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Dy. Commissioner of Income Tax, Circle-11 (1) , New Delhi Versus M/s Encorp E Services Ltd.

2016 (1) TMI 756 - ITAT DELHI

Addition on account of brand building and advertisement expenses - CIT(A) deleted the addition - Held that:- The assessee was incurring the expenses under consideration for its sales promotion and those expenses were incurred from year to year in the regular course of business. Therefore, those were revenue in nature and as such the ld. CIT(A) rightly deleted the addition made by the AO. - Decided in favour of assessee

Addition made by the AO on account of depreciation - CIT(A) delete .....

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our of assessee

Disallowance of deprecation on sealed premises - CIT(A) deleted the addition - Held that:- CIT(A) rightly directed the AO to allow the depreciation on the assets of the assessee which were included in the block of assets. See CIT Vs Oswal Agro Mills Ltd. (2010 (12) TMI 947 - Delhi High Court) and CIT Vs Sonal Gum Industries (2009 (2) TMI 84 - GUJARAT HIGH COURT ) - Decided in favour of assessee - ITA No. 1799/Del/2011, ITA Nos. 4460 & 4461 /Del/2011 - Dated:- 11-1-2016 .....

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ted order for the sake of convenience and brevity. 3. First we will deal with the appeal in ITA No. 1799/Del/2011 for the assessment year 2005-06. Following grounds have been raised in this appeal: 1. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of ₹ 1,64,99,137/- on account of expenses on brand building and advertisement. 2. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of ₹ .....

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143(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act) on 03.02.2007. Later on the case was selected for scrutiny. The AO during the course of assessment proceedings noticed that the assessee had claimed advertising and Brand Building expenses to the tune of ₹ 2,06,23,921/-. He asked the assessee to furnish the details of the said expenses. In response, the assessee furnished the details vide letter dated 31.10.2007. From the said details, the AO noted that the assessee h .....

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ded to the income of the assessee. The reliance was placed on the following case laws: Hylam Ltd. Vs CIT (1973) 87 ITR 310 (AP) CIT Vs Singareni Collieries Co. Ltd. (1980) 121 ITR 466 (AP) Assam Bengal Cement Co. Ltd. Vs CIT (1955) 27 ITR 34 (SC) 6. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted as under: (i) The appellant company in its profit and loss account for the year under reference has claimed ₹ 2,06,23,921/- by debiting the same under Advertisement .....

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nting to ₹ 41,24,784/- is allowed by him and balance of ₹ 1,64,99,137/- is disallowed. (ii) The AO in his order in para 4.1 to 4.5 has tried to analyze and distinguish between the revenue expenditure and the capital expenditure by citing various case laws but he himself has not adhered to fundamental principle of distinguishing revenue expenditure and capital expenditure. The AO in para 4.2 and 4.4 referred the case of Hylam Ltd. Vs CIT (1973) 87 ITR 310 (AP) and Andhra Pradesh High .....

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ere the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. Expenditure can be looked at either from the point of views of what is acqui .....

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evenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The Source or the manner of the payment .....

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ually exclusive and have to be applied to the facts of each particular case in the manner indicated. Thus the courts have held that a particular expenditure is a capital expenditure or a revenue expenditure depends upon the nature and object for which it is incurred. It should consider the nature and its use in ordinary course of business and object to which the expenditure was incurred. Therefore, before deciding whether a particular expenditure is a capital expenditure or a revenue expenditure .....

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of sale promotion of the company and it has not resulted in creation of any capital assets for the company. The expenditure incurred is in the nature of recurring expenses incurred wholly and exclusively for the promotion of the business and the expenditure incurred was not of durable nature. (iv) Therefore, such expenses on advertisement are to be allowed as business expenditure and are not a deferred revenue expenditure. We rely in the case of CIT VS Berger Paints (I) Ltd. (2002) 254 ITR 503 .....

