENTLY APPROVED BY THE SHAREHOLDERS IN JANUARY, 2001. MEM ORANDUM OF UNDERSTANDING (MOU) DATED 2.1.2011 WAS ENTERED INTO BETWEEN THE ASSESSEE AND NIIT LTD. IN ACCORDANCE WITH THE A PPROVAL GRANTED BY THE BOARD OF DIRECTORS AND THE SHAREHOLD ERS. IT WAS AGREED IN THE MOU THAT THE ONLINE EDUCATION BUSINES S IS TRANSFERRED TO THE ASSESSEE BY NIIT LTD. WITH EFFEC T FROM THE DATE OF INCORPORATION OF THE ASSESSEE AND FURTHER, DURIN G THE INTERVENING PERIOD, THE BUSINESS SHALL BE DEEMED TO HAVE BEEN CARRIED ON BY THE NIIT LTD. FOR AND ON BEHALF OF TH E ASSESSEE. IT WAS ALSO AGREED THAT THE EXPENSES INCURRED BY NIIT LTD. IN RESPECT OF ONLINE EDUCATION BUSINESS DURING THE INTERVENING PERIOD WOULD BE DEEMED TO HAVE BEEN INCURRED ON BEHALF OF THE AS SESSEE. THE CONSIDERATION FOR TRANSFER OF BUSINESS WAS AGREED A T RS.7,81,82,456/- WHICH WAS AS PER THE VALUATION CER TIFICATE ISSUED BY M/S PRICE WATERHOUSE COOPER. DURING THE INTERVENING PERIOD, NIIT LTD. HAD INCURRED VARIOUS EXPENSES LIK E ADVERTISING, TRAVEL AND CONVEYANCE, SALARIES ETC. WHICH AS PER T HE MOU WERE INCURRED FOR AND ON BEHALF OF THE ASSESSEE AND FOR WHICH ITA 647/DEL/2005 ASSESSMENT YEAR 2001-02 3 REIMBURSEMENT WAS SUBSEQUENTLY SOUGHT BY NIIT LTD. THROUGH A DEBIT NOTE RAISED ON THE ASSESSEE. 2.1 FOR THE RELEVANT PREVIOUS YEAR, THE RETURN OF I NCOME WAS FILED DECLARING A LOSS OF RS. 7,79,51,050/-. THE A SSESSMENT WAS COMPLETED U/S 143(3) OF THE INCOME TAX ACT, 1961 (H EREINAFTER CALLED 'THE ACT') BY COMPUTING THE LOSS AT RS. 2,94 ,57,500/- AFTER MAKING SEVERAL ADDITIONS/DISALLOWANCES WHICH WERE A S UNDER:- 1. ADVERTISEMENT & OTHER EXPENDITURE RS. 4,50,85,827 /- 2. TRAVELLING & CONVEYANCE EXPENSES RS. 5,68,199/- 3. PERSONNEL EXPENSES RS. 29,91,882/- 4. ROYALTY EXPENSES RS. 1,42,106/- 2.2 AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. COMMISSIONER OF INCOME TAX(A) WHO DISMISSED THE ASS ESSEES APPEAL AND NOW THE ASSESSEE HAS APPROACHED THE ITAT AND HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- 1. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED ON FACTS AND IN LAW IN CONFIRMING THE ASSESSMENT COMPL ETED AT LOSS OF RS.2,94,57,500 AS AGAINST THE RETURNED LOSS OF RS.7,79,51,050. 2. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN DISALLOWING ADVERTISEMENT EXPEN DITURE AMOUNTING TO RS.4,50,85,827 HOLDING IT TO BE IN THE NATURE OF CAPITAL EXPENDITURE. 2.1 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN HOLDING THAT ADVERTISEMENT EXPE NDITURE INCURRED BY NUT LTD, AND DEBITED TO THE APPELLANT W AS NOT INCURRED ON BEHALF OF THE APPELLANT AND THE PORTAL WAS BEING ITA 647/DEL/2005 ASSESSMENT YEAR 2001-02 4 USED BY NUT LTD. FOR ITS OWN BUSINESS TILL 31.3.200 1. 