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2015 (7) TMI 560 - ITAT DELHI

2015 (7) TMI 560 - ITAT DELHI - TMI - Disallowance of brand registration expenses - revenue v/s capital - Held that:- Respectfully following the decision of this Tribunal in the appellant’s own case for the assessment year 2002-03, we allow this ground of appeal filed by the assessee wherein CIT(Appeals) noted that these expenses were for fees required to be paid for as per state excise law for registration of the brand and allowed it by holding the same as revenue in nature. - Decided in favour .....

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e. The crucial facts to be taken into consideration that the provision made on the dispatch of goods is reversed the moment the goods reached the destination only actual breakages are charged to P&L account. It is only in respect of the goods which are under dispatch at the year end the provision was created. This shows that the amount debited to P&L account represents mostly actual breakages and this system of accounting is being followed continuously by the appellant. The provision is made on .....

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been made on some basis. Therefore, based on the ratio laid down in the above cases, the provision is allowable as a deduction.- Decided in favour of assessee.

Restricting the allowance of brand expenses to only 1/5th of such expenses - Held that:- From the details, it is clear that the expenditure is incurred only towards sales promotion and on advertisement issued. As decided in case of CIT Vs. Monto Motors [2011 (12) TMI 50 - DELHI HIGH COURT] advertisements and sales promotion are .....

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ear by holding that the approach of the authorities below is correct having regard to the judgment of the Supreme Court in the case of ITR Vs. Mahendra Mills, [2000 (3) TMI 3 - SUPREME Court ] holding that since the depreciation for the assessment year 2001-02 was not actually claimed, there was no justification to reduce the written down value by the amount on hypothetical depreciation. Matter would have been different had the Assessing Officer in the assessment proceedings for the assessment y .....

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J. For the Petitioner : Sh. Deepak Chopra, Adv. & Sh. Aditya Gupta, CA For the Respondent : Sh. Ramesh Chandra, CIT(DR) ORDER PER INTURI RAMA RAO, A.M.: These are the cross appeals filed by the assessee as well by the Revenue for the assessment years 2006-07 to 2008-09 impugning the orders of learned CIT(A) passed in respective assessment years. The assessee has filed ITA Nos. 4278/Del/2010, 287/Del/2012, 288/Del/2012 and the Revenue has filed ITA Nos. 5178/Del/2010, 1845/Del/2012 & 1846 .....

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d in law and deserves to be set aside. ii. That the ld. CIT(A) grossly erred in law in not allowing the brand registration expenses of ₹ 1,279,500/- as revenue expenditure for the year under consideration and in limiting the allowance of such expenditure only to 1/5th of such expenditure. iii. That the ld. CIT(A) grossly erred in law in holding such brand registration expenses to be capital in nature and holding that on account of such expenses the assessee would continue to derive benefit .....

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akages were bound to happen in transit since the appellants products were transported in glass bottles which were brittle in nature. vii. That the ld. CIT(A) gravely erred in not appreciating that the assessee had incurred actual breakages of ₹ 777,413/- which should have in any case been allowed. viii. That the ld. CIT(A) gravely erred in concluding that the accounting approach of the assessee was a colourable device made in circumvent the provisions of law. ix. That the ld. CIT(A) comple .....

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to various locations and it was for this breakages that a provision was made by the assessee on the basis of its past experience. xi. The ld. CIT(A) grossly erred on facts and in law in limiting the allowance of brand expenses amounting to ₹ 101,610,577/- to only 1/5th of such expense for the year under consideration. xii. That the ld. CIT(A) grossly erred in concluding that such brand expenses resulted in an enduring benefit arising to the assessee and hence were capital in nature. xiii. .....

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advertisement and sales promotion was extremely uncertain since brands and preferences change all the time and to hold the attention and preference of the consumer these expenses have to be incurred repeatedly. xvi. That the appellant reserves its right to add, alter, amend, or modify any ground of appeal either before or at the time of hearing of this appeal. 4. The similar grounds were raised for the other assessment years, namely, 2007-08 and 2008-09. 5. Facts in brief are that the appellant .....

