THE DCIT, CIRCLE-1(1)(1), AHMEDABAD vs. AAGAM INFRABUILD PVT. LTD.,, AHMEDABAD

आदेश / O R D E R

PER Ms. MADHUMITA ROY – JM: The appeal filed by the Revenue is directed against the order passed by the Commissioner of Income Tax(Appeals)-I, Ahmedabad [CIT(A) in short] dated 29.04.2016 arising out of the assessment order passed under s.143(3) of the Income Tax Act, 1961 (hereinafter referred

ITA No. 1762/Ahd/2016 DCIT vs. Aagam Infrabuild Pvt.Ltd. Asst.Year – 2012-13 - 2 - to as "the Act") dated 03/03/2015 for the Assessment Year (AY) 2012- 13.

(1) That the ld.CIT(A) erred in law and on facts in deleting the addition of Rs.4,22,091/- made on account of disallowance of depreciation claimed on Car.

(2) That the ld.CIT(A) erred in law and on facts in deleting the addition of Rs.68,030/- made being cessation of liability.

(3) That the ld.CIT(A) erred in law and on facts in deleting the addition of Rs.88,240/- made on account of “Website Development Expenditure”.

(4) That the ld.CIT(A) erred in law and on facts in deleting the addition of Rs.1,07,21,475/- made on account of “Advertisement Expenditure”.

ITA No. 1762/Ahd/2016 DCIT vs. Aagam Infrabuild Pvt.Ltd. Asst.Year – 2012-13 - 3 - During the course of assessment proceedings, the Assessing Officer (AO) wanted to be satisfied as to whether the assessee-company is fulfilling the two conditions while asking for depreciation on the asset; firstly, whether the asset should be owned by the assessee-company since it is a movable asset and secondly, whether the asset is used by the assessee-company for its own business purposes. The AO issued notice under s.142(1) of the Act annexed with show-cause notice dated 09/02/2015 directing the assessee to furnish the following details:-

(i) Log book showing use of vehicle for the purpose of business of the assessee. (ii) Copy of registration of vehicle with the Regional Transport Officer. (iii) Copy of the payment of tax/registration charges made in respect of vehicle concerned. (iv) Copy of purchase bill of Car/s. (v) Reason for registering the vehicle in the name of Director/s whereas it has been claimed that the payment has been made out of the fund of the assessee company and the depreciation thereon has also been claimed by the assessee company. (vi) Difference amount of registration charges on account of registration of vehicle in the name of Director/s instead of Company. (vii) The copy of the resolution of the Board passed for registering the vehicle in the name of the Director, if any (along with resolution book for verification). (viii) The amount of expenditure claimed in Profit & Loss account on account of such vehicles, which are not owned by the assessee company.

ITA No. 1762/Ahd/2016 DCIT vs. Aagam Infrabuild Pvt.Ltd. Asst.Year – 2012-13 - 4 - The assessee-company was directed to show-cause as to why the depreciation claimed on such vehicles, the ownership of which is not with the assessee-company and are not registered in the name of the assessee-company should not be disallowed and thus added back to the total income of the assessee-company. In response to the same, the assessee-company by and under reply dated 23.02.2015 informed the AO that the Director namely, Shri Abhaykumar Shah was duly authorized for executing the said transaction on the basis of the necessary Board Resolution passed unanimously. The assessee further submitted the purchase bill of the car along with the photocopy of the proof of registration with the Regional Transport Office and its respective ledger accounts. It was also pointed out by the assessee-company that the BMW Car was entirely used for the purpose of business of the assessee- company and not for the personal use of the Director who is having a personal car being Honda City ZX GXI for his personal use and the car in question was exclusively given by the assessee-company to the Director for the use of the company itself which is supported and substantiated by the board resolution passed unanimously to that effect.

