2013 (10) TMI 694 - AT - Income Tax

Jurisdiction u/s 263 - Whether CIT is justified in setting aside the assessment order passed u/s 143 (3) for making it afresh holding it to be erroneous and prejudicial to the interest of revenue within the meaning of section 263 - Held that - As per the notice u/s 263 of the Act, one of the issues on which the ld. CIT has sought to revise the assessment order was that the assessee ought to have written off and claimed only 1/5 of its advertisement expenditure, since the assessee had been following the concept of deferred revenue expenditure. However, a perusal of the impugned order shows that while passing the said order, the ld. CIT dropped this issue. Instead, he directed the Assessing Officer to inquire as to whether the advertisement expenditure of the assessee contained any capital expenditure or not. Therefore, evidently, there is a change in the impugned order vis-a-vis the show cause notice qua the issue of advertisement expenditure - where the show cause notice issued is on one ground and the revisional order is passed on an entirely different ground, the order cannot be sustained in law - Following decision of Asia Resort Ltd. vs. ACIT 2003 (3) TMI 269 - ITAT CHANDIGARH-A , Star India Ltd. vs. ACIT, Range 11(1) 2011 (11) TMI 117 - ITAT MUMBAI - Decided in favour of assessee. Capital or Revenue expenditure - Advertisement expenses - CIT held expenses as capital in nature - Held that - details were asked for of the assessee by the AO by putting a specific query, all possible details were duly furnished by the assessee in response, and no further question was asked by the AO. This conduct shows that the AO had duly considered the details called for by him and supplied by the assessee and that the AO stood satisfied from such details. Therefore, the ld. CIT, evidently, is not justified in observing that no inquiry was carried out by the AO. In this regard, the assessee is correct in contending that the ld. CIT was himself not sure that the AO had not carried out any inquiry. It is as such, that the CIT observed in the impugned order that it appeared that the AO had not caused any inquiry to ascertain the nature of the expenses. The CIT, as available from the order, had no basis for such finding of no inquiry into the nature of the expenses by the AO. Rather, instead of relying on anything in the assessment order to perceive such lack of inquiry by the AO, the CIT was swayed by his own misconceived opinion that since the incurrence of the expenditure had brought enduring benefit to the assessee, this was reason enough to disallow some part of the expenses as being capital in nature. Now this, in our considered opinion, cannot be the basis for invoking revisional jurisdiction by the CIT. As correctly contended, the mere factum of enduring benefit having accrued to the assessee is not, by itself, a decisive factor to hold the nature of the expenses incurred to be capital - The CIT was not justified in directing the AO to carry out inquiry to ascertain the nature of the expenses and to reframe the assessment by disallowing the expenses to be found to be capital in nature - Decided in favour of assessee.

Issues Involved:

1. Justification of the CIT's order under section 263 of the Income-tax Act, 1961, setting aside the assessment order dated 29.12.2009.
2. Whether advertisement expenses claimed by the assessee were capital or revenue in nature.
3. Whether the CIT was justified in revising the assessment order on grounds different from those mentioned in the show cause notice.
4. Whether the royalty payment treated as capital expenditure should have been allowed depreciation.

Detailed Analysis:

1. Justification of the CIT's Order under Section 263:

The CIT considered the assessment order dated 29.12.2009 as erroneous and prejudicial to the interests of the revenue. The CIT noted that the assessee had debited Rs. 2,76,79,914/- as advertisement expenses, which should have been capitalized for enduring business benefits. The CIT also observed that the royalty payment of Rs. 1,65,48,377/- was capital expenditure eligible for depreciation, which was not allowed, resulting in over-assessment of income.

2. Advertisement Expenses:

The CIT observed that a large part of the advertisement expenses rendered enduring benefits to the assessee and should have been disallowed as capital expenditure. The CIT directed the Assessing Officer (AO) to conduct inquiries to determine the nature of these expenses. However, this issue was not part of the show cause notice issued under section 263. The Tribunal found that the CIT cannot revise the assessment order on a ground different from that mentioned in the show cause notice, as established in various judicial decisions like 'Commissioner of Income-tax-XIII vs. Ashish Rajpal' and 'CIT vs. Contimeters Electricals (P) Ltd.'

3. Grounds Different from Show Cause Notice:

The Tribunal highlighted that the CIT's final revision order directed the AO to inquire whether the advertisement expenses included any capital expenditure, which was not mentioned in the show cause notice. This change in the revisional order is impermissible, as it violates principles of natural justice. The Tribunal cited multiple cases, including 'Infosys Technologies Ltd. vs. JCIT' and 'Vesuvius India Ltd. vs. CIT,' to support this point.

4. Royalty Payment:

The CIT held that the royalty payment of Rs. 1,65,48,377/- was capital expenditure for obtaining a non-exclusive license for a trademark and should have been allowed depreciation of Rs. 41,37,094/-. The Tribunal found that the CIT's order effectively reduced the assessment, which cannot be done under section 263. This reduction can only be achieved through section 264 of the Act.

Conclusion:

The Tribunal concluded that the CIT's order was not legally sustainable as it revised the assessment order on grounds not mentioned in the show cause notice. The Tribunal also found that the CIT failed to specifically point out any item of expenditure as capital in nature and that the AO had conducted inquiries into the nature of the expenses. Therefore, the appeal filed by the assessee was allowed, and the CIT's order was set aside.

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