GODREJ & BOYCE MFG CO. LTD,MUMBAI vs. ADDL CIT RG 10(2), MUMBAI

8488+5Godrej & Boyce attract any additional tax liability. The value of the assets of the demerged company should be the same when transferred to the resulting company. The amendment made by Finance Act, 2003 w.e.f. 01.04.2004, in our view, is curative and clarificatory in nature. The omission of the words “as appearing in the books of account” have neither taken away nor affected any rights of the assessee which were accrued to him before the said amendment. The amendment made vide Finance Act, 2003 has just removed the ambiguity. It has neither taken away any right of any assessee nor has given any new right to the Revenue.

3.The assessee had raised four additional grounds for the year under consideration,vide its letter dated 30.12.2015.After considering the material available on record,we are of the opinion that additional grounds raised by the assessee are legal in nature.Hence,same are being admitted.

8488+5Godrej & Boyce 3.1.During the course of hearing the AR fairly conceded that first two additional grounds have been decided against the assessee by the Hon’ble Bombay High Court(328ITR81).We find that the assessee had argued that provisions of section 14A were not applicable on dividend from shares/ units of mutual funds(Addl.GOA-2),that Rule 8D of the Income-tax Rules,1962 could not be applied for computing the disallowance u/s.14A(Addl.GOA-3).We find that both the issues stand decided against the assessee,as admitted by the AR,so,same are dismissed.

4.Additional ground no.3 pertains to the strategic investment made for business purposes. During the course of hearing the AR stated that the in the Statement of Facts the assessee had furnished details of strategic investments,that the Tribunal has dealt with the issue in many a cases and has held that the provisions of section 14A cannot apply for the strategic investment,that the issue stands allowed in favour of the assessee by the order of the Tribunal for the AY.2004-05 to 2006-07(supra).The DR referred to the case of M/s. India Infoline Ltd.(ITA/2490/Mum/2013-AY-2008-09 dt.1.12.2015) .On a query by the Bench,he could not explain as to how the facts for the case under consideration were different from the facts of the earlier years.It is found that the in the case of M/s. India Infoline Ltd.(supra),the Tribunal has not taken note of the cases of Garware Wall Ropes Limited(ITA/5408/Mum/2012),JM Financia Limited(ITA/4521/Mum/2012) and Oriental Structural Engineers (P). Ltd. (216 Taxman92).We further find that the Tribunal,in its order for the earlier years (supra),has dealt with the issue as under: “6.Vide its letter,dated 22.02.2016,the assessee had filed further additional grounds of appeal for with a request to admit the same.In its letter the assessee had stated that during the year under consideration the assessee had earned dividend income,that it was claimed exempt u/s. 10(34) of the act,that it was contended that assessee had not incurred an expense toward income of dividend income, that no amount was required to be disallowed section 14A of the Act,that the AO had disallowed an amount of Rs. 18.03 crores u/s.14A, that the FAA had reduced the disallowance to Rs.48.33 lakhs, that the assessee had taken a ground before the FAA in respect of non-applicability of provision of section 14. A to dividend subjected to tax under section 115-O/115-R of the Act, that the FAA did not adjudicate the said ground, that while filing the appeal before the Tribunal above ground was in inadvertently not taken, that during the year under appeal approximately 95% of the investments made by the assessee were in its group companies/subsidiaries.Referring to the order of the Tribunal in the case of the Garware Wall ropes Ltd (65SOT86),the assessee stated that above decision was rendered after the filing of the appeal, that the issue involved was legal one, that there was reasonable and sufficient cause for not raising the issue earlier.During the course of hearing before us,the AR made the same submission that are part of the letter of the assessee dated 22/02/2016.DR left the issue of admission of additional grounds to the discretion of the Bench. 7.After considering the material available on record,we are of the opinion that additional grounds raised by the assessee are legal in nature.Hence,same should admitted. We find that while deciding the appeal,the FAA had not adjudicated the issue raised by the 4

8488+5Godrej & Boyce assessee.Therefore, we are of the opinion,that in the interest of justice,matter should be restored back to the file of the FAA for fresh adjudication of the issue.He is directed to afford a reasonable opportunity of hearing to the assessee before deciding the matter. Both the additional grounds of appeal,raised by the assessee vide its letter dated 22/02/2016,are decided in its favour,in part.” Considering the above,we decide the additional ground no.3 in favour of the assessee ,in part.