2.2 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED ON FACTS AND IN LAW IN HOLDING THAT THE ARRANGEMENT BE TWEEN THE APPELLANT AND NUT LTD, WAS ONLY AN AFTERTHOUGHT, SO THAT EXPENSES COULD BE CLAIMED IN THE HANDS OF THE APPEL LANT. 2.3 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN HOLDING THAT THE BUSINESS OF TH E APPELLANT COULD NOT BE SAID TO HAVE COMMENCED FROM MAY 2000 B UT ONLY FROM FEBRUARY 2001. 2.4 WITHOUT PREJUDICE, THE COMMISSIONER OF INCOME-T AX (APPEALS) ERRED ON FACTS AND IN LAW IN NOT DIRECTIN G THE ASSESSING OFFICER TO ALLOW DEPRECIATION ON THE ADVE RTISEMENT EXPENSES DISALLOWED AS CAPITAL IN NATURE. 3. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN DISALLOWING THE EXPENDITURE INC URRED ON TRAVEL AND CONVEYANCE DEBITED BY NIT LTD, TO THE A PPELLANT AMOUNTING TO RS.5,68,199/- HOLDING IT TO BE IN THE NATURE OF CAPITAL EXPENDITURE ON THE SAME GROUND AS RELATING TO DISALLOWANCE OF ADVERTISEMENT EXPENDITURE. 3.1 WITHOUT PREJUDICE, THAT THE COMMISSIONER OF I NCOME-TAX (APPEALS) ERRED ON FACTS AND IN LAW IN NOT DIRECTIN G THE ASSESSING OFFICER TO ALLOW DEPRECIATION ON THE TRAV EL AND CONVEYANCE EXPENSES DISALLOWED AS BEING CAPITAL IN NATURE. 4. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) E RRED ON FACTS AND IN LAW IN SUSTAINING THE DISALLOWANCE MAD E BY THE ASSESSING OFFICER ON ACCOUNT OF PERSONNEL COST INC URRED BY NIIT LTD. FOR EMPLOYEES WORKING ON BEHALF OF THE AP PELLANT TO THE EXTENT OF RS.26,97,423/- 4.1 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED ON FACTS AND IN LAW IN UPHOLDING THE ORDER OF THE ASSE SSING OFFICER IN ALLOWING ONLY 1/5TH OF THE EXPENDITURE O F RS.14,72,297 ON PERSONNEL ON THE GROUND THAT THE SA ME WAS ITA 647/DEL/2005 ASSESSMENT YEAR 2001-02 5 INCURRED PRIOR TO COMMENCEMENT OF BUSINESS AND WAS COVERED UNDER SECTION 35D OF THE INCOME-TAX ACT ('T HE ACT'). 4.2 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED ON FACTS AND IN LAW IN UPHOLDING THE DISALLOWANCE OF R S.9, 14,650 ON ACCOUNT OF PERSONNEL COSTS DEBITED BY NII T LTD. ON THE GROUND THAT THE PERSONNEL WERE WORKING FOR NIIT LTD, AND NOT FOR THE APPELLANT. 4.3 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED ON FACTS AND IN LAW IN UPHOLDING THE DISALLOWANCE OF RS.6,04,935 ON ACCOUNT OF STAFF WELFARE EXPENSES DE BITED BY NUT LTD. ON THE GROUND THAT THE PERSONNEL WERE WORK ING FOR NIIT LTD. AND NOT FOR THE APPELLANT. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND, OR VARY THE ABOVE GROUNDS OF APPEAL AT OR BEFORE THE TIME OF HE ARING. 