THE DUPTY, CIT,, VIJAYAWADA vs. SRI RAVI RAMESH BABU,, VIJAYAWADA

IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE SHRI V. DURGA RAO, HON’BLE JUDICIAL MEMBER & SHRI D.S. SUNDER SINGH, HON’BLE ACCOUNTANT MEMBER ITA No. 52/VIZ/2017 (Asst. Year : 2008-09) DCIT, Circle-2(1), vs. Ravi Ramesh Babu, Vijayawada. D.No.24-16-12/28, F.F.2, Vasantha Apartments, Near Loyola College, Vijayawada PAN No. ADTPR 1314 G (Appellant) (Respondent)

Assessee by : Shri M.S.R. Prasad – CA. Department By : Shri P.S. Murthy – Sr.DR Date of hearing : 21/02/2018. Date of pronouncement : 23/02/2018. O R D E R PER V. DURGA RAO, JUDICIAL MEMBER

This appeal by the Revenue is directed against the order of Commissioner of Income Tax (Appeals), Vijayawada, dated 30/09/2016 for the Assessment Year 2008-09. 2. Facts of the case, in brief, are that the assessee is engaged in the business of trading in consumer goods under the name and style of M/s. Rama Sai Enterprises. The assessee filed his return of income by declaring total income of Rs. 1,15,09,840/-. The

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Assessing Officer completed the assessment under section 143(3) read with section 147 of the Income Tax Act, 1961 (hereinafter referred to as "Act"). In the assessment order, the Assessing Officer has noted that the assessee has claimed expenditure of Rs.1,14,71,033/- under the head ‘other expenditure’, which was in fact the expenditure incurred on E-cards. As the said expenditure was in the nature of capital expenditure, the assessee was asked to show-cause why the same should not be disallowed. In response to which, the assessee stated that out of the total expenditure on account of E-cards is Rs. 67,88,340/- and Quest- Net expenditure is Rs. 39,58,174/-. The assessee stated that E-card expenditure was an expenditure paid to the persons engaged in the lower chain of the multi level marketing commission work and the same was claimed as revenue expenditure. The Assessing Officer had not accepted the assessee’s contention by stating that E-card expenditure was incurred by the assessee to promote a long term benefit by engaging the man power and therefore treated the same as ‘capital expenditure’. 3. On appeal, ld. CIT(A) by following the decision in assessee’s own case for the Assessment Year 2007-08, allowed the appeal, by treating the expenditure incurred on E-card is revenue

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expenditure and directed the Assessing Officer to delete the addition. 4. On being aggrieved, revenue carried the matter in appeal before the tribunal. 5. Ld. Departmental Representative relied on the order passed by Assessing Officer. 6. On the other hand, ld. counsel for the assessee has submitted that the issue involved in this appeal is squarely covered by the coordinate bench of the tribunal for the Assessment Year 2007-08 in ITA NO. 466/VIZ/2012, dated 22/07/2016, hence, prayed for same may be followed and the appeal filed by the Revenue may be dismissed. 7. We have heard both the parties, perused the material available on record and orders of the authorities below. 8. The only issue involved in this appeal is whether the expenditure incurred by the assessee on E-card is a revenue expenditure or capital expenditure. The very same issue came up before this Tribunal in assessee’s own case for the Assessment Year 2007-08, where the tribunal has considered the issue and held that the expenditure incurred on E-card as revenue expenditure and upheld the order passed by the ld. CIT(A). For

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the sake of convenience, the relevant portion of the order is extracted as under:-

