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Income Tax Appellate Tribunal, MUMBAI BENCHES “E”, MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI ASHWANI TANEJA
Date of hearing : 08-12-2016 Date of order : 11-01-2017 O R D E R Per ASHWANI TANEJA, AM: These cross appeals have been filed against the order of the Commissioner of Income-tax (Appeals)-18, Mumbai [CIT(A), in short] “1. On the facts and circumstances of the case and in law" the Learned Commissioner of Income Tax (Appeals) (hereinafter referred to as "CIT(A") has erred in disallowing advertisement expenses amounting to Rs. 3,59,84,939/- by confirming the same as capital expenditure and allowing depreciation thereon @ 25 percent. He ought not to have done so. 2.1 On the facts and circumstances of the case and in law, the Learned CIT(A) has erred in confirming disallowance of depreciation amounting to Rs. 18,99,168/- on additions to fixed assets. He ought not to have done so. 2.2 Without prejudice to the above ground no. 2.1, on the facts and circumstances of the case, the Learned CIT(A) has erred in not accepting copies of bills relating to additions made to fixed assets as were submitted to him along with application under Rule 46A of the Income Tax Rules 1962. He ought to have accepted/considered the same.
On the facts and circumstances of the case and in law, the Learned CIT(A) has erred in not allowing depreciation of Rs. 9,06,2751- @ 25% of the opening WDV of net advertisement expenditure disallowed in Asst. Year 2007-08. He ought to have allowed the same.”
The revenue has filed appeal on the following grounds: “On the facts and in the circumstances of the case and in law, the CIT(A) erred in not upholding the entire disallowance of Rs.7,29,09,282 made out of advertisement expenses treated by the Assessing officer as capital expenditure, without appreciating the fact that the entire amount of expenditure was incurred towards brand building to secure a larger market share and to extract a premium from customers."
3 &769/Mum/2013 "On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that out of the total disallowance of advertisement expenditure of Rs.7,29,09,282/-made by the Assessing Officer, expenses to the extent Rs.3,69,24,343 is of revenue nature without appreciating that the entire expenditure of Rs.7,29,09,282 was in the capital field as it was incurred toward brand building to secure a larger market share and to extract a premium from customers. " "On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding the expenditure incurred for advertisement as revenue in nature without appreciating the fact that such advertisement expenditure has been incurred by the assessee to derive enduring benefit." Ground 1 of assessee’s appeal and grounds raised by the 3. revenue involve identical issue of disallowance of advertisement expenses by the AO by treating the same as capital in nature.
4. The brief background of the issue involved is that Assessee Company was engaged in the business of trading of vaccines and also in marketing support activities for its parent company. The AO noted that assessee company had claimed advertisement and business promotion expenses of Rs.7,37,65,195/-. The AO asked the assessee why these expenses should not be treated as capital expenditure. The AO was not satisfied with the explanation of the assessee and, therefore, it was held by him that out of the total expenses, a sum of Rs.8,55,913/- pertained to sample items and thus was of the revenue nature, but the balance amount of Rs.7,29,09,282/- was treated as capital expenditure and was disallowed by the AO. However, the AO allowed depreciation @ 20% on this amount. Thus, after granting benefit of depreciation, the net disallowance made by the AO was of Rs.5,46,81,962/-. Before CIT(A), detailed submissions were made explaining that the 4 &769/Mum/2013 entire expenses incurred on advertisement was revenue in nature. However, the Ld. CIT(A) bifurcated the advertisement expenses in two parts, i.e. product launch expenses and other expenses. He relied upon his earlier order for A.Ys. 2006-07 and 2007-08 and held the expenses with regard to the launching of the products were capital in nature which amounted to Rs.3,59,84,939/- and thus, these were disallowed. The balance amount of expenses was treated as revenue expenses and therefore, these were allowed by him. Thus, part relief was given by Ld. CIT(A). Both the parties, i.e. the assessee as well as the revenue filed appeals against the order of Ld. CIT(A) on this issue.
5. During the course of hearing before us, it was stated at the outset by the Ld. Counsel of the assessee that orders passed by the Ld. CIT(A) in earlier years, i.e. from A.Ys. 2005-06, 2006-07 and 2007-08 have reached the Tribunal wherein the Tribunal has allowed full relief to the assessee by holding that the entire advertisement expenses incurred by the assessee were revenue in nature. Our attention was drawn on the orders of the Tribunal passed in assessee’s own case. It was submitted that facts and legal position remains same. Therefore, earlier order should be followed and full relief should be given to the assessee.
