TMI Blog2015 (7) TMI 87X X X X Extracts X X X X X X X X Extracts X X X X ..... d this order and has become final. iii. Assessee’s books of accounts are maintained regularly on day to day basis and are duly audited; there is no qualification or any material adverse remark by the chartered accounts. iv. Assessee’s books of accounts have not been rejected much less even doubted. v. In view of a series of favorable orders in assessee’s own cases on these issues we are of the view thatthey are no more res integra. vi. Principle of ‘Consistency’ as enunciated by Hon’ble Supreme Court in Radhasoami Satsang (1991 (11) TMI 2 - SUPREME Court) is fully applicable to the assessee’s case which has been reconfirmed by Hon’ble Supreme Court in CIT v Excel Industries Ltd. [2013 (10) TMI 324 - SUPREME COURT] vii. The Hon’ble Gujarat High Court in the case of Sayaji Iron and Eng. Co. (2001 (7) TMI 70 - GUJARAT High Court ) is applicable to disallowance retained alleging personal user by the company. Respectfully following it we hold that in the case of assesse being a limited company which is an inanimate person, there can be no personal expenditure. Consequently the disallowances attributed to be personal user cannot be justified and are deleted. viii. Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20 & 521/JP/2012, 573 & 574/JP/2012 - - - Dated:- 15-6-2015 - SHRI R.P. TOLANI AND SHRI T.R. MEENA, JJ. For The Assessee : Shri O.P. Agarwal ,CA Shri Manish Agarwal, CA Shri Javed Iqbal, Advocate For The Revenue : Smt. Neena Jeph, Sr. DR ORDER PER R.P. TOLANI, JM:- This is a set of 3 appeals by the assessee for AYs 2005-06, 2006-07 2008- 09 and 2 appeals by the revenue for AYs 2006-07 2008-09 against the respective orders of the ld. CIT(A). Grounds raised in respective appeals are summed up as under:- ASSESSEE S APPEALS: AY 2005-06 1. On the facts and in the circumstances of the case the Ld. CIT(A) has grossly erred in confirming the disallowances made out of following expenses arbitrarily without appreciating the nature of expenses incurred vis- -vis expediency, thus the disallowances so confirmed deserves to be deleted. S.No. Nature of Expenses Amount claimed Amount disallowed i) Sales Promotion Exp. 7,67,50,154 13,90,047 ii) Telephone Exp. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Deepawali Exp. 17,27,146.00 3,45,429.00 iv Travelling Exp. 80,25,173.00 8,02,517.00 v Business Exp. 3,22,370.00 67,474.00 vi Other Expenses 1,95,28,932.00 5,00,000.00 vii Vehicle Running Exp. 23,02,020.00 2,30,202.00 viii Event Management Exp. 3,26,77,152.00 5,00,000.00 ix Foundation Day exp. 21,70,492.00 1,08,524.00 1.1 Ld. CIT(A) erred in ignoring the crucial facts that seven heads of expenses (S.No. 1 to 8) mentioned in ground no. 1 have suffered The Fringe Benefit Tax (FBT) thereon, which stands paid by assessee. The FBT paid by Assessee Company on these expenses is more than the tax that is payable on the amount of expenses disallowed. 2. Ld. CIT(A) erred in confirming the disallowance of ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved assessee preferred first appeals contending that multiple disallowances were made by AO purely on the basis of adhocism, suspicion, assumptions, and without assigning specific reasons. 2.2 Ld. CIT(A) allowed part relief by reducing the estimates. Aggrieved assessee is before us in these years. 2.3 The relevant year wise charts of disallowance made by AO, part relief given by the CIT(A) and remaining disallowances are as under:- AY: 2005-06 S. No. Name Amount claimed Amount disallowed by AO Addition sustained by CIT(A) Relief granted by CIT(A) 1. Sales Promotion Publicity Exp. 7,67,50,154 38,37,508 13,90,047 24,47,461 2. Telephone Exp. 1,27,11,214 5,00,000 5,00,000 NIL 3. Deepawali Exp. 20,65,215 4,13,043 4,13,043 NIL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30,50,092 21,75,229 8,74,863 2. Telephone Exp. 1,53,68,283 Lump sum 5,00,000 - 5,00,000 3. Deepawali Exp. 17,27,146 20% 3,45,429 - 3,45,429 4. Travelling Exp. 80,25,173 10% 8,02,517 - 8,02,517 5. Business Exp. 3,22,370 20% 64,474 - 64,474 6. Other Exp. 1,95,28,932 Lump sum 5,00,000 - 5,00,000 7. Vehicle running exp. 23,02,020 10% 2,30,202 - 2,30,202 Depreciation on Cars 24,24,544 10% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NIL 8. Marketing Survey Exp. 4,83,31,69 3 10% 43,36,835 NIL 9. Foundation day ceremony Exp. 17,88,930 Lump Sum 1,78,893 NIL 10. Additional Depreciation Exp. 35,31,480 - 35,31,480 NIL 2.4 Apropos Sale promotion and Publicity expenses ld. Counsel for the assessee contends