ADDL.C.I.T.3(1), MUMBAI vs. AMBIT CORPORATE FINANCE PVT. LTD., MUMBAI

The first issue in this appeal of Revenue, in AY 2008-09, is against the order of CIT(A) deleting the disallowance of expenditure incurred by assessee towards advertisement in media/ magazine amounting to ₹ 40,65,668/- for the reason that the benefit to the assessee is enduring nature over all long for long period of time. For this Revenue has raised following ground No.1-

Aggrieved, now Revenue is in second appeal before Tribunal. Before us, the learned Senior Departmental Representative heavily relied on the assessment order and stated that this expenditure for brand promotion is in the nature of enduring benefit and hence, AO has rightly allowed 1/3rd of the expenditure in this year.

On the other hand, the learned Counsel for the assessee stated that the assessee is a category I merchant Banker approved by SEBI. The activities of it mainly include acting as advisors in the entire range of corporate finance activities including mergers, acquisitions, de-mergers, disinvestments, capital raising, asset sale etc. During the assessment year 2008-09, the assessee has incurred advertisement expenses of ₹ 60,98,501/- which mainly consists of reimbursement of expenses to Ambit Holdings Private Limited. Firstly, payment made to NDTV Ltd. towards sponsorship expense for program series “In the Ambit of Business” on Union Budget 2008, and secondly, Payment made to Mudra Communications Ltd. for advertisement in Media. The expenses incurred in connection with the Programme “In the Ambit of Business” is related to series of episodes covering topics like expectations from Union Budget 2008, debate on the impact of Budget 2008 on various sectors and economy at large, challenges and opportunities from Budget 2008 etc. The employees of the assessee participate in these programmes and provide their views. The assessee has been incurring such expenses ITA Nos. 5991,6249,6250/Mum/2012, ITA No. 1096/Mum/2015 Ambit Corporate Finance Pvt. Ltd. AYs: 08-09, 09-10, 10-11 & 11-12 every year. It is also evident from the nature of topics covered in this program on Union Budget which itself is subject to change every year and has limited time value. The expenses incurred on these are of recurring nature. The discussions, views, debates conducted during these series pertain to then prevailing environment which itself is subject to constant change and hence, it does not entail any permanent benefit. Accordingly, the assessee incurs these expenses every year in its ordinary course of business depending on the need of business and subject to financial considerations. Sample copies of the bills of advertisement expenditure are already enclosed to the paper book of the assessee. As the assessee in the business of financial services, by participating in such programmes the assessee can demonstrate its professional expertise in these areas. The advertisement expenses paid to Mudra Communications Ltd. is for advertisement in magazines like India Today and Times of India in the normal course of business as part of its marketing exercise as an investment banker. A sample copy of the cut outs of the advertisement published in Economic Times- Mumbai on 17th October, 2007 is already enclosed to the paper book. Further, these expenses have been rightly allowed as admissible revenue expenses in AY 2006-07 and AY 2007-08. They are not of any exceptional nature or one time nature and hence, there is no question of any enduring benefit out of it. The Assessing Officer has allowed 1/3rd of expenditure in the AY 2008-09 on the consideration that these expenses are not of any enduring benefits. There is no provision in the Act to treat the expenditure as deferred revenue (in which expenses are to be allowed over a period of time except under section 35D). Expenditure can either be of revenue or capital in nature. Hence, once the expenditure is ascertained as not of any personal or capital nature, it has to be allowed as deductible expenditure as per the provisions of section 37 of the act. As per section 37 of the Act, an expenditure incurred will be allowed as deduction if it ITA Nos. 5991,6249,6250/Mum/2012, ITA No. 1794/Mum/2014, ITA No. 1096/Mum/2015 Ambit Corporate Finance Pvt. Ltd. AYs: 08-09, 09-10, 10-11 & 11-12 fulfills the following conditions, namely; such expenditure incurred is not in the nature of expenditure described under section 30 to 36 of the Act. Such expenditure is not in the nature of capital expenditure. Such expenditure is not of personal in nature. Such expenditure is laid wholly and exclusively for the purpose of business or profession. The learned Counsel, therefore, finally argued that the expenditure incurred satisfies all the conditions laid down under section 37 and the same ought to be allowed as business expenditure.

The learned Counsel for the assessee also relied on the decision of the Hon’ble Bombay High Court in the case of CIT vs. Asian Paints India Limited (2016) 243 Taxman 348/75 taxmann.com 152 (Bombay), wherein before the Hon’ble High Court question B, which is referred as under: - “(B) Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in deleting the disallowance made by the Assessing Officer on expenditure on ‘Corporate Brand’ building, treating such expenditure as revenue in nature?”

