ACIT, Ernakulam V. M/s Kumarakam Lake Resorts Pvt. Ltd, Cochin

ITA 853/COCH/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 4330 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 11 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-07-2010
• Appeal Filed By: Department
• Bench Allotted: DB
• Assessment Year: 2004-2005
• Appeal Filed On: 04-08-2008
• Court: TRIBUNAL
• Department Lawyers: M K GOPIANTHAN NAIR
• Assessee Lawyers: BIJU T
• Keywords: Business expenditure; Onus to prove; Revenue expenditure; Capital expenditure
• Section: 143(3); 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE T RIBUNAL COCHIN BENCH, COC HIN BEFORE S/SHRI N.VIJAYAKUMARAN, JM AND SANJAY ARORA, AM I.T.A. NO. 853 /COCH./ 2008 & C.O. NO. 114/ COCH./ 2008 ASSESSMENT YEAR: 2004-05 ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1(3), ERNAKULAM. VS. .M/S. KUMARAKOM LAKE RESORT PVT. LTD., 64, KAIRALI APARTMENTS, PANAMPILLY NAGAR, COCHIN - 682 036. [PAN: AABCK 1974B] (REVENUE APPELLANT) (ASSESSEE-RESPONDENT) REVENUE BY SHRI M.K.GOPIANTHAN NAIR, DR ASSESSEE BY SHRI BIJU T., FCA O R D E R PER SANJAY ARORA, AM: THIS APPEAL BY THE REVENUE, AND THE CORRESPONDING CROSS OBJECTION (C.O.) BY THE ASSESSEE, ARISE OUT OF THE ORDER BY THE COMMISS IONER OF INCOME-TAX (APPEALS)-II, KOCHI (CIT(A) FOR SHORT) DATED 30.5.2008, AND THE ASSESSMENT YEAR (A.Y.) UNDER REFERENCE IS 2004-05. 2. AT THE OUTSET, IT WAS NOTICED BY THE BENCH THAT THE ASSESSEES CROSS OBJECTION IS DELAYED BY A PERIOD OF 17 DAYS. THE SAME IS ACCOMP ANIED BY A CONDONATION PETITION, EXPLAINING THE REASONS FOR THE DELAY PER A SWORN AF FIDAVIT DATED 7.11.2008. IT IS AVERRED BY THE DEPONENT-DIRECTOR, SH. P.P. JOY, THA T ON THE RECEIPT OF A DEFECT MEMO TO THE CO ON 14.10.2008 FROM THE AR, ITAT, COCHIN BENC H, HE, BEING SUFFERING FROM VIRAL FEVER, COULD ACT THEREON ONLY AFTER A WEEK, THAT HE HAD APPROACHED THE COMPANY AUDITORS IN TIME, AND THE DELAY HAD OCCURRED ON THE IR PART, PERHAPS ON ACCOUNT OF BEING ENGAGED IN TAX AUDIT WORK, THE DUE DATE OF WHICH ST OOD PRE-PONED TO 30 TH SEPTEMBER FROM THAT YEAR ONWARDS, I.E., 2008. WE FIND THE DEL AY TO HAVE BEEN JUSTIFIABLY EXPLAINED, AND THAT NO LATCHES INFLICT THE ASSESSEE S PREFERENCE OF ITS CROSS OBJECTION. THE SAME STOOD CONDONED ON THAT BASIS, AND THE HEAR ING PROCEEDED WITH. ITA. NO.853/COCH./2008 & C.O . NO. 114/COCH/2008 2 3. THE ONLY ISSUE PRESSED BY BOTH THE SIDES RELATES TO THE DISALLOWANCE BY THE ASSESSING OFFICER (AO) VIDE ORDER U/S. 143(3) OF TH E INCOME-TAX ACT, 1961 ('THE ACT' HEREINAFTER) DATED 18.12.2006, OF THE ASSESSEES CL AIM IN RESPECT OF RS. 4,76,929/- ON ACCOUNT OF WAIVER OF DEBT AND ANOTHER RS. 3,83,838/ - TOWARD THE PROPORTIONATE COMPENSATION OF RS. 20 LAKHS, BOTH ARISING OUT OF T HE TERMINATION OF THE MARKETING AGREEMENT ENTERED INTO BY THE ASSESSEE WITH ONE, M /S. TULIP STAR HOTELS LTD. (TSHL). 