that the Break-up of the expenses in AY 2005-06 is under, facts in respect of other years are by and large same:- Particulars Amount (Rs.) Scheme Gifts 5,68,91,082 Other Gifts 4,09,038 Food refreshment 9,24,928 Frigate Cortege 9,84,814 Travelling 2,90,934 Hotel Booking 70,510 Publicity E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the assessee has not submitted any evidences in support of its contention that the gifts were given to various customers under the schemes to Hawkers, selling agents etc. So the same also remains unverified. Therefore, for want of verification and element of non-business use involved in them 5% of these expenses are disallowed and added back to the total income of the assessee. Therefore, disallowance @ 5% i.e. ₹ 30,50,092/- is made and same is added back to the total income of the assessee. AO Page 4 - A.Y. 2008-09 The assessee's submission is thoroughly examined. With due regards, the judicial pronouncements as relied by the assessee are not fully applicable in the case of the assessee. The reply of the assessee carries some weight but cannot be accepted in totality. Since these expenses are primarily in the nature of entertainment and as such these expenses cannot be said to have been incurred wholly and exclusively for business purpose. Further the expenditure incurred for nonbusiness can neither be denied nor ruled out as evident from the nature of expenses noted in the submission above like food and refreshments, traveling and conveyance, hotel booking, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of personal element therein. Thus without specifying even a single item of personal use partial disallowance has been retained in ad hoc manner. Further by a surprising action ld. CIT(A) qua the expenditure of ₹ 69,50,238/- incurred on scheme gifts and publicity expenses during the course of its business, without issuing any enhancement notice or providing a hearing hearing enhanced the 5% disallowance made by AO to 20% amounting to ₹ 13,90,047/-. The impugned enhancement was carried out by ld. CIT(A) on mere vague and sweeping observations that - the assessee failed to prove that amount was wholly and exclusively incurred for business purposes; it was not subject to verification; personal element may be involved and to plug any possible leakage of revenue. Ld. AO verified and held 5% as adhoc disallowable, most of which is deleted by ld. CIT(A); without observing any aggravating adverse fact the enhancement is carried out which is highly unjustified and arbitrary. 2.7. During the course of assessment proceedings, the assessee produced all the bills and vouchers along with the books of accounts before the Ld. AO, which is also observed ld. CIT(A) in his order. Beside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28/- + Hotel Booking ₹ 70,510/-. This also was incurred on the meetings of the advertisement and selling agents by the assesse organized for business consideration to get proper field feedback and apprise them of periodical commercial targets. These expenditure on food / refreshment during such stay in conferences of advertising agents constitutes essential tools of assessee s business and is undeniably incurred wholly and exclusively for business purposes. These are incurred as a regular feature for dealers as a business policy with the motive to boost its sales. Out of total receipts of ₹ 143.16 crores - receipts from sale of newspaper constitute ₹ 58.21 crores advertisement receipt are to the tune of ₹ 84.71 crores as tabulated at PB 213. Without any justifiable reason and merely on suspicions unjustified disallowances of ₹ 13,90,047/- is sustained by ld. CIT(A). 2.11. Lower authorities have failed to appreciate these crucial aspects that advertisement receipts are the backbone of media business could not be achieved without the participation of advertisement agencies. The advertisement receipts increased to ₹ 84.71 crores from ₹ 73 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : Hero Honda Motors Ltd. Vs. JCIT 103 ITD 157 (Del.) CIT Vs. Bhagwan Das ShobhaLal Jain 60 ITD 118 (Jabalpur) CIT Vs. Varinder Agro Chemicals Ltd. 205 CTR 324 (P H) Empire Jute Co. Ltd. Vs. CIT 124 ITR 1(SC) at is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency. S.A. Builders Vs. CIT 158 Taxman 74 (SC) Section 37(1) of the Income Tax Act, 1961 Business expenditure Allowability of Assessment years 1990-91 and 1991-92 Whether expenditure may not have been incurred under any legal obligation, yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency