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Income Tax Appellate Tribunal, “B”, BENCH
Before: SHRI MAHAVIR SINGH, JM & SHRI M.BALAGANESH, AM
आदेश / O R D E R PER M. BALAGANESH (A.M): This appeal in A.Y.2012-13 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-2, Mumbai in appeal No.591/14-15 dated 22/02/2018 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 29/12/2014 by the ld. Deputy Commissioner of Income Tax, Circle 4(2), New Delhi (hereinafter referred to as ld. AO).
2. Revenue has raised the following grounds of appeal:-
1) "Whether on the facts and in the circumstances of the case and in law, the CIT(A) was justified in holding that the expenses on account of due diligence expenditure and marketing research expenditures as revenue in nature and thereby deleting the disallowance by ignoring the fact that the assessee would be deriving enduring benefit from these expenses and hence the same are capital in nature." 2. "Alternatively and without prejudice to the above, the Id. CIT(A) ought to have considered the expenses in the nature of preliminary expenses as per section 35D(2) of the Act and therefore allowable only as per provision of section 35D(1)?" The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the DCIT 9(3)(2) be restored. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.
We have heard rival submissions. We find that the revenue had raised similar grounds before the Tribunal in assessee’s own case for A.Y.2010-11 in dated 12/06/2017 wherein the entire facts were discussed in detail and the observations of the Tribunal are as under:-
Briefly the facts of the case are that assessee-company is in the business of retailing a variety of household and consumer products through departmental stores under various formats and is expanding the chain with multiple consumer friendly format stores in India. The A.O. has completed the assessment at loss of Rs.165 crores as against the returned loss of 166.40 crores. The A.O. in the assessment order has disallowed the following expenses appearing under the Head "Legal and Professional Charges" claimed by the assessee as revenue in nature alleging that the assessee has derived the benefit of enduring nature for the incurrence of such expenses and hence the same are capital in nature. S. No. Particulars of Expenditure Amount (Rs.) 1. Real Estate Research Expenses 97,50,565 2. Marketing Research Expenses 25,23,870
3. Due Diligence Expenses Total 16,68,344 Total 1,39,42,779
3. The assessee challenged the addition before the Ld. CIT(A) and the written submissions of the assessee is reproduced in the impugned order in which the assessee briefly explained that it is engaged in the business of retailing a variety of household and consumer products through departmental stores under various formats and offers many food items and other household articles through its stores. The assessee is operating stores in different parts of India. The assessee has taken many properties on lease for the purpose of running of its stores across various locations in India. The A.O. made the addition merely on the presumption. The assessee incurred the expenditure for taking stores on lease. The assessee has not acquired any store/land and the nature of expenses are business expenditure incurred in relation to the existing line of business. The assessee has to locate the customer and to know the preference of the public for opening the store at appropriate location for the expansion of the existing business only. The assessee has been locating the most profitable customers, targeting the right marketing to specific prospects and calculating market penetration and identify market opportunities. The assessee also located the potential customers based on geographical area and used to make door-to-door interview for the purpose of business. Survey is also conducted for location of stores. Diaries are distributed among the households in a locality and the members are asked to record their buying patterns, product preferences and no. of visit to market etc., The Due Diligence Expenses are incurred in connection with the property proposed to be taken for store side. The assessee incurred similar expenditure in earlier as well as subsequent assessment years. The details of same are noted at page-9 of the impugned order. It was, therefore, submitted that assessee has incurred the expenditure for setting-up stores under the existing business and no new line of business has been established. The stores are taken on lease and are not owned by the assessee. The market research has been conducted for the existing business to assess the market attractiveness and customer preferences. The assessee relied upon the decision of the Hon’ble Delhi High Court in the case of CIT vs. Priya Village Roadshows Ltd., (332 ITR 594) (Delhi) in which it was held that if any expenditure is incurred for setting-up new unit which are part of existing line of business, the expenses are revenue in nature. The other decisions were also relied upon by assessee in support of the same contention.
