TMI Blog2009 (1) TMI 296X X X X Extracts X X X X X X X X Extracts X X X X ..... A) vide order dt. 4th Aug., 2003 dismissed the appeal of the assessee. Before us, the assessee has raised five grounds of appeal which are disposed of in seriatim as under: 3. Grounds of appeal Nos. 1 and 2 are taken together and the same are as under: "(1) On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming that freight charges of Rs. 35,61,395 have to be included in the value of closing stock of this assessment. He ought not to have done so. (2) Without prejudice to ground No. 1 above, on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that addition to the income of this assessment on account of including the freight of Rs. 35,61,395 in the value of closing stock could not be restricted to Rs. 11,87,652 even though in the value of closing stock of the earlier assessment, freight of Rs. 24,63,743 was included and the said higher value has to be considered as the value of the opening stock of this assessment. He ought not to have done so." 4. The relevant facts relating to this issue are that in the asst. yr. 1998-99 as well as in the year under appeal, the AO has added t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO, in our view, would not be justified in adding the cost of outward freight, which as per the method of accounting regularly employed by the assessee is not added to the valuation of the closing stock. The decision of the Hon'ble Supreme Court in the case of CIT vs. British Paints India Ltd. (1991) 91 CTR (SC) 108 : (1991) 188 ITR 44 (SC) is also inapplicable to the facts of this case. In that case, the Hon'ble Supreme Court held that the AO is empowered to reject the method of accounting even regularly employed by the assessee, if he is of the opinion that the true profits and gains cannot be determined as per the method of accounting adopted by the assessee. After the decision of the Hon'ble Supreme Court s. 145A has been incorporated which reads as under: "145A. Notwithstanding anything to the contrary contained in s. 145, the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head 'Profits and gains of business or profession' shall be- (a) in accordance with the method of accounting regularly employed by the assessee; and (b) further adjusted to include the amount of any tax, duty, cess or fee (by wha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 3 pertains to addition of Rs. 20,19,480 being Modvat credit added to the value of closing stock. Both the parties agreed that this ground is covered in assessee's favour by the Hon'ble Supreme Court decision in the case of CIT vs. Indo Nippon Chemicals Co. Ltd. (2003) 182 CTR (SC) 291 : (2003) 261 ITR 275 (SC), affirming the Hon'ble Bombay High Court decision reported at CIT vs. Indo Nippon Chemical Co. Ltd. (2000) 164 CTR (Bom) 78 : (2000) 245 ITR 384 (Bom). Accordingly, the finding of the learned CIT{A) on this issue is confirmed." 13. The learned Departmental Representative, on the other hand, contended that in view of s. 145A, the decision of the Tribunal in the case of Cyanamid India Ltd. is not applicable. 14. We have given our careful consideration to the rival contentions. In our considered view, the decision of the Tribunal in the case of Cyanamid India Ltd. relates to the asst. yr. 1994-95, when s. 145A was not on the statute book. It is also pertinent to mention that the Hon'ble Bombay High Court in the case of CIT vs. Indo Nippon Chemical Co. Ltd. (2000) 164 CTR (Bom) 78 : (2000) 245 ITR 384 (Bom) has specifically mentioned in its decision that they were conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied upon the decision of Delhi High Court in the case of CIT vs. Mahavir Aluminium Ltd. (2008) 214 CTR (Del) 45 : (2008) 168 Taxman 27 (Del). The Departmental Representative on the other hand relied upon orders of Revenue authorities. He has also relied upon following decisions: (i) West Coast Paper Mills Ltd. vs. Asstt. CIT (2006) 105 TTJ (Mumbai) 344 : (2006) 286 ITR 252 (Mumbai)(AT); (ii) CIT vs. Indo Nippon Chemicals Co. Ltd. (2003) 182 CTR (SC) 291 : (2003) 261 ITR 275 (SC); (iii) J.B. Chemicals Pharmaceuticals Ltd. vs. Addl. CIT (2006) 10 SOT 362 (Mumbai); (iv) ITA No. 7751/Mum/2004-order dt. 28th Jan., 2008; (v) Dy. CIT vs. Glaxo Smithkline Consumer Healthcare Ltd. (2007) 110 TTJ (Chd)(SB) 183 : (2007) 107 ITD 343 (Chd)(SB). 