Held, yes. 2.15 Apropos expenses other than Sales promotion and publicity expenses disallowed at ₹ 38,69,526 out of the total expenses of ₹ 6,82,78,790/- under various heads; Ld. CIT(A) failed to quote a single specific example be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to the procurement of machines was duly capitalized details of which were also submitted thus the remaining traveling undertaken by directors were for the purpose of business specially when one of the relatives of the directors or the staff traveled stays in the countries traveled. The travelling under taken by staff cannot be held as incurred for personal purposes as the same was incurred in relation to provide incentive to them and is part of the business. This crystal clear fact was ignored by Ld. CIT(A) as well, therefore, the disallowance made on account of travelling expenses deserves to be deleted. Business Expenses: 2.20 A sum of ₹ 2,24,731/- being 20% of total expenses claimed under this head was disallowed which includes the expenses incurred on the visits of representatives, suppliers and news line dignitaries who visited the office of the assessee company and its branches resulting into publicity and media coverage both print as well as electronic media. Ld. AO completely ignored the assessee s explanation dated 27.12.2007. Other Expenses 2.21 A sum of ₹ 5,00,000/- was disallowed out of other expenses claimed in Profit Loss Account. The o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the same pertained to subsequent assessment year. In this regard, it was the fee paid by the assessee company on the courses undertaken and completed by Shri Nihar Kothari, Managing Director of the assessee company. Though a part of the course pertained to the succeeding assessment year however, since the fee was paid in the year under consideration and was non-refundable, therefore the same was claimed for the year under appeal. Ld. AO as well as Ld. CIT(A) did not doubt the claim but unjustifiably assumed that the course was conducted in the period pertaining to succeeding assessment years, disallowance was made which was claimed by assessee on payment basis. Since the expenditure is neither doubted nor questioned, the assesse following mercantile system of accounting is eligible for this claim as it was irrevocably incurred during the year in question. Foundation Day Ceremony Expenses: 2.25 A sum of ₹ 4,05,424/- was disallowed out of total expenses claimed ₹ 40,54,240/- @ 10% which stood reduced to 5% by Ld. CIT(A). In this regard, it is submitted that the ceremony was solemnized with the object of achieving development in personal and direct interaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are personally used by the company, because a limited company by its very nature cannot have any 'personal use . The limited company is an inanimate person and there cannot be anything personal about such an entity. The view that we are adopting is supported by the provision of s. 40(c) and s. 40A(5) of the Act. Since the disallowances of similar nature were deleted by the Hon ble ITAT from year to year as mentioned in chart placed at PB 47-50 keeping the settled law about the principle of consistency, all these disallowances in the assessment years 2005- 06, 06-07 and 08-09 under appeals, deserve to be deleted. 3.4 Ld. DR. relied on the orders of ld. CIT(A) on these issues. 3.5 We have heard the rival contentions and perused the material available on record. Facts about assessee s regular maintenance of accounts, their non-rejection, diverse business activities, contentions, applicable case laws and past litigation history is narrated in details above and needs no repetition. We are inclined to allow grounds raised by assessee relating to retention of disallowances by ld. CIT(A) in all these years on following considerations. i. All disallowances have been allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee s grounds relating to disallowance in all these years. Respectfully following them the department cannot be justified in adopting a flip flop attitude and repeatedly go on disallowing the same type of expenditure year after year. vii. The Hon ble Gujarat High Court in the case of Sayaji Iron and Eng. Co. (supra) is applicable to disallowance retained alleging personal user by the company. Respectfully following it we hold that in the case of assesse being a limited company which is an inanimate person, there can be no personal expenditure. Consequently the disallowances attributed to be personal user cannot be justified and are deleted. viii. For AY 2006-07 qua the same disallowances assesse has paid more Fringe Benefit Tax (FBT). As over FBT and IT provisions if any expenditure is taxable under FBT it cannot be disallowed again in Income Tax provisions. 