According to the AO, the conditions specified under section 32 of the Act for claiming depreciation are not fulfilled. It is not proved that the dominion of the car lies with the assessee since the assessee is not the registered owner of the car. According to the AO, the assessee has

ITA No. 1762/Ahd/2016 DCIT vs. Aagam Infrabuild Pvt.Ltd. Asst.Year – 2012-13 - 5 - further failed to prove that the vehicle was used for the business purpose since no log books were maintained for the said purpose. He further added that since the assessee-company is a separate legal entity distinct from its director, the vehicle purchased by its director in his name cannot become the property of the assessee-company unless the same is transferred/sold to the assessee-company. Providing funds to the Director for purchasing of the said vehicle will simply not confer ownership upon the assessee-company. The transaction is between the two separate entities, the purchase of asset by one will not automatically become asset of fund provider even if registration requirement is ignored as claimed by the assessee. He thus disallowed the claim of the assessee of depreciation of Rs.4,22,091/- on the BMW motor car and added back to the total income of the assessee-company.

While dealing with the appeal preferred by the assessee, the CIT(A) considered the written submission filed by the assessee before him and ultimately allowed the claim of the assessee-company. Before the CIT(A), the assessee-company reiterated the submission to this effect that for claiming depreciation under section 32 of the Act, it is not necessary that the assessee-company has to be the registered owner of the asset. In this particular case, the Board has taken a resolution authorizing the Director to purchase the car for the purpose of the business out of the fund arranged by the assessee-company and merely because the

ITA No. 1762/Ahd/2016 DCIT vs. Aagam Infrabuild Pvt.Ltd. Asst.Year – 2012-13 - 6 - registration is done in the name of the Director cannot be a ground for disallowance of the legitimate claim of depreciation to the assessee- company.

The assessee-company further submitted before the CIT(A) that the car was purchased out of the fund of the assessee-company, the assessee had dominion over the vehicle and merely registration in the name of director does not prove its use by the Director. Further that the car is used exclusively for the purpose of the business of the assessee- company and not for the personal use of the Director and therefore there is no need for the assessee to maintain log books.

ITA No. 1762/Ahd/2016 DCIT vs. Aagam Infrabuild Pvt.Ltd. Asst.Year – 2012-13 - 7 - does not fulfill the conditions for claiming depreciation under section 32 of the Act.

(i) MM Fisheries (P) Ltd. 277 ITR 204 (Del.). (ii)Tamilnadu Civil Supplies Corporation Ltd. vs. CIT 249 ITR 214(SC) (iii)Mysore Minerals Ltd. vs. CIT 239 ITR 775(SC). (iv) CIT vs. Podar Cement (P.) Ltd. (1997) 226 ITR 625. (v) SBC (P) Ltd. in ITA No.6 (Bom) 1974-75, ITAT, Bombay (vi)Mohamed BuxShokat Ali 256 ITR 355 (Raj.) (vii) CIT vs. Salkia Transport Associates (1983) 33 CTR (Cal) 198: 1983) 143 ITR 39 (Cal): TC 27R.266 (viii) Continental Construction Ltd. vs. CIT (1990) 85 CTR (Del) 116:

ITA No. 1762/Ahd/2016 DCIT vs. Aagam Infrabuild Pvt.Ltd. Asst.Year – 2012-13 - 8 - (1990) 185 ITR 178 (Del) : TC 26R.532, CIT vs. Dilip Singh Sardarsingh Bagga (1993) 201 ITR 995 (Bom) : and CIT vs Mirza Ataullaha Baig & Anr. (1993) 202 ITR 291 (Bom): TC 27R.217.

Factually, the vehicles are shown as asset in the balance-sheet of the assessee-company and running & maintenance expenses are borne by the assessee-company and such maintenance expenditure on the vehicle in question have been allowed by the AO as revenue expenditure which is contrary to the finding of the AO and therefore the AO should have allowed the claim of the assessee.

In that view of the matter and in the absence of any controverting material brought on record by the revenue at the time of hearing before us, we do not find any infirmity in the order of the Ld.CIT(A) and the same is hereby upheld and thus the said ground of appeal of the revenue is dismissed.

