TMI Blog2005 (7) TMI 287X X X X Extracts X X X X X X X X Extracts X X X X ..... lead to one inescapable conclusion that what the assessee had spent was for acquiring a new business/new assets an enduring benefit and a source of income. From all the tests, the expenditure incurred could not have been considered u/s 37(1) for which claim was made. One of the essential conditions for allow ability of the claim u/s 37(1) is that expenditure should not be of the nature of capital expenditure. Hence, the claim of the assessee for Rs. 2.15 crores made in the return was not at all admissible as it was clearly a capital expenditure incurred for acquiring a new business, an advantage of enduring benefit, a source of income and acquisition of disposable rights in the title. The assessee declared only half truth that it is purchasing publishing rights of journal, right to customers and subscribers, use of trademark. The other half as shown above viz.,-(1) to whom payment was made and when, (2) copies of agreements/MoU, (3) that assessee is purchasing a new business, (4) that it is purchasing ownership of the titles along with incidental paraphernalia were kept withheld, (5) the period for which such rights were purchased. The claim was against the explicit opinion of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f income' which embraces within its scope some element of 'mens rea' as the word 'concealed' has been used in that part in cl. (c) of s. 271(1) his case would certainly fall within the domain of 'actus rea' as he has filed 'inaccurate and incomplete particulars'. Thus, we hold that the assessee has filed inaccurate particulars for claiming the deduction and explanation furnished was not bona fide. We therefore, uphold the levy of penalty and reverse the order of CIT(A). In the result, the appeal of the Revenue is allowed. - HON'BLE T.K. SHARMA, J.M. AND D.C. AGRAWAL, A.M. For the Appellant : K. Shivram, Adv. For the Respondent : O.P. Sharma, Adv. ORDER D.C. Agrawal, A.M.: 1. In this appeal, the Revenue raised the following effective grounds: 1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in canceling the penalty levied under s. 271(1)(c). As laid down in the case of CIT vs. Jeevan Lal Sah (1994) 117 CTR (SC) 130 : (1994) 205 ITR 244 (SC), the onus is on the assessee to establish there were bona fide reasons to claim the deductions but in the absence of any reason, penalty has to be levied. 2. The appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essed on 30th March, 1999 under s. 143(1). Subsequently, the case was taken up for scrutiny by issuing the notice under s. 143(2). During the course of assessment proceedings, two MoUs for purchase of business with titles of two periodicals as aforesaid, were submitted to the AO. It was claimed by the learned Authorised Representative of assessee that the assessee has appended a note 'No.5' in the 'computation of income' sheet as under: Note 5. Expenses of Rs. 2,15,00,000 for purchase of publishing rights of journal is revenue expenditure, as it is incurred for acquiring right to get subscriber and advertisement customer for publishing journal and for use of trademark in view of Supreme Court decision in Alembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC) and CIT vs. Aquapump Industries (1996) 132 CTR (Mad) 506 : (1996) 218 ITR 427 (Mad). (3) Before the AO it was claimed that the consideration was paid for the use of trademark of the above journals and know-how for editorial content which is very prime for the journal. It was argued that the amount was paid not for acquiring any patent, right or copyright covered under s. 35A and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 132 CTR (Mad) 506 : (1996) 218 ITR 427 (Mad). In this case, the Court mainly dealt with the transfer of technical know-how for a period of 5 years and payment of royalties consideration thereof and the Court held that the expenditure was revenue in nature. However, in the instant case, there is no such issue of transfer of technical know-how and payment of royalty, hence the ratio of the above-mentioned case has no bearing on the facts of the present case. (4) Thus, the total income was assessed at Rs. 47,09,194 as against returned loss of Rs. 1,52,55,092. At the end, he also initiated penalty proceedings under s. 271(1)(c) for furnishing inaccurate particulars. (5) The above decision of the AO to disallow the claim of entire sum of Rs. 2.15 crores in one year and to allow only 1/14th thereof in the year under consideration seems to have been accepted by the assessee, as no appeal was filed against disallowance before CIT(A). This was also confirmed by the learned counsel for the assessee before us during the course of hearing. (6) In the penalty proceedings, the AO after extensively discussing the issue from paras 12 to 16 of penalty order levied the penalty. (7) The penalty was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 72 (MP). (8) Thus, according to learned CIT(A), the genuineness of expenditure was not doubted and there was a difference of opinion between appellant's stand and that of the AO. Merely because the assessee accepted the allowance of 1/14th under s. 35A as against entire claim should not go against him. The difference of opinion cannot lead to conclusion that assessee has concealed its income by furnishing inaccurate particulars. The Department is now agitated against the cancellation of penalty by the impugned order of CIT(A). 