ACIT-8(1)(1), MUMBAI, MUMBAI vs. RELIANCE RETAIL LTD, MUMBAI

4. On the first ground relating to disallowance made by ld. Assessing Officer u/s 14A by invoking Rule 8D, the uncontroverted factual position is that no income exempt under the Act is earned or received by the assessee during the year under consideration, as noted in the impugned assessment order itself. Further, nothing is brought on record even otherwise in the course of hearing by the revenue on this fact. It is also important to note that ld. Assessing Officer has computed the disallowance by taking yearly average of the total investments which is not in accordance with the provisions contained in rule 8D.

4.1. Attention was invited to the amendment brought in section 14A, vide Finance Act, 2022, introducing an Explanation to section 14A. The same is reproduced as under: “Explanation.—For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income.” Inserted by Finance Act, 2022, w.e.f. 1-4-2022 21 4.2. The aforesaid Explanation provides that the provisions of section 14A would apply to a case where assessee has not received any exempt income during the concerned financial year. It was submitted that this amendment is made effective only from 01.04.2022, i.e., from Assessment Year 2022-23. Therefore, the same cannot be applied to the assessment year under consideration, i.e., AY 2018-19.

be made if the assessee had not earned any exempt income), as the revenue has not been accepted the said decision and has preferred an SLP against the said decision.

In section 14A of the Income-tax Act, -

(a) in sub-section (l), for the words "For the purposes of', the words "Notwithstanding anything to the contrary contained in this Act, for the purposes of' shall be substituted;

(b) after the proviso, the following Explanation shall be inserted, namely:-

"[Explanation.-For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income.]"

8. Consequently, this Court is of the view that the amendment of Section 14A, which is "for removal of doubts" cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood.

5.1. Further, reliance is also placed on the decision of Coordinate Bench of ITAT, Mumbai in the case of ACIT, Central Circle 4(2), Mumbai vs. K Raheja Corporate Services Pvt Ltd. [2022] which dealt with the amendment brought by the Finance Act 2022 and deleted the disallowance made u/s. 14A r.w. Rule 8D.

5.2. Also, in respect of addition made to the book profit u/s 115JB for the disallowance computed by the ld. Assessing Officer u/s 14A by applying rule 8D, case of the assessee is supported by the decision of Hon'ble Special Bench of Delhi ITAT in the case of ACIT vs Vireet Investment Pvt. Ltd. 165 ITD 27 (Del SB) wherein it is held that "In view of above discussion, we answer the question referred to us in favour of assessee by holding that the computation under clause (f) of Explanation 1 lo section 115JB(2) is to be made without resorting to the computation as contemplated u/s 14A read with Rule 8D of the Income-tax Rules, 1962."

5.3. Accordingly, considering the facts on record and the jurisprudence discussed above, no disallowance is called for u/s 14A r.w.r. 8D when assessee has not earned any exempt income during the year to make addition to the normal computation of total income under the Act nor to make adjustment to the book profit for the same u/s 115JB. Thus, we do not find any reason to interfere with the findings arrived at by the ld. CIT(A) on this issue. Accordingly, ground no. 1 taken by the revenue is dismissed.

6.1. During Assessment Year 2016-17, assessee started developing and launched a website in the name of ‘Ajio’ to facilitate its consumers to make purchase of merchandises and lifestyle products through online channel instead of visiting stores physically. AJIO became operational during the AY 2017-18 when the first online sale was made on 03.04.2016 through the AJIO.com website.

6.2. From the verification of the details, ld. Assessing Officer noticed that assessee had incurred expenses of Rs. 351 Crores in connection with the development of e-commerce platform by the name, Ajio.com. In its books of accounts, which were prepared as per provisions of the Companies Act, 2013, assessee treated the same as ‘intangible assets under development’ and capitalized the same in the books of accounts in compliance with the Accounting Standards, viz. Ind AS – 16 and Ind AS – 38, issued by the Institute of Chartered Accountants of India (ICAI) which are mandatorily applicable from 01.04.2016 and onwards. However, for the purpose of computation of business income under the provisions of the Act, assessee treated the same expenditure as revenue to claim its deduction as these were in the nature of expenses incurred for the purpose of promotion and marketing. Ld. Assessing Officer after examining the contentions of the assessee held this expenditure as an integral part of development of e-commerce platform i.e., Ajio.com, therefore, treated it as capital expenditure. Ld. Assessing Officer disallowed the marketing expenses for the year on the ground that the same were required to be capitalized as per the Accounting Standards and that the same are rightly accounted under “Intangible Assets under development”. Accordingly, after allowing depreciation @ 25% on the same, he arrived at disallowance of Rs. 263.40 crores to make the addition. This addition was made also for the purpose of arriving at book profits u/s 115JB.