7. We have heard the learned Representatives of the parties, record perused and gone through decisions cited. In this connection, it is worthwhile to note that the Memorandum and CBDT circular Explaining the Provisions of s. 145A inserted by the Finance (No. 2) Bill, 1998 states as follows: 'Computation of value of inventory The issue relating to whether the value of closing stock of the inputs, work-in-progress and finished goods must n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de in opening stock subject however, to a condition that such adjustment should not result in double deduction for same expenditure: The Delhi High Court judgment is the only High Court judgment available on the issue. In such circumstance the judicial proprietary demands that we are to follow the above judgment of the High Court. Since we follow the judgment of the Delhi High Court, therefore, the decisions of Tribunal relied upon by the learned Departmental Representative does not help the Revenue. The judgment of the apex Court in the case of CIT vs. Indo Nippon Chemicals Co. Ltd., cited by the learned Departmental Representative is distinguishable on facts as the said case decided by the apex Court considering the facts of that case. The apex Court in that case held that adopting gross method for purchases and net methods for unconsumed stock at the end of year is not permissible. 7.3 On consideration of s. 145A, above Memorandum and CBDT circular Explaining the Provisions of s. 145A and above judgment of the Delhi High Court, we noted that when the adjustments are made in the valuation of inventories, this will affect both the opening as well as closing stock. Whatever adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t credit availed or accrued on the utilisation of the inputs, it is bound to give distorted picture of the income of the assessee. This is neither the intention of the legislature nor of the Hon'ble Delhi High Court in the case of CIT vs. Mahavir Aluminium Ltd. (2008) 214 CTR (Del) 45 : (2008) 168 Taxman 27 (Del). The Hon'ble High Court in the aforesaid case, while holding that the adjustment has got to be made in the opening stock also has held that "every corresponding adjustment must be made in the opening stock subject however to a condition that such adjustment should not result in double deduction for the same expenditure". 19. In our considered view, the gross method has got to be followed as per provisions of s. 145A in contrast with the net method as mandated under the said section, which in our view, will put an end to the unnecessary litigation. According to our limited understanding, there may not be any substantial benefit or loss to the assessee by following gross method in respect of the inputs and the inventories etc. as mandated under s. 145A. We accordingly consider it appropriate to direct the AO to go through the exercise and work out the addition or relief, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order of the AO and that of the CIT(A). 24. We have given bur careful consideration to the rival contentions. It is observed from the assessment order that the AO has disallowed the claim of the assessee for the reasons indicated therein in para 5.3 of the assessment order which is reproduced as under: "It has been judicially decided by the Kerala High Court in Travancore Tea Estates Co. Ltd. vs. CIT (1992) 102 CTR (Ker) 273 : (1992) 197 ITR 528 (Ker) that the burden of proof that there is a debt owing to the assessee that it has been taxed in the earlier years, that the debt arose in the course of business of the assessee and finally that it had become bad in the year of account, is all on the assessee. Further, the Calcutta High Court in the case of CIT vs. Coates of India Ltd. (1998) 150 CTR (Cal) 311 : (1998) 232 ITR 324 (Cal) has held that having regard to the facts and circumstances of the case, the assessee is required to show that a bona fide assessment had been made by him to the effect that the realization of the debts was not possible. Further, that the facts on which the judgement has to be taken by the assessee should reveal the irrecoverability of the debt from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional High Court of Bombay in the case of Star Chemicals (Bombay) (P) Ltd. and s. 36(2) of the Act. The ground of appeal raised by the assessee is thus allowed for statistical purposes. 26. We now take up the appeal of the assessee for the asst. yr. 1998-99. 27. The first ground of appeal is as under: "On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the learned AO in holding that the commuted value of fees/compensation of Rs. 5,70,42,000 payable by your appellants to M/s Atul Ltd. under the agreement dt. 14th Feb., 1997 and modified by a letter dt. 4th Feb., 1998 is in the nature of capital expenditure. He ought not to have done so." 28. The relevant facts relating to this issue are that the assessee had claimed deduction of Rs. 5,70,42,000 on account of commuted fee paid/payable towards infrastructure facilities in the computation of total income filed with the return of income notwithstanding the fact that the said amount was not debited to the P L a/c. During the course of assessment proceedings, the assessee was asked to justify the claim. In the letter dt. 23rd Nov., 2000, the assessee had explained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... balance amount of Rs. 2,50,00,000 was paid in the financial year 1998-99. The assessee in the computation of income had