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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI G. S. PANNU, AM & SHRI AMARJIT SINGH, JM
O R D E R
PER AMARJIT SINGH, JM:
The assessee has filed the present appeal against the order dated 25.01.2016 passed by the Commissioner of Income Tax (Appeals)-22 Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the AY. 2011- 12.
2. The assessee has raised the following grounds: - “1. Being aggrieved against order of the Commissioner of Income Tax (Appeals)- 22, Mumbai, this appeal petition is being filed Lo consider the following grounds of appeal, which are independent and without prejudice to each other
ITA. No.1727/M/16 A.Y.2011-12
1) On the facts and circumstances of the case and in law, the Commissioner of Income Tax(A) erred in confirming disallowance of Legal S Professional Charges of Rs 1.08.69,332/- paid to REACH for representative service by treating the said expenses as of capital nature though these expenses are of revenue nature. 2) Without prejudice to above and on the facts and circumstances of the case and in law, the Commissioner of Income Tax(A) erred in confirming disallowance of Rs.23,34,349/- being charges for the year included in the total expenses paid to REACH. The expenditure incurred of Rs 1,08,69,332/- includes an amount of Rs.23,34,349/- pertains to yearly charges towards registration which is of recurring nature 3) Without prejudice to above and on the facts and circumstances of the case and in law, the Commissioner of Income Tax(A) ought to have allowed 1/5'lh of the total expenditure incurred by way of amortization and 7 or depreciation on the said expenditure on the amount capitalized on payments to REACH. 4) On the facts and circumstances of the case and in law, the Commissioner of Income Tax(A) erred in disallowing Legal & Professional Charges of Rs 14,74,991/-paid to Intertek India Pvt Ltd. for assisting in registration process with REACH by treating the said expenses as of capital nature though these expenses were of revenue nature. 5) Without prejudice to above and on the facts and circumstances of the case and in law, the Commissioner of Income Tax(A) erred in confirming the disallowance of Rs 1,89,001/- out of total amount paid to Intertek India Pvt Ltd of Rs,14,74,991/-which pertains to Testing Charges No enduring benefit results out of the said expenses and same is allowable as revenue expenses. 6) Without prejudice to above and on the facts and circumstances of the case and in law, the Commissioner of Income Tax(A) ought to have allowed payments made to Intertek India Pvt. Ltd., by spreading over a period of 5 years instead of allowing depreciation on the said expenditure.
ITA. No.1727/M/16 A.Y.2011-12
7) On the facts and circumstances of the case and in law. the Commissioner of Income Tax(A) erred in confirming disallowance of Professional Charges of Rs.60,36.000/- paid lo Avalon Consulting by treating the said expenses as deferred revenue expenses even though the expenses are of revenue nature and incurred for day to day business policy decisions, 8) On the facts and circumstances of the case and in law, the Commissioner of Income Tax(A) erred in confirming disallowance u/s 14A @0.5% of average Investments amounting to Rs.78,403/-. On the facts, the provisions of S.14A are not applicable. 9) On the facts and circumstances of the case and in law, the Commissioner of Income Tax(A) erred in holding that initiation of penalty proceedings u/s.271(1)(c) of the Act is premature and not maintainable 10) The appellant craves leave to add, amend, modify, substitute, and or cancel any of the grounds of appeal
.”
3. The brief facts of the case are that the assessee filed its return of income for the A.Y. 2011-12 on 2011-12 declaring total income to the tune of Rs.20,65,98,287/-. The return was processed u/s 143(1) of the I.T. Act, 1961. Thereafter, the case was selected for scrutiny and notice u/s 143(2) of the I.T. Act, 1961 was issued and served upon the assessee. The notice u/s 142(1) of the Act dated 19.07.2013 was also issued and served upon the assessee. The assessee is a company and is engaged in the business of Reclaiming of rubber from waste rubber punch and split products from waste rubber and wind power generation, thermo plastic elastomers. During the year under consideration, the assessee derived its income from business. After disallowance Legal and Professional charges u/s 40(a)(i) of the Act, 1961 and disallowance of interest paid and disallowance u/s 14A of the Act, the total income of the assessee was assessed to the tune of Rs.22,69,19,280/-. Feeling aggrieved, the assessee filed an appeal before
ITA. No.1727/M/16 A.Y.2011-12 the CIT(A) who partly allowed the claim of the assessee but the assessee was not satisfied on account of the ground mentioned above, therefore, the assessee has filed the present appeal before us.