ITA No. 1762/Ahd/2016 DCIT vs. Aagam Infrabuild Pvt.Ltd. Asst.Year – 2012-13 - 9 - since long should not be added back in view of section 41(1) of the Act. In response thereof, the assessee vide letter dated 23/02/2015 submitted that the assessee had not obtained any benefit in respect of aforesaid trading liability either by way of remission or cessation thereof. More so, the liability is still left to be settled on account of pending dispute. The assessee has not obtained any benefit in respect of expenditure incurred on that trading liability which was allowed as a deduction in any other previous years and therefore provisions of section 41(1) does not apply. According to the AO, the said outstanding liability is of a period exceeding three years under consideration and the same has not been paid off even elapse of three years which according to the Limitation Act, 1963 ceased after the completion of three years from the close of the year in which the said item admitted or proved is entered in the account and thus the liability of the assessee-company to pay its debts has ceased to exist. According to him, this is a trading liability, i.e. the liability to supply goods, further benefit has been derived by the assessee-company by way of not paying the liabilities in respect of goods/services/advance for supply of goods and services and same falls within the purview of section 41(1) of the Act. The AO further added when the creditors in question are not traceable, then payment of trading liability does not arise and the liability with regard to making payment comes to an end and there is cessation of the liability under s.41(1). The AO thus added an

ITA No. 1762/Ahd/2016 DCIT vs. Aagam Infrabuild Pvt.Ltd. Asst.Year – 2012-13 - 10 - amount of Rs.68,030/- treating the same as deemed income of the assessee under the provisions of section 41(1) of the Act.

ITA No. 1762/Ahd/2016 DCIT vs. Aagam Infrabuild Pvt.Ltd. Asst.Year – 2012-13 - 11 - 519 (SC) it is held that when unclaimed liabilities are written back, then as a matter of general rule it cannot be said that assessee has obtained benefit and section 41(1) of the Act. The Hon’ble Apex Court further decided the principle that the expiry of the period of limitation prescribed under the Limitation Act, 1963, could extinguish the debt but it would only prevent the creditors from enforcing the debt. It is further decided in the case of CIT vs. Silver Cotton Mills Co.Ltd. (2001) 170 CTR 377 (Guj.) that if unclaimed liabilities are not written off, the liability to tax under s.41(1) does not arise.

We have also gone through the judgement of Hon’ble Jurisdictional High Court in the case of CIT vs. Bhogilal Ramjibhai Atara in Tax Appeal No.588 of 2013 dated 04/02/2014 as well as the judgement in the case of CIT vs. Nitin S.Garg (2012) 22 taxmann.com 59 (Guj.) where identical issue has been considered. In this particular case, the liabilities as mentioned hereinabove are continuously admitted by the assessee in its balance-sheet and the assessee has not obtained any benefit either by way of remission or cessation of any liability, no addition under s.41(1) of the Act was warranted in the case of the assessee-company. The CIT(A) further added that the liability of Rs.68,030/- incurred by the assessee during the assessment year under consideration i.e. Financial Year (FY) 20/11/2012 and the AY 20/12/2013 only and three years have not expired during the year under

ITA No. 1762/Ahd/2016 DCIT vs. Aagam Infrabuild Pvt.Ltd. Asst.Year – 2012-13 - 12 - consideration. Therefore, the liability has not become time-barred during the relevant assessment year. Looking to the totality of the case, we find that section 41(1) of the Act is not applicable to the instant case and such liability cannot be disallowed in the relevant assessment year 2012-13 and thus we upheld the order passed by the CIT(A) in deleting the addition of Rs.68,030/- made by the AO on account of cessation of liability. Thus, ground No.2 of the appeal of the revenue is rejected.

In the instant case, the assessee has claimed an amount of Rs.88,240/- on account of website development expenses paid to G.R.Infosys. The AO issued a questionnaire dated 09/02/2015 requesting the assessee to explain why the said expenses would not be treated as capital expenditure and accordingly the same should not be disallowed. In response thereof, the assessee vide its submission dated 23.02.2015 explained that the expenses incurred for website development cannot be equated with acquisition of software or to be treated as capital expenditure. Such expenses were incurred by the assessee to promote the business interest and thus revenue in nature. Such submission was not accepted by the AO. The AO disallowed the same mainly on the basis that the expenses incurred on account of development of website is apparently of enduring benefit and thus the same falls under the category

ITA No. 1762/Ahd/2016 DCIT vs. Aagam Infrabuild Pvt.Ltd. Asst.Year – 2012-13 - 13 - of capital expenditure and the AO made an addition a sum of Rs.88,240/- to the total income of the assessee-company. In appeal, the CIT(A) considered the submissions made by the assessee and also the judgements relied upon and allowed the expenditure amounting to Rs.88,240/- incurred by the assessee towards website development by deleting the disallowance made by the AO holding such expenditure as capital in nature.