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) and thereafter the case was selected for scrutiny. The assessment was completed on 16.12.2009 under Section 143(3) of the Act at a total income of ₹ 1,29,53,57,400/- after making several disallowances to the tune 10,68,18,564/-, addition on account of provision of transit breakage ₹ 14,01,233/-, on account of depreciation ₹ 25,27,254/-, on account of brand registration ₹ 12,79,500/- and on account of brand expenses ₹ 10,16,10,577/-. Being aggrieved, appeal was pr .....

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or AY 2006-07, ₹ 17,43,500/ for AY 2007-08 and ₹ 7,89,500/- for AY 2008-09. The brief facts relating to the ground of appeal are as follows: 8.1 The appellant had claimed the above expenditure incurred on account of registration of brand in the several states. It was explained before the Assessing Officer that these expenses were incurred for registering the brands in each of the States in which the assessee sold its products and these registrations were to be renewed (as per the Sta .....

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decision, the appellant had raised the present ground. 8.2 During the course of hearing before us, the learned counsel has drawn our attention to page 32 and 34 wherein the details of expenditure along with the documentary evidence in support of the same were placed. From the perusal of details, it is clear that this expenditure has to be incurred every year in order to register the brands of the products being sold by the appellant in every States as per the Excise Policy of every State. It is .....

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90,000/- on brand registration expenses which was disallowed by the Assessing Officer on the ground that they were capital in nature. The CIT(Appeals) however noted that these expenses were for fees required to be paid for as per state excise law for registration of the brand and allowed a sum of ₹ 1,90,000/- by holding the same as revenue in nature. He, however, confirmed a disallowance of ₹ 2 lacs since the receipts for such amount had not been produced. 13. Before us also, the ass .....

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7,39,806/- for AY 2008-09. During the years under consideration, the appellant claimed aforesaid amounts as provision for transit breakages and shortages. It was explained during the course of assessment proceedings that the transit breakage and shortage represented the losses which occurred during transportation of goods from factory to destination. During the financial year, provision for such breakage/shortage was made on month to month basis. However, once the goods reach their destination t .....

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occur and making provision for the same amounts to provision for contingent liability and therefore disallowed the same. On appeal before the CIT(A), following the Tribunal s order for the assessment year 2004-05 confirmed the disallowances. The relevant paragraphs of the Tribunal s order are reproduced below: We have heard the parties and considered the rival submissions, the assessee had given details for provision of transit breakage as under: A.Y. Total amount debited to Transit Breakage &a .....

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7,281 During the year a provision of ₹ 702,244 has been created and a reversal of ₹ 1,128,529 pertaining to the assessment year 2003- 04 has been made. The Assessing Officer has wrongly made an addition of ₹ 247,281 without giving the credit of ₹ 673,281 relating to assessment year 2003-04 reversed in the current year. No addition ought to have been made since the figure of reversal is higher that the figure of provision made during the year. The assessee is new in the bu .....

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s against the provision of ₹ 10,46,164/- the actual expenditure was ₹ 5,33,376/-, in assessment year 2003- 04 the expenditure was ₹ 19,45,425/- as against the provision of ₹ 25,60,802/- and in assessment year 2004-05, the expenditure was ₹ 40,27,830/- as against the provision of ₹ 42,75,111/-. In each year, the provision is excessive. It may also be noted that the assessee came into existence in these years and has no experience of its own to enable it to esti .....

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, in case of Andhra Pradesh the rate is ₹ 10 per case, in case of Goa it is ₹ 15 per case and in the case of Karnataka it is ₹ 15 per case. How the amount of ₹ 10 or ₹ 15 per case arrived at is anybody s guess. In any case, this chart also does not show as to on what experience it was determined that the rate of breakage in rupees would be ₹ 10, ₹ 9.5 and ₹ 15 in respect of these three places. Again this provision is based from first day of the acc .....