GROUND NOs.1 to 6:- 4. Ground nos. 1 to 6 are inter-connected, therefore, are being taken up together for adjudication. On these issues the assessee has claimed the legal and professional charges of Rs.1,08,69,332/- paid to Reach (Registration, Evaluation, authorization and Restrictions of Chemicals) which is the European Regulatory Authority and disallowance of Rs.23,34,349/- yearly charges paid the Reach which has been included in the amount of Rs.1,08,69,332/- and disallowance of legal and professional charges of Rs.14,74,991/- paid to Intertek India Pvt. Ltd. for assisting in registration process with Reach. However, the assessee in alternative claimed the depreciation in the ground nos. 3, 5, & 6. It is liable to be seen whether the expenses incurred by assessee on account of disallowance of legal and professional charges of Rs.1,08,69,332/- paid to Reach and an amount of Rs.14,74,991/- paid to Intertek India Pvt. Ltd. for assisting in registration process with Reach is revenue in nature or capital in nature. The assessee company is in the business of Reclaiming of rubber from waste rubber punch and split products from waste rubber and wind power generation, thermo plastic elastomers which is being raised for tyre industry. In order to market its products in the European Countries, the assessee company had to get itself registered with the Registration, Evaluation, Authorisation and Restrictions of Chemicals (Reach) which is the European Regulatory Authority. The principle of the aforesaid Regulatory Authority is that it is ITA. No.1727/M/16 A.Y.2011-12 for the manufacturers, importers and down-stream users to ensure that the manufacturers, place on the market or use such substances that do not adversely affect human health or environment. After getting the registration, the assessee would be entitled to Export product in the European Countries. For the Registration purpose, the assessee paid the aggregate sum of Rs.1,08,69,332/- for the registration with the Reach, the details of which is as under: - Particulars Euros Ind. Rs. Page No. Joint Submission for Buta 1, 2, Dien 5,050 3,71,155 21 Joint submission for Carbon Black 1,11,000 81,63,828 22 Fees for registration of substances above 1000 23,250 17,03,016 23 tonnes (Carbon Black) Fees for registration of substances in the range 8,625 6,31,333 24 of 100 to 1000 tonnes (Buta Diene) 1,08,69,332 Thereafter, the assessee paid the renewal charges in subsequent years, the assessee took the help of M/s. Intertek India Pvt. Ltd. for registration and paid a sum of Rs.14,74,991/- being professional charges. The ld. Representative of the assessee has argued that the expenses paid to Reach is revenue in nature and in this regard the Hon’ble ITAT has also passed the order in dated 11.02.2011 and in the case of USV Ltd. DCIT (2012) 24 taxmann.com 218 and ACIT Vs. Torrent Pharmaceuticals Ltd. (2013) 29 taxmann.com 405 (Guj). On the other hand, the Ld. Representative of the Department has refuted the said contentions. The nature of expenses mentioned above are not dispute.
ITA. No.1727/M/16 A.Y.2011-12 However, it is required to be seen whether the same is in nature of revenue or capital in nature. The assessee company is engaged in the business of Reclaiming of rubber from waste rubber punch and split products from waste rubber and wind power generation, thermo plastic elastomers used for tyre industry. In order to market its products in the European Countries, the assessee company had to get itself registered with the Registration, Evaluation, Authorisation and Restrictions of Chemicals (Reach) which is the European Regulatory Authority. The certification of this organization is necessary for marketing the product which do not adversely affect human health or environment. The registration fee as well as the fee paid to M/s. Intertek India Pvt. Ltd. being the professional charges has been denied. The similar has come before the ITAT in the case of ITA. No.241/Ahd/2008. The finding has been given in para no. 6 which is hereby reproduced below.: -
“6 We have heard the rival contentions and gone through the facts and circumstances of the case. We find that explanation of the assessee is that these are the expenses incurred for obtaining registrations in foreign country for the product which the assessee- company proposes to market in overseas market and without registration of the products, the assessee-company would not be able to market the products in the overseas market. Further, these payments are made to drug regulatory authorities in various countries for the products market in the respective countries. Furthermore, these fees are to be paid on recurring basis depending upon the validity of the various registrations. The fees have been paid on expiry of the registration and out of total payment of Rs.28,14,355/- major payment of Rs.8,03,706/- is in respect of product registration in Poland. Likewise payments have been made in Vietnam. Russia, Ghana and China etc. We find that the export over the years have increased from the export sale of Rs.26, crores in financial year 1998-99 to the exports have grown to Rs.160 crores in financial year 2005-06 an increase of more
ITA. No.1727/M/16 A.Y.2011-12 than 600%. Accordingly, these expenses are rightly allowed by CIT(A) and we confirm the same. This issue of Revenue’s appeal is dismissed.” 5. The Mumbai ITAT in the case of USV Ltd. Vs. DCIT (2012) 24 taxmann.com 218 (Mum) has also decided such type of issue and the relevant finding has been given in para no. 45 as under: -
45 We have considered the submissions of the Ld. Representative of the parties and the orders of the authority below. The Department has not disputed the fact that by ANDA registration, the assessee has completed the statutory requirement to sell the product in USA market and in the absence of such registration, the assessee may not be able to sell its product without hindrance. Considering the above facts, we agree with the Commissioner (Appeals) that such expenditure has been incurred by the assessee for the purpose of its business which is to be allowed as revenue expenditure. Hence the Commissioner (A) has correctly held that the expenditure of Rs.7,03,927/- be allowed as revenue expenditure. The Commissioner (A) has rightly directed the AO to withdraw the depreciation allowed for Rs.87,991/-. Therefore, ground o.2 of the appeal taken by the revenue is dismissed.
