ACIT, NEW DELHI vs. M/S. GLOBUS SPIRITS LTD., NEW DELHI

O R D E R. PER I. C. SUDHIR, J. M. :

The Revenue has questioned first appellate order on the following grounds :- “ 1. Whether ld. CIT (Appeals) was correct on facts and circumstances of the case and in law in deleting the disallowance of Rs.2,00,000/- made by the Assessing Officer on account of expenses;

2. Whether ld. CIT (Appeals) was correct on facts and circumstances of the case and in law in deleting the disallowance of Rs.1,79,77,181/- made by the Assessing Officer on account of brand promotion expenses. ”

3.1 The ld. Sr. DR has basically placed reliance on the assessment order on the issue. The ld. AR, on the other hand, tried to justify first appellate order in this regard.

3.2 Having gone through the orders of the authorities below, we find that the Assessing Officer had made the disallowance in question on ad-hoc basis out of the expenses debited during the year on estimate basis. The Assessing Officer observed that some of the expenses claimed were disproportionate and some of the expenses were not vouched and verifiable. The ld. CIT (Appeals) has deleted the disallowance with this finding that the gross profit ratio for the assessment years 2008-09 (in question), 2007-08 and 2006-07 was 24%, 19% and 17% respectively and net profit for these assessment years was 12%, 10% and 7% respectively. The ld. CIT (Appeals) observed that variation in expense of one head in a year as compared to earlier year cannot be the basis to make an addition, especially when overall gross profit and net profit was showing an increasing trend. He noted further that when books of accounts were duly audited and Assessing Officer did not point out any specific defects in the books of accounts and no expenses had been found to be of non-business nature, the ad-hoc disallowance of Rs.2 lakhs made by the Assessing Officer was not warranted. We fully concur with the finding of the ld. CIT (Appeals) as even an estimation of disallowance needs some basis to justify the action of the Assessing Officer in this regard as just and reasonable. It is an established proposition of law that even discretion is to be exercised judiciously. While examining the action of the Assessing Officer in making the ad-hoc disallowance in question, the ld. CIT (Appeals) has noted that books of accounts were duly audited and no specific defects were found therein by the Assessing Officer nor was any allegation that expenses had been incurred for non-business purposes. He has further noted that the assessee has shown better trading result during the year in comparison to last three years and there was increasing trend. The first appellate order is thus reasoned one and does not need any interference by the Tribunal. The same is upheld. Ground No. 1 is accordingly rejected.

4.1 In support of the ground the ld. Sr. DR submitted that assessee itself had admitted that the expenditure incurred were capital in nature. Heavy expenses were incurred on brand building. The action of the Assessing Officer, thus cannot be held erroneous in treating said expenses as capital in nature on the ground that these expenses give benefit of enduring nature and further the assessee itself had recognized the same to be on capital account in its books of account.

4.2 The ld. AR, on the other hand, placed reliance on the first appellate order. He submitted that assessee is in the business of manufacture and sale of country liquor and Indian made foreign liquor (IMFL). In the course of its existing business of sales and marketing of liquor products, in addition to existing brand and in existing States, during the year the assessee who has to increase the sale of its products had introduced some new brands and also entered and increase focus on new States. As per the Excise Policy of States various registrations / license fees are required to be paid in every State for manufacture and sale of liquor products which are annual fees and are paid year to year on their renewal. During the year the assessee company as an accounting policy matter, instead of debiting the said expenses under the respective heads of expenditure, capitalized part of the same, under the head “intangible assets / brand development”. No new brand was purchased. The brand development expenses were incurred in the course of existing business of manufacturing and sale of liquor. He placed reliance on the following decisions :-

(i) Empire Jute Company Vs. CIT 124 ITR 1 (SC); (ii) CIT Vs. Siti Financial Consumer Fin. Ltd. 335 ITR 29 (Del.); (iii) CIT Vs. Usha Iron & Ferro Metal Corporation Ltd. 296 ITR 140 (Del) (iv) CIT Vs. Salora International Ltd., 308 ITR 199 (Del); (v) CIT Vs. Liberty Group Marketing Division 315 ITR 125 (P & H); (vi) Sony India Pvt. Ltd. Vs. DCIT 315 ITR 150 (AT) (Del.) (VII) CIT Vs. Core Health Care Ltd. 308 ITR 263 (Guj.)

4.3 On perusal of the orders of the authorities below, we find that though during the year the assessee had capitalized a sum of Rs.1,79,77,181/- under the head tangible / know-how and brand development in the books and had claimed depreciation thereon. However, after realizing that the expenses so capitalized are of Revenue in nature, the assessee vide its revised return claimed the same as revenue expense and consequently reduced the depreciation claimed thereon. The ld. CIT (Appeals) has noted the following material facts :- i) The appellant is in the business of manufacture and sale of country liquor and Indian made foreign liquor. ii) In the course of its business and for the marketing for its products the appellant incurs various expenses which are claimed and allowed as revenue expense. iii) As per the excise policy of States various annual registration/license fees are required to be paid in every state for the manufacture and sale of liquor products in respective States. iv) In the course of its existing business of manufacture and sale of liquor products, in addition to the existing brands in existing States, during the year, the appellant introduced some new brands and also entered and increased focus on new states so as to increase the sale of its products. v) Because of accounting policy, the routine business expenses of the nature mentioned above in relation to marketing of its new brands / products and in new States, instead of debiting under the respective heads of expenditure, were capitalized under the head intangible assets / brand development.

4.4 On the basis of above material facts, the ld. CIT (Appeals) has come to the conclusion that the expenses claimed as Revenue expenses in this year are routine business expenses required to be incurred in the course of business. The marketing and brand promotion is an integral part of business activity of the assessee company and the entire expenses are of routine business expenses and have been incurred in the course of running the existing business. The Assessing Officer has not pointed out any specific expense, which is of enduring benefit or has been incurred to acquire any capital asset. Such expenses in respect of on-going business are undisputedly Revenue in nature.

Under the above facts, we fully concur with the findings of the ld. CIT (Appeals) also because similar recurring expenses incurred in earlier years have been allowed as Revenue expenses. The decisions relied upon by the ld. CIT (Appeals) also strengthen the finding arrived at by him under the facts and circumstances of the present case on the issue. The Hon’ble Supreme court in the case of Empire Jute Company Vs. CIT (supra) has been pleased to hold that it is only when an enduring advantage is in the capital field that the expenditure would be disallowable. If advantage of enduring benefit is in the Revenue field it would be on the Revenue account. The Hon’ble jurisdictional High Court of Delhi in the case of CIT Vs. Siti Financial Consumer Fin. Ltd. (supra) has been pleased to hold that advertisement and publicity expenses even when substantial, having been incurred to facilitate business, no advantage in capital field is resulted. Again in the case of CIT Vs. Usha Iron & Ferro Metal Corporation Ltd. (supra) the Hon’ble jurisdictional High Court of Delhi has been pleased to hold that the expenditure incurred by the assessee towards improving its business was for the expansion of its existing business. Merely because the assessee treated the amount as a capital expenditure in its books, it would not be bound by as there is no estoppels against the law and just assessment is the object of the Legislature under the provisions of the I. T. Act. The first appellate order on the issue is comprehensive and reasoned one to which we fully concur with. The same is upheld. Ground No. 2 is accordingly rejected.