6.3. Ld. Assessing Officer held that the said marketing expenses were capital in nature on the following grounds: i) Details of sales made by Ajio platform were not given. ii) Accounting Standard 16 referred by assessee relates to borrowing cost. More relevant Accounting Standard is AS 26, according to which all direct expenses attributable to project has to be capitalized. Amortisation of the same commences from the date when the asset was put to use. iii) Even as per new Indian Accounting Standard, Ind AS 38, expenses incurred on internally generated intangible assets need to be accounted as cost of intangible assets till it reaches the condition necessary for it to be capable of operating. Nowhere in the IndAS, it is specified that the cost can be split into marketing and other than marketing cost. iv) In the break-up of marketing expenses, assessee itself admitted that Rs. 351.2 crores were incurred as “marketing expenses” of an intangible asset under development but claimed as revenue expenditure. v) Assessee has not developed any other software, hence, it cannot be said that the marketing expenses were not directly relatable to the online portal of Ajio. vi) Assessee is into the business of retailing. Portal AJIO.com is developed for the enduring benefit of business of the assessee. It is clear that assessee by itself is not in to the business of any software development or any IT enabled services. Its core business is retailing of its products. Ld. Assessing Officer also observed, “it is understandable that any marketing expenditure incurred in connection with its merchandise, would go on revenue account. Whereas the amount of Rs.351.28 Cr. was incurred for popularizing its merchandize online portal.” vii) Expenditure incurred on marketing of the said online portal has been claimed as revenue expenditure whereas the same should have been capitalized along with development cost as done in the books of account.

7.1. For the year under consideration, the books of account of assessee had been drawn up in compliance with the Companies (Indian Accounting Standards) Rules, 2015 according to which, entire cost incurred on development of ‘Ajio’ was accounted and reflected under the head ‘Intangible Assets under development’ in the audited financial statements. During the year under consideration, amount of Rs. 1847.93 crores were incurred which has been classified / reflected under the head ‘Intangible Assets under development’. In the aforesaid classification in the books of account, under the head ‘Intangible Assets under development’, also included accumulated marketing expenses incurred for its products on Ajio. Marketing Expenses incurred for the year under consideration was Rs. 351,20,69,547/-. However, since assessee was already in the business of retail of fashion and lifestyle products, it treated the aforesaid marketing expenses incurred for products on AJIO as revenue in nature and claimed deduction under section 37(1) of the Act, while computing income under the provisions of the Act. As far as other cost relating to AJIO are concerned, the same were capitalized in Assessment Year 2017-18 for the purpose of computing income under the Act. Depreciation was claimed u/s. 32(1) of the Act on the capitalized component from Assessment Year 2017-18 and onwards.

7.2. Break-up of marketing expenses claimed as deduction by the assessee is reproduced below: Head-wise Expenses A.Y. 2018-19 Advertisement Expenses 350,28,55,221 Business Promotion & Marketing Research Expenses 3,92,840 Product Samples 68,63,586