4. THE FACTS IN BRIEF ARE THAT THE ASSESSEE-COMPANY ORIGINALLY ENTERED INTO AN AGREEMENT WITH TSHL ON 15.3.1999 FOR A PERIOD OF 10 YEARS. THIS AGREEMENT WAS PRE- CLOSED IN 2002, AND THE ASSESSEE-COMPANY ENTERED IN TO A NEW (MARKETING) AGREEMENT WITH THE SAID COMPANY ON 1.8.2002 FOR A PERIOD OF 5 YEARS. THIS (SECOND) AGREEMENT WAS ALSO TERMINATED BY THE ASSESSEE-COMPANY ON 25.9 .2003. AS THE SAME RESULTED IN A PRE-CLOSURE OF THE AGREEMENT, A LUMPSUM AMOUNT OF R S. 20 LAKHS WAS SETTLED TO BE PAID TO THE SAID COMPANY, BESIDES WAIVING RS. 4.77 LACS DUE FROM THE SAID COMPANY AT THE RELEVANT POINT OF TIME, BY WAY OF COMPENSATION THERETO. ACCORDINGLY, PROPORTIONATE EXPENSES, I.E., FALLING TO THE SHARE OF THE CURRENT YEAR (RS. 3,83,838/-), WITH THE BALANCE RS. 16.16 LAKHS TO BE CLAIMED OVER THE REMAINING APPROXIMATELY 3.33 YEARS, I.E., UP TO 31/7/2007, THE DATE TILL WHICH T HE AGREEMENT WAS TO RUN. THE AO DISALLOWED THE CLAIM FOR RS. 4.77 LAKHS, MADE U/S. 37(1) OF THE ACT, BY HOLDING IT TO BE A CAPITAL EXPENDITURE RESULTING IN AN ENDURING BENE FIT TO THE ASSESSEE. LIKEWISE, FOR ITS CLAIM FOR RS. 3.84 LAKHS. IN APPEAL, THE LD. CIT(A ) FOUND THE ASSESSEES CLAIM AS ADMISSIBLE AS THE PAYMENTS TO TSHL WERE ONLY TO ENA BLE THE ASSESSEE TO RUN ITS BUSINESS MORE PROFITABLY AND EFFICIENTLY. AGGRIEVE D, THE REVENUE IS IN APPEAL. 5. WHILE THE REVENUE AGITATES THE DELETION OF THE D ISALLOWANCE, IN VIEW OF THE SPECIFIC FINDINGS BY THE AO, THE ASSESSEE CONTENDS THAT ONCE THE LD. CIT(A) HAD ARRIVED AT A FINDING THAT THE EXPENDITURE UNDER REF ERENCE WAS A REVENUE EXPENDITURE, DEDUCTIBLE U/S. 37(1) OF THE ACT, HE OUGHT TO HAVE ALLOWED THE ASSESSEE THE ENTIRE AMOUNT OF RS. 24.77 LAKHS AS A PERMISSIBLE BUSINESS EXPENDITURE FOR THE RELEVANT ASSESSMENT YEAR, PARTICULARLY CONSIDERING THAT THE ASSESSEES CLAIM FOR THE SUBSEQUENT ITA. NO.853/COCH./2008 & C.O . NO. 114/COCH/2008 3 YEARS FOR A PROPORTIONATE CLAIM (AS FOR RS. 4,84,84 8/- IN A.Y. 2005-06) STOOD REJECTED BY HIM ON THE BASIS THAT NO LIABILITY AROSE FOR THE SAID YEAR, AND THAT THERE IS NO CONCEPT OF A DEFERRED REVENUE EXPENDITURE UNDER THE ACT. 6. BEFORE US, LIKE CONTENTIONS STOOD RAISED BY THE EITHER SIDE, WITH THE ASSESSEE RELYING ON THE DECISION IN THE FOLLOWING CASES:- - CIT VS. POINEER ENGINEERING SYNDICATE , 175 ITR 93 (MADRAS). - EMPIRE JUTE CO. LTD. VS. CIT (1980) 124 ITR 1 (SC). - CIT VS. ASHOK LEYLAND , 86 ITR 549 (SC). - HONDA SEIL POWER PRODUCTS LTD. VS. CIT , 157 TAXMAN 76 (SC). - CIT VS. TODI TEA CO. LTD ., 239 ITR 28 (CAL.) - CIT VS. J&SP LTD ., 149 ITR 581 (DEL.) THE LD. DR, ON THE OTHER HAND, RELIED ON THE ASSESS MENT ORDER. 7. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATERIAL ON RECORD. 