claimed the total deduction of Rs. 5,70,42,000. The AO has disallowed the claim by treating the expenditure as capital expenditure not qualifying for deduction under s. 37. The AO has given detailed reasons for making the disallowance. The AO has also pointed out that the assessee in its accounts had not debited the above amount as expenditure for the year under appeal. That the assessee in its balance sheet had shown the sum of Rs. 3,20,42,000 as an advance without any debit in the P L a/c. That in the subsequent assessment year, the assessee has after paying further amount of Rs. 2,50,00,000 amortised the total amount of Rs. 5,70,42,000 under the head 'Miscellaneous expenditure' over a period of six years from the asst. yr. 1999-2000. According to the AO, the assessee in its accounts stated the above amount as an advance and from the asst. yr. 1999-2000 onwards as capital expenditure amortised over six years. The claim of deduction has been disallowed by the AO. The AO has relied upon the following decisions to support the view: (1) R.K. Palshikar (HUF) vs. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 269 : (2002) 254 ITR 503 (Cal) to support the contention. 32. The learned Departmental Representative, on the other hand, relied upon the findings of the AO as well as those of the CIT(A). It has further been pointed out that the assessee company has been taken over by the another company after expiry of two years and therefore the allowance of deduction of the lump sum payment for acquisition of the right to use the infrastructure facilities cannot be allowed in the year under appeal. Our attention was invited to findings of CIT(A) particularly to para Nos. 8 to 10 of the order, wherein the issue has been dealt with in detail. Further reliance has been placed on the following decisions to support the decision of the Revenue authorities: (1) CIT vs. Khimline Pumps Ltd. (2002) 178 CTR (Bom) 284 : (2002) 258 ITR 459 (Bom); (2) Enterprising Enterprises vs. Dy. CIT (2007) 208 CTR (SC) 433 : (2007) 293 ITR 437 (SC); (3) Jt. CIT vs. Mukund Ltd. (2007) 109 TTJ (Mumbai)(SB) 172 : (2007) 291 ITR 249 (Mumbai)(SB)(AT); (4) Aztec Software Technology Services Ltd. vs. Asstt. CIT (2007) 109 TTJ (Bang)(SB) 892 : (2007) 294 ITR 32 (Bang)(SB)(AT). It was pleaded that the disallowance m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred for obtaining an advantage of enduring benefit, may nonetheless be on revenue account and the test of enduring benefit may breakdown. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. (iii) What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from the practi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... derable cost, expenses and effort, developed over the years the aforesaid chemical complex by providing and creating excellent infrastructural facilities, such as, landscaping, schools (Kalyani and Atul Vidyalayal, sports complex, community center, dams, water treatment plants, water supply lines, roads and other facilities more particularly described in the First Schedule hereunder written (for all which development and infrastructural facilities are hereunder for the sake of brevity collectively called 'infrastructural facilities'): And whereas along with other lessees and other occupants of the premises in the aforesaid chemical complex. CIL and its employees with Atul's permission have been using and enjoying the infrastructural facilities for the past-forty years at no significant cost or consideration in spite of requests by Atul to CIL to pay proportionate compensation: And whereas pursuant to negotiations held between Atul and CIL, the parties have agreed that CIL will pay to Atul and Atul will accept from CIL such fees or compensation determined on quantum merit basis as is hereinafter provided for the infrastructural facilities to be enjoyed and availed of by CIL as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tructural facilities during the subsistence of this agreement and shall not do or omit to do or suffer to be done anything whereby such use and enjoyment by CIL and its employees of the infrastructural facilities during the subsistence of this agreement is avoided, impeded, hindered or obstructed in any manner, and, (b) by solely liable for payment of any taxes, cesses, charges or outgoings of whatsoever nature and all increases therein or any new levies or outgoings assessed, charged, imposed or payable for or in respect of or in relation to or in connection with Atul's ownership of the infrastructural facilities their establishment and/or use and enjoyment by the users thereof except any taxes or charges in respect of electricity which shall be borne by CIL on actual usage basis; 5. The monthly fee or compensation referred to in d. 3 above shall be in respect of the use and enjoyment by CIL and its employees of the infrastructural facilities described in the First Schedule. It is expressly agreed and understood that CIL and its employees shall also be entitled along with other users to use and enjoy, so long as CIL continues to be a lessee of the premises within the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e tax for residential quarters leased to Cyanamid India. 