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unt Co. Ltd. Vs CIT (1970) 75 ITR 1991 (SC). (v) Respectfully following the above case laws it is prayed that the disallowance of ₹ 1,64,99,137/- made by the AO out of advertisement expenses may kindly be deleted. 7. The ld. CIT(A) after considering the submissions of the assessee observed that the partywise and monthwise details of Advertisement & Brand Building expenses provided by the assessee revealed that those expenses had been incurred on account of press advertisement, cable ad .....

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Burger Paints India Ltd. 254 ITR 503. 8. Now the department is in appeal. The ld. DR strongly supported the order of the AO and further submitted that the expenses incurred by the assessee were having enduring benefit, therefore, those were capital in nature. As such the AO rightly made the addition and the ld. CIT(A) was not justified in deleting the same. 9. In his rival submissions the ld. Counsel for the assessee reiterated the submission made before the ld. CIT(A) and further submitted tha .....

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ement, cable advertisement, printing of trend book, telecast in television, radio, designing & printing of posters & sign boards for increasing the profitability of its business of computerized lottery. Those expenses were incurred in the regular course of business, therefore, the AO was not justified in treating the expenses of Advertising and Brand Building as capital in nature. On the other hand, the ld. CIT(A) after considering the nature of expenses which were mainly on account of t .....

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he Hon ble Calcutta High Court in the case of CIT Vs Burger Paints (I) Ltd. (2002) 254 ITR 503 (supra) held as under: that if according to the revenue laws the assessee is entitled to treat a sum as a revenue expenditure, then that legal right of the assessee is not estopped by the treatment given by the assessee to it in its own books of account. Advertisement expenses are normally to be treated as revenue expenditure. 11. Similarly the Hon ble Punjab & Haryana High Court in the case of CIT .....

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glow sign boards with an object to facilitate the business operation and not with an object to acquire an asset of enduring nature. Therefore the expenditure was of revenue nature and the Tribunal had rightly treated it as of revenue nature. 12. The Hon ble Jurisdictional High Court while deciding the similar issue in the case of CIT Vs Orient Ceramics and Industries Ltd. (2013) 358 ITR 49 (Del) held that the expenditure on glow sign boards displayed at various outlets were revenue in nature. 1 .....

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unt of depreciation. 15. Facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee claimed depreciation @ 60% on Plant & Machinery and had given a note that the Plant & Machinery comprises of software, hardware and other equipment which were in the nature of computers. The AO however, allowed depreciation @ 25% which was applicable on Plant & Machinery and accordingly made the addition of ₹ 7,58,70,585/-. 16. Bein .....

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n were part and parcel of computer system and the software to run the same. Depreciation is allowable under Income tax Act on the basis of character of the item of machinery. Computers are also plant and machinery eligible for higher rate of depreciation at sixty percent and the assessee company has rightly claimed and entitled to depreciation at sixty percent. (ii) The assessing officer while making the disallowance observed as under: From the perusal of depreciation chart it is seen that asses .....

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mputer. Hence depreciation amounting to ₹ 5,47,63,830/- is allowed on P&M as against the claim of ₹ 13,06,34,415/- and balance depreciation of ₹ 7,58,70,585/- is disallowed and added to the income of the assessee. Penalty proceedings u/s 271(1)(c) of the Act is initiated for furnishing inaccurate particulars of income. (iii) You will kindly see from the enclosed details that the items grouped under the head Plant & Machinery are POS Terminal Hardware. One set of POS Ter .....

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delete the disallowance and direct the Assessing Officer to allow depreciation @ 60% as applicable to computer. 17. The assessee on the direction of the ld. CIT(A), also furnished the copies of bills of computers which were debited under the head POS computer Terminals (hardware) and grouped under the head Plant & Machinery. 18. The ld. CIT(A) after considering the submissions of the assessee observed that the POS Terminals which had been grouped under the head Plant & Machinery consist .....

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assessee reiterated the submission made before the authorities below and strongly supported the impugned order passed by the ld. CIT(A). 21. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is not in dispute that the assessee grouped the POS Terminal Hardware under the head Plant & Machinery. One set of POS Terminal was consisted of a monitor, A CPU, A Printer, a scanner, Card swipe machine and a .....