7.1 THE FIRST THING THAT STRIKES US IN THE MATTER IS THAT THE PRESENT CASE, WHICH REVOLVES ESSENTIALLY ON THE QUESTION OF THE NATURE OF THE EX PENDITURE INCURRED BY THE ASSESSEE, IS ALMOST WHOLLY FACTUALLY INDETERMINATE. THE CLAIM IS WITHOUT ANY BASIS, OR SHOWING IN ANY MANNER, THE COMMERCIAL BENEFIT OR THE BUSINESS ADVANTAGE THAT THE ASSESSEE ACQUIRED OR STANDS TO ACQUIRE ON ACCOUNT OF THE EXP ENDITURE, FOR IT TO BE CLAIMED AS A DEDUCTIBLE BUSINESS EXPENDITURE. THE ONUS TO PROVE ITS RETURN, AND THUS THE CLAIMS PREFERRED THEREBY, IS CLEARLY ON THE ASSESSEE. ONL Y ONCE IT DOES THAT, BY FURNISHING THE PRIMARY FACTS ALONG WITH THE RELEVANT MATERIAL, COU LD THE REVENUE, IF NOT SATISFIED, PROCEED TO MAKE A VERIFICATION AND INVESTIGATION IN TO THE MATTER, AND IT COULD BE SAID THAT THE ONUS STANDS SHIFTED THERETO. IN THE PRESE NT CASE, FIRSTLY, THE ENTIRE LIABILITY OF RS. 24,76,929/- DUE TO TSHL ARISES ON THE TERMINATI ON OF ITS SECOND AGREEMENT DATED 1.8.2002 BY THE ASSESSEE ON 25.9.2003. THE SAID A GREEMENT, TITLED `MARKETING AGREEMENT IS NOT ON RECORD. THERE IS NO CLAIM THA T THE COMPENSATION PAID BY THE ASSESSEE AROSE OUT OF THE TERMS OF THE CONTRACT. WHAT IS THE NATURE OF THE SERVICES CONTRACTED TO BE RENDERED BY TSHL TO THE ASSESSEE, AND HOW WAS IT TO BE COMPENSATED THEREFOR, I.E., THE CONSIDERATION TOWARD THE SAME ? WHAT IS THE BUSINESS PURPOSE FOR ITA. NO.853/COCH./2008 & C.O . NO. 114/COCH/2008 4 WHICH THE COMPENSATION IS GIVEN ? THIS IS AS, IF THE COMPANY DID NOT PAY THE CONSULTING COMPANY (TSHL), OR WAS NOT OBLIGED TO PA Y IT, THE SAID COMPANY WOULD ALSO WITHHOLD OR SIMILARLY NOT BE OBLIGED TO RENDER THE SERVICES . IN OTHER WORDS, THE CONTRACT BEING ONE OF SERVICE(S), THERE COULD BE NO VESTED RIGHTS AS SUCH; THE OBLIGATION(S) OF ONE COMPANY FORMING THE CONSIDERAT ION FOR THE OTHER, SO THAT THERE WOULD BE NO OCCASION TO PAY THE COMPENSATION. AGAIN, HOW IS IT THAT THE ASSESSEE- COMPANY STANDS TO RECEIVE RS. 4.77 LAKHS FROM TSHL; IT, RATHER, BEING OBLIGED ONLY TO PAY AN AMOUNT IN CONSIDERATION OF THE RECEIPT OF SE RVICES ? THE ANSWERS TO ALL SUCH QUESTIONS ARISE FOR ASCERTAINMENT. ARE ESSENTIAL TO DECIDE THE ISSUE, AND SHOULD BE APPARENT FROM THE AGREEMENT ITSELF, WHICH STANDS TE RMINATED, RESULTING IN THE IMPUGNED LIABILITY. IN ANY CASE, THE BUSINESS PURPO SE OR MOTIVE, WHICH IS NOT CLEAR IN THE ABSENCE OF THE ESSENTIAL DETAILS, AND WHICH WOU LD ALSO EXHIBIT THE BUSINESS OR COMMERCIAL ADVANTAGE ACCRUING OR ARISING TO THE ASS ESSE, NEEDS TO BE CLARIFIED FOR IT TO QUALIFY AS DEDUCTIBLE EXPENSE U/S. 37(1). MERELY ST ATING THAT IT WOULD ENABLE IT TO RUN ITS BUSINESS MORE PROFITABLY OR EFFICIENTLY, THE BA SIS ON WHICH THE LD. CIT(A) ALLOWS IT RELIEF, WOULD BY ITSELF NOT SUFFICE, I.E., DE HORS , ANY BASIS TO SO CONTEND; THE SAME HAVING BEEN OSTENSIBLY INCURRED BY IT AS