4. Before us, the learned Departmental Representative submitted that the assessee has purchased rights and titles of the two journals, the expenditure for which is clearly a capital expenditure and now covered under s. 35A. Further, the note given by the assessee in the computation of income sheet is wrong and misleading. The agreement is for entire title and business and not for customers and advertisers. The assessee did not furnish the copy of agreement along with the return so as to know the exact nature of payment. Assessment was originally completed under s. 143(1). As the returns were accepted under s. 143(1) and only a limited scrutiny @ 2 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ara 8 of the assessment order, wherein it has been admitted by AO in a way, that the assessee has acquired a trademark or copyright. Further, there is no finding of concealment in the assessment order. The assessee furnished a reply to the AO, which was placed on p. 25 of the paper book. In this reply, it was clearly mentioned that the said expenditure is allowable as revenue expenditure. Since, there are two possible opinions, the assessee has adopted one opinion. The issue is clearly debatable as to whether it is revenue expenditure or not. One view is that of the assessee and other view is that of the AO. On debatable issues, if addition is made, then no penalty can be levied. He has claimed expenditure under s. 37(1) and not under s. 35A, which is clearly not applicable. Thus, there is clear debate as to whether expenditure is allowable under s. 35A or under s. 37(1). In fact, the assessee has purchased a license, which is revenue expenditure. It was w.e.f. 1st April, 2002 under s. 55(2A) that trademark has been made a capital asset, which means that prior to 1st April, 2002, the expenditure incurred on trademark would be revenue expenditure. The learned Authorised Representati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e incurred for purchase of above is debited to deferred revenue expenditure to be amortised over a period of three years. 10. It shows that auditors had treated the expenditure of Rs. 2.15 crores as deferred revenue expenditure to be amortised over a period of 3 years and was accordingly debited to 'deferred revenue expenditure account'. Accordingly, in the Sch. 14 to the balance sheet and P L a/c as at 31st March, 1998 an amount of Rs. 71,66,667 was written off and balance of Rs. 1,43,33,333 was shown as balance under the head 'Deferred revenue expenditure'. 11. It shows that in the P L a/c only a claim of Rs. 71,66,667 was made as per auditors note. However, in computation of income, the assessee added back Rs. 71,66,667 to the declared loss and claimed entire sum as deduction. The working of this Annex. I is given as under: Annexure I Profit and gains from business or profession: Loss as per P L a/c considered separately - (15,69,804) Depreciation as per P L a/c 40,05,870 Loss on asset discarded 8,05,421 Disallowance under s. 43B Bonus 49,642 Ex gratia 3,02,661 Employers and employees contribution to PF/Pension 1,06,361 Employers and Employees contribution of ESI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acture of penicillin for a period of two years. The appellant was to keep the technical know-how confidential and secret and was not to seek any patent for the process. For the asst. yr. 1964-65, the appellant claimed deduction of the sum of Rs. 2,39,625 as a revenue expenditure. Both the Department and the Tribunal rejected the claim holding that the expenditure was capital in nature. In coming to this conclusion, the Tribunal held, on an interpretation of the agreement, (i) that the appellant had to install a larger plant modeled on the pilot plant; (ii) that the payment was not made in the course of carrying out an existing business but was for the purpose of setting up a new plant and a new process; (iii) that the outlay was incurred for complete replacement of the equipment of the business inasmuch as a new process with a new type of plant was to be put up in the place of the old process and old plant. On a reference, the High Court held that the sum of Rs. 2,39,625 was not a revenue expenditure. On appeal to the Supreme Court: Held , reversing the decision of the High Court, (i) that there was no material before the Tribunal to come to the finding that the appellant had obtai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l know-how at any particular stage in this fast changing area of medical science. The state-of-the-art in some of these areas of high priority research is constantly updated so that the know-how could not be said to bear the element of the requisite degree of durability and non-ephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeonholing an outlay, such as this, as capital.' (ii) 'In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is well-nigh impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demaraction. However, some broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might reasonably be held to fall. These tests are generally efficacious and serve as useful servants; but as masters they tend to be over-exacting.' (iii) 'The question in each case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... instruction, guidelines