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Before: Shri A. Mohan Alankamony & Shri Duvvuru RL Reddy
O R D E R
PER DUVVURU RL REDDY, JUDICIAL MEMBER:
This appeal filed by the Revenue is directed against the order of the Commissioner of Income Tax (Appeals) 11, Chennai dated 25.09.2017 relevant to the assessment year 2014-15. Besides challenging deletion of disallowance of exhibition expenses at ₹.25,78,256/-, the Revenue also challenged deletion of addition of ₹.6,15,26,406/- made at the rate of 5% to
Brief facts of the case are that the assessee is engaged in the manufacture and sale of automatic lift doors. The assessee filed the return of income on 29.09.2014 admitting an income of ₹.27,62,59,570/-. The assessment under section 143(3) of the Income Tax Act, 1961 [“Act” in short] was completed by assessing the total income at ₹.34,03,64,232/- by making addition of 5% of the turnover worked out to ₹.6,15,26,406/- and disallowing exhibition expenses of ₹.25,78,256/-.
2.1 With regard to the addition of 5% of the turnover over and above the income declared, the Assessing Officer noticed from the financials submitted by the assessee that the profit for assessment year 2013-14 was 26.80% of the total turnover, whereas, it was declared at 19.82% for the assessment year 2014-15. The Assessing Officer observed that the profit was declared by inflating the expenses. The purchases and clearing & Forwarding was 1.4164% of the turnover for the assessment year 2013-14 and it was @ 1.50% for the assessment year 2014-15. Similarly, packaging expenses was @ 4.5928% of the turnover for the assessment year 2013-14 and the same was @ 4.9867% for the assessment year 2014-15. Since the assessee could not furnish any convincing reply against the query raised, the Assessing Officer estimated the gross profit 5% of the turnover at ₹.6,15,26,406/- and added to the total income of the assessee.
3 & C.O. No. 55/Chny/18 3. The assessee carried the matter in appeal before the ld. CIT(A). After considering the submissions of the assessee as well as various decisions, the ld. CIT(A) deleted the addition.
On being aggrieved, the Revenue is in appeal before the Tribunal. The ld. DR submitted that the assessee has failed to substantiate the reasons for exorbitant raise in expenditure when compared to the expenditure incurred in last previous year. It was further submitted that the increase of about 35% in expenditure cost cannot be held to be reasonable even though minor variations are bound to be present during the course of any business and therefore, the ld. DR pleaded that the order of the ld. CIT(A) on this issue should be set aside and restored that of the Assessing Officer.
On the other hand, the ld. Counsel for the assessee vehemently argued that by comparing the profit and expenses under two heads for the assessment year under consideration and previous assessment year, it is mere assumption of the Assessing Officer that the expenses are inflated and addition was made arbitrarily without any concrete materials and prayed for confirming the order passed by the ld. CIT(A) in deleting the addition.
We have heard both sides, perused the materials available on record and gone through the orders of authorities below. Since there was variation
4 & C.O. No. 55/Chny/18 in the profits declared by the assessee for the assessment year under consideration and previous assessment year, the Assessing Officer was of the opinion that the assessee has exaggerated the expenses since the assessee could furnish proper explanation for the inflated expenses and accordingly, addition was made. No details of financials of the assessee were filed before the Tribunal. While summarising the facts in the Cross Objection, the submission of the assessee is that the Assessing Officer made addition of ₹.6,41,04,662/- being 5% of the turnover is also factually wrong since 5% of the total turnover is only ₹.6.1 crores [₹.122 crores x 5%]. Since there is variation in the profit declared by the assessee in the assessment year under consideration compared with previous year, it cannot be ruled out that the assessee has not inflated the expenses and the same is determined by the Assessing Officer at 5% is also in higher side. Accordingly, we direct the Assessing Officer to adopt 2.5% of the total turnover may be disallowed towards inflated expenses. Thus, the ground raised by the Revenue is partly allowed.