6. Per contra, Ld. DR did not point out any distinction in facts or legal position of earlier years and the year before us.
7. We have gone through he orders passed by the Tribunal in earlier years. It is noticed that the CIT(A) has followed his earlier orders for A.YS 2005-06, 2006-07 & 2007-08 for deciding this issue partly in favour of the assessee and partly in favour of the revenue. All these orders have reached the Tribunal. The Tribunal, vide its order dated 13-02-2015 in ITA Nos. 2356/Del/2010, 4903/Del/2010 5 I.T.A. No.647 &769/Mum/2013 dated 13-02-2015 for A.YS 2005-06 & 2006-07 held that the entire expenses incurred on advertisement by the assessee was revenue in nature. Similarly, in A.Y. 2007-08 also, the Tribunal vide its order dated 29-01-2016 has given full relief to the assessee by treating the product launch expenses also as revenue in nature. While allowing the appeal of the assessee, the Tribunal in the above said order for A.Y. 2007-08 has observed as under:-
“4. We have considered the rival contentions and perused the materials placed on record. The basic point of dispute between the Assessing Officer/learned CIT(A)'s views and that of the assessee is whether the aforesaid expenses, which have been booked under the broad head of "advertisement expenses" can be said to be giving rise to any 'advantage' of an 'enduring nature' or are regular expenses of 'revenue nature' ordinarily incurred or expended in the course of business for the purpose of carrying out the business in a more efficient manner. While the Assessing Officer (learned CIT(A) are of the view that the advertisement expenses have given rise to a 'benefit of enduring nature' so as to qualify as a capital expenditure. Learned AR contended that all such expenses are incurred in the normal course of business for advertising various products of the assessee company and such advertisement expenses should be treated as 'revenue expenditure' and be allowed u/s. 37 of the Income Tax Act and relied upon ClT Vs. Indian Visit.com(P) Ltd. decided by Hon'ble Delhi High Court in of 2008.
We have carefully considered the facts of the present case and also gone through the aforementioned judicial pronouncements as relied upon by the parties. We find that facts emerging from the perusal of this judgment are that under the circumstances, this kind of expenditure incurred by the assessee would be revenue in nature because the assessee was already in the business and had added new line of the business. If the assessee incurred expenses for the purposes of launch of new a new vaccine i.e. Immovax Polio Vaccine (IPV)-IV or sponsor or tarry out seminars 6 &769/Mum/2013 (promotional meetings) with narration sponsorship of PEDICON-2007, then expenses would fall in revenue field and not a capital nature as it accrue of any advantage of enduring nature.
we have considered various judicial pronouncements but what is to be seen under the Income Tax Act that whether simply, if an expenses would provide benefit of enduring nature to the assessee which make expenses as capital in nature? In our view correct proposition of law is not like that. If expenses can be treated as capital expenditure merely on the basis of getting benefit of enduring nature, said expenses then eventually each and every expense can be placed in the category of capital expenses. Let us take the example of the payment made on account of salary to the employee or on the training of the employee in such situation after getting training employees made profit useful in a longer period thereby providing enduring benefit. There can be numerous of such expenses but none of these expenses can be categorized 'capital' in nature. Merely because expenditure provides benefit of enduring nature should not ipso facto become capital. In support of the view taken by us we can take support of the Judgment of Hon'ble Supreme Court in the case of Empire Jute Company Ltd. Vs. CIT (124 ITR 01). In our considered opinion before expenses can be put into, it has to be between the test i.e. [i] expenses should provide benefit of enduring nature [ii] expenses should give rise to accretion to fixed capital of the assessee. We have also considered the Judgment rendered by Hon'ble High Court of Allahabad in the case of CIT vs. Modi Olivetti Ltd. (37 Taxmann.com 464) which also discussed by Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. Vs CIT (124 ITR 01). In our considered opinion before expenses can be put into, it has to be between the test i.e. (i) expenses should provide benefit of enduring nature (ii) expenses should give rise to accretion to fixed capital of the assessee. We have also considered the judgment rendered by Hon’ble High Court of Allahabad in the case of CIT vs Modi Olivetti Ltd (37 Taxmann.com 464) which also discussed by Hon’ble Supreme Court in the case of Empire Jute Co. Ltd Vs. CIT, Operative para of which is as under:-