The learned Counsel for the assessee drew our attention to Para 5 of the judgement of Hon’ble Bombay High Court, wherein exactly identical expenditure as in the case of assessee was incurred and relevant Para 5 reads as under: -- “5. Re. Question No.(B) : (a) The Respondent-Assessee incurred expenditure on advertisement on television aggregating to Rs.29.99 crores. This expenditure related to ITA No. 1794/Mum/2014, ITA No. 1096/Mum/2015 Ambit Corporate Finance Pvt. Ltd. AYs: 08-09, 09-10, 10-11 & 11-12 advertisements published on television relating not only to individual products manufactured by it but also towards corporate advertisement to the extent of Rs.5.47 crores. (b) The Assessing Officer disallowed the expenditure claimed towards corporate advertisement amounting to Rs.5.47 crores on the ground that the same is on capital account as corporate advertisement helps in building the company's brand value. The benefit of such build up of brand value would endure over a period of years and therefore fall in the capital field. This view was taken by the Assessing Officer in his final order after his draft Assessment order taking an identical view was upheld by the D.R.P. (c) On appeal to the Tribunal, the impugned order allowed the Respondent Assessee's appeal by inter alia holding that the expenditure is revenue in nature, even if the same is incurred for promotion of a corporate brand, as it facilitates the business of the Assessee and results in increased sales and profitability. The impugned order further holds that the enduring benefit, if any, on account of brand building would not be in the capital field. (d) Mr. Malhotra, learned Counsel for the Revenue, urges that an expenditure incurred to create/improve a brand would be on capital account. This is in view of the enduring benefit available to the Respondent-Assessee in relation to its brand. It is particularly submitted that amounts received on sale of brand is on capital account and not taxed as Revenue receipts. As also, amount paid to purchase a brand is regarded on capital account. Therefore, the expenditure incurred on brand advertisement cannot be allowed as Revenue expenditure.

We have heard the rival contentions and gone through the facts and circumstances of the case. We find that in the present case also the facts are not in dispute that the assessee has incurred this expenditure mainly on brand promotion during the year including advertising in Media/ Magazine. It is also not disputed by Revenue. Now before us, that this expenditure is not a corporate advertising films, is in respect of ongoing business. Once, this is for the business and expenditure incurred on brand advertisement, the same is to be allowed as Revenue in nature. Respectively, following Hon’ble Bombay High Court in the case of Asian Paints India Limited (supra), we confirm the order of CIT(A) allowing the claim of the assessee and dismiss this issue of Revenue’s appeal. Revenue’s appeal is dismissed.

Coming to assessee’s appeals in Nos. 6249/Mum/2012, 6250/Mum/2012, 1794/Mum/2014, 1096/Mum/2015 for A.Y. 2008-09, 2009-10, 2010-11,2011-12. The only common issue in all these four years is as regards to the disallowance of expenses relatable to exempt income by the AO and confirmed by CIT(A) by invoking the provisions of section 14A of the Act read with rule 8D of the Income Tax Rules, 1962 (the rules). Briefly stated facts are that the AO noted, the ITA Nos. 5991,6249,6250/Mum/2012, ITA No. 1794/Mum/2014, ITA No. 1096/Mum/2015 Ambit Corporate Finance Pvt. Ltd. AYs: 08-09, 09-10, 10-11 & 11-12 assessee has received dividend income of ₹ 43,26,298/- in AY 2008-09, ₹ 45,55,366/- in AY 2009-10, ₹ 47,70,620/- in AY 2010-11 and ₹ 1,47,57,441/- in AY 2011-12. The assessee claimed these dividend incomes has exempt under section 10(34) of the Act in all the years. The assessee suo moto disallowed a sum of ₹ 6,48,945/- (which was revised before CIT(A) vide computation at ₹ 3,81,528/-) for AY 2008-09, a sum of ₹ 3,29,296/- for AY 2009-10, a sum of ₹ 3,24,441/- for AY 2010-11, and a sum of ₹ 1,80,077/- for AY 2011-12.

The facts and circumstances are exactly identical in all the years and hence, we will take the facts from AY 2008-09 and will decide the issue. We find that in all the years, the AO has simply applied Rule 8D and made disallowance under Rule 8D (2)(iii) of the Rules except in AY 2010-11 Rule 8D (2)(ii) was also applied. The AO made disallowance of ₹ 14,07,045/- in AY 2008-09, a sum of ₹ 21,36,632/- in AY 2009-10, a sum of ₹ 69,53,073/- (including disallowance under Rule 8D(2)(ii) of interest amounting to ₹ 2,37,604/- for AY 2010-11 and a sum of ₹ 1,01,58,963/- for AY 2011-12. The CIT(A) also confirmed the disallowance made by AO for all the AYs.