6. The Hon’ble Gujarat High Court has also adjudicated the similar type of issue in the case of CIT Vs. Torrent Pharmaceuticals Ltd. (2013) 29 taxmann.com 405 (Guj). The relevant finding has been given in para no. 4 & 5 below.:-
“4. The Tribunal in the impugned order recorded the findings inter-alia as under:- ''Further, these payments are made in drug regulatory authorities in various countries tor the products market in I lie respective countries. Furthermore, these fees are to be paid on recurring basis depending upon the validity of the various registrations. The fees have been paid on expiry of the registration and out of total payment of Rs.8,03,706/- is in respect of product registration in Poland. Likewise payments have been made in Vietnam, Russia, Ghana and China etc. We find that the exports over the years have increased from the ITA. No.1727/M/16 A.Y.2011-12 export sale of Rs,26 crores in financial year I9°.tt-I W to the exports have grown to Us, 160 crores in financial year 2005- 2006 an increase of more than 600%. Accordingly, these expenses are rightly allowed by CTT(A) and we confirm (he same."
The findings of the Tribunal are justified on both the issues. The garden expenditure was for the purpose of maintaining garden to control the pollution. The company had put up un affluent treatment plant and pollution used to generate because the release of pollutants. The maintaining a garden helped in controlling pollution arising from the pollutants. It cannot be gainsaid that the expenses for garden had nexus with business activity. It can well be be treated for business purpose and can be claimed as expenditure. Similarly, the expenses for foreign country registration was for business purpose only. because the same helped the assessee in marketing its products in the foreign countries and promoting the sales.”
On appraisal of the above mentioned finding, we noticed that in the instant case, the assessee has also incurred similar type of expenses for marketing his product in European Countries after getting the certification from Reach and after making the necessary payment to the said association as well as making the payment to the firm who assisted for the registration in the Reach. Both the expenses are correlated with each other. These expenses are revenue in nature and in this regard. We also find in support of the law mentioned above (supra). Taking into account of all the facts and circumstances, we set aside the finding of the CIT(A) on this issue and allow the claim of the assessee. The alternative relief claimed ground nos. 3, 5, & 6 is not required to be adjudicated being academic in nature.
ISSUE NO 7:-
Under this issue the assessee has claimed the confirmation of the disallowance of 4/5 professional charges paid to M/s. Avalon Consulting of ITA. No.1727/M/16 A.Y.2011-12 Rs.60,36,000/-. In the year of assessment, the assessee appointed M/s. Avalon Consulting to study the strategy developments and business plan for its business of re-claimed rubber. The areas of study has been assigned as under.: - “1 Assessment of the customers segment to reaffirm the company growth plans and identification of future areas of vulnerability.
Assessment of value chain opportunities and preliminary market potential of opportunities for value chain diversification.
Organization mapping of key senior managers with a view to present restructuring plan for senior management team and statutory/executive board for guidance.
Demand assessment of Reclaim Rubber downstream product (non-type for domestic) and tyre demand for international market.
5. Customer value proposition survey.
Identification of finance options for the growth plan.”