7 &769/Mum/2013 III. Section 37(1) of the income-tax Act, 1961 - Business expenditure - Allowability of Advertisement expenses - Assessment year 1991-92 - Assessee spent a sum towards advertisements in respect of launching of a new product - Assessing Officer disallowed such advertisement expenses on ground that assessee had treated same as 'deferred revenue expenditure' in its books of account - Whether merely because assessee had firstly shown entire amount in books of account as deferred revenue expenditure could not be made a "ground to disallow advertisement expenses when indisputably in computation of income, assessee had claimed entire sum of expenses as revenue expenditure - Held, yes (para 5 to 7) (in of assessee)
IV. Section 37(l), read with section 37(2A), of the Income-tax Act, 1961 - Business expenditure-Allowability of Entertainment expenditure] - Assessment year 1991- 92 - Whether where Tribunal considering facts allowed 30 per cent of entertainment expenses incurred by assessee, same needed no interference - Held, yes (Para 18) (In favour of assessee)
5. We find that neither the Assessing Officer nor the CIT(A) has disputed the revenue nature of the advertisement expenses of Rs. 77,16,120/-. There is no dispute that such expense is allowable expenditure. Merely because the assessee has firstly shown the entire amount in the books of accounts as deferred revenue expenditure and thereafter debited Rs.29,51,909/- in the profit and loss account cannot be made a ground to disallow the advertisement expenses of Rs. 77,16,120/ - when indisputably in the computation of income, the assessee has claimed the entire su m of Rs. 77, 16, 120/ - after adding back Rs.29,Sl, 909/ - to the profit as per profit and loss account. While considering this issue the Tribunal has recorded the following findings in paragraph Nos. 10, 11, 12, 13 and 14 of the impugned order.-
We have considered the rival submissions. A copy of the computation of the total income for the A. Y.91- 92 is placed at page 20-21 of Assessee's paper book.
8 &769/Mum/2013 Perusal of the same indicates that the .Assessee had debited a sum of Rs. 29,51,909/-in its profit and loss account and this sum was added back to the profit as per profit and loss account and the entire sum of Rs. 77, 16, 1201- was claimed as deduction. By disallowing the entire sum of Rs. 77,16,1201- the AO has in effect disallowed a sum of Rs. 29,51,9091- in excess of what has been claimed by the Assessee as deduction. The disallowance at best could have been only Rs.47,64,2111- (Rs.77,16,1201- Less Rs.29,51,9091-)for the reason that even as per the AO the expenditure to the extent of Rs.29,51,9091- was of a revenue nature as the benefit from incurring this expenditure resulted in benefit to the Assessee to that extent during the previous year. Be that as it may. We may now consider the concept of deferred revenue expenditure. The reason for making the addition by the revenue authorities below as capital expenditure was mainly for the reason that the assessee had treated the same as "deferred revenue expenditure" in its books of account and according to the Revenue authorities the said expenditure incurred on Advertisement would result in benefits which will accrue to the Assessee over a period of time beyond the previous year. So far as the treatment given by the ·assessee- company in its books of account in' respect of the said expenditure is concerned, it is pertinent to ascertain as to whether such expenditure has been treated by the assessee as capital expenditure in its books of account. In this regard, we find that the assessee has treated the said expenditure as “deferred revenue expenditure" considering the advantage of enduring nature accrued to it which was going to last for a few years beyond the previous year. The authorities below, however, considered the treatment given by the assessee to resemble with the capital expenditure specifically considering that if indicated the accrual of advantage to the assessee of enduring nature. Before we consider the relevance of the test of enduring benefits for ascertaining the nature of expenditure, it would be appropriate to find out the meaning and nature of the term "deferred revenue expenditure". The institute of chartered Accountants of 9 &769/Mum/2013 India in its guidance-note issued on the "terms used in financial statements" has defined the term "deferred revenue expenditure" as the expenditure for which payment has been made or liability has been incurred in a particular year. But which is carried forward on the presumption that it will benefit over a subsequent period or periods. The institute of Cost and Management Accountant has defined the said term in its publication as an expenditure incurred during the accounting period but not fully charged against income in that period, the balance being carried forward and charged in the next or a subsequent period. From the perusal of these definitions, it is abundantly clear that there is nothing to indicate that the concerned expenditure has to be of capital nature Jar the purpose of treating the same as deferred revenue expenditure. On the contrary, although the said expenditure results into a benefit which accrues to the assessee over a period exceeding the accounting