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ision of Calcutta Bench of the Tribunal in the case of JCIT Vs. ITC Ltd., 299 ITR 341 (SB) cannot be of any help to the assesee as in all these the provision was made on a scientific basis based on the experience of the assessee. 11. We accordingly reverse the order of the CIT(Appeals) in the appeal for assessment year 2001-02 on this issue and uphold the disallowance and his orders in the appeals for assessment years 2002-03 to 2004-05. 9.1 From the above it is clear that this Hon ble Tribunal .....

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the moment the goods reached the destination only actual breakages are charged to P&L account. It is only in respect of the goods which are under dispatch at the year end the provision was created. This shows that the amount debited to P&L account represents mostly actual breakages and this system of accounting is being followed continuously by the appellant. The Hon ble Apex Court in the case of Rotrok Controls (India) Pvt. Ltd. (supra) held as follows vide para 18: At this stage, we o .....

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ee whereas the case of Indian Molasses Co. [1959] 37 ITR 66 (SC) was restricted to an individual retiree. On the other hand, the case of Metal Box Company of India [1969] 73 ITR 53 (SC) pertained to an army of employees who were due to retire in future. In that case the company had estimated its liability under two gratuity schemes and the amount of liability was deducted from the gross receipts in the profit and loss account. The company had worked out its estimated liability on actuarial valua .....

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the assessee company had formulated leave encashment scheme. It was held, following the judgment in Metal Box Company of India [1969] 73 ITR 53 (SC), that the provision made by the assessee for meeting the liability incurred under leave encashment scheme proportionate with the entitlement earned by the employees, was entitled to deduction out of gross receipts for the accounting year during which the provision is made for that liability. The principle which emerges from these decisions is that .....

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the impugned judgments before us the assessee(s) has succeeded except in the case of Civil Appeal Nos. 3506 to 3510 of 2009-arising out of SLP(C) Nos. 14178-14182 of 2007-Rotork Controls India (P) Ltd. vs. CIT, in which the Madras High Court has overruled the decision of the Tribunal allowing deduction under section 37 of the 1961 Act. However, the High Court has failed to notice the reversal which constituted part of the data systematically maintained by the assessee over last decade. 9.2 Even .....

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scretion of the management is a submission which deserves to be rejected at the threshold. It is well settled that if a liability arises within the accounting period, the deduction should be allowed though it may be quantified and discharged at a future date. Therefore, the provision for a liability is amenable to a deduction if there is an element of certainty that it shall be incurred and it is possible to estimate the liability with reasonable certainty even though the actual quantification m .....

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me Court being pertinent are extracted herein below (page 67):- "But the contention was that though Schedule VI to the Companies Act may permit a provision for contingent liabilities, the Income Tax Act, 1961, does not, for unde Section 36(v), the only deduction from profits and gains permissible is of a sum paid by an assessee as an employer by way of his contribution towards and approved gratuity fund created by him for the exclusive benefits of his employees under an irrevocable trust. T .....

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while preparing the P. & L. Account. It is recognised in trading circles and we find no rule or direction in the Bonus Act which prohibits such a practice." 6. In the case of Shree Sajjan Mills Ltd (supra), the Supreme Court was examining the provision made by the assessee towards gratuity under the Income Tax Act, 1961. The Supreme Court, after noticing the judgment in Metal Box Company of India Ltd. Vs. Their Workmen [1969] 73 ITR 53, crystallized its analysis at page 599 and made th .....

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ench of this Court, while considering deductibility of a provision for warranties made by an assessee, which dealt in computers in the case of CIT Vs. Hewlett Packard India (P) Ltd. [2008] 314 ITR 55 (Del.), by its judgment passed in Appeal No. ITA 486/2006 dated 31.03.2008, upheld the deductibility of the provision for warranty on the ground that it was made on the basis of actuarial valuation being covered by the principle set out in Metal Box Company of India Vs. Their Workmen [1969] 73 ITR 5 .....

