VIKI INDUSTRIES PVT LTD.,CHENNAI vs. DCIT, CHENNAI

आयकर अपील�य अ�धकरण, “डी” �यायपीठ, चे�नई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI �ी ए. मोहन अलंकामणी, लेखा सद�य एवं �ी धु�वु� आर.एल रे�डी, �या�यक सद�य के सम� Before Shri A. Mohan Alankamony, Accountant Member & Shri Duvvuru RL Reddy, Judicial Member आयकर अपील सं./I.T.A.No.852/Chny/2017 �नधा�रण वष�/Assessment Year:2012-13 M/s. Viki Industries Pvt. Ltd., The Deputy Commissioner of No. 1, Krishna Street, Vs. Income Tax, Nungambakkam, Corporate Circle 3(2), Chennai 600 034. Chennai 600 034. [PAN: AAACV2003P] (अपीलाथ� /Appellant) (��यथ�/Respondent) Shri D. Anand, Advocate अपीलाथ� क� ओर से / Appellant by : ��यथ� क� ओर से/Respondent by : Mrs. S. Vijayaprabha, JCIT सुनवाई क� तार�ख/ Date of hearing : 25.04.2018 घोषणा क� तार�ख /Date of Pronouncement : 18.06.2018 आदेश /O R D E R PER DUVVURU RL REDDY, JUDICIAL MEMBER: This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 13, Chennai dated 20.01.2017 relevant to the assessment year 2012-13. The assessee has raised the following grounds: “1. The order of the learned Commissioner of Income Tax (Appeals)-13, Chennai, is wrong, illegal and is opposed to law and facts of the case.

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impugned assessment year failed to see that it was only during the impugned year the capital work in progress has been capitalized to the respective capital asset. 8. The learned CIT (A) ought to have seen that the intention of the legislature was to give additional depreciation only for the year in which the eligible asset was first put to use and not for any previous or succeeding year. 9. The learned CIT(A) ought to have allowed the additional depreciation since additional benefit in the form of additional allowance u/s. 32(1)(iia) is one-time benefit to encourage the industrialization and in view of the decision of Hon’ble Supreme Court in the case of Bajaj Tempo Ltd, the provisions related to it have to be constructed reasonably, liberally and purposive to make the provision meaningful. 10. The learned CIT(A) erred in upholding the disallowance of Rs.10,55,875/- under the head entrance fee for clubs. The learned CIT(A) ought to have seen that appellant did not incur any expenditure towards aforesaid head neither the alleged expense is claimed by the appellant in the P&L for the impugned assessment year. 11. The learned CIT(A) ought to seen that the appellant has already disallowed the fee paid to the ROC for increase in authorized capital while computing the total income and therefore upholding the disallowance of the aforesaid amount of Rs.1,55,500/- would lead to double jeopardy. 12. The learned CIT(A) erred in law in upholding disallowance of a sum of Rs.3,04,344/- by invoking section 40A(3) of the Income Tax Act. For these and other grounds that may be rendered at the time of hearing it is most humbly prayed that the Hon'ble Tribunal may be pleased to allow the appellants appeal and thus render justice.” 2. Brief facts of the case are that the assessee is engaged in the business of manufacturing and trading of construction grade steel bars and dealers in IMFL packing materials. The assessee filed its return of income

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on 30.09.2012 admitting loss of ₹.2,12,67,038/-. The Assessing Officer completed the assessment under section 143(3) of the Income Tax Act, 1961 [“Act” in short] assessing the total income of the assessee at ₹.2,01,69,693/- after making various disallowances/addition.

2.1 With regard to the disallowance of Deferred Revenue expenditure, by giving break-up, the assessee has debited an expenditure of ₹.1,62,93,447/- towards deferred revenue expenditure and written off an amount of ₹.38,06,161/-. On perusal of the break-up of the expenses, the Assessing Officer observed that the expenses are mainly incurred towards advertisement and brand building or the ‘i steel’ and to promote sales in the Indian market. For the Income-Tax purposes, the assessee has claimed the entire expenditure during the year, whereas, for the book purposes, it has amortized expenses proportionately. The Assessing Officer did not accept the differential treatment given by the assessee for book purposes and for income tax purposes and accordingly, disallowed the amount of ₹.1,62,93,447/- and brought to tax.

2.2 Aggrieved, the assessee carried the matter in appeal before the ld. CIT(A). After considering the submissions of the assessee, the ld. CIT(A) confirmed the addition.