Before us, the learned Counsel for the assessee stated that in any of the years, AO has not recorded any satisfaction as can be seen from the assessment order. The learned Counsel took us through the assessment order whereby the AO has relied on the decision of ITAT special Bench, Mumbai, in the case of ITO Vs. Daga Capital Management P. Ltd. 117 ITD 169 (SB) wherein it is held that Rule 8D is retrospective. The relevant Para 6.6 and 6.7 of the AO’s order reads as under: - “6,6 The insertion of section 14A with retrospective effect, from 1.4.1962, is a serious attempt on the part of the ITA No. 1794/Mum/2014, ITA No. 1096/Mum/2015 Ambit Corporate Finance Pvt. Ltd. AYs: 08-09, 09-10, 10-11 & 11-12 Legislature not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total Income under the Act, against the taxable income. The Legislature has further clarified its intention that the expenses incurred can be allowed only to the extent they arc relatable to the earning of the taxable income. The language has, therefore, made an attempt to curb the practice used to reduce the tax payable on the exempt Income by debiting the expenses incurred to earn the exempt income against the taxable income The language used by the legislature in the statute makes it amply clear that the legislature was well aware that the deduction of expenses in respect of exempt income were being claimed in full, against the taxable income was therefore clarified that expenses incurred can be allowed only to the extent they are relatable to earning of the taxable income. Nature of the expenses incurred may, therefore, be related partly to the exempt income, and partly to the taxable income, but the intention of the legislature to allow the expenses only to the extent they are relatable to the earning of taxable income. It has been clarified unambiguously that in computing the total income, no deduction shall be allowed in respect of expenditure incurred by the assessee against the income which is ITA Nos. 5991,6249,6250/Mum/2012, ITA No. 1794/Mum/2014, ITA No. 1096/Mum/2015 Ambit Corporate Finance Pvt. Ltd. AYs: 08-09, 09-10, 10-11 & 11-12 claimed as exempt from tax. Circular No.14 of 2001 dated 22.11.2001, and Circular No.8 of 2002 dated 27.8.2002 have also explained the provisions wherein it has been clarified that no expenses relatable to an income exempt from tax would be allowed as a deduction.

The learned Counsel for the assessee stated that this decision of the special bench of ITAT in the case of ITO Vs. Daga Capital Management P. Ltd. (supra), is reversed by the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT [2017] 394 ITR 449 (SC) and held the provisions of Rule 8D of the Rules ITA No. 1794/Mum/2014, ITA No. 1096/Mum/2015 Ambit Corporate Finance Pvt. Ltd. AYs: 08-09, 09-10, 10-11 & 11-12 as prospective and will apply for and from AY 2008-09 and thereafter the relevant assessment years falls wherein Rule 8D of the Rules will apply. The learned Counsel for the assessee drew our attention to Supreme Court decision in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) and he referred to the relevant page 471, Para 37 & 38, wherein Hon’ble Supreme Court has clearly stated that it is mandatory for the AO with regard to subjective satisfaction on the issue. The relevant observations of the Hon’ble Supreme Court read as under: - “37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub- sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of ITA Nos. 5991,6249,6250/Mum/2012, ITA No. 1794/Mum/2014, ITA No. 1096/Mum/2015 Ambit Corporate Finance Pvt. Ltd. AYs: 08-09, 09-10, 10-11 & 11-12 the Rules or a best judgment determination, as earlier prevailing, would become applicable.

In the present case, we do not find any mention of the reasons which had prevailed upon the Assessing Officer, while dealing with the Assessment Year 2002-2003, to hold that the claims of the Assessee that no expenditure was incurred to earn the dividend income cannot be accepted and why the orders of the Tribunal for the earlier Assessment Years were not acceptable to the Assessing Officer, particularly, in the absence of any new fact or change of circumstances. Neither any basis has been disclosed establishing a reasonable nexus between the expenditure disallowed and the dividend income received. That any part of the borrowings of the assessee had been diverted to earn tax free income despite the availability of surplus or interest free funds available (Rs. 270.51 crores as on 1.4.2001 and Rs. 280.64 crores as on 31.3.2002) remains unproved by any material whatsoever. While it is true that the principle of res judicata would not apply to assessment proceedings under the Act, the need for consistency and certainty and existence of strong and compelling reasons for a departure from a settled position has to be spelt out which conspicuously is absent in the present case. In this regard we may remind ourselves of what has been observed by this ITA No. 1794/Mum/2014, ITA No. 1096/Mum/2015 Ambit Corporate Finance Pvt. Ltd. AYs: 08-09, 09-10, 10-11 & 11-12 Court in Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC).”

From the facts of the present case, it is clear that the AO despite the fact that all the books of accounts were produced before him, he could not point out any nexus with the exempt income and that of the expenditure relatable to this exempt income. Even the Hon’ble Supreme Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), has clearly laid down the principle that the satisfaction of the AO must be there for making disallowance under section 14A of the Act read with Rule 8D of the Rules. In the present case, the satisfaction is missing in all the years. Accordingly, we allow the appeals of the assessee on this issue except suo moto disallowance of a sum of ₹ 3,81,528/-in AY 2008-09 be enhanced to as sum of ₹ 6,48,945/- as it has revised the disallowance. The AO will recompute the income accordingly in all these years.