A BUSINESS MAND, FOR, AND IN THE REGULAR COURSE OF CARRYING THE BUSINESS. THE QUESTION HERE IS NOT OF QUANTUM, WHICH IS NORMALLY NOT IN QUESTION, OR OF MUCH RELEVANCE, BUT OF THE NATUR E AND THE PRECISE PURPOSE FOR WHICH THE IMPUGNED AMOUNT STANDS PAID; THE WAIVER OF DEBT , IN CONSEQUENCE TO A CONSCIOUS BUSINESS DECISION TO THAT EFFECT, BEING ALSO AN EXP ENSE. FOR A VALID CLAIM U/S. 37(1) OF THE ACT, IT IS NOT ONLY NECESSARY THAT THE OUTLAY S HOULD NOT BE A CAPITAL EXPENDITURE, BUT ALSO THAT IT IS EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR PROFESSION, SO THAT IT COULD BE REGARDED AS INTEGRA L TO THE PROFIT-MAKING PROCESS. 7.2 THE REVENUE, ON ITS PART, HAS ALSO PROCEEDED IN A MECHANICAL MANNER. IT CLAIMS OF THE BENEFITS ARISING TO THE ASSESSEE AS BEING EN DURING IN NATURE, WITHOUT, IN THE LEAST, STATING OF WHAT THOSE BENEFITS ARE; THE ASSESSEES CLAIM BEING ITSELF DEVOID OF THE ESSENTIAL FACTS, AND WITHOUT ANY SUBSTANTIATION. IT OUGHT TO HAVE CALLED UPON THE ASSESSEE TO FURNISH THE NECESSARY DETAILS IN SUBSTA NTIATION OF ITS CLAIMS/CASE. IN OTHER WORDS, ITS FINDINGS ARE AS UNFOUNDED AS THE ASSESSE ES CLAIM ITSELF. IT IS ONLY ONCE THE ITA. NO.853/COCH./2008 & C.O . NO. 114/COCH/2008 5 NATURE OF THE BENEFITS IS DELINEATED, THAT, ON AN O BJECTIVE ASSESSMENT OF THE MATERIALS, IT COULD BE CLAIMED TO BE ONE WHICH WOULD INURE OVER A SUFFICIENTLY LONG PERIOD OF TIME FOR IT TO BE DECLASSIFIED AS A REVENUE EXPENDITURE. AGAIN, AS CLARIFIED BY THE HONBLE APEX COURT IN THE CASE OF EMPIRE JUTE CO. LTD. VS. CIT , 124 ITR 1 (SC), THAT EVEN SO, THE ENDURING-BENEFIT TEST MAY BREAK DOWN, AND IT IS ONLY WHERE THE EXPENDITURE IS IN THE CAPITAL FIELD THAT IT WOULD BE JUSTIFIABLY EXCL UDED. ALSO, AS NOTED EARLIER, THE ENTIRE LIABILITY OF RS. 24.77 LAKHS ARISING ON THE TERMINA TION OF THE AGREEMENT HAS TO BE CONSIDERED AS ONE COMPOSITE FIGURE, TO BE ALLOWED E ITHER AS AN EXPENDITURE FOR THE CURRENT YEAR, I.E., ASSUMING SATISFACTION U/S. 37(1 ), OR ON A PRO-RATA BASIS, AND THERE IS NO OCCASION TO SEGREGATE IT INTO TWO PARTS; THE LIA BILITY FOR RS. 20 LAKHS WOULD ONLY HAVE BEEN ARRIVED AT ONLY AFTER CONSIDERING AND TAK ING INTO ACCOUNT THE WAIVER OF THE DUES OF RS. 4.77 LAKHS. 7.3 THIS BRINGS US TO ANOTHER QUESTION, I.E., OF THE ASSESSEE BEING ENTITLED TO FULL RELIEF, RATHER THAN A PROPORTIONATE ONE, AND WHICH FORMS THE SUBJECT MATTER OF ITS CO. THE ASSESSEE ALSO CONTENDS OF HAVING MOVED AN APPLI CATION U/S. 154 FOR ALLOWING THE TOTAL EXPENDITURE AS A REVENUE EXPENDITURE, AND WHI CH STANDS, ON ITS REJECTION BY THE AO, APPEALED AGAINST BEFORE THE LD. CIT(A), THOUGH HAS NOT CLARIFIED ITS STATUS. IN THIS REGARD, THE ASSESSEE HAS PLACED RELIANCE ON THE DEC ISION IN THE CASE OF K.N. OIL INDUSTRIES , 143 ITR 13 (MP). WE DO NOT FIND ANY DECISION BEA RING THE