Sales Promotion Expenses 19,57,900 Grand Total 351,20,69,547 7.3. Vendor-wise details furnished by the assessee before the ld. Assessing Officer explaining the nature along with relevant supporting documents of the expenditure incurred in respect of marketing expenditure on AJIO platform during the Assessment Year 2018-19 is tabulated as under: Sr. PAN of the Name of Address of Amount Nature of Supporting No. vendor the vendor the vendor (in Rs.) expense Document 1 AAACV7737Q V i b r a n t 3rd Floor 335,05,14,275 Advertising / Sample Advertising Court Marketing and Video links Private Ltd House, sales promotion for Lokmanya expenses such advertising Tilak Marg, as online done on Mumbai, advertisement Facebook / 400002, campaign on TV MH, India TV channels / Campaign digital / YouTube platforms like etc. Facebook, enclosed at Google / Annexure YouTube / 2; Further, Print media / sample Outdoor radio / invoice Cinema / cable copy and other enclosed at digital Annexure platforms 3a AEKPD1178E F us io n F B -1 01 2,81,48,965 Advertisement Sample i 1 m s ,VastuRidhi expenses - invoice Enclave, Production cost copy Pump of shooting for enclosed at House, Commercials Annexure Andheri (E) and 3b Mumbai, advertisements 400093, MH, India AAGCP5413M P h a n t o No 57, 2Nd 1,22,78,980 Advertisement Sample m Ideas Cross, expenses - Fees invoice Private D'Costa towards copy Limited Layout, ideation, enclosed at Wheeler concept Annexure Road Extn creation, script 3c Bangalore, writing and 560084, coordination KAR, India with production house for Commercial and Advertisements Multiple PANs Multiple Multiple 12,11,27,326 Marketing and Sample vendors – addresses advertisement invoice Others expenses (viz. copy mass mail, enclosed at SMS, cashback Annexure campaign etc.) 3d Sales promotion expenses (viz. digital banners, catalogue shoot etc.), Product Samples etc. Grand Total 351,20,69,547 7.4. Assessee demonstrated from the sample copies of the content of the advertisements which run as a sales / marketing campaign on various media platforms viz. Facebook, YouTube, Print TV etc. that these sales / marketing campaigns which provided discounts on various product price (listed on the AJIO.com platform) have been done to solicit the prospective customers to buy the products on AJIO.com platform. It was also asserted that marketing expenditure was not directly related to the development of online portal AJIO.com and was incurred for the promotion and scaling up of the sales on the online platform / website operations, after the asset were put to use. From the nature of the above expenses, it was established that these are routine marketing and advertisement of the products displayed on the platform, i.e., related to sales, which are generally incurred on a year-to-year basis. Thus, these expenditures are in the nature of revenue and do not give any enduring benefit in the capital field, nor asset or intangible is being created.

7.5. Assessee substantiated its claim also by placing factual data on record to submit that approx. 4.5 lakhs customers purchased goods of Rs. 51.23 crores on Ajio.com platform. During Assessment Year 2018- 19 also, approx. 15.15 lakhs customers purchased goods of Rs. 250.36 crores on this AJIO.com platform. Month-wise and party-wise details of sales made on AJIO.com platform to various retail customers during the impugned assessment year were duly provided during the course of the assessment proceedings. Assessee also provided before the ld. Assessing Officer, month-wise count of customers during Assessment Year 2017-18 and 2018-19. On the observation of ld. AO that assessee did not furnish the required information, assessee placed on record e- Proceedings Response Acknowledgement vide its number 501557931130921 to evidently demonstrate that all the information with corroborating evidence was provided which placed in the paper book.

7.6. Assessee claimed that ld. AO has nowhere in its order denied that the expenditure in question had not been incurred for the purpose of business. Merely because these expenses are recognised as capital expenditure/ shown under Intangible assets under development' in the books of account, ld. AO has treated the same as capital expenditure. Hence, merely because the expenditure in question is treated differently in the books of account, the same cannot be denied deduction as revenue expenditure. In other words, the manner of accounting shall not determine the taxability of income or allowability of any expenditure. The taxability of income and allowability of an expense shall be determined on the basis of provisions of income-tax law as contained in the Act and as explained by various Courts from time-to- time. Income-tax return must take precedence over the accounts in respect of the claims by any Assessee.

7.7. Furthermore, it was pointed out that in para 3.11 of the impugned assessment order, ld. AO himself admits that marketing expenditure in connection with merchandise would go on revenue account and also admitted that the expenditure was incurred for popularising its merchandize on its online portal. Ld. AO also admitted that assessee was not in the business of any software development or any IT enabled services. It is admitted that assessee is in the business of retailing.

7.8. The reasons explained by the assessee for the treatment given in the books of the account Ajio.com is that it did not reach its condition necessary for it to be capable of operating in the manner intended by management as required by Indian Accounting Standard (Ind AS) 16 - Property Plant and Equipment and /or Ind AS 38- Intangible Assets. The relevant paras of these Ind AS are hereby reproduced as below:- i. Ind AS 38, Para 30- "Recognition of costs in the carrying amount of an intangible asset ceases when the asset is in the condition necessary for it to be capable of operating in the manner intended by management. ii. Ind As 38 Para 66 - "The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management." iii. Ind As 16, property, Plant and Equipment para 16" The cost of an item of property, plant and equipment comprises: (a)... (b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. (c).