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lying this principle to the facts of the case, even in this case the provision was made based on past experience and the actual damages were taken into account immediately after the goods reached the destination which means that the provision was made only in respect of goods which were under dispatch as at the end of the year. This provision was made based on the past experience. Therefore, the provision had been made on some basis. Therefore, based on the ratio laid down in the above cases, th .....

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nd expenses. The appelant explained that these expenses were incurred for advertising, sales promotion, cost and distribution etc. The Assessing Officer held that the brand expenses were incurred for enhancing the image of the brand and as such it was resulting in an enduring benefit. Therefore, he disallowed the same holding to be capital expenditure. On appeal before the CIT(A), the CIT(A) held that although the expenditure was in the nature of event management, business promotion expenses etc .....

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er the expenditure is revenue or capital. He placed reliance on the following decisions: 1. Empire Jute Company, 124 ITR 1 (SC), 2. CIT Vs. Berger Paints (India) Ltd., 254 ITR 503, (Cal.), 3. CIT Vs. Vs. Adidas India Marketing Pvt. Ltd., 195 Taxman 256 (Del.), 4. Addl. Comm. Vs. Delhi Cloth and General Mills, 144 ITR 280 (Del), 5. DCM Vs. CIT, 198 ITR 500 (Del.), 6. The Commissioner of Income Tax Vs. Citi Financial Consumer Financial Ltd., 335 ITR 29 (Del.), 7. CIT Vs. India Visit.Com (P) Ltd., .....

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r. 10.3 We have heard the rival submissions and perused the details of the expenditure incurred placed at pages no. 76 to 79 of the paper book. From the details, it is clear that the expenditure is incurred only towards sales promotion and on advertisement issued. The issue whether the advertisement expenditure is revenue or capital is adjudicated by the Hon ble Jurisdictional High Court in the case of CIT Vs. Monto Motors, 206 TAXMAN 43 (Del.) vide para 4, which is reproduced below: Advertiseme .....

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ompanies compete and are available in abundance. Advertisements and sales promotion are conducted to increase sale and their impact is limited and felt for a short duration. No permanent character or advantage is achieved and is palpable, unless special or specific factors are brought on record. Expenses for advertising consumer products generally are a part of the process of profit earning and not in the nature of capital outlay. The expenses in the present case were not incurred once and for a .....

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ITA No. 5178/Del/2010 for AY 2006-07, 1845/Del/2012 for AY 2007-08 & 1846/Del/2012 for AY 2008-09. 11. Now, we shall deal with the appeal filed by the Revenue for the assessment year 2006-07. The grounds of appeal raised by the Revenue in ITA No. 5178/Del/2010 are reproduced as under: i. On the facts and circumstances of the case the Ld. CIT(A) erred in law as well as on merits in deleting the addition of ₹ 25,27,254/- made by the AO on account of excessive depreciation claimed by the .....

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expenses i.e. ₹ 2,55,900/- for the period under consideration and to disallow balance amount of ₹ 10,23,600/- which could be spread over by the appellant for the four successive years subject to other provisions of the Act. iv. On the facts and circumstances of the case the Ld. CIT(A) erred in law as well as on merits in holding that spreading over five year of brand expenses resulting in enduring benefit is in conformity with the specific provisions of the Act, while the AO held the .....

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ppeal at any time before or during the hearing of this appeal. 12. The first ground raised by the Revenue is pertaining to restricting the claim of depreciation on account of reducing WDV on account of not claiming depreciation in the assessment year 2000-01. The assessee claimed depreciation of ₹ 25,27,254/- for AY 2006-07; ₹ 21,68,161/- for AY 2007-08 and ₹ 18,61,471/- for AY 2008-09. The Assessing Officer adopted WDV after notionally allowing the depreciation for the years i .....

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009 by holding as follows: 6. We are of the opinion that the approach of the authorities below is correct having regard to the judgment of the Supreme Court in the case of ITR Vs. Mahendra Mills, 243 ITR 56 holding that since the depreciation for the assessment year 2001-02 was not actually claimed, there was no justification to reduce the written down value by the amount on hypothetical depreciation. Matter would have been different had the Assessing Officer in the assessment proceedings for th .....

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