RELIANCE LIFESTYLE HOLDINGS LTD,MUMBAI vs. DCIT RG 3(1), MUMBAI

The facts in brief are that the AO during the course of assessment proceedings found that the assessee has claimed an amount of Rs.1,05,89,163/- as revenue expenditure which were shown as Project Development Expenditure included under the head Work-In –Progress (WIP) however while filing the return of income claimed as revenue expenditure and accordingly assessee was asked to justify the claim which was replied by the assessee vide letter dated 15.3.2013. The assessee submitted before the AO that the business of the assessee was that of trading in merchandising , goods and services and during the year incurred various revenue expenditure in connection with the business amounting to Rs.1,05,89,163/-, the details whereof was also furnished before the AO and is reproduced as under for better understanding of the issue: S.No. GE description Amount Amount 1 Payment to and provisions for employees Salaries and wages 65,24,792 Employees welfare and other amenities 2,95,896 Cont. to emp. retirement benefit 3,15,319 71,36,007 2 Rent 4,51,209 3 Rates and taxes 21,19,115 4 Travelling and conveyances expenses 77,850 5 Legal and professional fees 7,24,839 6 Other interest paid 56,421 7 Gen and admin charges 23,722 34,53,157 Total of revenue expenditure debited under the 1,05,89,164 head project development expenditure and claimed under section 37(1)

The ld. AR vehemently submitted before us that the ld.CIT(A) has grossly erred in confirming the disallowance of expenses of revenue nature incurred during the year. The AR further submitted that the assessee has rightly claimed the expenses while filing return of income by giving complete details in the computation of income filed before the authorities below. The ld. AR argued that the said expenditure were not incurred either for acquiring capital asset or creating any enduring benefit and therefore finding of the facts by the authorities below were incorrect and wrong. The ld. AR submitted that for claiming any expenses of revenue in nature the mode of entries or treatment of the said expenditure in the books of account were not material for allowing the deduction while computing the income of the assessee. The ld. AR finally submitted that the issue was covered in favour of the assessee by the decision of co-ordinate Bench of the Tribunal in the case of assessee’s sister concern in M/s Reliance Footprint Ltd V/s ACIT in (AY-2008-09) dated 23.10.2013. The ld. AR submitted that in view of the ratio laid down in the above mentioned decision of the Tribunal the ground should be decided in favour of the assessee by allowing the appeal of the assessee.

The ld. DR on the other hand while opposing the contention of the ld. AR submitted that the expenditure by the assessee were of capital nature as substantiated by the manner of treatment and accounting in the books of account maintained by the assessee in which the said expenditure shown under the head Project Development Expenditure which was further classified under the head WIP and the assessee in order to suppress profit claimed the said expenditure in the computation of income at the time of filing the return of income. Therefore the orders passed by the authorities below should be upheld and be confirmed.