3. THE LD. SENIOR ADVOCATE FOR THE ASSESSEE SUBMITT ED THAT THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF NIIT LTD. AND IT WAS INCORPORATED IN MAY 2000 WITH THE SOLE OBJECTIVE OF ACQUIRING ONLINE LEARNING BUSINESS FROM NIIT LTD. IT WAS FUR THER SUBMITTED THAT DUE TO PROCEDURAL FORMALITIES, THE TRANSFER WA S APPROVED BY RESOLUTION ONLY IN DECEMBER 2000 AND THE MOU WAS CONSEQUENTLY ENTERED INTO BETWEEN THE ASSESSEE AND THE NIIT LTD WHEREIN IT WAS AGREED THAT THE BUSINESS AND ALL THE ACTIVITIES INCLUDING EXPENSES SHALL BE DEEMED TO HAVE BEEN TRA NSFERRED TO THE ASSESSEE W.E.F. MAY 2000 I.E. THE DATE OF INCOR PORATION. IT WAS SUBMITTED THAT IN VIEW OF THE MOU, THE EXPENDITURE INCURRED BY NIIT LTD. DURING THAT PERIOD WAS NOT FOR THE BUSINE SS PURPOSES OF ITA 647/DEL/2005 ASSESSMENT YEAR 2001-02 6 NIIT LTD. BUT FOR THE BUSINESS PURPOSES OF THE ASSE SSEE WHO HAD ACQUIRED THE BUSINESS WITH RETROSPECTIVE EFFECT AND , THEREFORE, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER BY HOLDI NG THAT SINCE THE DECISION TO TRANSFER BUSINESS TO THE ASSESSEE W AS TAKEN ONLY IN DECEMBER 2000/JANUARY 2001, THE EXPENDITURE INCU RRED DURING THE PERIOD PRIOR TO THE DECISION COULD NOT B E SAID TO BE THE EXPENDITURE OF THE ASSESSEE. 3.1 IT WAS ALSO SUBMITTED THAT THE ASSESSING OFFICE R DREW ADVERSE INFERENCE ON THE BASIS OF SOME DISCREPANCY BETWEEN THE PERIOD OF EXPENDITURE MENTIONED IN THE DEBIT NOTE F OR ADVERTISEMENT RAISED BY NIIT LTD. AND THE ACTUAL DE TAILS SUBMITTED BY THE ASSESSEE. IT WAS FURTHER SUBMITTE D THAT THE NOTING ON THE DEBIT NOTE RAISED BY NIIT LTD. WAS A CLERICAL MISTAKE AND THE ACTUAL PERIOD OF EXPENDITURE PERTAINED TO M AY 2000 TO JANUARY 2001 WHICH WAS DULY SUPPORTED BY THE BILLS AND FURTHER THAT THE ASSESSEE CANNOT BE PENALISED FOR A CLERICA L MISTAKE COMMITTED BY A THIRD PARTY. IT WAS FURTHER SUBMITT ED THAT ANOTHER OBJECTION OF THE ASSESSING OFFICER IN ALLOW ING ADVERTISEMENT EXPENDITURE TO THE ASSESSEE WAS THAT THE PORTAL NETVARSITY.COM WAS THE PROPERTY OF NIIT LTD. TILL 3 1.03.2001. IN THIS REGARD, IT WAS SUBMITTED THAT NIIT LTD. HAD NO T GENERATED ITA 647/DEL/2005 ASSESSMENT YEAR 2001-02 7 ANY REVENUE FROM THE USE OF THE PORTAL NETVARSITY.C OM BUT WAS ONLY UPGRADING THE PORTAL/ASSET FOR ULTIMATE USE BY THE ASSESSEE. 3.2 IT WAS ALSO SUBMITTED THAT ANOTHER OBJECTIO N OF THE ASSESSING OFFICER IN NOT ALLOWING THE ADVERTISEMENT EXPENSES WAS THAT THE ASSESSEE ITSELF HAD TREATED THE SAME AS DE FERRED REVENUE EXPENDITURE IN ITS BOOKS OF ACCOUNT AND, THEREFORE, THERE WAS NO REASON THAT THE SAME SHOULD BE TREATED AS REVENUE E XPENDITURE. IN THIS REGARD, THE LD. SR. ADVOCATE SUBMITTED THAT THE TREATMENT IN BOOKS OF ACCOUNTS OF A PARTICULAR ITEM OF EXPEND ITURE IS NOT THE ONLY DETERMINING FACTOR FOR ALLOWING AN ITEM OF EXP ENDITURE UNDER THE PROVISIONS OF THE ACT AND FURTHER, THE INCOME T AX ACT ITSELF DOES NOT RECOGNISE THE CONCEPT OF DEFERRED REVENUE EXPENDITURE. 