year) such benefit does not accrue to the assessee in the capital filed but the same accrues only in the revenue filed. As a matter of fact, the very purpose of categorizing certain expenditure differently under the head "Deferred revenue expenditure” for the purpose of drawing financial statements appears to be that the said expenditure even though is of revenue nature results into benefit of enduring nature to the assessee and the same, therefore, deserves a different treatment in terms of preparation of the annual accounts to determine, inter alia the profit of a particular period year as the benefit thereof accrues over a period exceeding the accounting year in which the same are incurred. It is thus clear that when any expenditure is treated as a "deferred revenue expenditure; it presupposes that the concerned expenditure, creating benefit in. the Revenue field, is a revenue expenditure but considering its enduring benefits as well as the fact that it does not result in the creation of an new asset or advantage of enduring-nature in the capital field the same is required to be treated distinctly from capital expenditure. It is thus clear that the authorities below misconstrued the term "deferred expenditure" as capital expenditure on the basis of accounting 10 I.T.A. No.647 &769/Mum/2013 treatment given by the assessee in. its books of account and proceeded to draw an adverse inference without considering the nature of the impugned expenditure as its aIlowability of the same under the provisions of the Income-tax Act.
The Hon’ble Supreme Court in the case of Empire Jute Co. Ltd. v. CUT (1980) 124 ITR 1 has observed as under:
'There may be cases Where expenditure, even if incurred for obtaining an advantage of enduring benefit, may" nonetheless be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee’s trading operations or enabiing the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future.
1.2 From the perusal of the aforesaid observations of the Apex Court, it is evident that the test of enduring benefit alone is not conclusive for treating any expenditure as capita! expenditure and it is relevant to find out or ascertain as to whether such expenditure results into an advantage of enduring nature to the assessee in the capital filed or revenue filed so as to decide the exact nature of the said expenditure and allowability of the same under the Income-tax Act.
As regards the relevance of accounting method 11 &769/Mum/2013 followed by the assessee, we have already observed that the treatment given by the assessee to the impugned expenditure as deferred revenue expenditure cannot be considered as different from the one followed for the purpose of computinq the total income under the Income Tax Act. In any case, as held by the Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. V. CIT (1971) 82 ITR 363, the allowability of a particular deduction depends on the provisions of law relating thereto and not on the basis of entries made in the books of account, which are not decisive or conclusive in. this regard.
14. The expenditure in question was incurred towards advertisements in launching of a new product and was revenue in nature. The action of the revenue authorities in treating the same as capital expenditure and disallowing the claim for deduction was not proper. We direct 'the AD to delete the addition of Rs. 77, 16,120/- made to the total income; Thus grounds 1.1, 1.2 and 1.4 are allowed while ground No. 1.3 does not require any adjudication in view of the decision on grounds 1.1, 1.2 and 1.4.'
6. Learned counsel for the appellant has failed to point out any error of fact any error in the impugned order of the ITAT on the point of allowability of advertisement expenses of Rs. 77,16,120/ -. We also do not find any error in the aforesaid findings recorded by the ITAT. In the case of CIT vs Woodward Governor India (P.) Ltd. (2009) 312 1TR 254/179 Taxmann 326 (SC) vide paragraph no. 24, 25 and 33, the Hon'ble Supreme Court has held that Section 37 enjoins that any expenditure not being expenditure of the nature described in Sections 30 to 36 laid out or expended wholly and exclusively for the purposes of business or profession should be allowed in computing the income chargeable under the head "profits and gains of business". The word "profit" implies a comparison between the state of business at two specific dates, usually separated by an interval of "12 months". In the case of CIT v. Walfort Share and Stock Brokers(P.) Ltd. (2010) 326 ITR 1/ 192 Taxman 211 (SC) Hon'ble Supreme Court has held that the scheme of 12 &769/Mum/2013 Sections 30 to 37 is that profits and gains must be computed subject to certain allowance for 'deductions/ expenditure. The charge is not on gross receipts, it is on profits and gains. Profits have to be computed after deducting losses and expenses incurred in business. A deduction for expenditure for loss which is not within the prohibition must be allowed if it is on the facts oldie case a proper debit item to be charged against the incomings of the business in ascertaining the true profits.