8. Steam supplied by Atul to CIL on actual consumption basis. 9. Recurring charges for effluent treatment facilities @ 5 per cent of total expenses. 10. Water cess (for 1995-96, CIL's share amounted to Rs. 16,971.80). 11. Internal telephone connection charges (the same amounted to Rs. 1,525 during 1995-96).'" 37. The above agreement has been modified by a letter dt. 4th Feb., 1998 of M/s Cyanamid India Ltd., whereby monthly payment has been agreed to be commuted at a sum of Rs. 15 crores less monthly fee already paid. In our considered view, it is important to note that from the date of lease agreement i.e., 26th Aug., 1953 till the year 1997 i.e., upto the execution of the agreement dt. 14th Feb., 1997, the assessee had been using all the infrastructure facilities referred to in the agreement without any cost. However, the assessee was required to pay the operational charges for some of the facilities indicated in the Second Schedule to the agreement dt. 14th Feb., 1997. As per the lease agreement dt. 31st Dec., 1966, it has been mentioned by the AO in the assessment order and not disputed before us, that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the rate shall drains, avenue trees and be the same as at present. lighting within the Atul Chemical Complex. ------------------------------------------------------------------ 4. Provision of adequate 4. Land supervision charges effluent drainage system (presently the same is Rs. constructed/installed by Atul 1,84,119 per year). carrying treated effluent outside Atu1's boundary wall near bank of the river Par estuary; ------------------------------------------------------------------ 5. Provision of suitable 5. Land revenue charges houses to senior managers (presently the same is Rs. of CIL within the Atul 6,863.37 per year). Chemical Complex as per agreed plan. ------------------------------------------------------------------ 6. Provision of the following 6. Share of road repair and welfare activities/benefits Kalyani School running charges on within the Atul Chemical the same basis as at present. Complex, namely good schools, top class recreational and entertainment facilities for employees and their families, occupational health and hygiene services to the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the infrastructure facilities right from the possession of the leased premises. The assessee even after the payment of commuted value is required to make the payments on account of actual user of most of the facilities from the so-called infrastructure facilities. It is in the light of this background, we have to consider the admissibility of the claim of the assessee in regard to the lump sum payment made. Before we proceed further, it is noteworthy that the assessee company has subsequently been taken over by M/s BASF India Ltd. and the facilities which the assessee and its employees are legally entitled to have been passed on to the successor company. With this background, we proceed to consider the claim of the assessee. 40. As pointed out earlier, the assessee has placed reliance on the decision of the Madras High Court in the case of CIT vs. Gemini Arts (P) Ltd. and the decision of the Hon'ble Supreme Court in the case of CIT vs. Madras Auto Service (P) Ltd. In the Madras High Court decision, the issue was about the payment of rent in a lump sum. The Hon'ble Madras High Court held that lump sum payment of rent for the use of premises was allowable as a deduction as reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nduct of the assessee would be a relevant factor in keeping in mind as to the nature of the expenditure as conceived by the assessee. 43. We may hasten to add that the issue is not to be decided solely on the basis of the entries made in the books of account. The decision shall have to be taken on the basis of the entire facts and circumstances of this case. In our view, it will be relevant to refer the decision of the Hon'ble Supreme Court in the case of Aditya Minerals (P) Ltd. vs. CIT (1999) 156 CTR (SC) 97 : (1999) 239 ITR 817 (SC). In this case, the assessee had obtained a lease under the terms of lease of land for excavation. Under the terms of lease of rent, the lessee had to deposit with the lessor by way of guarantee for due performance of this lease deed for fifteen years, an amount equal to the rent of lease of land for the full period of lease which would be adjustable against the rent every month. The entire guarantee deposit would not carry any interest payable to the lessee by the lessor. The lease deed granted to the assessee the liberty to use the land for excavation purposes and subsidiary purposes. The assessee claimed rent amounts worked out at Rs. 10,752 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. The Court thus accepted the argument on behalf of the assessee in Gotan Lime Syndicate vs. CIT that what it got was a right to get lime for manufacturing and the payment had a direct relation to the amount of lime that was removed." 