7.9. From the above extracted paras of the relevant IndAS accounting standards, it is clear that expenses incurred on internally generated intangible assets need to be accounted as cost of intangible assets till the intangible asset reaches the condition necessary for it to be capable of operating in the manner intended by management. As per submissions of the assessee, it is understood that Ajio.com platform has not reached to an operation stage as intended by the management (in spite of the fact that some transactions of sales have started on this platform since FY 2016-17). Therefore, based on the mandatory applicable Ind AS mentioned above, expenses incurred on Ajio.com platform has been accounted as intangible asset under development in the books of accounts/financial statement.

8.1. The aforesaid decision has been upheld by the Hon'ble Jurisdictional High Court of Bombay in case of CIT v. Reliance Footprint Limited [2017] of 2014 (now merged with the assessee) by appreciating the revenue nature of the expenses and that the same were incurred on account of expansion of business. It was also held that it is not relevant as to how the Assessee shows a particular income or expenditure in the books of account.

8.2. Assessee also relied on the decision of Coordinate Bench of ITAT, Mumbai in an identical case of Reliance Fresh Ltd vs. ACIT [2016] 72 taxmann.com 170 (Mum) (now renamed as Reliance Retail Limited), wherein assessee was in the business of organized retail. It had launched new projects and incurred routine business expenses such as employee's cost, travelling expenses, professional fees, communication expenses, printing and stationary expenses, hire charges, etc. These expenses were held as deductible revenue item even though the same were capitalized in the books of account. This decision of Coordinate Bench of ITAT, Mumbai was upheld by the Hon'ble Jurisdictional High Court of Bombay in the case of PCIT vs. Reliance Fresh Ltd. [2019] OF 2017 (now renamed as Reliance Retail Limited), by following its own decision in the case of Reliance Footprints Ltd. vs. ACIT (supra).

8.3. Hon'ble High Court has ruled in favour of the respective assessees holding that even though the assessee capitalized expenditure for the purpose of accounting standards and to comply with the provisions of Companies Act, the nature of expenses are relatable to operational & maintenance of day to day businesses, in such circumstances the expenses which were incurred for running the business would be revenue expenditure for the purpose of income-tax irrespective of treatment of the same by the assessee in its books of accounts. The said judgments are: a. PCIT v. Reliance Fresh Ltd. [2019] IT A No. 985 OF 2017 (now renamed as Reliance Retail Limited) b. CIT v. Reliance Footprint Limited [2017] |TA No. 948 of 2014 (now merged with the Appellant)

8.4. Out of several judicial precedents cited, reference is made the following to buttress the contention that treatment as per Accounting Standards would only be relevant for the purpose of drawing books of account as per Companies Act, 2013 and it has no relevance in computing income under the Act: i. Taparia Tools Limited v. JCIT [2015] 55 taxmann.com 361 (SC) "19. In the instant case, as noticed above, the Assessee did not want spread over of this expenditure over a period of five years as in the return filed by it, it had claimed the entire interest paid upfront as deductible expenditure in the same year. In such a situation, when this course of action was permissible in law to the Assessee as it was in consonance with the provisions of the Act which permit the Assessee to claim the expenditure in the year in which it was incurred, merely because a different treatment was given in the books of account cannot be a factor which would deprive the Assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that entries in the books of account are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act. ii. Kedarnath Jute Mfg. Co. Ltd. v. CIT[1971] 82ITR 363 (SC) Whether the Assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the Assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. " iii. CIT v. India Discount Co. Ltd. [1970] 75|TR 191 (SC) It is well established that a receipt which in law cannot be regarded as income cannot become so merely b.ecause the Assessee erroneously credited it to the profit and loss account. The appeal having no merit was accordingly dismissed. iv. Tutikorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC) It is true that the Supreme Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act.