SAID CITATION. SO HOWEVER, WE FIND SUBSTANCE IN THE ASSESSEES CON TENTION. THIS IS FOR THE REASON THAT WHERE ALL THE RELEVANT FACTS WITH REGARD TO THE CLA IM ARE ON RECORD, IT COULD PRESS FOR A LEGAL CLAIM BEFORE ANY APPELLATE AUTHORITY. THE DE CISION BY THE HONBLE APEX COURT IN THE CASE OF GOETZE (INDIA) LTD. VS. CIT , 284 ITR 323 (SC) WOULD NOT OPERATE TO RESTRICT THE ASSESSEES CLAIM, WHICH, IT IS TRITE, IS TO BE ALLOWED FOR THE RELEVANT YEAR ONLY; THE ENTIRE FACTS IN RELATION TO THE ASSESSEES CLAIM BE ING ON RECORD. THEREFORE, ITS ENLARGED CLAIM MADE WITH REFERENCE TO THE LEGAL POSITION, I. E., THAT THERE IS NO CONCEPT OF DEFERRED REVENUE EXPENDITURE UNDER THE ACT, IS ADMI SSIBLE IN LAW, IN PRINCIPLE. WE MAY HASTEN TO ADD THAT OUR SAID OBSERVATIONS WOULD BE SUBJECT TO THE FINDINGS ON THE NATURE OF THE BENEFIT OR THE COMMERCIAL ADVANTAGE A RISING TO THE ASSESSEE ON INCURRING THE SAID EXPENDITURE, AND ITS RELATIONSHIP WITH TIM E, I.E., WHETHER REMOTE OR TENUOUS, OR ITA. NO.853/COCH./2008 & C.O . NO. 114/COCH/2008 6 DIRECT AND DEFINITE. THIS IS AS WHERE THE RELATIONS HIP IS DEFINITE, THE ASSESSEE MAY WELL BE ENTITLED TO A PRO-RATA DEDUCTION, EVEN AS HELD I N THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. VS. CIT , 225 ITR 802 (SC). 8. IN VIEW OF THE FOREGOING, WE, AS A FINAL FACT-FI NDING AUTHORITY, ONLY DEEM IT FIT AND PROPER THAT THE MATTER BE RESTORED BACK TO THE FILE OF THE AO FOR ALLOWING THE ASSESSEE AN OPPORTUNITY TO JUSTIFY ITS CLAIM U/S. 3 7(1) OF THE ACT BY BRINGING THE RELEVANT FACTS AND CIRCUMSTANCES ON RECORD. THE AO SHALL PASS A SPEAKING ORDER IN THE MATTER, FACTUALLY DETERMINING THE ISSUE; THE LAW IN THE MATTER, AS ALSO SOUGHT TO BE BROUGHT FORTH BY THE ASSESSEE PER A HOST OF DECISIO NS, BEING CLEAR AND SUFFERING FROM NO AMBIGUITY, AND AFTER GIVING PROPER OPPORTUNITY T O THE ASSESSEE, IN ACCORDANCE WITH LAW. WE MAY ALSO ADD, IF ONLY BY WAY OF ABUNDANT CA UTION, THAT WE HAVE NOT EXPRESSED ANY OPINION IN THE MATTER, AND THE FOREGOING DISCUS SION WAS ONLY TO HIGHLIGHT THE ISSUES THAT ARISE, WITH WE FINDING NEITHER OF THE P ARTIES AS HAVING DISCHARGED THEIR OBLIGATIONS UNDER THE ACT. WE DECIDE ACCORDINGLY. 9. IN THE RESULT, BOTH THE REVENUES APPEAL AND THE ASSESSEES CROSS OBJECTION ARE ALLOWED FOR STATISTICAL PURPOSES. SD/- SD/- (N.VIJAYAKUMARAN) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: ERNAKULAM DATED: 08 JULY, 2010 GJ COPY TO: 1. KUMARAKOM LAKE RESORT PVT. LTD., 64, KAIRALI APA RTMENTS, PANAMPILLY NAGAR, KOCHI - 682 036. 2. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE -1(3), ERNAKULAM. 3. THE COMMISSIONER OF INCOME-TAX (APPEALS)-II, KOC HI. 4. THE COMMISSIONER OF INCOME-TAX, KOCHI. 5. D.R./I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) ITA. NO.853/COCH./2008 & C.O . NO. 114/COCH/2008 7