5.Fourth additional ground of appeal is about disallowance made as per the provisions of section 14A of the Act.Before us,the AR fairly conceded that the issue stands decided against the assessee,by the orders of the Tribunal for the earlier AY.s.We find that while deciding the appeals for AY.2005-06 to 2007-08,the issue was dealt as under: “5.During the course of hearing before us,the AR fairly conceded that additional Ground had to be decided against the assessee,that Hon'ble Bombay High Court had decided the issue against the assessee.We find that the Hon’ble Court had dismissed the appeal of the assessee with regard to adhoc disallowance made u/s. 14A of the Act for computing book profits u/s. 115JB of the Act (328ITR81).Respectfully following the judgment of the Hon’ble High Court additional ground no.1 is decided against the assessee.” Respectfully following the above,we decide the Addl.Ground No.4 against the assessee.

ITA/8502/M/11 (AY :08-09)(By Revenue ): 6.First ground of appeal,raised by the AO,pertains to deletion of disallowance of interest expenses u/s.14A of the Act.Representatives of both the sides agreed that identical issue was decided against the AO by the Tribunal while adjudicating the appeals of the earlier three AY.s.(supra).We would like to reproduce the relevant portion of the order and same reads as under: “11.The solitary ground of appeal,filed by the AO,is about restricting the disallowance in respect of managerial/administrative expenses to 1% of dividend income and deleting the disallowance of interest expenditure.During the assessment proceedings,the AO found that the assessee had earned dividend income of Rs. 4833.44 lakhs during the year and had claimed it as exempt.He asked the assessee as to why expenses attributable to earning of dividend income should not be disallowed.After considering the submission of the assessee,the AO made a disallowance of Rs.17.42 crores under the head interest expenditure,invoking the provisions of section 14A of the Act.He further held that exempt dividend income could not have been earned without incurring of indirect expenses i.e.administrative and managerial expenses.He made disallowance of 60.90 lakhs under the head indirect expenses. 12.Aggrieved by the order of the AO the aa preferred an appeal before the FAA and made detailed submission.After considering the assessment order and the submission of the assessee ,the FAA held that while completing the assessments for the AY.s 07-08 and 2008-09 the AO himself had stated that assessee had not used borrowed funds for making investment and that the assessee had made investment from his own funds,that the Tribunal while deciding the appeals for the AY.s 1998-99 to 2001-02 had held that Department could not establish nexus between the borrowing and the investment in the dividend earning shares, that the Tribunal had indirectly held that no investments were made out of borrowings, that no expenses could be attributed to earning of dividend income, that prior to AY 98-99 the AO had not made such disallowance in any of the years, that in the AY.s 03-04 and 04-05 the AO had made disallowance of Rs.46.95 lakhs and 36.29 lakhs respectively being the interest 5

8488+5Godrej & Boyce expenditure and managerial/administrative expenses, that in those years the AO had made estimation of such expenses at the rate of 1% of dividend income,that there was no evidence that investments were made out of borrowed funds.Finally he deleted the addition of 17,42,14,000/-.With regard to disallowance made under the head managerial/administrative expenses the FAA held that in the case of Group Companies Godrej Agrovet Ltd. and Godrej Industries Ltd. the Tribunal had restricted the expense to the extent of 2-5% of the dividend income.Finally, he held that it would be sufficient and justified to attribute expenses equivalent to 1% of the dividend received as expenses attributable to earning of exempt income u/s.14A of the Act. 13.During the course of hearing before us,the DR left the issue to the discretion of the Bench.The AR supported the order of the FAA.After considering the available material we find that the Tribunal had ,while deciding the appeals for earlier years,given a finding that the assessee had not used borrowed funds to earn exempt income,that the FAA discussed the issue at length and held that there was no evidence to prove that the assessee had not used its own funds for earning exempt income.In these circumstances,we are of the opinion that there is no legal infirmity in the order passed by the FAA as far as interest expenditure is concerned. We further find that FAA had restricted the administrative/managerial disallowance @ 1%.The AO had not given any reason for making the disallowance. Therefoere, confirming the order of the FAA,we decide the effective GOA against the AO.” We find that the Hon’ble Bombay High Court has decided the identical issue in favour of the assessee,in the case of HDFC Bank Ltd.(383ITR529).Considering the above,we decide the first ground of appeal against the AO.