3.3 THE LD. SR. ADVOCATE FURTHER SUBMITTED THAT A NOTHER OBJECTION OF THE ASSESSING OFFICER WAS THAT THE ADV ERTISEMENT EXPENDITURE WAS INCURRED FOR BUILDING OF THE BRAND NETVARSITY.COM WHICH WAS PURCHASED FOR A CONSIDER ATION OF RS. 7,81,82,456/- WHEREAS THE WRITTEN DOWN VALUE OF THE PORTAL ON THE DATE OF SALE IN THE BOOKS OF NIIT WAS ONLY RS. 34,38,117/- AND, THEREFORE, THE AMOUNT SPENT ON ADVERTISEMENT R EPRESENTED EXPENSES TOWARDS BUILDING UP OF THE BRAND AND WAS I N FACT CAPITAL EXPENDITURE AND HENCE NOT ALLOWABLE AS A RE VENUE ITA 647/DEL/2005 ASSESSMENT YEAR 2001-02 8 EXPENDITURE. REFUTING THIS OBSERVATION OF THE ASSE SSING OFFICER, THE LD. SR. ADVOCATE SUBMITTED THAT THE BRAND NETVA RSITY.COM WAS ALREADY IN EXISTENCE AND THE EXPENDITURE WAS ON LY INCURRED TOWARDS ITS PROMOTION AND, THEREFORE, THE EXPENSES WERE ALLOWABLE AS REVENUE EXPENDITURE. 3.4 IT WAS FURTHER SUBMITTED THAT ANOTHER OBJECTI ON OF THE ASSESSING OFFICER WAS THAT SINCE REVENUES WERE GENE RATED IN THE HANDS OF THE ASSESSEE ONLY FROM FEBRUARY 2001, THE BUSINESS COULD BE SAID TO HAVE COMMENCED ONLY FROM THAT DATE AND, THEREFORE, THE ADVERTISEMENT EXPENDITURE INCURRED P RIOR TO THAT WAS ESSENTIALLY CAPITAL IN NATURE. TO THIS OBSERVAT ION OF THE ASSESSING OFFICER, THE LD. SR. DR SUBMITTED THAT TH E ONLINE LEARNING ACTIVITY WAS INITIALLY PROVIDED WITHOUT AN Y EXTRA CHARGES BEING CHARGED FROM THE STUDENTS ALONG WITH THE NORM AL CLASS ROOM CURRICULUM. IT WAS FURTHER SUBMITTED THAT COM MENCEMENT OF BUSINESS DOES NOT WAIT FOR THE ACTUAL REVENUES T O START COMING IN AND, FURTHER, A BUSINESS IS SAID TO BE SET UP AS SOON AS IT IS IN A POSITION TO START OPERATIONS. IT WAS FURTHER SUB MITTED THAT THERE CAN BE A TIME LAG BETWEEN THE SET UP OF BUSINESS AN D COMMENCEMENT OF ACTIVITIES AND FURTHER THAT EXPENSE S INCURRED BEFORE SET UP ARE TO BE DISALLOWED BUT EXPENSES INC URRED BETWEEN ITA 647/DEL/2005 ASSESSMENT YEAR 2001-02 9 THE DATE OF SET UP AND COMMENCEMENT OF BUSINESS ARE FULLY ALLOWABLE. IT WAS FURTHER SUBMITTED THAT SINCE THE ONLINE LEARNING BUSINESS WAS ALREADY IN EXISTENCE PRIOR TO ITS BEIN G TAKEN OVER BY THE ASSESSEE, THE SAME CAN BE SAID TO HAVE BEEN ACQ UIRED BY THE ASSESSEE WITH EFFECT FROM ITS INCORPORATION WHICH W AS IN MAY 2000 AND, THEREFORE, ALL THE EXPENSES INCURRED AFTE R THAT DATE ARE FULLY ALLOWABLE. 3.5 IT WAS FURTHER SUBMITTED BY THE LD. SENIOR ADVO CATE THAT THE ASSESSEES APPEAL ON THIS ISSUE WAS DISMISSED BY TH E LD. COMMISSIONER OF INCOME TAX (A) ON THE GROUND THAT T HE DECISION TO TRANSFER THE ACTIVITIES WAS TAKEN AFTER SEVEN MO NTHS OF INCORPORATION WHEREAS THE SAME SHOULD NOT HAVE TAKE N SO MUCH TIME BECAUSE THE ASSESSEE AS WELL AS NIIT LTD. WERE GROUP CONCERNS. IT WAS SUBMITTED BY THE LD. SR. ADVOCATE THAT DUE TO THE TIME LAG OF SEVEN MONTHS BETWEEN THE DATE OF IN CORPORATION AND DECISION TO TRANSFER OF ACTIVITIES, THE