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TMI Blog2013 (10) TMI 694X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Rath ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether the advertisement expenses contained any capital expenditure or not." 3. The aforesaid additional ground has been said to be a legal ground, which inadvertently remained to be omitted in the original grounds taken. A request has been made for admission of the said additional ground. 4. Having read the additional ground, we find that indeed, this ground raises a legal issue as to whether the ld. CIT was correct in passing the order u/s 263 of the Act on a ground entirely different from that raised in show cause notice issued. The facts with regard to this ground are undisputedly already on record and no fresh fact is required to be gone into to decide this ground. On the other hand, this ground, as contended, will enable substantive justice to be dispensed with. 5. Thus, following 'National Thermal Power Co. Ltd. vs. CIT', 229 ITR 383 (SC), the additional ground taken by the assessee is admitted. 6. As per the impugned order, the CIT, on examination of the assessee's income-tax record for Assessment Year 2007-08, i.e., the year under consideration, noted that during the year, the assessee had debited an amount of Rs. 2,76,79,914/- to its Profit Loss Account under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure claimed in the audited Profit Loss Account in respect of earlier assessment years and had claimed the entire expenses relating to the current year as a revenue expenditure; and that thus, there was no error in the method of accounting for advertisement and all the advertisement expenses incurred during the year had been claimed as business expenditure u/s 37(1) of the IT Act. 9. The ld. CIT, however, passed the impugned order, observing as follows:- "3. I have considered the above submissions of the AR of the assessee company. It is observed that the assessee company has debited a sum of Rs.2,76,79,914/- under the head advertisement expenses. On examination of the details filed in this regard, it is noticed that an amount of Rs.14710314/- has been incurred towards expenses on advertisement and publicity. The balance of the expenses have been found to be as under:- Show expenses 72,89,993/- Sales/business promotion expenses 15,13,074/- Event exp-BMW 13,75,000/- Photo School expenses 12,54,220/- Professional fee model 8,48,770/- Other advertisement 4,43,606/- Sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isional order would amount to making an assessment in the garb of Section 263 of the Act, which is not permitted by the Act. For this proposition, the ld. counsel for the assessee has sought to place reliance on the following case laws:- i) 'Commissioner of Income-tax-XIII vs. Ashish Rajpal', 320 ITR 674 (Del); ii) 'CIT vs. Contimeters Electricals (P) Ltd.', 317 ITR 249 (Del); iii) 'Infosys Technologies Ltd. vs. JCIT', 105 TTJ 802 (Bang.); iv) 'Vesuvius India Ltd. vs. CIT', 54 SOT 172 (Kol); v) 'Star India Ltd. vs. ACIT, Range 11 (1)', 14 ITR (Trib) 106 (Mum); vi) 'Asia Resort Ltd. vs. ACIT', 143 Taxman 8 (Chd) (Mag) 12. The Ld. DR, on the other hand, has placed strong reliance on the impugned order in this regard. Qua this issue, we find that the notice dated 04.02.2011 (copy at APB 182-183) reads as follows:- "F.No.CIT-IV/263/2010-11/4009 Dated: 04.02.2011 The Principal Officer, M/s Genesis Colors Pvt. Ltd., 1A-2, Rao Tula Ram Marg, New Delhi - 110022. Sub: Proceedings u/s 263 of the IT Act, 1961 - M/s Genesis Colours Pvt. Ltd. - A.Y. 2007-08 - reg. An examination of the income-tax assessment records of M/s Genesis Colors Pvt. Ltd. for A.Y. 2007-08 it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OF INCOME TAX DELHI-IV, NEW DELHI." 13. Thus, 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 (reproduced hereinabove) 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. Such a course of action is not permissible in law, as has been held in various judicial decisions. In 'Commissioner of Income-tax-XIII vs. Ashish Rajpal' (supra), it was held that where the notice issued by the Commissioner before commencing proceedings u/s 263 of the Act referred to four issues and the final order passed referred to nine issues, the revisional proceedings were vitiated as a result of breach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the concept of deferred revenue expenditure, it ought to have written off and claimed only 1/5 of the advertisement expenditure, as discussed above, though this issue has been mentioned as the first issue in the show cause notice, it is entirely absent in the revisional order. The assessee has contended that it had been explained before the CIT that the assessee had never followed the deferred revenue expenditure concept for income-tax purposes and had claimed the entire advertisement expenses in the year of incurrence; and that thereupon, the ld. CIT dropped this issue while passing the impugned order. 