7. The next ground raised in the appeal of the Revenue is with regard to deletion of disallowance of exhibition expenses of ₹.25,78,256/-. As per the financials of the assessee, the Assessing Officer was of the opinion that the exhibition expenses claimed by the assessee at ₹.25,78,256/- is capital in nature since the benefits of exhibition would be enduring in nature for many
Aggrieved, the Revenue is in appeal and the ld. DR submitted that the benefits derived from exhibition are not ephemeral or transitory in nature, but, the benefits are enduring in nature and hence the Assessing Officer rightly brought the same under capital field.
On the other hand, besides relying on various decisions including the judgement of the Hon’ble Supreme Court in the case of Taparia Tools Ltd. 372 ITR 605, by filing copy of the decision of the Coordinate Benches of the Tribunal in the case of ACIT v. Dorcas Market Makers P. Ltd. 2012 (11) TMI 541 – ITAT Chennai, the ld. Counsel for the assessee submitted that the issue is squarely covered in favour of the assessee and prayed for similar directions on this issue.
We have heard rival contentions. The point at issue is whether the exhibition expenses incurred by the assessee are revenue in nature or capital. By following the decision in the case of ACIT v. Ashima Syntex Ltd. (2009) 117 ITD 1 (Ahd)(SB), in the case of ACIT v. Dorcas Market Makers P. Ltd. (supra), the Coordinate Benches of the Tribunal held as under: “6. We have heard both the sides, perused the records and gone through the orders of the authorities below. The issue involved in this appeal is whether the expenditure incurred by the assessee has to be allowed in the year under consideration, i.e. assessment year 2007-08 6 & C.O. No. 55/Chny/18 or 2008-09 and 2009-10. According to the AO the benefit of expenditure should be spread over in a span of 2 years and the expenditure was held to be allowable for the assessment years 2008-09 and 2009-10. On appeal, the learned CIT(A) by following various decisions of the jurisdictional High Court, allowed the claim of the assessee.
In the case of Ashima Syntex Ltd. (supra), the Special Bench of the Tribunal has considered various decisions. The Special Bench considered the very same issue and held that so far as corporate advertisement expenses, exhibition expenses, public relation expenses, cultural programme expenses, quota expenses and sales promotion expenses were concerned, since said expenses did not result in creation of any tangible or intangible asset and, moreover, there was no evidence regarding accrual of any specific revenue in years under consideration or subsequently over a defined period with incurring of said expenditure, those expenses could be allowed entirely in year in which they were incurred. In the present case it is not the case of the Revenue that the assessee has not incurred the expenditure. It is an admitted fact that the expenditure incurred by the assessee is revenue in nature. We therefore, following the jurisdictional High Court decisions and other decisions, relied upon by the learned CIT(A) in his order as also the Special Bench decision of the Ahmedabad Bench of the Tribunal in the case of Ashima Syntex Ltd. (supra) dismiss this ground of appeal raised by the Revenue.” From the above, it is clear that the corporate advertisement expenses, exhibition expenses, public relation expenses, cultural programme expenses, quota expenses and sales promotion expenses are revenue in nature and cannot be held as capital. Moreover, in the present case, the Assessing Officer has not recorded any findings that there was revenue generation against the exhibition expenses or such expenses created any tangible or intangible asset to the assessee. Accordingly, the ground raised by the Revenue is dismissed.
7 & C.O. No. 55/Chny/18 11. In the cross objection, the assessee strongly supported the order passed by the ld. CIT(A) on both the issues. However, since, we have directed the Assessing Officer to adopt 2.5% of the total turnover as inflated expenses and dismissed the ground raised by the Revenue with regard to the exhibition expenses, the Cross Objection filed by the assessee become infructuous and accordingly, the same stands dismissed.
In the result, the appeal filed by the Revenue is partly allowed for statistical purposes and the Cross Objection filed by the assessee is dismissed.
Order pronounced on the 22nd June, 2018 at Chennai.