2019 (6) TMI 987 - AT - Income Tax

E-commerce business - Selling at a price lower (predatory pricing) than the cost price - disallowance of loss - business model of creating marketing intangible assets for long-term benefits - expenditure of a capital nature - HELD THAT - As decided in own case 2018 (5) TMI 337 - ITAT BANGALORE the starting point for computing income from business is the profit or loss as per the profit and loss account of the Assessee, which cannot be disregarded unless certain provisions Section 145(3) of the IT Act are invoked. Since the AO has not invoked such provisions, the AO is not empowered to go beyond the book results. As held that it is settled law that where a trader transfers his goods to another trader at a price less than the market price and the transaction is a bonafide one, the taxing authority cannot take into account the market price of those goods, ignoring the real price fetched to ascertain the profit from the transaction and income which has accrued or arisen can only be subject matter of total income and not income which could have been earned but not earned . As held that the AO was not right in proceeding to ignore the books results of the Assessee and resorting to a process of estimating total income of the Assessee in the manner in which he did, what can be taxed is only income that accrues or arises as laid down in Sec.5 of the Act. Nothing beyond Sec.5 of the Act can be brought to tax . There is no provision to disregard the loss declared by the Assessee and also there is no provision by which the Revenue can ignore the sale price declared by an Assessee and proceed to enhance the sale price without any material before him to show that the Assessee has in fact realized higher sale price. Valuation of intangibles is academic since it rejected the basic position adopted by the Revenue and held that the Assessing Officer should accept the loss declared by the Assessee. The Tribunal concluded that the action of the Revenue in disregarding the books results cannot be sustained and the further conclusion that the action of the Revenue in presuming that the Assessee had incurred expenditure for creating intangible assets/brand or goodwill is without any basis. Accordingly, the loss declared by the Assessee in the return of income should be accepted by the AO and the action of disallowing the expenses in without any basis. We are of the view that the aforesaid conclusion of the Tribunal will equally apply to AY 2012-13 to 2014-15 also as the basis of making the addition in these AYs are also the same as it was made in AY 2015-16. The allegation of the revenue regarding the Assessee and M/S.WS Retail Pvt.Ltd., being related parties does not emanate from the order of assessment. The revenue cannot be permitted to take a stand which was not the factual basis on which addition was made by the AO. Even otherwise, there is no basis for the stand taken by the revenue in the grounds of appeal. We therefore find no merit in these appeals by the revenue. Respectfully following the order of the Tribunal in Assessee s own case for AY 2015-16, we uphold the orders of the CIT(A) and dismiss, these appeals by the revenue.

Summary

Issues Involved:
1. Legitimacy of selling goods below cost price.
2. Nature of losses incurred by the Assessee.
3. Classification of losses as capital expenditure.
4. Valuation of intangible assets.
5. Relationship between the Assessee and WS Retail Pvt. Ltd.

Detailed Analysis:

1. Legitimacy of Selling Goods Below Cost Price:
The Assessee, engaged in the wholesale business of books, mobiles, and computers, sold goods at prices lower than the cost price. The AO questioned this practice, suggesting it was not a normal business practice. The Assessee justified this by explaining that e-commerce was in its nascent stage, and selling at discounted prices was a strategy to increase sales volume and attract buyers.

2. Nature of Losses Incurred by the Assessee:
The Assessee reported significant losses for AYs 2012-13, 2013-14, and 2014-15. The AO argued that these losses were due to a strategy of selling goods below cost price to create customer goodwill and brand value, which would benefit the Assessee in the long run. The AO concluded that these losses were intended to create marketing intangibles and should be considered capital expenditure.

3. Classification of Losses as Capital Expenditure:
The AO classified the losses as capital expenditure, arguing that the strategy of selling below cost was to create intangible assets like brand value and goodwill. The AO allowed depreciation on these intangibles but added the remaining amount back to the Assessee's income. The Assessee contended that no part of the purchases should be considered capital expenditure, as the expenses did not create any asset of enduring advantage.

4. Valuation of Intangible Assets:
The AO adopted the cost approach for valuing intangibles, based on OECD's BEPS guidelines. He compared the Assessee's profit margins with market averages and concluded that the difference in sales due to the Assessee's strategy should be considered the value of marketing intangibles. The AO made significant additions to the Assessee's income for each assessment year based on this valuation.

5. Relationship Between the Assessee and WS Retail Pvt. Ltd.:
The Revenue raised concerns about the relationship between the Assessee and WS Retail Pvt. Ltd., suggesting that the transactions were not at arm's length. The Assessee argued that this was not the basis of the assessment and that the Revenue had not provided any material evidence to support this claim.

Tribunal's Findings:

1. Tribunal's Previous Ruling:
The CIT(A) referred to a previous ITAT ruling in the Assessee's case for AY 2015-16, where the Tribunal held that the AO cannot disregard the real price fetched in bona fide transactions. The Tribunal had concluded that the AO should accept the loss declared by the Assessee, as there was no provision to disregard the loss or enhance the sale price without evidence.

2. Application to Current Assessment Years:
The Tribunal found that the same principles applied to AYs 2012-13 to 2014-15. The Revenue's concerns about the relationship between the Assessee and WS Retail Pvt. Ltd. were not supported by the assessment order or any factual basis. The Tribunal upheld the CIT(A)'s decision to delete the additions made by the AO and dismissed the Revenue's appeals.

Conclusion:
The Tribunal concluded that the AO's actions in disregarding the book results and presuming the creation of intangible assets were without basis. The losses declared by the Assessee should be accepted, and the Revenue's appeals were dismissed. The judgment emphasized that only actual income accrued or arisen can be taxed, and speculative or potential income cannot be considered.