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Income Tax Appellate Tribunal, DELHI BENCH ‘D’ : NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI L.P. SAHU
ASSESSEE BY : None REVENUE BY : Shri Amit Jain, Senior DR Date of Hearing : 13.08.2018 Date of Order : 17.08.2018
O R D E R PER L.P. SAHU, ACCOUNTANT MEMBER : This is an appeal filed by the Revenue against the order of the CIT (Appeals)-XXI, New Delhi dated 23.02.2011 for the Assessment Year 2007- 08 on the following grounds of appeal :-
“1. The Ld. CIT(A) has erred on facts and in law by restricting to Rs.4,00,84,012/- the disallowance of Rs.10,02,10,030/- treated by the AO as the amount of capital expenditure, ignoring that: (i) Although reliance has been placed on the Hon'ble Delhi High Court decision in the case of CIT Vs OCL India Ltd., (2010-TIOL-SOS-HC-DEL-IT), no reasons has been cited for the random adoption of 40% as the percentage of capital expenditure lout of the total expenditure. (ii) No reason has been given for holding that the expenses amounting to Rs.10,02,10,030/- .treated by AO as capital expenditure was neither fully capital nor fully revenue in nature.
(iii) The expenditure of Rs.10,02,10,030/- had been mostly incurred towards initial outlay of business comprising procurement of capital equipment, research and development6 land lot6hjer expenditure It6he aim and objectives of which were of enduring benefit to the assessee's business.
(iv) The expenditure of Rs.10,02,10,030/- was mainly incurred for the purpose of exploring and establishing a new business which was yet to commence and therefore, the same was prior period expenditure of capital nature which is not allowable." 2. Brief facts of the case are that the assessee filed return of income and declared loss from business or profession at Rs.9,83,05,419/- and income from other sources declared at Rs.10,007/-. M/s. Ultra Motor Limited started their operations in India as a liaison office in early 2005 and realizing the potential M/s. Ultra Motor UK decided to open a subsidiary company by the name of M/s. Ultra Motor India Pvt. Ltd. (UMI i.e. assessee). The assessee, UMI, was incorporated on 2nd January, 2006 with an objective of manufacturing motors from patented Russian motor technology and sell the same to the existing bi-cycle manufacturing companies like Avon, Hero, BSA, etc. enabling them to launch electrical bicycles. In this regard, the company initiated the activities for manufacturing of the above products and the assessee company incurred huge expenditure on the international travel, inland travel, marketing & advertisement expenses, research & development cost and personnel expenses. The case was selected for scrutiny and statutory notices were issued to the assessee. In response to the notices, the assessee made written submissions before the ld. AO. On perusal of the profit & loss account, the ld. AO observed that the assessee has shown sales of Rs.5,23,890/- and expenditure of Rs.10,02,10,030/-. On the justification of the above loss declared by the assessee, the assessee made submissions before the AO. After considering the submissions of the assessee, AO disallowed the expenses debited of Rs.10,02,10,030/- by holding as under:-
“ I have carefully examined assessee's submissions and found not acceptable in view of the following facts:
It is said that assessee company was incorporated on 2-1- 2006 as a 100% subsidiary of Ultra Motor Co. Ltd. UK.
The company was formed with an objective of introducing 'Electric Motor' to used in making e-bikes in India.
Assessee has changed its object clause to include introduction of e-bikes into India as its main objective along with dealing in spare parts of e-bikes.
Information called from assessee's submission that assessee company has started a joint venture with Rotomag Co. in this direction. However, this venture was closed due to competition from China. The above facts indicate that first stated business activity has not commenced at all. The assessee has debited an amount of Rs.88,22,825/- is nothing but capital in nature. To substantiate this finding the note given by the Auditors in Notes to the Accounts clearly proves that it is an account of capital in nature and pertain to the earlier stated business activity. It is said that the company provided
Rs.62,32,063/- for procuring the raw material and capital equipment purchased by the Vendor M/s Rotomag Motors and Controls Ltd related to the discontinued business and an amount of Rs.22,40,765/- purchased from M/s Maxop Engg. Co. pvt. Ltd. on account of tools is also related to discontinued business. Therefore, these expenses are not allowable expenditure because business has been discontinued. Therefore the submissions made vide letter dated 24-8-2009 and 4-12-2009 are without any substance therefore, is rejected.