We find that the Assessing Officer and the CIT(A) have not disputed the nature of advertisement expenses to be revenue expenditure. The ITAT has also recorded the finding of fact to this effect as quoted above) and as such we are of the view that there is no error in the order of the ITAT in setting aside the addition made by the Assessing Officer on account of advertisement expenses.
In the result the Question No. 1 is answered in negative i.e. in favour of the assessee and against the revenue.”
7. One another point cannot lost sight of the facts that in assessee's own case similar additions were made in A.Y. 2005-06 and 2006-07 against which assessee had preferred an appeal before learned CIT(A) and both these appeals have been decided in favour of the assessee by learned CIT(A) and therefore even according to the principles of Judicial consistency the Department should have followed earlier judgment of learned CIT(A) in assessee's own case same facts so considering the totality of the facts and legal proposition in the present case we allow this ground of the assessee.”
8. Similarly while deciding revenue’s appeal also, the Tribunal in A.Y. 2007-08 held that the entire expenses incurred by the assessee was revenue in nature and, therefore, order passed by the Ld.CIT(A) was upheld and relief given by Ld.CIT(A) was confirmed by observing as under:-
13 &769/Mum/2013 “16. After analyzing the order passed by learned CIT(A), we are of the view that the learned CIT(A) has passed judicious, well reasoned order after considering the submissions made by the parties as well as after considering facts and circumstances of the case. Therefore there is no need to interfere with the order passed by learned CIT(A). Accordingly we uphold his order and dismiss the appeal filed by the Revenue.”
We have gone through the order passed by the Tribunal and facts of the case before us. It is noted that the expenditure incurred by the assessee on advertisement are on identical pattern as were incurred in the earlier years. The CIT(A) has also relied upon earlier years’ orders while deciding the appeal of the present year. Thus, respectfully following the order of the Tribunal of earlier years, we decide this issue in favour of the assessee. Whole amount of advertisement expenses, whether incurred on launch of product or otherwise is directed to be treated as revenue expenses. As a result, ground 1 of assessee’s appeal is allowed and grounds raised by the revenue in its appeal are dismissed.
10. Ground 2: In this ground, the assessee is aggrieved with the action of lower authorities in not granting the benefit of depreciation of Rs.18,99,168/- on the additions made to the fixed assets during the year.
11. It has been contended by the Ld. Counsel that the disallowance was made because of assessee being not able to provide complete evidences due to some reasons beyond the control of the assessee as the office of the assessee was shifted. But during the appellate proceedings before Ld. CIT(A), additional evidences were submitted along with prayer under rule 46A of the
Per contra, the Ld. DR submitted that sufficient opportunities were given to the assessee to submit the evidences. In the absence of assessee providing evidences, claim cannot be allowed.
13. We have gone through the facts and circumstances of the case. Our attention was drawn by the Ld. Counsel upon paper book containing copies of invoices and other evidences to substantiate the addition to fixed assets made during the year. It was also submitted that entire payment was made by cheque and all the suppliers are available for verification as may be considered appropriate by the AO. In our considered opinion, evidences shown to us prima facie indicate that these assets seem to have been acquired by the assessee during the year under consideration. Thus, the claim of the assessee should not be disallowed without verifying these evidences. Therefore, this issue is sent back to the file of the AO with a direction to allow opportunity to the assessee to submit these evidences, which should be considered by Ld. AO on objective basis before deciding this issue afresh. The AO is free to make verification with any of the suppliers / vendors in case of any doubt. The claim should not be rejected merely on the basis of doubts and surmises. The AO has got ample powers under the law to make any verification directly with any person to examine the issue properly. The assessee shall also furnish copy of bank statements, etc. to substantiate that payment was made by the assessee for acquiring these assets. The assessee is also free to 15 &769/Mum/2013 submit other supporting evidences to substantiate its claim. These evidences shall be taken into consideration by the AO as stated above. With these directions, this issue is sent back to the file of the AO and this ground may be treated as allowed, for statistical purposes.
Ground 3 was stated to be infructuous and, therefore, dismissed, as such.
In the result, appeal of the assessee is partly allowed and that of the revenue is dismissed. Order pronounced in the court on this _11th day of January, 2017.