We have gone through the several judgements passed on this issue. In the case of Alembic Chemical Works Co.Ltd. vs. CIT (1989) 177 ITR 377 it is held by the Hon’ble Supreme Court that the test of enduring benefit is not a certain and conclusive test, it cannot be applied blindly and mechanically without regard to particular facts and circumstances given in the case. Once the tests of ownership and enduring benefit are satisfied, the question whether expenditure incurred

ITA No. 1762/Ahd/2016 DCIT vs. Aagam Infrabuild Pvt.Ltd. Asst.Year – 2012-13 - 14 - on website development is capital or revenue has to be seen from the point of view of its utility to a businessman and how important an economic or functional role it plays in his business. In the present case, the Websites enable companies to do what the printed brochures did but, in a much more efficient manner as well as in a much shorter period of time covering a much larger set of people worldwide. The advance of technology and the wide spread use of the internet has provided a very powerful medium to companies to publicize their activities to a larger spectrum of people at a much lower cost. It does not lead into addition into the capital base of the company but only helps in the promotion of the business of the company. It is also decided by the Hon’ble Jurisdictional High Court in the case of M/s.Edelweiss Capital Ltd. that even if the websites had materialized, the expenditure could not have been viewed as capital expenditure because the website is put up for the purpose of day-to-day running of the business and even if it is seen that some enduring benefit is obtained by the assessee, the benefit cannot be said to accrue to the assessee in the capital field. A website is something where full information about the assessee’s business is given and it helps the assessee’s customers in dealing with it. A website constantly needs updating, otherwise it may become obsolete. It helps in the smooth and efficient running of the day-to-day business. The expenditure would have been allowable as revenue expenditure. In the case of Empire Jute Co. Ltd. vs. CIT (1980) 124 ITR 01, the Hon’ble Supreme Court observed

ITA No. 1762/Ahd/2016 DCIT vs. Aagam Infrabuild Pvt.Ltd. Asst.Year – 2012-13 - 15 - that if the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. Considering the entire facts of the matter, judgements passed by various Tribunals, High Court and the ratio laid down by the Hon’ble Supreme Court in this regard, we are of the considered opinion that the expenditure incurred by the assessee on account of website development is revenue in nature and we thus upheld the decision of the Ld.CIT(A)and dismiss the said ground of appeal preferred by the revenue.

ITA No. 1762/Ahd/2016 DCIT vs. Aagam Infrabuild Pvt.Ltd. Asst.Year – 2012-13 - 16 - expenditure and made disallowance of Rs.1,07,21,475/- treated to be as part of closing work-in-progress. The assessee during the course of appellate proceedings filed a written submission wherein it was stated that the expenditure of advertisement as mentioned hereinabove is to promote the business of the company and to create awareness of money investors regarding the scheme initiated by assessee-company. The advertisement made by the assessee-company will have its impact only for a limited period. The people will remember advertisements by way of hoardings put up by the assessee-company only till the time it is put on and forget the same at a later stage. The contention made by the AO as the expenditure on advertisement be of enduring nature is not correct, had it been like this, there would have been no requirement for the assessee-company to incur huge expenditure in subsequent years on the same account. It is a fact that the assessee-company has incurred huge advertisement expenditure in subsequent years too which proves that such expenditure is not enduring nature but delivers the results only for a short span of time. According to the assessee, by incurring the expenditure on advertisement, the assessee-company did not acquire in fixed capital asset since it was only incurred to promote business in the real estate market and thus the same should be treated as revenue expenditure. Reliance were made on the following judgements by the assessee:-

ITA No. 1762/Ahd/2016 DCIT vs. Aagam Infrabuild Pvt.Ltd. Asst.Year – 2012-13 - 17 - (a) Dy.CIT vs. Godrej Tea Ltd. 4 ITR (Trib) 649 (b) ITO vs. M/s. Elka Cosmetic Pvt.Ltd. (ITAT Delhi) (c) CIT vs. Bharat Aluminium Co.Ltd. 303 ITR 256 HC (Delhi) (d) Silicon Graphics Systems (I) (P) Ltd. vs. DCIT 106 TTJ 1153 ITAT (Delhi).