It is contended that the assessee paid the said amount for the business purpose. The assessee paid the total amount in sum of Rs.75,45,000/- and in this regard the invoices have been generated which lies at page no. 48 to 51 of the paper book. The AO accepted the expenses but allowed to the extent of 1/5th on the basis of this fact that the benefit was not limited to the extent of one year under consideration as the study and business plan report is a devise strategy for the future year of the assessee company and therefore it would not be allowable the entire expenditure in the one year. The said disallowance has been confirmed by the CIT(A). The contention of the assessee is that the assessee expended the said amount in the year of consideration, therefore, the same is liable to be allowable in view of the law settled in the case of Taparia Tools Ltd. Vs.
ITA. No.1727/M/16 A.Y.2011-12 JCIT (372 ITR 605), Madras Industrial Investment Corporation Ltd. Vs. CIT (225 ITR 802 (SC). It is also argued that the advertisement also relates to future year but the Madras High Court in the case of CIT Vs. Brilliant Tutorials Pvt. Ltd. (292 ITR 399) and DCIT Vs. Cox & Kings (I) Ltd. (2011) 11 taxmann.com 444 (Trib.) allowed the claim of the assessee. The Hon’ble Supreme Court in the case of Taparia Tools Ltd. Vs. JCIT (372 ITR 605) has specifically held in para no. 17 as under.:-
17 What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the Income Tax Department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of “matching concept” is satisfied, which up to now has been restricted to the cases of debentures.”
The Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. Vs. CIT (225 ITR 802 (SC) has held in para no. 15, 16 as under.: -
“15. The judgment in Madras Industrial Investment Corporation Ltd. Vs. CIT was cited by the Ld. counsel for the Revenue to justify the decision taken by the courts below. We find that the court categorically held even in that case that the general principle is that ordinarily revenue expenditure incurred wholly and exclusively for the purpose of business is to be allowed in the year in which it is incurred. However, some exceptional cases can justify spreading the expenditure and claiming it over a period of ensuing years. It is important to note that in that judgment, it was the assessee who wanted spreading the expenditure over a period of time and had justified the same. It was a case of Issuing debentures at discount; whereas the assesses had actually incurred the liability to pay the discount in the year of issue of debentures
ITA. No.1727/M/16 A.Y.2011-12 itself- The court found that the assesses could still be allowed to spread the said expenditure over the entire period of five years, at the end of which the debentures were to be redeemed. By raising the money collected under the said debentures, the assesses could utilise the said amount and secure the benefit over number of years. This is discernible from the following passage in that judgment on which reliance was placed by the learned counsel for the Revenue herself: "The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs.3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a con- tinuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred it cannot be spread over a number of years even if the asses-see has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd, v. CIT [1982] 30 CTR (Cal) 363 ; [1983] 144 ITR 474 (Cal), the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question. Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures
ITA. No.1727/M/16 A.Y.2011-12 Thus, the first thing which is to be noticed is that though the entire expenditures was incurred in that year, it was the assessee who wanted the spread over. The court conscious of the principle that normally revenue expenditure is to be allowed in the same year in which it is incurred, but at the instance of the assessee, who wanted spreading over, the court agreed to allow the assessee that benefit when it was found that there was a continuing benefit to the business of the company over the entire period.”
The Hon’ble Supreme Court held in the above said decision that there should not be split of revenue expenses accepted some exceptional cases such as amortization etc. The concept of advertisement expenses is also similar to the study mentioned above for the future purpose mentioned above related to the existing business of the assessee. The Hon’ble Madras High Court in the case of CIT Vs. Brilliant Tutorials Pvt. Ltd. (supra) and the Hon’ble Mumbai ITAT in the case of Cox & Kings (supra) has allowed the claim of the assessee in similar circumstances. In view of the said circumstances, we are of the view that the claim of the assessee is not liable to be declined. The expenses is also liable to be allowed in the relevant year in accordance with law. Accordingly, this issue is decided in favour of the assessee against the revenue.
ISSUE NO 8:- 12. Under this issue the assessee has challenged the confirmation of the disallowance of Rs.78,403/-. The assessee did not earn the exempt income. Since, the assessee did not earned the exempt income, therefore, there should not disallowance u/s 14A. The assessee relies upon the decision of the Delhi High Court in the case of Pr. CIT Vs. IL & FS energy Development Co- Ltd. (399 ITR 483). In view of the said law, we set
ITA. No.1727/M/16 A.Y.2011-12 aside the finding of the CIT(A) and delete the addition raised in view of the provision u/s 14A of the Act in this regard. Accordingly, this issue is being decided in favour of Assessee.