TMI Blog2018 (7) TMI 1813X X X X Extracts X X X X X X X X Extracts X X X X ..... f M/s Reliance Footprint Ltd (2013 (12) TMI 161 - ITAT MUMBAI), we are of the considered view that the AO was erred in disallowing revenue expenses claimed by the assessee in the statement of total income, but treated as pre-operative expenses to be capitalized under the head, ‘capital work-in-progress’ in books of account. Therefore, we direct the AO to delete addition made towards disallowance of expenses. - Decided in favour of assessee. - I.T.A No.1196/Mum/2014 - - - Dated:- 27-7-2018 - Shri Mahavir Singh(JUDICIAL MEMBER) AND Shri G Manjunatha (ACCOUNTANT MEMBER) For The Appellant : Shri Vijay Mehta For The Respondent : Shri Ram Tiwari ORDER Per G Manjunatha, AM : This appeal filed by the assessee is directed against order of the CIT(A)-132, Mumbai dated 23-12-2013 and it pertains to AY 2009-10. The assessee has raised the following grounds of appeal:- 1. Ground no. 1: i) The learned Commissioner of Income tax (hereinafter referred to as CIT(A)) erred in confirming the disallowance of claim for deduction in respect of revenue expenditure incurred during the year amounting to ₹ 79,23,44,6107-. 2. The brief facts of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be treated as capital expenditure. The AO has given various reasons to deny the claim of the assessee towards revenue expenditure in the statement of total income. Relevant portion of order of AO is extracted below:- 4. The above argument of the assessee is considered carefully and the same is not acceptable for the following reasons: a. As per assessee's own version it has acquired and added a number of outlets during the year across the country and the impugned expenditure has been incurred in connection with acquisition and addition of new outlets only. As the expenditure has resulted in creation of substantial tangible asset, the same is bound to be treated as capital expenditure only in view of the accounting principles. b. In notes to Schedule C (Fixed assets) to the balance sheet, the impugned amount is shown as pre-operative expenses, which cannot be allowed as revenue expenditure for the year under consideration. c. An expenditure cannot enjoy dual status of being capital in Books of Accounts and revenue for the purposes of Income Tax. d. The assessee itself in its books of accounts treated the same to j be capital in nature and accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are incurred towards existing business activity for the purpose of expansion by setting up more outlets. Therefore, there is no reason for the AO to disallow such expenditure only for the reason that the assessee has provided the same in the books of account as pre-operative expenses. 5. The Ld.CIT(A), after considering relevant submissions of the assessee and also relying upon case laws cited by the assessee, observed that the assessee has failed to prove that these expenses were paid by it during the previous year relevant to AY 2009-10 in the course of its business. Though there is no dispute that these expenses are revenue expenses and assessee has been expanding its business of trading in various products during the year by acquiring portion of Reliance Retails Ltd, as it is evident from the director s report and also the expenses, in principle, were admissible u/s 37 of the Act, as is already uphold by the ITAT, Mumbai Benches. However, in absence of any proof that they were incurred by the assessee and coupled with the fact that such expenses were incurred prior to the date of agreement, there is no merit in the argument of the assessee that these are incurred in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rying out market research work such as to contact various manufacturers and suppliers of the footwear and other accessories; getting base price and delivery schedules as well as comparing the products of various manufacturers of unbranded products with the price and quality of branded products, preparing various reports for this purpose, planning, distribution and logistic, sourcing, designing products, inventory planning discussing consumer preferences for various product range etc. The submissions made by the assessee before Ltd. CIT(A) matches with the job description of all the employees, Therefore, it cannot be said that assessee did not provide the necessary details, by furnishing these details, the assessee had placed on record prima facie material to substantiate the query raised by Ld. CIT(A). Without pointing out any defect and without bringing any adverse material on record, Ld. CIT{A) has observed that assessee has failed to prove that the expenditure was made wholly and exclusively for the purpose of business of the assesseee. Thus, there is not basis for recording such finding. Therefore, even for the additional reasons described by Ld, CU (A), the disallowance cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s capitalized 1,589.15 lacs. It is noteworthy that AO has also observed in the assessment order that these expenses are debited as 'pre-operative expenses' in notes 2 in the Schedule 'C' (fixed assets) of the Balance Sheet. 3.9 In view of this there was no ambiguity that these expenses were not incurred during the PY 2008-09 relevant to AY 2009-10 and hence they being not admissible u/s, 37 have to be disallowed. The action of AO is upheld. Ground No. 1 is dismissed. 6. The Ld. AR for the assessee, at the time of hearing submitted that the issue is squarely covered in favour of the assessee by the decision of ITAT, D Bench in the case of M/s Reliance Footprint Ltd in ITA No.5997/Mum/2011, wherein under similar set of facts, the ITAT by following the decision of Hon ble Bombay High Court in the case of CIT vs Kothari Auto Parts Manufacturing Ltd 109 ITR 333 (Bom) and the decision of Hon ble Gujarat High Court in the case of CIT vs Alembic Glass Industries Ltd 103 ITR 750 (Guj), held that the expenditure incurred by the assessee are for the purpose of expansion of its business and those expenditure are in the nature of revenue expenditure and does not cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself in its books of account treated the same to be capital in nature and accordingly capitalised under the head pre-operative expenses . It is the contention of the assessee that expenditure incurred under the head pre-operative expenses and treated as capital work-in-progress are in the nature of revenue expenditure being rent, salary and other general overhead expenses, which are incurred in connection with running of day to day business of expansion of its existing business by acquisition of new outlets, therefore, merely for the reason that the assessee has given different treatment for the same in its books of account and in the statement of total income for the purpose of computation of income cannot be a reason for disallowing said expenses. 9. Having heard both the sides, we find that expenses incurred under the head, pre-operative expenses are in the nature of revenue expenses, which are incurred in connection with running of day to day business activity of the assessee. Although, the said expenditure has been incurred in connection with expansion of its existing business to set up more retail outlets, but the fact remains that the business activity of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epend upon the provisions of law relating thereto and not on the view which the assessee might take of his rights, nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter. 6.1 From the submissions made by the assessee before the AO itis also clear that opening of stores at various places was one composite business of the assessee and in that course the assessee had started operation of its stores at Bangalore and Hyderabad. It was the contention of the assessee that operations of these stores at various locations is one composite business and once business had been started then the expenditure cannot be linked only to the stores which became operational during the year under consideration. Such submission of the assessee has not been controverted by the AO. All these details were submitted before the AO and it is not the case of the AO that assessee had not incurred such expenditure for its business. In the letter submitted by the assessee before AO it is clearly mentioned that when the expenditure is incurred for the purpose of expansion of business which is already in existence and, which is in the nature of revenue, then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is clearly mentioned that the assessee has employed these persons for carrying out market research work such as to contact various manufacturers and suppliers of the footwear and other accessories; getting base price and delivery schedules as well as comparing the products of various manufacturers of unbranded products with the price and quality of branded products, preparing various reports for this purpose, planning, distribution and logistic, sourcing, designing products, inventory planning discussing consumer preferences for various product range etc. The submissions made by the assessee before Ld. CIT(A) matches; with the job description of all the employees. Therefore, it cannot be said that assessee did not provide the necessary details. By furnishing these details, the assessee had placed on record prirna facie material to substantiate the query raised by Ld CIT(A). Without pointing out any defect and without bringing any adverse material on record, Ld C1T(A) has observed that assessee has failed to prove that the expenditure was made wholly and exclusively for the purpose of business of the assessee. Thus there is no basis for recording such finding. Therefore, even for t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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