9. Findings of ld. Assessing Officer for making the disallowance and submissions made by the assessee to counter the same are summarily tabulated below for ease of reference: Sr. Assessing Officer’s Findings Assessee’s Submissions No. i) Details of sales made by Ajio Details were given, vide letter platform were not given. dated 13 September 2022. ii) Accounting Standard 16 Reference to old accounting referred by Appellant relates to standards are irrelevant and borrowing cost. More relevant hence, this need not be Accounting Standard is AS 26, countered. according to which all direct expenses attributable to project has to be capitalized. Amortisation of the same commences from the date when the asset was put to use. iii) Even as per new Indian As per IndAS 38, it is not even Accounting Standard, Ind AS a requirement that the 38, expenses incurred on marketing expenses are internally generated intangible necessarily to be capitalized. assets need to be accounted as In any case, mandate of Ind cost of intangible assets till it AS does not determine reaches the condition deductibility of a particular necessary for it to be capable of expenditure under the operating. Nowhere in the provisions of the Act. IndAS, it is specified that the cost can be split into marketing and other than marketing cost. iv) In the break-up of marketing Assessee did not admit that expenses, Assessee itself the marketing expenses were admitted that Rs. 351.2 crs incurred for intangible asset. was incurred as “marketing It stated that "Details of expenses” of an intangible Expenses incurred which asset under development but were accounted / reflected in claimed as revenue financial statement as expenditure. intangible asset under development but claimed as allowable expenses for income tax purposes" v) Assessee has not developed any Assessee was indeed into other software, hence, it cannot development of 2 more be said that the marketing projects, viz. Supply Chain expenses were not directly Management platform and relatable to the online portal of Loyalty platform. Ajio. vi) Assessee is into the business of Assessee incurred marketing retailing. The portal AJIO.com expenses to advertise its is developed for the enduring products for sale on AJIO benefit of assessee’s business. platform. AO himself admits It is clear that the assessee by that marketing expenditure itself, is not in to the business in connection with of any software development or merchandise would go on any IT enabled services. Its core revenue account and also business is retailing of its admitted that the products. It is understandable expenditure was incurred for that any marketing popularizing its merchandize expenditure incurred in on its online portal. AO also connection with its admitted that the Assessee merchandise, would go on was not in the business of revenue account. Whereas the any software development or amount of Rs.351.28 Cr. was any IT enabled services. He incurred for popularizing its admits that the Assessee is in merchandize online portal. the business of retailing. Accordingly, it is inconceivable that the Assessee incurred expenditure to advertise its portal and not merchandise. vii) The expenditure incurred on Entries in books of account is marketing of the said online irrelevant for the purpose of portal has been claimed as computing income under the revenue expenditure whereas provisions of Income-tax Act the same should have been capitalized along with development cost (in the books of account). Therefore, the said marketing expenses of Rs.351.2 Cr being on capital account is disallowed.

10. After going through the submissions made by assessee and considering the facts and circumstances of the case and also the judicial precedents relied upon by the assessee, ld. CIT(A) concluded that even though assessee capitalized expenditure for the purpose of accounting standards and to comply with the provisions of Companies Act, 2013, the nature of expenses is relatable to operational and maintenance of day-to-day businesses. In such circumstances, expenses which were incurred for running the business would be revenue expenditure for the purpose of income-tax irrespective of treatment of the same by the assessee in its books of accounts. Thus, after verification of the assessee’s submissions and details of expenses, it was held that the expenses incurred were mainly towards marketing and sales promotion which are nothing but fall under the category of sales promotion and marketing in expansion of the existing business. Therefore, by following the judicial pronouncements and ratios as laid down by the Coordinate Bench of ITAT Mumbai and Hon'ble jurisdictional High Court in assessee’s own case, ld. CIT(A) treated the marketing expenses incurred for expansion of e-commerce platform ‘Ajio.com’ as revenue expenses and reversed the addition made by the ld. Assessing Officer.

12.1. Claim of the assessee is that merely on account of procedural reasons of delay in filing of Form 67, the legitimate claim cannot be denied. It is an undisputed fact that Form 67 is on record. We find that this issue is no longer res integra as held in favour of the assessee by the Hon’ble High Court of Madras in the case of Duraiswamy Kumaraswamy v. PCIT [2024] 460 ITR 615 (Mad) where in it held that where assessee claimed foreign tax credit (FTC) and filed Form-67 after due date specified for furnishing return under section 139(1) but before completion of assessment proceedings, rejection of assessee's FTC claim was not proper. Respectfully following the aforesaid jurisprudence, in the given set of facts, we remit the matter back to the file of ld. Jurisdictional Assessing Office (JAO) for the limited purpose of verification of the records to allow the claim of the assessee. Accordingly, grounds raised by the assessee in its cross objection are allowed for statistical purposes.