3.7 Considering the entirety of above observations we have no hesitation in deleting the disallowances/additions retained by Ld. CIT(A) out of various expenses mentioned in respective grounds for AY 2005-06, 2006-07 2008-09 which are deleted. Grounds raised by assesse in this behalf in all these years are allowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 145.98 crs in AY 2005-06; ₹ 1.80crs in AY 2006-07 and ₹ 2.51 crs for AY 2008-09. As compared with TO the expenditure on marketing and survey constitutes meager % of such increase in turnover i.e. differential turnover. It makes it abundantly clear that the expenses incurred for marketing and survey are very reasonable as compared to the commercial benefits achieved. For conducting such surveys, assessee appointed following independent parties in respective years namely: i. M/s Perfect N Marketing, Jaipur ii. M/s Aneu Marketing Jaipur iii. M/s A One Marketing They rendered the requisite services by conducting door to door surveys in different areas on different days through their self hired team of surveyors and collected following type of information:- 1. Number of houses where the newspaper published by the assessee company is read. 2. Number of houses where any other newspaper is read. 3. Number of houses where the newspapers published by the assessee company and other both are read. 4. Number of houses where no newspaper is read. These agencies supplied the collected information on these domains to assessee, on the basis thereof compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not tenable. 2) Copy of returns of income filed by these agencies were submitted with AO vide letter dated 27.12.2007 PB 13-18 wherein PAN and other relevant details were duly mentioned. 3) Abstracts of monthly survey reports were submitted before the AO vide letter dated 31.12.2007 PB 62-74. 4) Opportunity to cross examine the persons whose statements were recorded by the inspector was asked for which was never provided despite assessee s request PB-62. Ld. AO disallowed the entire expenditure in all these years. Aggrieved assessee raised these grounds in first appeal. Ld. CIT(A) however confirmed the order of ld. AO relying mainly on following summary of observations: i. Initial onus to prove gaminess of the expenditure and parties was not discharged by the assessee as these parties, their bills/voucher and copy of income tax return were not filed. ii. Inspector was deputed who found that some other persons were residing at these address and not the parties who are claimed to have rendered services. iii. The daily survey reports were prepared in hurry by some layman or temporary employees of the assessee. iv. The bank inquiries revealed that amounts pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statement of the party produced by the assessee and made the additions on surmises, overlooking the vital evidence and against the principles of natural justice. It was submitted before ld. CIT(A) that the services rendered and expenditure incurred in this behalf cannot be doubted. The entire business expenditure has been incurred through account payee cheques and cleared through banks. The transactions in question were wholly and exclusively in the normal course of business; requisite TDS on these payments was made and deposited in govt. treasury. The expenditure of similar nature was also claimed in the preceding assessment years which have been allowed as business expenditure by orders passed u/s 143(3). Facts and circumstances in the preceding years are identical to the years under appeal, on principal of consistency the AO should not be flip flop from the position which is accepted in the preceding assessment years. The credibility of inspector s report was challenged by relying on the decision of the Hon ble Supreme Court in the case of CIT Vs. J.K. Charitable Trust reported in 308 ITR 161 and KishinchandChellaramVs CIT 125 ITR 713 (SC) where it was held that any evidence whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13 In the circumstances it is pleaded that the assessee having discharged its onus to prove the rendering of services and incurring of expenditure during the course of its business the entire expenditure in respect of Marketing Survey may kindly be deleted and entire expenditure may be allowed u/s 37(1). 