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2.3 On being aggrieved, the assessee is in appeal before the Tribunal. The ld. Counsel for the assessee has submitted that the Assessing Officer has not disputed that the revenue nature of expenses and also the fact that the entire expenses relating to advertisement and brand promotion were incurred by the assessee during the impugned year, but, legally not justified in rejecting in amortizing the expenses over the period of 5 years in the books of account, even though such treatment is not recognized in the Act. By relying upon the decision in the case of CIT v. Brilliant Tutorials P. Ltd. (supra), the ld. Counsel for the assessee prayed for deleting the addition. On the other hand, the ld. DR strongly supported the orders of authorities below and submitted that the present case is against the matching concept i.e., revenue vs. corresponding expenses, thereby warranting addition even though the Assessing Officer observed that the expenses are revenue in nature.

2.4 We have heard both sides, perused the materials available on record and gone through the orders of authorities below. The assessee claimed deferred revenue expenses amounting to ₹.38,06,160/ - as 1/5th of the expenditure of ₹.1,62,93,447/-. At the same time, under section 37 of the Act, the assessee claimed deduction of expenditure for ₹.1,62,93,447/- by stating that deferred revenue expenses amounting to ₹.38,06,160/- are added back in the computation of income. The assessee clarified before the

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Assessing Officer that not to burden the Profit & Loss Accounts of the relevant year with expenses, the deferred revenue expenses were debited in the books of accounts and as such under the Income Tax Act the entire expenses of ₹.1 ,62,93,447/ - were claimed under section 37 of the Act. After considering the submissions, the Assessing Officer concluded that the differential treatment given by the assessee for book purposes and for Income Tax purpose for the same kind of expenses is not acceptable one and thus, he held that such treatment given by the assessee is against the matching concept (i.e. revenue vs. corresponding expenses) and therefore, the brand building expenses have to be amortised alongwith the estimated life of the product. Accordingly, the same ratio as adopted by the assessee for the book purpose to amortise these expenses over a period of 5 years commencing from the assessment year 2013-14 was accepted by the Assessing Officer and allowed sum of ₹.38,06,160/- as claimed by the assessee and disallowed sum of ₹.1,62,93,447/- and added back to the total income. Before the ld. CIT(A), the assessee made following submissions: “During the appeal proceedings, the appellant contended during the appeal proceedings that appellant had been incurring expenses for advertisement and publicity, professional charges, printing & stationary charges, business promotion expenses, other expenses, travelling expenses, exhibition expenses for total of Rs.1,62,93,447/- and such expenses had been incurred since the FY 2010-11 and even the later years since it was essential to keep its brand fresh in the minds of the consumers. Though the expenditure are of revenue in nature but in order not to burden the Profit & Loss A/c of a year with such a huge expenditure, the appellant devised an accounting policy to differ the write off of the expenditure over a period of 5 years commencing from the year following the year of expenditure. As such 1/5th of expenditure amounting to Rs.38,06,161/- was debited to Profit & Loss A/c in the FY 2011-

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12 though it pertains to the FY 2010-11. However, the same was added back in computing the total income. At the same time, the entire expenditure of Rs.l,62,93,447/- was claimed as allowable expenditure u/s 37 of the Income Tax Act, as the expenditure being revenue in nature, incurred wholly and exclusively for the purpose of the business of the appellant. Thus, the AO arrived to such conclusion without establishing that the expenditure so incurred are capital in nature, the AO has erred in arguing for matching concept of the revenue with the expenditure incurred, such argument did not find favour with the jurisdictional Madras High Court decision in the case of CIT vs. Brilliant Tutorials Pvt. Ltd. 2007, 292 ITR399 Mad wherein the Hon'ble High Court held that once the expenditure is held as revenue in nature and incurred fully and exclusively in the business, a further enquiry as to whether the income has flown thereon from the expenditure, would not be justifiable ground for rejection. On the other hand, an expenditure satisfying the character as revenue expenditure should be allowed in assessment. The AR also relied on the case laws of CIT vs. Berger Paints India Ltd. (No.2), 2002,254 ITR 503 Calcutta High Court where the decision of Apex Court of Kedarinath Jute Mills was followed. Similarly, the decision of ITAT Hyderabad in the case of Amarraja Bateries Ltd. vs. ACIT, 2004, 91 ITD 280 Hyderabad ITAT wherein it was held that entries in the Books of accounts do not determine the allowability or otherwise expenditure and that revenue expenditure incurred wholly and exclusively for the purpose of business and income relatable thereto would arise for a number of years, must be allowed in its entirety in the year in which it was incurred even though the assessee had written off the said expenses in the books over a period of years. For all the reasons stated above and in view of the and following judicial decisions and especially of the jurisdictional Madras High Court decision in the case of Brilliant Tutorials Pvt. Ltd the disallowance of Rs.1,62,93,447/- be deleted.” After considering the submissions of the assessee, the observations of the ld. CIT(A) are reproduced as under: “I have carefully considered the appellant's clarification and its reliance on the various courts and the jurisdictional High Court decision of Brilliant Tutorials. It is fact that the AO in the assessment order has categorically stated that the expenses are mainly incurred towards advertisement expenses in various forms and brand building. Naturally in the initial years of product launch huge expenses needs to be incurred to promote the products. But there may not be any corresponding revenue from the products in relation to the expenses incurred therefore, the treatment is not in line with the principle of matching the concept (i.e. revenue vs. corresponding expenses) and therefore these brand building expenses have to be amortised along with the estimated life of the product. Therefore, the respectfully differing the jurisdictional High Court decision, I confirm the action of the AO to adopt the same ratio as considered by the assessee for books purpose and amortize these expenses