7.Next ground of appeal is about gain on prepayment of sales tax deferral loan.It was brought to our notice that issue stands covered against the AO by the order of the Tribunal for the AY.2005-06(ITA/6867/Mum/2011 & C.O.176/Mum/2012 dtd.26.06.2013 ).We would like to refer to the relevant portion of the said order and it reads as follow: “

4. We have considered the rival submissions and carefully perused the orders of the lower authorities and the material evidences brought on record. It is not in dispute that the assessee has taken benefit of the scheme offered by the, Government of Maharashtra. As provided in Circular No.496 dated 25.09.1987 and Circular No.674 'dated 29.12.1993 issued by the CBDT, although the sales tax collected from the customers is a trading receipt, on account of deferral scheme, the same is deemed to have been paid. As a result, it amounts to discharge of the ability to pay sales tax. Once the liability is discharged the unpaid deferrals assumes a character of loan. In the light of the above Circulars of the CBDT, 'sales' tax collected by the assessee, which is not paid into the Government Treasury yet deemed to have been paid is nothing but the loan granted by the Governmerit to the assessee . Therefore, such a loan cannot be treated as a trading liability. Facts 'on record show that during the year under consideration the Government of Maharashtra introduced the Net Present Value (NPV) under Maharashtra Act No.XX of 2002 & Rule 31D of BST Rules 1959 notified vide Govt. Notification No.STR- 12.02/CR-002/Taxation-l, dated 16.11.2002, where under the eligible undertaking was permitted to prepay the loan amount. Under the said scheme, the prepayment was allowed at the NPV of the loan repayable at the end of the loan period. The assessee availed the benefits of this scheme and got a remission in the aggregate loan liability amounting to Rs.9,92,92,718/-. It is further seen that on 12.12.2002 the Government of Maharashtra announced a scheme of "Premature Repayment of the amount of deferred tax by the eligible units at NPV". The industries who had availed the incentives of the sales tax scheme were permitted to prematurely repay the deferred sales tax liability by arriving at NPV by applying a specific discount. The assessee availed the benefit of the scheme announced on 12.12.2002 as under: Sales tax liability Rs.18,79,58,925/- Less : Premature repayment Rs. 8,86,66,207/- 6

8488+5Godrej & Boyce Surplus accrued on the above Rs. 9,92,92,718/- This surplus has been treated as capital receipt, which has been taxed by the Assessing Officer u/s 41(1) of the Act. Considering these facts; we find force in the contention of the counsel that the issues are squarely covered by the decision of the Special-Bench of the Tribunal in the case of Sulzer India Ltd. (supra). The Tribunal has held as under: "The assessee was liable to pay sales tax amounts collected from 1-11-1989 to 31- 10-1996, payments of which were deferred under the scheme, and the amounts were payable after twelve years in six equal annual instalments commencing from 1-5-2003/ which meant that the liability was payable in future, Later on the State Government came out with a scheme by which it was provided that if some dealers opted, then they could pay the future liability at a discounted value or what one may call net present value immediately. Thus, in this situation, it could not be construed as remission of liability, because the State Government had not waived of any of the liability as given in the illustrations. Had the State Government accepted lesser amount after twelve years or reduced such instalments, then it could have been a case of remission or cessation. However, in the instant case the State Government had chosen to receive the money immediately which was receivable from 1-5-2003 to 1-5-2008. The amount of Rs.337.13lakhs was actually paid to SICOM on 30-10- 2002, Thus, it did not satisfy the condition of actual remission in praesenti. It was a simple case of collecting the amount at net present value which was due later on and even the formula for collecting the net present value was also given by the SICOM and the amounts had been paid as per that formula, Therefore, such payment of net present value of a future liability could not be classified as remission or cessation of the liability so as to attract the provisions of section 41(l)(a) [Para l08}" Considering facts in totality, in the light of the aforesaid decision of the Tribunal Special Bench which has been rightly followed by the CIT(A), we do not find any reason to interfere with the findings of the CIT(A). For the reasons stated above, it was to be held that the deferred sales tax liability being the difference between the payment of net present value against the future liability credited by the assessee under the capital reserve account in its books of account was a capital receipt and could not be termed as remission/cessation of liability and, consequently, no benefit would "arise to the assessee in terms of section 4l(l)(a) [Para l09]. The appeal filed by the revenue is accordingly dismissed.

Respectfully,following the above,we decide ground no.2 against the AO.