Vide submissions dated 24-8-2009 it is said that relevant financial year assessee company has decided to import the motors from China due to suitability of technology and pricing advantage. Therefore, it has appointed high profile executives like Sh. V.J. Prakash, as MD, Sh. Ganesh Mahalingam, Director, business development, and Sh. Bhan KK, Director, China Operations. It is further said that the activity of sourcing of right vendors producing high quality products at most suitable price started during this year and a no. of visits are made by the company executives to China. However, on perusal of P&L Alc. no such import has been shown as purchases and corresponding sales etc. therefore, this argument is taken without supporting facts. Therefore, this expenditure incurred international travel, inland travel, marketing and advt. expenses and research and development cost, and personal expenditure are nothing but they are incurred to explore new business which has not yet commenced. Therefore, all these expenditures are treated as capital in nature.
In the P&L A/c. assessee has credited sales of Rs.5,23,890/- for which no details have been filed. Therefore, it is held that assessee has not commenced any business and is in the process of setting up of assessee. Therefore, all expenditure are treated as capital in nature and disallowed.
Subject to the above discussion, income of the assessee company is recomputed as under :-
Net loss as per computation Rs. 9,83,05,419 Add : Expenses disallowed Rs.10,02,10,030 Total income Rs. 6,73,552”
3. Feeling aggrieved from the order of the AO, the assessee filed an appeal before the ld. CIT (A) and the ld. CIT (A), after considering the submissions made by the assessee and relying upon some case laws, allowed the appeal of the assessee. Aggrieved from the order of the ld. CIT (A), the Revenue is in appeal before us.
4. Assessee has not preferred to put in appearance despite issuance of the notice on different dates and consequently, we proceeded to decide the present appeal with the assistance of the ld. Senior DR as well as on the basis of documents available on the file.
We have heard the ld. Departmental Representative for the revenue to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
Ld. DR relied on the order of the AO and submitted that the assessee has not yet started the business activities, therefore, the ld. AO has rightly treated the expenditure incurred by the assessee as capital expenditure. He submitted that the ld. CIT (A) has partly allowed the appeal without any basis treating only 40% of the expenditure as capital expenditure.
After hearing the Revenue and observing the orders of the authorities below, we find that the ld. CIT (A) has passed good reasoned order and for the sake of clarity, the findings recorded by the ld. CIT (A) is reproduced as under :-
“4.2 I have gone through the observation of the AO in the assessment order and written submission of the Ld.AR of the appellant and it is held that expenses amounting to Rs.10,02,10,030/- is neither capital nor fully revenue in nature as has been discussed by the AO in the body of assessment order that this expenditure has been incurred for international travel, inland travel, marketing and advertisement expenses, research and development cost and personal expenditure are nothing but incurred to explore new business. In this regard reliance is placed on the judgement of the Hon'ble Delhi High Court in the case of CIT Vs.OCL India Ltd. Reported at 2010-TIOL-808-HC- DEL-IT, wherein, the Hon'ble Delhi High Court relied on the judgment in the case of CIT Vs J.K.Synthetics Ltd. 222CTR 339, wherein, the Hon'ble Delhi High Court has laid down the Broad principles for treating the expenses as in the nature of capital or revenue as under:-
"13. We may first spell-out the principles which are to be kept in mind to determine as to whether such expenses are to be treated capital or the revenue expenditure. These are neatly culled out in the case of CIT Vs. J.K.Synthetics Ltd, 222 CTR( 2008-TIOL-671-HC-DEL-IT) by this Court, as under:-
'BOARD PRINCIPLES WHICH EMERGE ONR EADING OF VARIOUS AUTHORITIES
An overall view of the judgement of the Supreme Court, as well as, of the High Courts would show that the following broad principles have been forged over the years, which require, to be applied to the facts of each case: (i) the expenditure incurred towards initial outlay of business would be in the nature of capital expenditure, however, if the expenditure is incurred while the business is ongoing, it would have to be ascertained if the expenditure is made for acquiring or bringing into existence asset or an advantage of an enduring benefit for the business, if that be so, it will be in the nature of capital expenditure. If the expenditure, on the other hand, is for running the business or working it, with a view to produce profits, it would be in the nature of revenue expenditure;
(ii) It is the aim and object or expenditure, which would, determine its character and not the source and manner of its payment;
(iii) The test of "once and for all' payment i.e., a lump sum payment made, in respect of, a transaction is an inconclusive test. The character of payment can be determined by looking at what is the true nature of the asset which is acquired and not by the fact whether it is a payment in 'lump sum' or in an installment. In applying the test of an advantage of an enduring nature, it would not be proper, to look at the advantage obtained, . s lasting forever. The distinction which is required to be drawn is, whether the expense has been incurred to do away with, what is a recurring expense for running a business, as against, an expense undertaken for the benefit of the business as a whole;
(iv) An expense incurred for acquisition of a source of profit or income would be absence of any contrary circumstance, be in the nature of capital expenditure. As against this, an expenditure which enables the profit making structure to work more efficiently leaving the source or the profit making structure untouched, would be in the nature of revenue expenditure. In other words, expenditure incurred to find tune trading operations to enable the management to run the business effectively, efficiently and profitably leaving the fixed assets untouched would be an expenditure of a revenue nature even though the advantage obtained may last for an indefinite period. To that extent, the test of enduring benefit or advantage could be considered as having broken down;
(v) Expenditure incurred for grant of license which accords' access' to technical knowledge, as' against, 'absolute' transfer of technical knowledge and information would ordinarily be treated as revenue expenditure. In order to sift, in a manner of speaking, the grain form the chaff, one would have to closely look at the attendant circumstances, such as:
(a) the tenure of the licence.