“7. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The A.O. disallowed E-card expenditure for the reason that the expenditure incurred by the assessee is capital in nature. The A.O. further observed that the expenditure incurred under the head E-card expenses is an initial outlay and the assessee is getting enduring benefit out of the expenditure, therefore, it is a capital in nature but not a revenue expenditure. The A.O. further observed that in addition to this, the assessee has failed to prove the expenditure incurred under the head E-card expenses with necessary evidences. Except furnishing ledger extract, he could not furnish any evidences to substantiate the claim of expenditure. It is the contention of the assessee that E-card expenses are nothing but a subscription charges to become a member of multi level chain marketing. He had purchased E-card from M/s. Quest Net Marketing India Pvt. Ltd. and given the same to existing members for onward transmission of the same to new members to enhance the network down the line and to develop team base to earn more income. Therefore, the A.O. was not correct in observing that the assessee has not proved the expenditure and also the expenditure incurred by the assessee is capital in nature. 8. We find force in the arguments of the assessee for the reason that the E-card expenditure incurred by the assessee is not a capital expenditure, as the assessee has paid the amount towards purchase of E-cards from multi level chain marketing company to be passed on to other members of the group so as to enhance the team base to earn more income. The E-card expenditure incurred by the assessee is nothing but subscription charges paid to become a member of a multi level marketing. The assessee has purchased membership cards and distributed to existing members to admit new members to the group, so that he will get commission on the business done by the members of the group. The CIT(A) after considering the details filed by the assessee and also taken into account the remand report of the A.O. held that E-card expenditure incurred by the assessee is revenue in nature and also the assessee has proved the expenditure with necessary evidences. The relevant portion of the CIT(A) order is extracted below: “6. From the remand report submitted by the Assessing Officer, it is clear that of expenditure incurred is not in doubt. The only other issue remains to be examined is whether the genuineness the expenditure is capital or revenue in nature.

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Various courts, including the Hon'ble Supreme Court in the cases of M/s. Abdul Kayoom vs. CIT (1962) 44 ITR 689 and CIT vs. Ashok Leyland Ltd. (86 ITR 549), have held that there cannot be a hard and fast rule for determination of a capital or revenue expenditure. The nature of expenditure can only be determined from the actual facts of the case. In the appellants case, as borne out in the remand report, the E- Cards are nothing but transmission of money in different denominations, which can be used for purchase of gold coins by the members. Purchase of F-Cards gives the owner the possibility of purchasing gold coins, as part of the business model of M/s. Quest Net Enterprises India Pvt. Ltd of which the appellant is one of the members in the distribution chain: As noted by the Assessing Officer in the remand report, there is no guarantee that the appellant will get enduring benefits years together for the E-Cards supplied by him to the members down the line, as once the chain is stopped at one stage, the benefit there from would end Further, as submitted by the appellant, there is no guarantee that the persons to whom the E-Cards have been given will generate commission to the appellant by actively engaging in sales promotion of the products of M/s Quest Net Enterprises India Pvt. Ltd., and there is no guarantee that each individual person will be successful in generating further customers/members in the multi level marketing chain. The Assessing Officer in his remand report has also clarified that the "E Card Expenses claimed by the assessee are genuinely incurred by the assessee, wholly and exclusively in connection with expanding his team base and developing his business."' In view of the facts and circumstances of the case and the remand report submitted by the Assessing Officer, I hold that the expenditure towards purchase of E-Cards is properly explained and is 'a revenue' expenditure incurred for furtherance of the appellant’s business. In the result, the addition made of Rs.78,85,275/- towards disallowance of E-card expenses, is hereby deleted.” 9. The CIT(A) discussed at length, before coming to the conclusion that E-card expenditure incurred by the assessee is revenue in nature. The facts remain unchanged. The revenue has failed to prove the findings of the facts recorded by the CIT(A) is incorrect. Therefore, we are of the view that the CIT(A) has rightly held that the E-card expenditure is revenue in nature. We do not see any error or infirmity in the order passed by the CIT(A). Hence, we inclined to upheld the CIT(A) order and dismiss the appeal filed by the revenue.

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Sd/- sd/- (D.S. SUNDER SINGH) (V. DURGA RAO) Accountant Member Judicial Member Dated : 23rd February, 2018. vr/- Copy to: 1. The Assessee - Ravi Ramesh Babu, D.No.24-16-12/28, F.F.2, Vasantha Apartments, Near Loyola College, Vijayawada 2. The Revenue – DCIT, Circle-2(1), Vijayawada. 3. The Pr.CIT, Vijayawada. 4. The CIT(A), Vijayawada. 5. The D.R., Visakhapatnam. 6. Guard file. By order

(VUKKEM RAMBABU) Sr. Private Secretary, ITAT, Visakhapatnam.