Further that nowhere in the Income-tax Act, it is provided that the expenditure should be claimed only when income has been earned as per section 37(1) of the Act, the assessee can claim any expenditure which is incurred for the purpose of business or profession (not being personal nature). It was also pointed out by the assessee that there is no concept of deferred revenue expenditure under the said Act, unless the Statute provides to defer revenue expenditure over a period, the entire amount is to be allowed in the year in which it is incurred for running the business in terms of section 37 of the Act. The ratio has been decided by the Courts in the following judgements relied upon by the assessee:-

(a) CIT vs. Casio India Ltd. (2001) 335 ITGR 196 (Guj.) (b) CIT vs. Citi Financial Consumer Finance Ltd. 335 ITR 29 (c) 19 SOT 13, Situ Electro Instruments (P) Ltd. vs. ITO.

Number of judgements were relied upon by the assessee in support its claim for allowing the expenditure incurred on advertisement.

ITA No. 1762/Ahd/2016 DCIT vs. Aagam Infrabuild Pvt.Ltd. Asst.Year – 2012-13 - 18 - The Ld.CIT(A) relying upon the submissions made by the assessee-company and the judgements cited by it deleted the addition of Rs.1,07,21,475/- made on account of “advertisement expenditure” by the AO. We have heard the Ld.DR. The Ld.Departmental Representative vehemently objected to the observations made by the Ld.CIT(A) while deleting the addition as mentioned hereinabove and supported the contention made by the AO in deciding the issue in favour of Revenue.

We have gone through the order passed by the AO, the written submission made by the assessee-company, the observation made by the Ld.CIT(A) and the judgements relied upon by the assessee-company before the Ld.CIT(A) in support of his appeal on the issue in hand.

We further add that the assessee-company is engaged in the business of purchasing and developing land and sale thereof mainly carried out plotting activity during the year. During the course of business, it has incurred substantial advertisement expenditure. During the year under consideration, the assessee has recognized revenue of Rs.95.90 lakhs but has been able to collect membership collection of more than Rs.15 crores. The advertisement helps to carry out many business more than effectively and smoothly. In this particular case, the assessee-company is required to incur advertisement expenditure on

ITA No. 1762/Ahd/2016 DCIT vs. Aagam Infrabuild Pvt.Ltd. Asst.Year – 2012-13 - 19 - year-to-year basis to attract more customers/clients and public at large become aware about the products sold by its. As the expenditure has not resulted in capital asset so as to be recorded as expenditure in capital field. Such expenditure is made by the assessee year-after-year so as to keep the product in market. The controversy in this particular case is this as to whether the advertisement expenditure is for enduring benefit, capital in nature or otherwise has already been adjudicated by the Hon’ble Gujarat High Court in the case of Core Healthcare Ltd. 308 ITR 263 (Guj.) wherein the judgement of the Hon’ble Apex Court in the matter of Alembic Ltd. was considered. It has been decided in the said judgement that the approach of the Commissioner (Appeals) that the expenditure in question was treated as deferred revenue expenditure and hence was capital in nature is not a correct approach since there is no such category of deferred revenue expenditure in the Income Tax Act. The issue is also squarely covered by the Hon’ble Jurisdictional High Court in the case of Core Healthcare Ltd. We thereafter, are of the opinion that the “advertisement expenditure” incurred by the assessee- company is not of enduring nature and thus 3/4th of expenditure is not required to be treated as part of cost of closing work-in-progress. We also observe that the expenditure incurred by the assessee-company in respect of advertisement is treated as revenue expenditure and affirm the order passed by the CIT(A) in deleting the addition of Rs.1,07,21,475/-

ITA No. 1762/Ahd/2016 DCIT vs. Aagam Infrabuild Pvt.Ltd. Asst.Year – 2012-13 - 20 - towards the cost of advertisement expenditure. Thus, ground No.4 of the Revenue’s appeal is dismissed.