LD. COM MISSIONER OF INCOME TAX (A) HAD DRAWN THE INFERENCE THAT THE BUS INESS WAS CARRIED ON BY NIIT ONLY AND THE DECISION TO TRANSFE R THE SAME WAS ONLY AN AFTERTHOUGHT AND AS SUCH, THE EXPENSES WERE NOT ALLOWABLE IN THE HANDS OF THE ASSESSEE. TO THIS OB SERVATION OF THE LD. COMMISSIONER OF INCOME TAX (A), THE LD. SR. ADV OCATE ITA 647/DEL/2005 ASSESSMENT YEAR 2001-02 10 SUBMITTED THAT NIIT LTD., BEING A WIDELY HELD LISTE D COMPANY, SOME TIME LAG IN COMPLETING PROCEDURAL FORMALITIES AND OBTAINING THE APPROVAL OF THE BOARD AS WELL AS THE SHAREHOLDE R IS NOT ABNORMAL AND THE ASSESSEES CONTENTIONS CANNOT BE B RUSHED ASIDE ONLY ON THE GROUND OF TIME LAG BETWEEN THE DA TE OF COMMENCEMENT OF BUSINESS AND THE DATE OF SIGNING OF THE MOU. 3.6 IN RESPECT OF DISALLOWANCE OF TRAVELLING AND CO NVEYANCE EXPENSES AMOUNTING TO RS. 5,68,199/-, THE LD. SR. A DVOCATE SUBMITTED THAT HIS ARGUMENTS WERE SIMILAR TO AS RAI SED FOR THE ALLOWABILITY OF ADVERTISEMENT EXPENSES. 3.7 ON THE ISSUE OF PERSONNEL EXPENSES, THE LD. SR. ADVOCATE SUBMITTED THAT PERSONNEL EXPENSES OF RS. 14,27,297/ - WERE INCURRED TOWARDS ASCERTAINING THE FEASIBILITY OF BU SINESS AND MAKING A BUSINESS PLAN AND THE ASSESSING OFFICER WA S OF THE VIEW THAT SINCE THESE WERE INCURRED PRIOR TO THE COMMENC EMENT OF BUSINESS, ONLY 1/5 TH OF THE SAME WERE ALLOWABLE IN TERMS OF PROVISIONS OF SECTION 35D OF THE ACT. IT WAS SUBMI TTED BY THE LD. SR. ADVOCATE THAT THE ARGUMENTS FOR THE ALLOWABILI TY OF THESE EXPENSES WERE THE SAME AS FOR THE ALLOWABILITY OF A DVERTISEMENT EXPENSES AND FURTHER THAT IT HAD BEEN HELD BY VARIO US HON'BLE ITA 647/DEL/2005 ASSESSMENT YEAR 2001-02 11 HIGH COURTS THAT DISALLOWANCE U/S 40A(2) OF THE ACT COULD BE MADE ONLY AFTER RECORDING A FINDING BY THE ASSESSIN G OFFICER THAT THE EXPENDITURE WAS EXCESSIVE OR UNREASONABLE HAVIN G REGARD TO THE MARKET VALUE OF GOODS OR SERVICES, THE ULTIMATE BUSINESS NEEDS AND THE BENEFIT DERIVED BY OR ACCRUING TO THE ASSESSEE THERE FROM. IT WAS SUBMITTED THAT THE ONUS HAD BEE N CAST UPON THE ASSESSING OFFICER TO FIND OUT THE FAIR MARKET V ALUE OF GOODS AND BRING ON RECORD COMPARABLE EXPENSES BEFORE MAKI NG DISALLOWANCE IN THIS REGARD. 3.8 IT WAS ALSO SUBMITTED THAT NIIT LTD. WAS A PRO FIT MAKING COMPANY AND WITHOUT PREJUDICE TO EARLIER ARGUMENTS AND EVEN ASSUMING THAT EXCESS EXPENDITURE HAD BEEN INCURRED BY NNIT LTD ON ACCOUNT OF THE ASSESSEE, THE SAME HAD BEEN TREAT ED AS INCOME BY NIIT LTD., WHICH WAS A PROFIT MAKING COMPANY AND THERE WOULD BE NO LOSS OF REVENUE. 3.9 IT WAS SUBMITTED THAT SALARY EXPENSES OF RS. 9 ,14,650/- AND STAFF WELFARE EXPENSES AMOUNTING TO RS. 6,04,93 5/- WERE ALSO DISALLOWED BY THE ASSESSING OFFICER ON THE GROUND T HAT NO ACTIVITIES HAD BEEN UNDERTAKEN BY THE ASSESSEE TILL FEBRUARY 2001. THE LD. SR. ADVOCATE SUBMITTED THAT THE ARGU MENTS ON ITA 647/DEL/2005 ASSESSMENT YEAR 2001-02 12 THIS ISSUE WOULD ALSO BE THE SAME AS RAISED ON THE ISSUE RELATING TO ADVERTISEMENT EXPENSES. 