We have carefully considered the rival contentions and perused the material placed before us including the orders of authorities below. We find that the assessee is in the business of trading in merchandise and goods and services. The assessee incurred an expenditure of Rs.1,05,89,163/-, the details whereof has been given supra in para no 4 hereinabove. From perusal of the above details it is clear the expenditures consisted of Salaries and wages, Employees welfare and other amenities, travelling and conveyances, legal and professional fees and other interest paid which appeared to be apparently of revenue expenditure. In our opinion the submissions of the ld. AR carry weight that in order to claim expenses the manner, mode and mere entries in the books of account and final presentation in the balance sheet is not material. We further find that the issue in hand stands covered in favour of the assessee by the decision of Tribunal in the case of M/s Reliance Footprint Ltd (supra) wherein it has been held as under : “6. We have heard both parties and their contentions have carefully been considered. There is no dispute to the fact that the assessee has shown a turnover of Rs.4.75 crores in relation to its stores which were made operational during the year at Bangalore and Hyderabad. Before the AO it was the case of the assessee that it is in the process of expansion of its business and thus this expenditure has been incurred in relation to expansion of business. It was also submitted that the expenditure which are in the nature of salary, electricity, audit fee etc. are essentially incurred for expansion of existing line of business that is setting up of more number of stores/speciality stores under planned format or for maintenance of already established stores. These submissions were made before the AO and have not been controverted by the AO and disallowance is made mainly on the ground that the assessee can not give dual status to these expenditures i.e. as “capital” in books of account and as “revenue” for Income tax purposes. However, such view of the AO can not be upheld in view of the decision of Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Company Ltd. (supra) wherein it has been held that the issue that whether the assessee is entitled to a particular deduction will depend upon the provisions of law relating thereto and not on the view which the assessee might take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter. 6.1 From the submissions made by the assessee before the AO it is also clear that opening of stores at various places was one composite business of the assessee and in that course the assessee had started operation of its stores at Bangalore and Hyderabad. It was the contention of the assessee that operations of these stores at various locations is one composite business and once business had been started then the expenditure can not be linked only to the stores which became operational during the year under consideration. Such submission of the assessee has not been controverted by the AO. All these details were submitted before the AO and it is not the case of the AO that assessee had not incurred such expenditure for its business. In the letter submitted by the assessee before AO it is clearly mentioned that when the expenditure is incurred for the purpose of expansion of business which is already in existence and, which is in the nature of revenue, then the same is allowable as revenue expenditure irrespective of the treatment given by the assessee to such expenditure in its books of account. No material has been brought on record by the AO to negate such submissions made by the assessee. These propositions put forth by of the assessee before AO are supported by the decision of the Hon'ble Bombay High Court in the case of CIT vs. Kothari Auto Parts Manufacturers Pvt. Ltd. (supra), and the decision of Hon'ble Gujarat High Court in the case of CIT vs. Alembic Glass Industries Ltd. (supra). Therefore, it has to be held that these expenditures incurred by the assessee are for the purpose of expansion of its business and those expenditure are in the nature of revenue ( being mostly paid to employees). These are allowable in the year itself as per ratio of aforementioned decision of the Hon’ble Bombay High Court in the case of CIT vs. Kothari Auto Parts Manufacturers Pvt. Ltd.(supra) and Hon’ble High Court of Gujrat in the case of CIT vs. Alembic Glass Industries Ltd. (supra). These expenditures did not create any asset and also did not provide enduring benefit to the business of the assessee so as to say that the expenditure was capital in nature. Therefore, we hold that expenditure are allowable in the year under consideration irrespective of the fact that assessee has given dual status to such expenditure in its books of account vis-à-vis computation of income filed alongwith return. 6.2 So far as it relates to the observations made by Ld. CIT(A) in his order that assessee vide his letter dated 28/6/2011 has merely given the name, designation and amount paid with reference to salary paid without giving any proof of work actually being done, we may mention that we have carefully gone through the details filed by the assessee before Ld. CIT(A). Copy of the documents submitted before Ld. CIT(A), as mentioned earlier, were filed before us. We find that assessee in the details so filed has mentioned job description of each of the employees alongwith amount paid to him describing also that how much TDS has been deducted. For example job description is described as sourcing product design and development; sourcing and procurement; category management; marketing communication, marketing consumer behaviors; distribution and logistic; sourcing and procuring; talent acquisition buyer etc. etc. In the note which has been filed along with the details it is clearly mentioned that the assessee has employed these persons for carrying out market research work such as to contact various manufacturers and suppliers of the footwear and other accessories; getting base price and delivery schedules as well as comparing the products of various manufacturers of unbranded products with the price and quality of branded products, preparing various reports for this purpose, planning, distribution and logistic, sourcing, designing products, inventory planning discussing consumer preferences for various product range etc. The submissions made by the assessee before Ld. CIT(A) matches with the job description of all the employees. Therefore, it cannot be said that assessee did not provide the necessary details. By furnishing these details, the assessee had placed on record prima facie material to substantiate the query raised by Ld. CIT(A). Without pointing out any defect and without brining any adverse material on record, Ld. CIT(A) has observed that assessee has failed to prove that the expenditure was made wholly and exclusively for the purpose of business of the assessee. Thus there is no basis for recording such finding. Therefore, even for the additional reasons described by Ld. CIT(A), the disallowance cannot not be upheld. 6.3 It is already mentioned that the assessee itself has disallowed a sum of Rs. 51,23,957/- out of the aforementioned amount of Rs.3,64,49,545/- under the provisions of section 40A(7)/40A(9)/43B of the Act. The claim of the assessee as per grounds of appeal

The issue raised in the second grounds of appeal

The ld. Counsel for the assessee vehemently argued before us that the ld. CIT(A) has grossly erred in confirming the order of AO on the issue of taxation of provision written back qua the leave encashment as both the authorities below have failed to appreciate the correct position qua the leave encashment. The ld.AR submitted that the provision for leave encashment were created in the earlier years and were coming over since then. During the year the assessee reversed the provision to the extent of Rs.36,40,709/- relating to those employees who have consumed the leave and have not claimed the leave encashment. The ld. AR also contended that the provision for leave encashment was not claimed as expenditure in the year of creation and therefore during the year when these provisions were reversed by way of writing back the same these were reduced from the income of the assessee and not offered to tax. Lastly, the ld.AR submitted that since the provisions were not claimed as expenditure in the year of creation, the same could not be brought to tax in the year when these were actually written back. In view of this the ld.AR of the assessee submitted that the order of ld.CIT(A) be set aside and the AO be directed to allow deduction.

On the other hand, the ld. DR relied on the orders of authorities below by submitting the provision for reversal has to be brought to tax.

We have heard the rival contentions and perused the material placed before us including the orders of authorities below on the issue. We find from the page 35 of the paper book that the assessee has opening balance of provision of leave encashment brought forward from the earlier years and the amount written back out of the said amount to the tune of Rs.36,40,709/-. It was submitted before us during the course of hearing the provision for leave encashment was not claimed as deduction in the year of creation of the said provision and therefore in the year of reversal/writing back of leave encashment due to non-claim of leave encashment by the employees who have consumed leave period of the same could not be offered to tax. We are of the considered opinion that if at the time of creation of provision of leave encashment, deduction was not claimed, the AO was not justified to bring to tax the amount written back out of the said provisions for leave encashment. Therefore, we find merit in the argument of the ld.AR that reversal of Rs.36,40,709/- could not be taxed on the ground that the same were not claimed as deduction in the earlier year in which the same were created. However, we feel that the issue is required to be examined at the end of the AO and it would be fair and reasonable if the matter is set aside and restored back to the file of AO to examine whether the amount written back of Rs.36,40,709/- was claimed as deduction or not and decide the issue accordingly as per fact and law.

In the result, the appeal filed by the assessee is partly allowed for statistical purpose.