8.Last ground of appeal deals with provision made for service contract.The AR and the DR agreed that the Tribunal,while deciding the appeals for the AY.1992-93,1996-97 and 1997

98. (ITA/3329/Mum/99 & C.O.322/M/99 dtd.31.12.2004 and ITA/4934 & 4935/Mum/2000 dtd. 8.2.2005)had decided the identical issue against the AO.We are reproducing paragraph 2 of 8488+5Godrej & Boyce the order for the AY.1992-93(pg.38 of the paper book)of the order of the Tribunal(supra)and same reads as under: “In this case the original assessment was completed u/s.143(3) on 30/1/95 fixing income at Rs.11,89,09,910/- which was revised subsequently giving appeal effect at Rs.11,68,83,397/-. Later on Assessing Officer noticed that an amount of Rs.292.21 lakhs claimed by the assessee as expenses on account of provision of free services under product warranty was debited to profit and loss account. This was a provision made for estimated unascertained future cost that may or may not incur under warranty period. Assessing Officer opined that this was not allowable item and the taxable income escaped from the assessment net. After recording the assessment, the Assessing Officer issued notice u/s.148. assessee objected the above reopening and disallowance consequently made before the CIT(A).” Respectfully,following the same,ground no.3 is decided against the AO. ITA/658/Mum/2013-AY.2009-10. 9.Following our order for the earlier year,Grounds no.1 to 3 and first two additional grounds are decided against the assessee.Additional grounds no.3-4 are allowed in its favour,in part.

10.Grounds no.4-6 pertain to expenditure incurred on brand improvement.It was brought to our notice that the Tribunal,while deciding the appeal for the AY.2009-10 in the case of Godrej Industries Ltd.(ITA/3428&3737/Mum/2013,dtd. 1.06.2016),a sister concern,had held as under: 3. Ground No.1: In this ground, the assessee has challenged the action of the lower authorities in holding that expenditure incurred on brand improvement was capital in nature. During the course of assessment proceedings it was noted by the Assessing Officer that assessee was engaged in the business of manufacturing / processing / trading in industrial chemicals. It was noted by the Assessing Officer that assessee shared expenses with its other group companies on account of payment made to M/s Interbrand, a company engaged in creation and developments of brands and claimed the said expenditure as revenue expenditure. It was held by the Assessing Officer that the said expenditure was not revenue expenditure and it was capital expenditure for the reasons that change in the brand / logo symbolised Godrej's new corporate identity and the refurbishment of its master brand. The aim was to consolidate Godrej's presence in various business area. It was finally held by the Assessing Officer after going through the nature of expenses that these amounts were incurred in rebranding the Godrej brand and enhancing the Godrej brand and, therefore, these were capital expenditure as brand constituted an intangible asset. Accordingly, the Assessing Officer treated the same as capital asset and allowed depreciation @20% and balance amount was treated as capital expenditure and disallowed the same.

8488+5Godrej & Boyce totally created the new intangible asset which is totally different from earlier one. Hence this process of renewal or renovation, created a new intangible asset. Hon'ble Supreme Court in the case of Baliwala Nand Kishore vs. CIT 224 ITR 414 held that renewal or renovation of asset is in capital nature. The appellant had relied on the decision of Empire Jute Co. Ltd. vs. CIT - 124 ITR 1 and Alembic-Chemical Works Ltd. vs. CIT - 177 ITR 377. Depreciation of the intangible asset in Income-tax Act was not in existence. This came into operation from the year 1998. Moreover those two decisions can be distinguished as no new asset was created. For the aforesaid reasons, as the expenditure incurred and paid to interbrand (Consultant) is in the nature of capital expenditure. This expenditure is not allowed to deduct from P&L account. Hence, this ground of appeal is dismissed. A.O's order of allowing depreciation on the above expenditure is upheld.”

5. While deciding this appeal, the ld.CIT(A) relied upon his earlier order passed in the case of other group companies of the assessee, viz. M/s Godrej & Boyce Mfg. Co Ltd for A.Y. 2009-10. It was brought to our notice that the appeal of the said company is still pending and this issue was open for adjudication by us.

6. During the course of hearing, ld.counsel of the assessee made vehement' arguments to contend that the impugned expenses are revenue expenses. It was submitted that Godrej is an old brand and may be more than 100 years'old. The expenses incurred during the year, through M/s. Interbrand are for renewal and improvement. Our attention was drawn on the copy of the agreement with M/s. Interbrand to show the scope of services for which the payment was made. It was submitted that perusal of the agreement clearly shows that it was mentioned therein that Godrej brand already existed and what was required was to make desired improvement in the name. It was submitted that no new asset had come into creation. Finally reliance was placed on the decision of Hon'ble ITAT in the case of Fine Jewellery (India) Ltd v ACIT 30 Taxman.com 323 and Fine Jewellery India Ltd vs ACIT 151 ITO 385 wherein it was held that expenditure incurred on brand building by the assessee, who was manufacturer and exporter of jewellery was to be allowed as business expenditure. Finally our attention was drawn on written submissions filed before the CIT(A) wherein facts were discussed in detail and reliance was placed in support of judgements in support of the claim of the assessee.