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over a period of 5 years commencing from the AY 2013-14 therefore allowing deferred expenses of Rs.38,06,160/- and disallowing the sum of Rs.l,62,93,447/- as disallowable expenditures under the Income Tax Act. The ground of appeal therefore on this issue is dismissed.” It is clear from the above findings of the ld. CIT(A) that from the expenses incurred by the assessee, there was no corresponding revenue in relation to the expenses incurred and therefore, the treatment is not in line with the principle of matching the concept i.e., revenue vs. corresponding expenses.

2.5 It is not in dispute that entire expenses relating to advertisement and brand promotion incurred by the assessee during the impugned year are revenue in nature. In this case, in the books of account, the assessee has amortized expenses proportionately and also claimed deduction under section 37 of the Act as well. The deferred revenue expenditure is essentially revenue in nature and the decision to treat the same as deferred revenue only represents a management decision taken in view of the magnitude of the expenditure involved. For the purpose of allowability of any expenditure under the Act, what is material is the classification between the capital and revenue and the same does not recognise any concept of deferred revenue expenditure. That is why the Assessing Officer himself allowed the amount debited in the profit and loss account.

2.6 In the instant case, we find that the expenditure relating to advertisements, brand promotion expenses is in the revenue field and not

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disputed by the authorities below. The only issue to be considered is whether the assessee can claim the entire expenditure in this year itself, even though it had written off this expenditure in the books over a period of five years. In this connection, we may refer to the decision of the Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT 225 ITR 802 , wherein, it was held as under: “…Section 37(1) further requires that the expenditure should not be of a capital nature. The question whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on, or conduct of the business, that it may be regarded as an integral part of the profit- making process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. Any liability incurred for the business of obtaining a loan would be revenue expenditure. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purposes 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 assessee 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. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debenture, 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 debentures.” The aforesaid judgement clarifies that though the assessee may have written off the expenditure in its books of account over a period of five years,

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it must be allowed in its entirety in the year in which it was incurred, if it is revenue expenditure, and if it is wholly and exclusively incurred for the purposes of business. In the case under consideration, there is nothing to suggest that with this expenditure, any asset, tangible or intangible, has been created. There is no evidence on record regarding accrual of any specific revenue in the years under consideration or subsequently over a defined period with the incurring of said expenditure. The Assessing Officer himself admitted the portion of expenditure debited in the profit and loss account as revenue expenditure.

2.7 Moreover, by following the above judgement of the Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT (supra), in the case of Amar Raja Batteries Ltd. v. ACIT 91 ITD 280, the Hyderabad Benches of the Tribunal has held that a revenue expenditure, income relatable to which will arise for a number of years, must be allowed in its entirety in year in which it is incurred even though the assessee proceeds to write off the said expenditure in books of account over a period of years.

2.8 Further, In the case of Taparia Tools Ltd. v. JCIT [2015] 372 ITR 605, the Hon’ble Supreme Court was also of the opinion that that the revenue expenditure incurred in a particular year is to be allowed in that year, is to be applied. If the assessee claims that expenditure in that year, the Department

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cannot deny it. Thus, once it is not in dispute that the entire expenditure incurred by the assessee towards advertisement & brand promotion as revenue in nature, in view of the decisions referred hereinabove, the disallowance of ₹.1,62,93,447/- made by the Assessing Officer stands deleted.