about secrecy, confidentiality or partibility. (iv) No technical know-how or process was involved in the acquisition made by the assessee. It was only the two titles and right to publish the two magazines as an exclusive owner, for which entire payment was made. This clearly shows that the case of Alembic Chemical Works Co. Ltd. is applicable but in contrast i.e., where the assessee gets an enduring benefit it will be a capital expenditure as in the case of this assessee whereas if the expenditure is incurred to obtain a benefit, which is not enduring, it will be revenue expenditure. Thus, where the expenditure is incurred to improve the existing product line and to acquire know-how, the expenditure will only be revenue. It was also so held in CIT vs. South India Exports Co. Ltd. (1999) 155 CTR (Mad) 192 : (2000) 242 ITR 150 (Mad). On the other hand, if there was an initial contribution by way of purchasing technical know-how, the amount attributable to such know-how as initial contribution would not be an expenditure much less a revenue expenditure under s. 37(1). It is so held in Eimco KCP Ltd. vs. CIT (2000) 159 CTR (SC) 137 : (2000) 242 ITR 659 (SC). Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness, which was a new line for the assessee, it acquired, in the process, right to publish two magazines. In fact, it was not an expenditure but it was an investment. Thus, the assessee's reliance on the decision and then claiming the entire amount paid in purchasing new business as revenue expenditure was misplaced and incorrect. 17. The MoU signed with PMM states as under: Whereas the seller owns and publishes the periodical entitled Indian Architect Builder (hereinafter referred to as 'the title') as described in Sch. I to the MoU. The seller is the exclusive owner of the said titles which are free from all charges, liens and encumbrances, with the seller having the right to sell the same. Now the seller has agreed to sell to the purchaser the said title as described above while the purchaser have agreed to purchase the said title from the seller and use the title and the information in the course of its business on the terms and conditions hereinafter appearing. Now this MoU witnesseth and it is hereby agreed, recorded, confirmed and acknowledged by and between the parties as under: The buyer agrees to purchase and the seller agrees to sell the said title for a pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fillment of the contracts pertaining to publication of the advertisement with regard to issues of November, 1997 and onwards. (e) The seller shall provide to the buyer a list of employees as detailed in Sch. II with regard to the said title and all relevant details pertaining to the employees. (f) The employees relating to the said title as detailed in Sch. II would cease to be in the employment of the seller w.e.f. mid-night of 31st Oct., 1997 and it would be the responsibility of the seller to settle all financial dues (including recovery of temporary and long-term loans) relating to the said employees. (g) The employees relating to the said titles would be absorbed by the buyer after the mid-night of 31st Oct., 1997 at the gross remuneration as detailed in Sch. II. The buyer reserves the right to re-designate such employees having regard to their existing organisation and are free to assign duties as per their requirement. The buyer would not be responsible for any financial liabilities of the employees pertaining to the period prior to mid-night of 31st Oct, 1997. (h) The seller would enter into a rental contract with the buyer with regard to space occupied by the employees rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve or of universal application. Each case depends on its own facts. To decide, therefore, on which side of the line the expenditure falls, it is necessary to look at the nature of the business, the nature of the expenditure and the nature of the right acquired. If it is incurred by the assessee for the purpose of creating, curing or completing his title to capital, it must be regarded as capital expenditure. But if it is for the purpose of protecting his business, it would be considered as revenue expenditure. Moreover, it is the true nature of the expenditure that is relevant and not the description given to it by the assessee in his books of account or other documents. (ii) CIT vs. Madras Auto Service (P) Ltd. (1998) 148 CTR (SC) 398 : (1998) 233 ITR 468 (SC) The general principles applicable in determining whether a particular expenditure is capital or revenue expenditure are as follows: (1) Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment; (2) Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry provision and allows an expenditure, not covered, under ss. 30 to 36 in computing the income chargeable under the head 'Profits and gains of business or profession', on fulfilment of the other requirements, namely, (i) the expenditure should not be in the nature of capital expenditure or personal expenses of the assessee; (ii) it should have been laid out or expended wholly and exclusively for the purposes of the business or profession; (iii) it should have been expended in the previous year. The appellant-assessee was a company registered under the Indian Companies Act. It was incorporated in the year 1965. Two companies, Eimco, an