22. Be that as it may, since the impugned order does not seek to revise the assessment order on the alleged issue of deferred revenue expenditure, this question does not require to be gone into, though detailed arguments have been addressed with regard thereto and reliance has been sought to be placed on numerous case laws. 23. Now, we take up the issue as to whether the ld. CIT was justified in holding that some part of the expenditure amounting to Rs. 2,76,79,914/- claimed by the assessee under the head 'advertisement' was of capital nature and had been wrongly allowed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure of Rs. 2,76,79,914/- had been furnished before the ld. CIT. Attention in this regard has been drawn to APB 184-192, which is a copy of the assessee's letter dated 03.06.2011. In this letter, qua the issue at hand, the assessee submitted before the ld. CIT that the expenditure on advertisement was purely revenue expenditure, having been incurred during the year for the advancement of the assessee's business. Also, in the assessee's reply dated 06.09.2011 (APB 193- 196) to the Commissioner, the assessee furnished details of advertisement expenses incurred by the assessee in excess of Rs. 1 lac each, as desired by the Commissioner. It was explained that the entire advertisement expenditure was revenue in nature. 26. Hence, the assessee did get the opportunity of being heard in respect of the error in this regard, which the Commissioner proposed to revise. Provision of such opportunity to the assessee takes the proposed action of the ld. CIT outside the ken of 'Ashish Rajpal.' It is therefore, that the action of the ld. CIT is not being rejected outright and its merits are being gone into infra. 27. The issue is as to whether indeed, as alleged by the ld. CIT, the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses as capital in nature; and that the ld. CIT erred in merely issuing a vague direction based on an illegal proposition of law. For the proposition that enduring benefit test is not the sole test for deciding the nature of an expenditure , the following judgements have been relied on:- i) 'Empire Jute Company Ltd. vs. CIT', 124 ITR 1 (SC); ii) 'ACIT vs. Medicamen Biotech Ltd.', 99 TTJ 873 (Del); and iii) 'Bharat Gears Ltd. vs. CIT', 337 ITR 368 (Del). 30. The ld. Counsel for the assessee has then contended that the expression "it appears" used by the ld. CIT before the words "that the AO has not caused any inquiry to ascertain the nature of such expenses being either revenue or capital" shows that the ld. CIT was himself not sure that no inquiry had been undertaken; and that if there is an inference of adequate inquiry from the assessment order, the provisions of Section 263 of the Act cannot be invoked. The following case laws have been sought to be relied on:- i) 'CIT vs. Vikas Polymers', 341 ITR 537 (Del); ii) 'CIT vs. Leisure Wear Exports Ltd.', 341 ITR 166 (Del); iii) 'CIT vs. Sunbeam Auto Ltd.', 332 ITR 167 (Del); iv) 'CIT vs. Prima India Products', 11 DTR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al on record, it is seen that in this case, admittedly, the AO had put a specific query to the assessee regarding the expenses incurred. Question No.11 at APB 197 states as follows:- "11. Detail of following expenses:- Gratuity, PF,Leave encashment, staff welfare, advertisement Royalty, party wise commission TDS thereon. 36. The assessee, in its reply dated 09.11.2009 (APB 198-199), stated as follows (relevant portion):- "Kindly refer to your notice u/s 142 (2) of Income-tax Act, 1961 requiring certain information/documents. The required information as per the questionnaire is as detailed hereunder:- .................................................................................................. Advertisement as on 31.03.2006 15,00,000 [Refer to note 20(i) and (ii) of Schedule 14 of notes on Accounts to the balance sheet]" 37. Note 20(ii) (APB 172) (in Schedule 14 to the Assessee's Notes to the Accounts) reads as follows:- "(ii) Advertising expenses of Rs.2,500,000 (balance Rs.1,500,000 as at 31 March, 2006, net of Rs.1,000,000 already charged off in the previous years) and leasehold expenses of Rs.14,632,527 (balance Rs.10,179,515) as at 31 March, 2006, net o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecific 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inasmuch as the CIT did not point out any item to hold that the expense was capital expenditure. He merely stated that a large part of the expenses had rendered enduring benefit to the assessee. The observation of the CIT (A) was, therefore, a result of mere guess work, conjectures and surmises, without any specific finding of error of claim. It goes without saying that merely observing that there is reason to disallow some of the expenses as capital, without pointing out specifically as to which of the expenses were found by the ld. CIT to be of capital nature, cannot and does not comprise a finding u/s 263 of the Act. The direction issued by the ld. CIT is, therefore, a vague direction unsustainable in law. 45. The other issue taken up by the ld. CIT was that according to him, during F.Y. 2006-07, relevant to the year under consideration, it had been held that royalty claimed of Rs. 1,65,48,377/- was capital expenditure and had been added back to the income of the asessee; that since it had been paid to obtain a non-exclusive licence for use of a licensed trade mark, it was in the nature of intangible asset and depreciation of Rs. 41,37,094/- (25% of Rs. 165,48,377/-) should h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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