4. IN RESPONSE, THE LD. SR. DR SUBMITTED THAT THE L D. COMMISSIONER OF INCOME TAX (A) HAS DISCUSSED THE IS SUES INVOLVED IN DETAIL BEFORE UPHOLDING THE DISALLOWANC ES. HE PLACED RELIANCE ON THE OBSERVATION AND FINDINGS OF THE LD. COMMISSIONER OF INCOME TAX (A) AND VEHEMENTLY ARGUED THAT THE DI SALLOWANCES NEEDED TO BE UPHELD BY THE ITAT BECAUSE THE ASSESSE E HAD BEEN SHIFTING ITS STAND BEFORE THE VARIOUS AUTHORITIES A ND FURTHER, IT WAS AMPLY CLEAR THAT THE IMPUGNED EXPENSES DID NOT PERTAIN TO THE ASSESSEE BUT WERE PART OF THE COMPOSITE COST OF PURCHASE AND HAD BEEN SPLIT UP AND SHOWN AS EXPENDITURE FOR THE PURPOSES OF WINDOW DRESSING. IT WAS ALSO SUBMITTED THAT THE AS SESSEE HAD ITSELF TREATED THE ADVERTISEMENT EXPENDITURE AS DEF ERRED REVENUE EXPENDITURE IN ITS BOOKS OF ACCOUNTS AND, THEREFORE , NOW THE ASSESSEE CANNOT CLAIM THE SAME AS REVENUE EXPENDITU RE BY SHIFTING ITS STAND. IT WAS ALSO SUBMITTED THAT THE FACT THAT THE RESOLUTION OF TRANSFER OF BUSINESS WAS PASSED AFTER NINE MONTHS FROM THE MONTH OF INCORPORATION ITSELF PUTS THE BONA FIDES OF THE ASSESSEE UNDER DOUBT. THE LD. SR. DR ALSO SUBMITTE D THAT THE DISPUTE IN THE PRESENT APPEAL DID NOT PERTAIN TO SE TTING UP OF ITA 647/DEL/2005 ASSESSMENT YEAR 2001-02 13 BUSINESS BUT TO INCURRING OF EXPENDITURE. IT WAS S UBMITTED THAT THE DISALLOWANCE AS CONFIRMED BY THE LD. COMMISSION ER OF INCOME TAX (A) SHOULD BE UPHELD BY THE ITAT. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE FACTS ARE NOT IN DISPUTE. THE ONLY QUESTION FOR ADJUDICATION IS WHETHER THE EXPEN DITURE INCURRED UNDER VARIOUS HEADS BEING CLAIMED BY THE A SSESSEE AS HAVING BEEN INCURRED FOR AND ON BEHALF OF THE ASSES SEE BY NIIT LTD. CAN BE CONSIDERED AS EXPENDITURE INCURRED FOR AND ON BEHALF OF THE ASSESSEE OR THE EXPENDITURE WAS INCURRED BY NIIT LTD. ON ITS OWN ACCOUNT AND WAS NOT TO BE ALLOWED AS A DEDU CTION IN THE HANDS OF THE ASSESSEE. A PERUSAL OF THE ORDERS OF B OTH THE LOWER AUTHORITIES REVEALS THAT BOTH THE AUTHORITIES HAVE PROCEEDED WITH THE NOTION THAT EXPENDITURE INCURRED PRIOR TO THE D ATE OF SIGNING OF THE MOU CANNOT BE REGARDED AS EXPENDITURE INCURR ED FOR AND ON BEHALF OF THE ASSESSEE ALTHOUGH THERE ARE NUMERO US JUDICIAL PRECEDENTS WHEREIN IT HAS BEEN HELD THAT EVEN PRE-I NCORPORATION EXPENDITURE IS ALLOWABLE AS A DEDUCTION. THE HONBL E APEX COURT HAS HELD IN THE CASE OF MARSHALL SONS & CO. VS. CIT REPORTED IN CIT 223 ITR 809 (SC) THAT A COMPANY CAN DECIDE TO H IVE OFF BUSINESS SUBSEQUENTLY FROM A RETROSPECTIVE DATE. TH ERE ARE ALSO ITA 647/DEL/2005 ASSESSMENT YEAR 2001-02 