3.1 We have heard rival contentions. It is true that, as followed by the Assessing Officer, in the case of DCIT v. Brakes India Ltd. in I.T.A. Nos.249 & 1166/Mds/2010 & I.T.A. No.1069/Mds/2010 dated 06.01.2012, the Coordinate Benches of the Tribunal observed that each assessment year is

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separate and independent assessment year and the provisions of section 32 of the Act do not provide for carry forward of the residual additional depreciation, if any, and accordingly, dismissed the ground raised by the assessee with regard to allowance of additional depreciation.

3.2 Against the order of the Tribunal, the assessee [Brakes India Ltd.] preferred further appeal before the Hon’ble Jurisdictional High Court. By distinguishing the jugdement of Hon’ble Madras High Court in the case of M.M. Forgings Ltd. v. Addl. CIT 349 ITR 673 and by referring to the decision of the Tribunal in the case of Fresh & Honest Café Ltd v. DCIT in I.T.A. No. 1373/Mds/2016 dated 10.08.2016, wherein, the Tribunal followed its own decision in assessee’s own case for earlier assessment year, in which, the decision of the Hon’ble Karnataka High Court in the case of CIT v. Rittal India (P) Ltd. 66 taxmann.com 4 has been referred, in the case of Brakes India Ltd. v. DCIT in T.C. A. No. 551 of 2013 dated 14.03.2017, the Hon’ble Madras High Court, decided the issue in favour of the assessee by duly affirming the decision in the case of CIT v. Rittal India (P) Ltd. (supra). Further, it was also held that the issue is squarely covered by the decision of Hon’ble Madras High Court in the case of CIT v. Shri T.P. Textiles Pvt. Ltd. in T.C.A. No.157 of 2017 vide order dated 06.03.2017. In view of the above judicial precedents with regard to grant of additional depreciation in the subsequent years, we are of the considered opinion that the issue involved

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in this appeal is squarely covered in favour of the assessee and against the Revenue. Accordingly, the addition towards the claim of additional depreciation of ₹.2,32,51,399/- stands deleted.

4.1 It was the submissions of the ld. Counsel that the assessee did not incur any expenditure towards entrance fee for clubs and moreover, the alleged expenses were not at all claimed by the assessee in the profit and loss account for the relevant assessment year under consideration and prayed for deleting the addition. On the other hand, the ld. DR relied on the orders of authorities below.

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4.2 We have considered the rival submissions and perused the orders of authorities below. We find force in the arguments of the ld. Counsel and are unable to understand as to how the Assessing Officer made the addition, once the expenditure towards entrance fee for clubs was not claimed in the profit and loss account. Under the above facts and circumstances, we direct the Assessing Officer to verify the same and if found that the assessee has not claimed the said expenditure in the profit and loss account, the same should be deleted. Thus, the ground raised by the assessee is allowed for statistical purposes.

5.1 We have heard rival contentions and perused the orders of authorities

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below. By filing copy of the computation of income of the assessee, it was the submissions of the ld. Counsel for the assessee that the assessee has already disallowed the fee paid to the ROC for increase in authorized capital while computing the total income and prayed for deleting the disallowance. We find force in the arguments of the ld. Counsel. Under the above facts and circumstances, we direct the Assessing Officer to verify the same and decide the issue afresh after giving an opportunity of being heard to the assessee. Thus, the ground raised by the assessee is allowed for statistical purposes.

6.1 We have head rival contentions and perused the orders of authorities below. With regard to the issue, the assessment order is very cryptic. No details of payment exceeding ₹.20,000/- was brought on record. It was the

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contention of the ld. Counsel that no expenditure in excess of ₹.20,000/- was paid in cash. In view of the above, we direct the Assessing Officer to verify the accounts of the assessee once again and decide the issue afresh. If the assessee’s claim was found wrong that no expenditure in excess of ₹.20,000/- was paid in cash, the disallowance made under section 40A(3) of the Act stands confirmed and otherwise, there should not be any disallowance. This issue is allowed for statistical purposes.

Sd/- Sd/- (A. MOHAN ALANKAMONY) (DUVVURU RL REDDY) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, the 18.06.2018 Vm/- आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant, 2.��यथ�/ Respondent, 3. आयकर आयु�त (अपील)/CIT(A), 4. आयकर आयु�त/CIT, 5. �वभागीय ��त�न�ध/DR & 6. गाड� फाईल/GF.