45. Reference may also usefully be made to the decision of the Hon'ble Supreme Court in the case of Enterprising Enterprises vs. Dy. CIT. In this case, the assessee had taken a quarry on lease for ten years and claimed deduction of a proportionate part of the rent as deduction for the period 10th January to 31st Oct., 1991. The Tribunal held that the lease rent paid was capital expenditure and the High Court affirmed the decision of the Tribunal. The assessee preferred an appeal to the Supreme Court, but the latter affirmed the decision of the Hon'ble High Court. In this case also the Hon'ble Supreme Court considered its own decisions in the cases of Aditya Minerals (P) Ltd. vs. CIT, Gotan Lime Syndicate vs. CIT and Pingle Industries Ltd. vs. CIT. 46. Reference to the decision of the Hon'ble Bombay High Court in the case of CIT vs. Khimline Pumps Ltd. will also be useful. In this case, an open plot of land was leased out to M/s APVE Ltd., a compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n for drainage were effected for the better enjoyment of the lands under the scheme. Because of such improvements, the owner got betterment of the land and the value of the land increased. Such improvements also resulted in providing better facilities for carrying on the business of the appellant. The question was whether the betterment charge required to be paid by the appellant was revenue expenditure deductible in computing the profits of the appellant? The Tribunal and the High Court, on a reference, held that the betterment charge was capital expenditure and was not deductible. On appeal to the Supreme Court: Held , affirming the decision of the High Court that since the payment had no direct nexus with the day-to-day running of the business and as a result of the payment of the betterment charge, the value of the appellant's land had increased, the betterment charge was capital expenditure. Merely because the improvements had also resulted in providing better facilities for carrying on the business of the appellant, the betterment charge did not become revenue expenditure." 48. In the present case, the factors which are important to be considered is that there was a leas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en taken over by the another company within a period of two years. As stated earlier, at the time of taking over of the company by an another company, the value of the right along with the value of rights in question and along with the value of the land would have necessarily been taken into account for determining the value of the company. 51(a) We, accordingly on the basis of the above discussion and taking into consideration the totality of the facts and circumstances of this case, hold the expenditure to be on the capital field. The ground of appeal raised by the assessee is accordingly dismissed. 52. The second ground of appeal reads as under: "On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the learned AO in holding that the expenditure of Rs. 96,25,000 incurred by the appellants representing their share of 25 per cent of the cost of extension of treated effluent discharge pipeline owned and belonging to M/s Atul Ltd. represented an expenditure of capital nature and or represented an investment made for creating a new asset. He ought not to have done so." "Without prejudice to the aforesaid content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine in Atul Complex was in the interest of various companies and therefore, the cost of the additional pipeline was agreed to be shared by the companies using the same. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. vs. CIT at pp. 10 and 11, in the case of Lakshmiji Sugar Mills Co. (P) Ltd. vs. CIT (1971) 82 ITR 376 (SC) and in the case of L.H. Sugar Factory Oil Mills (P) Ltd. vs. CIT (1980) 19 CTR (SC) 185 : (1980) 125 ITR 293 (SC). It was contended that though the assessee had acquired the right to use the pipeline and therefore, it was an advantage of enduring nature, but at the same time, the assessee had not acquired any capital asset. Therefore, the entire expenditure was permissible as revenue expenditure. 