4.14 Ld. Sr. DR supported the orders of lower authorities and vehemently argues that the onus of proving the genuineness of expenditure has not been properly discharged by the assessee. The explanation furnished by assessee is full of latches, ifs and buts. The alleged survey reports do not inspire any confidence and are hush documents to any how support that survey was conducted. They fail to invoke any conviction that a meticulous survey job can be completed in such a shoddy manner so as to command such huge expenditure. 4.15 We have heard the rival contentions and peruse the material available on record. As the facts emerge the record and evidence in this behalf has surfaced in piece meal and from time to time as the assessee attempted to fill in the gaps about inferences drawn by the authorities from time to time. Consequently a cohesive verification of material appears ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chargeable under the head Profits and gains of business or profession of any one previous year. 5.3 Term manufacture has not been defined in section 32(1)(iia) of the Income Tax Act, 1961; the definition of the word production as rendered in section 2(29BA) should be referred to which reads as under: (29BA) manufacture , with its grammatical variations, means a change in a non-living physical object or article or thing,- (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or (b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure; 5.4 A perusal of the above definition reveals that in order to term a particular activity as manufacture , following circumstances are required to exist: 1. There must be a change in a non living physical object/article/thing 2. That change must result into transformation of the object into a distinct / new object. 3. The new object is supposed to have a different name, character and use. Or, alternatively 4. That change must bring i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial undertaking would not amount to manufacturing. A printed magazine or periodical even if it is not bound has a definite identity and its usage is completely different from the blank paper on which it is printed. The expression used in section 80-1(2)(iii) is manufacture or produce any article or thing . The word produce is similar to the word production and while every manufacture can be characterized as production, every production need not amount to manufacture. There was no reason to exclude the printed paper produced by the assessee in its second and third units from the ambit of the expression article or thing . The language of section 80-I(2)(iii) thus clearly indicates that the second and third units did manufacture or produce an article or thing . Thus, even if the printed material, as produced by the second and third units, was taken as an intermediate product which required to be further bound for making it marketable, the word produce , occurring in section 80-I(2)(iii), would include it within its ambit. In the abovementioned case, it has clearly been held that printing amounts to manufacture / production and therefore it was held that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle or thing was also entitled to the additional depreciation. Since no new printing machines were purchased in the earlier year therefore no such claim of additional depreciation was made. Since the word production was not defined in the Income Tax Act therefore it was imperative to construe its general meaning. The word production refers to applying human endeavor on some existing raw material. Therefore ever manufacture could be characterized as production, but every production did not amount to manufacture. The Hon ble Rajasthan High court in the cases of ITO Vs Arihant Tiles Marble Pvt. Ltd. (295 ITR 148) has held that sawing of marble blocks into slabs and tiles amounted to production and therefore the assessee was entitled to deduction u/s 80IB of the IT Act, This decision is fully applicable to the facts of the present cases. I therefore direct the AO the allow the claim of additional depreciation of ₹ 35,31,480/- to the appellant. This ground of appeal is allowed. It is thus submitted that ld. CIT(A) s decision being in conformity of sec. 32(1)(iia) and the judicial precedents cited above, same deserves to be upheld. 5.9 We have heard the rival conten ..... X X X X Extracts X X X X X X X X Extracts X X X X
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