7. Per contra, the ld.DR opposed the submissions of the assessee and submitted that it was a case of re-launch of the brand which gave rise to an intangible asset and, therefore, lower authorities have rightly capitalised the expenses incurred on the same. 8.We have considered the submissions of the assessee in detail and gone through the judgments relied upon by it. We have also gone through the order of the lower authorities and submissions of the ld. DR. We have read the agreement entered into between Godrej group and Interbrand, UK for improvements in the Godrej brand. It is a matter of public knowledge that brand "Godrej" has been existing for last many years. The terms of the agreement itself suggest that desired improvements were required to be made in the Godrej brand which was already existing. It was further submitted by the assessee before the lower authorities that there was no change in Godrej logo, the logo, the signage, the size of the brand name as all of these remained to be the same as they were before. The only change was change in the colour and colour combination which was brought in line with the likes of the youth. In any case, we have conspicuously noted that the name of the brand "Godrej"remained as it is, i.e. Godrej. Under these circumstances, one cannot contend at all that there was any type of acquisition of new intangible asset. The Godrej brand was with this group and remained as it is.There was no change in the ownership of the brand. In the given facts, at the best, it could be argued that there was some improvements in the looks and appearance of the brand. Under these circumstances, it cannot be contended that there was creation of a new capital asset. It was settled way back by Hon'ble Supreme Court in the case of Empire Jute Co Ltd vs CIT 124 ITR 1 that for the purpose of treating an expenditure as capital expenditure, twin conditions are must, viz. (i) there should be benefit of enduring nature; (ii) the expenditure must give rise to creation of new capital asset. The observations of Hon’ble Supreme Court were reiterated in subsequent judgment in the case of Alembic Chemical Works Ltd vs CIT 9

8488+5Godrej & Boyce

177 ITR 377 (SC) and thereafter many judgments came from various courts from all over the country wherein similar views were taken. In the facts of the case before us, admittedly, there is no creation of new asset Thus, the impugned expenditure cannot be held to be a capital expenditure. Similar view has been taken by Hon'ble Murnbai Bench of ITAT in the case of Fine Jewellery (India) Ltd vs ACIT (supra) as has been relied upon by the ld.counsel wherein it has been held that expenditure incurred by the assessee on creation of brand was allowable as revenue expenditure u/s 37(1) of the Income-tax Act. The ld.counsel also relied upon other judgements from Mumbai Bench in the case of Brightest Circle Jwellery Pvt Ltd (ITA No.4511/Mum/2011 dated 11th May, 2012) which has been authored by one of us, i.e. Hon'ble JM, wherein identical issue was involved and after discussing the entire law on this issue it was held by the co-ordinate bench that expenditure incurred on brand building was revenue in nature. Thus, under these facts and circumstances of this case and in view of the clear position of law as discussed above, we hold these expenses are revenue expenses and direct the Assessing Officer to treat the same as such and allow the same and, therefore, we delete the disallowance made by the Assessing Officer.” As the facts of both the cases are identical,except the amounts involved,so,respectfully following the above order,we decide grounds no.3-6 in favour of the assessee.

ITA/189/Mum/2013-AY.2009-10: 11.First ground of appeal

,is identical to the first ground raised by the AO in the earlier AY. So,same is decided against him,following our order for that year. 12.Ground no.2 deals with claim made by the assessee with regard to the interest on 64 Bonds, amounting to Rs.56,643/-.During the assessment proceedings,the assessee made a claim that the above interest-amount received by it was exempt, that the same was offered as taxable income by it, while filing the return.However, the AO refused to entertain the claim.

13. Aggrieved by the order of the AO assessee preferred an appeal before the FAA.He held that the claim made by the assessee was a legal claim,that the assessee ahd inadvertently treated tax free income as taxable item. Relying upon the judgment of Jute Corporation of India (87 ITR68) of the Hon’ble Apex Court he directed the AO to allow the claim of the assessee. 14.Before us,the DR and the AR supported the orders of the AO and the FAA respectively. We find that the issue of allowing a claim by the FAA now stands decided by the judgment of the Hon’ble Bombay High Court,delivered in the case of Pruthvi Brokers & Shareholderes (349 ITR 336).The Hon’ble Court has,after considering the case of Goetz India Ltd.,held as under: “An assessee is entitled to raise not merely additional legal submissions before the appellate authorities but is also entitled to raise additional claims before them. The appellate authorities have the discretion to permit such additional claims to be raised. The appellate authorities have jurisdiction to deal not merely with additional grounds, which became available on account of change of circumstances or law, but with additional grounds which were available when the return was filed. The words “could not have been raised” must be construed liberally and not strictly. There may be several

8488+5Godrej & Boyce