56. In the alternative, it was contended that if the claim of the assessee is not admitted on the ground that the expenditure is of capital nature, then the assessee having a joint owner of the pipeline also required to incur expenditure of repairs and maintenance, depreciation be allowed to the assessee. The learned counsel for the assessee relied upon the decision of the Pune Bench of the Tribunal in the case of T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits of the company. On appeal to the Supreme Court: " Held , affirming the decision of the High Court (i) that since the installations and accessories were the assets of the municipality and not of the respondent, the expenditure did not result in bringing into existence any capital asset for the company; (ii) that the advantage secured by the respondent by incurring the expenditure was absolution or immunity from liability to pay municipal rates or taxes for a period of 15 years. If these liabilities had to be paid, the payments would have been on revenue account and therefore, the advantage secured was in the field of revenue and not capital; (iii) that, therefore, the expenditure was deductible under s. 10 (2)(xv) of the Indian IT Act, 1922 in computing the respondent's business profits." 59. In the present case, the assessee was required by the Pollution Control Board to extend the treated effluent discharge pipeline by four kilometres. In order to meet the requirements of the Pollution Control Board, if the assessee had laid down the pipeline by meeting the entire cost of the pipeline, there would be no doubt about the nature of the expenditure being of capital na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cost of extension of the treated effluent discharge pipeline based on our agreement to allow us to continuously use this pipeline (along with other users) on the following conditions: 1. Cyanamid India Ltd. (Cyanamid) will bear 25 per cent of the total cost of Rs. 3.85 crores provided the same is actually incurred by you. 2. Cyanamid will bear 25 per cent of routine repair and maintenance costs of the 4 kms. extended pipeline actually and reasonably incurred by you. 3. Cyanamid agrees to bear 25 per cent of the investment costs and recurring expenses including maintenance of any effluent treatment infrastructure projects in future (only if we should decide to participate in such projects). This is however, subject to our prior agreement in writing only. We would like to state that in all the above cases, payments will be made by us subject to verification and prior approval by us of quotations, orders, costs and expenses and technical specifications by our technical/finance personnel. If at any time in future, Cyanamid should discontinue use of the aforesaid treated effluent discharge pipeline, Cyanamid shall also discontinue any further contribution as aforesaid." 62. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing heard before deciding the issue by the AO as directed above. 64. The third ground of appeal is as under: "On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the AO in disallowing the expenditure of Rs. 5,94,450 incurred by the appellants on production of advertisement films by holding it to be capital expenditure. He ought not to have done so." 65. In respect of this ground, the learned counsel for the assessee contended before us that s. 37(3) which restricted the allowance in respect of advertisement expenses has been deleted by the Finance Act, 1997 w.e.f. 1st April, 1998. The learned counsel for the assessee however, contended that the advertisement films are having very short life and therefore, the expenditure cannot be said to be of capital nature. The AO has treated the cost of film and other production expenses for producing advertisement films and commercials to be used as TV spots as capital expenditure. The AO has relied upon the decision of the Bombay High Court in the case of CIT vs. Patel International Film Ltd. (1976) 102 ITR 219 (Bom), wherein it has been laid down that there is a distin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Tribunal, Ahmedabad Bench 'A', in the case of IAC vs. Joshi Formulabs (P) Ltd. (1991) 42 TTJ (Ahd) 259. A copy of the said order has been placed on record. Having heard both the parties at length and having gone through the record of the case, we do not find any reason whatsoever to interfere with the order of the learned CIT(A). Undeniably, no capital asset or right or benefit of enduring nature has been created or acquired by the assessee by production of the advertisement film in question. It. is common knowledge that public interest, like public memory, has a short span of life. In order to keep mass interest intact in its products, an assessee has to continuously strive to keep on advertising their products in ever increasingly novel ways and methods, through the media. This involves a continuous change in the advertisement of the products. So as to catch and hold the interest of the consumer, the assessee has to keep on launching new products, for which new advertisements have to be floated. This itself makes it clear that an advertisement film ordinarily does not have a life of more than a year at the maximum. Such films are definitely covered by the settled economi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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