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tment as were involved in ITA No. 1799/Del/2011 for the assessment year 2005- 06. The only difference is in the amount involved, therefore, our findings given in the former part of this order shall apply mutatis mutandis for the appeals relating to assessment years 2006-07 & 2007- 08. 23. Another issue vide Ground No. 3 in ITA No. 4461/Del/2011 for the assessment year 2007-08 raised by the department, relates to the deletion of addition of ₹ 1,86,85,586/- made by the AO on account of d .....

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f Arunachal Pradesh Government to run the lottery business. It was operating in Arunachal Pradesh and also in other states on the basis of same license. The company had office and Godown in Kolkata, West Bengal and it was also validly running lottery business in West Bengal. In the mean time, West Bengal Government imposed ban on the running of lottery of other states in West Bengal. The West Bengal Government sealed the office premises and Godown of the assessee company and other companies runn .....

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ciation was not allowable u/s 32 of the Act. Accordingly, the AO disallowed ₹ 1,86,85,586/-. The reliance was placed on the following case laws: CIT Vs oriental Coal Co. Ltd. (1994) 206 ITR 682 (Cal) 26. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted as under: (i) The appellant company is engaged in the online lottery business under the band Lotto from its inception in December 2003. The assessee company was operating under the license of Arunachal Pradesh .....

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any among other lottery operators moved to Hon ble Kolkata High Curt against the ban imposed by West Bengal Government on running of lottery of other states in West Bengal. The Hon ble High Court granted an interim order and directed the state of West Bengal to return all the seized equipments and terminals. (ii) Since the assets under consideration which were sealed and depreciation there on was disallowed by the learned Assessing Officer were installed and put to use in the earlier years, the .....

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llowable on each individual assets. With the introduction of block system from assessment year 1988-89 the basic structure of depreciation allowance has changed. Under the block system, identification of each asset is not possible. It would therefore, mean that in block depreciation, except to the limited extent as to requirement of use at the point of entry into the block, the concept of user cannot be applied to assets in the block. Once it enters the block, it automatically gets depreciation .....

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268 ITR 461 (Raj.), where it was held that if part of business remained closed, right to depreciation is not lost. 2. In the case of Vishwanath Bhaskar Sathe Vs CIT 10 ITC 386 (Bom), where the assessee was a member of ginning factories pool but his factory did not work under the pool agreement, it was held that the assessee was entitled to depreciation. 3. In the case of CIT Vs Vayithri Plantations Ltd. (1981) 128 ITR 675 (Mad.), where the machinery was not used because of labour unrest the asse .....

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the Companies Act. (vii) The disallowance of ₹ 1,86,85,586/- was without any basis and should have been calculated on WDV as per Income tax Act. The learned Assessing Officer cannot go beyond the definition of WDV under section 43(6) of the Income tax Act which does not contain any provision for adjustment to any block of assets in case some part of the assets could not be actually used during the year under assessment. 27. The ld. CIT(A) after considering the submissions of the assessee o .....

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e by the AO and strongly supported the assessment order dated 16.11.2009. He further submitted that the assets being sealed were not put to use, therefore, the assessee was not entitled to claim the depreciation and the AO rightly disallowed the same. The reliance was placed on the following case laws: CIT Vs oriental Coal Co. Ltd. (1994) 206 ITR 682 (Cal) Dineshkumar Gulabchand Agrawal Vs CIT 267 ITR 768 (Bom) DCIT, Special Range-4 Vs Yellamma Dasappa Hospital 290 ITR 353 ACIT (OSD) Range 3(3), .....

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al Agro Mills Ltd. 341 ITR 467 (Del) CIT Vs Sonal Gum Industries 322 ITR 542 (Guj) 30. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted fact that the assets on which depreciation has been disallowed by the AO were forming part of the block of assets of the assessee. The AO disallowed the depreciation for the reason that the assets were sealed. 31. On a similar issue the Hon ble Jurisdict .....

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