The Ld. CIT(A) after considering the explanation of the assessee, in the light of material on record, held that the expenditure incurred by the assessee are revenue in nature and accordingly, deleted the addition. The findings of the Ld. CIT(A) in para-5 of the order are reproduced as under:- 5. Finding on grounds of appeal:- “I have carefully considered the findings of the AO in the assessment order and the written submissions of the appellant including the enclosed paper book and the case laws relied upon by the appellant. It is seen that the appellant is engaged in the business of retailing a variety of household and consumer products through departmental stores. It is seen from the assessment order that the AO has made a total disallowance of Rs.1,39,42,779/- by holding such expenses as capital in nature." Broadly, these expenses under consideration are classified as Real Estate Research expense (Rs.97,50,565/-); marketing research expense(Rs. 25,23,8701-) and expenses on legal due diligence(Rs.16,68,344/-). In para-3 of the assessment order the AO has inter- alia held that the assessee company furnished all the relevant details and from perusal of which it was observed by the AO that the assessee company either conducts or cause to conduct through hired agencies in specific regions having high density of population surveys and collecting data, such as house hold counting, profiling study and mapping on the basis of analysis of which the assessee company decides as to where opening of stores will be fruitful for the business of the assessee company and curing of legal obstruction in purchasing of land, purchasing of stores, constructing of stores, renovation thereof etc. Taking into consideration the fact that the nature of expense is of such nature that it will produce enduring nature of benefits to the assessee company, the AO has held these expanses as capital in nature and has accordingly denied the allowability of the same as revenue expenditure. The appellant in his submission has essentially argued that the objective of carrying out such market and real estate surveys/ studies is to know where the customers are located and to determine their preferences and needs. Secondly, once the catchment area and customer preferences are determined, to identify appropriate locations where the retail stores can be opened. Thereafter, once a particular store location has been identified, due diligence of the property is undertaken from an independent party to check the legality of the property. Depending on the due diligence report, the appellant decides whether to open a store at the proposed site or not Consequently, in some cases, if the due diligence report is negative then the appellant may ultimately decide not to open a store at the proposed site. On a consideration of the details of expenses, it is apparent that these expenditure are incurred in the normal course of retail business of the appellant, are recurring and periodical in nature and require constant updating from time to time and. therefore there is no basis for treating them as one time capital outlay which is enduring in nature and therefore could be characterized as capital expenditure. The marketing and real estate expenditure are in the nature of identifying fresh markets/areas for the appellant's existing line of business, which would contribute to the increase in generation' of revenues' and therefore is essentially in. the nature of expenses incurred for efficient expansion of business and the same cannot be treated by any stretch of imagination as capital expenditure. In this connection the ratio laid down by the Court in case of C1T vs Priya Village Road Shows Ltd. 185 Taxman 44 and of the Tribunal in KJS India (P) Ltd. vs DCIT 45 SOT 17 are squarely applicable to the facts of the appellant case. Further, the reasoning of the AO that expenses have been incurred in relation to purchase of land, purchase of stores, construction of stores etc also remains unsubstantiated as the AO has not brought on record the description and location of the purchase of land / stores. On the contrary the correct, factual position appearing from the financial statements is that the appellant has taken the stores on lease and. has not bought land/ building for opening such stores. The same is evident in particular from the fixed assets schedule where there is no block of land or building appearing . Therefore, there is no basis for treating any of the above referred expenses as capital expenditure in nature and disallowing the same. Accordingly, Grounds of appeal
Nos. 1 to 7 are allowed.
5. The Ld. D.R. relied upon the order of the A.O. and submitted that the expenses are clearly capital in nature.
6. On the other hand, the Learned Counsel for the Assessee reiterated the submissions made before the authorities below.
7. After considering the rival contentions, we do not find any merit in the departmental appeal. The assessee has explained that these expenditure are incurred in the normal course of retail business of the assessee and are recurring and periodical in nature and requires constant updating from time to time. Therefore, these are not capital expenditure in nature. The assessee explained that these expenses have been incurred for setting-up stores under the existing business and no new line of business has been established. The assessee also explained that stores are taken on lease and are not owned by the assessee. The market research has been conducted for the existing business to assess the marketing attractiveness and preference of the customers. In earlier as well as subsequent years similar expenditure have been incurred by the assessee which are lesser than the expenses claimed in the assessment, year under appeal. The market and real estate expenditure are in the nature of identifying fresh markets/areas for the assessee’s existing line of business which would contribute to the increase in revenue of the assessee and was meant for the efficient expansion of the business and therefore, the same could not be treated as capital expenditure in nature. Further, A.O. has failed to point-out while incurring these expenditure what capital has been accumulated by the assessee. Considering the nature of business of the assessee and that assessee has been setting-up stores for providing household items to the public, would clearly support the explanation of the assessee that the aforesaid expenses have been incurred wholly and exclusively for the purpose of business'. The Ld. CIT(A) on proper appreciation of facts and material on record, correctly held that these expenses are not capital in nature. Considering the facts of the case in the light of findings of the Ld. CIT(A) and the discussion above, we do not find any infirmity in the order of the Ld. CIT(A) in deleting the entire addition. The departmental appeal fails and is accordingly dismissed.
In the result, appeal of the Revenue is dismissed.
3.1. In this case, the appeals for A.Yrs. 2010-11 and 2011-12 were disposed off by the Co-ordinate Bench of Delhi Tribunal in assessee’s own case. Later the file was transferred to Mumbai due to change of registered office. Accordingly, the appeal for A.Y. 2012-13 is filed before us. 4.3. Respectfully following the aforesaid decision for A.Y.2010-11 in assessee’s own case, we are inclined to dismiss the grounds raised by the revenue.