(b) The right, if any, in the licensee to create further rights in favour of third parties' (c) The prohibition, if any, in parting with a confidential information received under the license to third parties without the consent of the licensor, (d) Whether the licence transfers the 'fruits of research' of the licensor, 'once for all', (e) Whether on expiry of the Licence the licensee is required to return back the plans and designs obtained under the licence to the licensor even though the licensee may continue to manufacture the product, in respect of, which 'access' to knowledge was obtained during the subsistence of the licence. (f) Whether any secret or process of manufacture was sold by the licensor to the licensee. Expenditure on obtaining access to such secret process would ordinarily be construed as capital in nature;
(vi) the fact that assessee could use the technical knowledge obtained during the tenure of the license for the purposes of its business after the Agreement has expired, an in that sense, resulting in an enduring advantage, has been categorically rejected by the courts. The Courts have held that this, by itself, cannot be decisive because knowledge by itself may last for a long period even though due to rapid change of technology and huge strides made in the field of science, the knowledge may with passage of time become obsolete;
(vii) while determining the nature of expenditure, given the diversity of human affairs and complicated nature of business; the test enunciated by courts have to be applied from a business point of view and on a fair appreciation of the whole fact situation before concluding whether the expenditure is in the nature of capital or revenue.
Governed by the aforesaid principles, we are of the view that the Tribunal has rightly held that the scope of study was the mixture of both the areas namely part of it related to the study from which benefit of enduring nature was sought to be achieved and part thereof related to the treating activities. Therefore, the expenditure incurred was required to be apportioned between the two viz capital and revenue expenditure.
When we come to the allocation of this expenditure, the reason for allocation 20% of the expenses towards capital expenditure is not discernible from the order of the Tribunal. According to the Tribunal itself, out of the five aspects on which report to the Consultant was sought, two related to expansion or starting of new projects. On this observation of the Tribunal there is no dispute. This is correct as areas no.4 & 5 relate to possible acquisition in southern region and expansion of existing cement plant and from these studies benefit of enduring nature was sought to be derived at. Then the obvious fallout would be to allocate 40% of the total expenditure and not 20% to the head "capital expenditure".
4.3 The ratio of the above said judgement of the Hon'ble Delhi High Court clearly hits the case and the same ratio is taken for determining the ratio of capital or revenue nature. As in the instant case, AO has decided that all the expenses amounting to Rs.10,02,10,030/- as capital nature, same is restricted to 40% only. Thus, by applying the ratio out of Rs.10,02,10,030/-, an amount of Rs.4,00,84,012/- (40%) should be treated as capital expenditure and remaining 60%, i.e., Rs.6,01,26,018/- should be allowed as revenue expenditure. Accordingly, appeal is partly allowed.
5. For statistical purpose, appeal will be treated as partly allowed.”
From the above, we find that the ld. CIT (A) has, after considering the submissions of the assessee and the order passed by the AO, has rightly allowed 40% of the expenditure i.e. Rs.4,00,84,012/- as capital expenditure and the remaining 60% expenditure i.e. RS.6,01,26,018/- is allowed as revenue expenditure. It is also clear from the submissions made before the AO that the assessment for the year ending 31.03.2006 was assessed u/s 143(3) of the Income-tax Act, 1961 vide order dated 16.09.2008 at a business loss of Rs.13,73,867/-. Therefore, there is no doubt that the business has already been commenced and during the impugned year, the assessee also shown the sale of Rs.5,23,890/-. From the impugned year, the assessee has also started the research and development activity. Therefore, it is patently clear that the assessee company business was set up in the previous year and the assessee company continued its main activities for expansion of its business network. In the totality of the facts and circumstances of the case, we do not want to interfere with the findings reached by the ld. CIT (A), therefore, the appeal of the Revenue is dismissed.
In the result, the appeal of the Revenue is dismissed. Order pronounced in open court on this 17TH day of August, 2018.