14 NUMEROUS JUDGMENTS ON THE PROPOSITION THAT EXPENDIT URE INCURRED BETWEEN THE SET UP OF BUSINESS AND EARNING OF REVENUE ARE ALLOWABLE. THE HONBLE DELHI HIGH COURT HAS ALS O HELD SO IN CIT VS. SAMSUNG ELECTRONICS LTD. REPORTED IN 356 IT R 354 (DEL). SIMILARLY, THERE ARE ALSO NUMEROUS DECISIONS WHEREI N IT HAS BEEN HELD THAT ADVERTISEMENT EXPENDITURE FOR PROMOTION O F A PRODUCT IS NOT CAPITAL IN NATURE AND NOTICEABLE AMONGST THE M IS THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CAS E OF CIT VS. SPICE DISTRIBUTION LTD REPORTED IN 374 ITR 30 (DEL) . FURTHER, IT IS ALSO A SETTLED JUDICIAL PRECEDENT THAT NO DISALLOWA NCE U/S 40A (2) CAN BE MADE WITHOUT THE AO RECORDING A FINDING THAT THE EXPENDITURE INCURRED WAS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE MARKET VALUE OF THE GOODS OR SERVICES , THE LEGITIMATE BUSINESS NEEDS AND THE BENEFIT DERIVED BY OR ACCRUI NG TO THE ASSESSEE THERE FROM. HOWEVER, BOTH THE LOWER AUTHOR ITIES HAVE NOT CONSIDERED THE SUBMISSIONS OF THE ASSESSEE IN L IGHT OF THE SETTLED JUDICIAL PRECEDENTS AS DISCUSSED ABOVE. IT IS FURTHER SEEN THAT THE ASSESSEE HAD CONTENDED BEFORE THE LD. CIT (A) THAT NIIT LTD WAS A PROFIT MAKING COMPANY AND THAT THE EXPEND ITURE INCURRED ON BEHALF OF THE ASSESSEE BY NIIT LTD. WAS DULY ACCOUNTED FOR BY NIIT LTD AS INCOME AND THAT THERE WAS NO LOSS OF ITA 647/DEL/2005 ASSESSMENT YEAR 2001-02 15 REVENUE HAS NOT BEEN CONSIDERED AT ALL BY THE LD. C IT (A). THE HONBLE APEX COURT HAS HELD IN CIT VS. GLAXO SMITHK LINE ASIA (P) LTD REPORTED IN 236 CTR 113 (SC) THAT NO DISALLOWAN CE U/S 40A(2) CAN BE MADE IN REVENUE NEUTRAL CASES. THIS A SPECT HAS ALSO BEEN OVERLOOKED BY BOTH THE AUTHORITIES BELOW. FURTHER, WE ARE OF THE CONSIDERED OPINION THAT BOTH THE LOWER A UTHORITIES HAVE MIS-DIRECTED THE EFFORTS AND HAVE NOT EXAMINED THE IMPUGNED EXPENDITURE IN LIGHT OF THE PROVISIONS OF SECTION 3 7 OF THE ACT. ACCORDINGLY, THIS IS A FIT CASE FOR BEING RESTORED TO THE FILE OF THE LD. CIT (A) AND WE DO SO WITH THE DIRECTION THAT TH E LD. CIT (A) WILL EXAMINE THE IMPUGNED ISSUES AFRESH IN LIGHT OF THE SETTLED JUDICIAL PRECEDENTS AS DISCUSSED ABOVE AS WELL AS E XAMINE THE EXPENDITURE IN LIGHT OF THE PROVISION OF SECTION 37 AFTER GIVING A DUE OPPORTUNITY TO THE ASSESSEE. 6. IN THE FINAL RESULT, THE APPEAL OF THE ASSESSEE STANDS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 20.11. 2017. SD/- SD/- (R.K. PANDA) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER DT. 20.11. 2017 GS ITA 647/DEL/2005 ASSESSMENT YEAR 2001-02 16 COPY FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR BY ORDER ASSTT. REGISTRAR COPY FORWARDED TO:- 6. APPELLANT 7. RESPONDENT 8. CIT(A) 9. CIT 10. DR BY ORDER ASSTT. REGISTRAR ITA 647/DEL/2005 ASSESSMENT YEAR 2001-02 17