American company, and K.C.P. Ltd., an Indian company, promoted the appellant-company. The authorised capital of the appellant was Rs. 1,00,00,000 consisting of 10,00,000 equity shares of Rs. 10 each. Each of them agreed to subscribe Rs. 4,70,000, out of which each would have to pay initially a sum of Rs. 2,80,000 towards its contribution. Towards its share, Eimco contributed technical know-how. It valued the know-how, etc., at a sum of Rs. 2,35,000 and paid the balance in cash as its contribution. The board of directors of the appellant allot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is debatable. As already held above that the decisions in the cases of Alembic Chemical Works Co. Ltd. and Aquapump Industries are not even remotely connected with the assessee's case. An issue on which Tribunal have expressed an opinion in favour of the assessee or which has been regarded as debatable by any Court would certainly be a debatable on which there can be another opinion. There cannot be a second opinion, and has not been, on the facts of the assessee's case, that expenditure incurred on acquiring a new business, a source of income, an asset and benefit of enduring nature could be revenue in nature. 22. In one of the cases relied upon by the assessee i.e., Rupam Mercantile Ltd. vs. Dy. CIT decided by Third Member, the question involved was whether penalty under s. 271(1)(c) can be imposed where assessee had claimed entire interest expenditure in one year on issue of debentures whereas such expenditure was held to be deferred and allowable in six years, on the basis of decision of Hon'ble Supreme Court in Madras Industrial Investment Corpn. Ltd. vs. CIT (1997) 139 CTR (SC) 555 : (1997) 225 ITR 802 (SC). The assessee contested the case and lost in Tribunal. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on had no application for the above short reasons apart from elaborated reasons given by the learned Vice President in his proposed order. 23. Thus, in Rupam Mercantile Ltd.'s case that assessee had a case at the time of filing of return that entire expenditure on discount can be claimed in one year, by virtue of contractual agreement to pay upfront discount of Rs. 62 per issue. This fact was also recognized by the Hon'ble Gujarat High Court by admitting the appeal on substantial question of law. However, in the present case there is no scope of any debate. The assessee did not consider that it has any case for even not filing an appeal before the CIT(A). Merely because an assessee holds a view contrary to establish legal views and decisions, would not lead to the belief that there is also a second opinion possible and assessee had acted bona fide thereon. An opinion based on incorrect application of provisions of the Act or of judicial pronouncements cannot become the basis of claim and deduction and computation of income. If that is so, then correct computation of income and allowance of claims/deduction in accordance with law can only be done when an assessment is undert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is purchasing ownership of the titles along with incidental paraphernalia were kept withheld, (5) the period for which such rights were purchased. (b) The claim was against the explicit opinion of the auditors according to which only 1/3rd could be claimed this year. Hence, the assessee was apparently conscious of the wrong claim. If the claim would have been restricted to one third as per auditor's advice, there could be some semblance of bona fide even though the opinion of the auditors is not according to law as entire expenditure is prima facie disallowable. (c) Even on the basis of the facts declared by the assessee, the expenditure would only be capital as the note below computation sheet of income does not show the period and nature and does not indicate that there was an acquisition of absolute rights and not merely use of the right. (d) Facts were shown half and distorted so as to make them appear that they fit into the decisions in Alembic Chemical Works Co. Ltd.'s case and Aquapump Industries' case. Had the note mentioned in the return that it is purchasing a new running business, above decision would not have any application and it could not have been claime ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee made the Revenue to believe that purchase of titles was for limited period and not in perpetuity. This is a conscious act because the assessee made the Revenue to believe that by relying on Alembic Chemical Works Co. Ltd.'s case, the titles in journals were acquired for use only for limited period and would revert back to the original owner as the facts were in Alembic Chemical Works Co. Ltd.'s case. Had the assessee disclosed that the rights in journal were purchased in perpetuity as absolute owner to the exclusion of previous owner, ratio of Alembic Chemical Works Co. Ltd.'s case could not have been applied. The claim is made on the basis of filing inaccurate particulars and against the advice of the auditors. When full particulars of the claim are brought on record, no debatable issue would arise. No two views were possible and, hence the assessee chose not to contest the treatment that it is a capital expenditure. 29. The assessee had offered an explanation that his claim is covered by decisions of Alembic Chemical Works Co. Ltd.'s case and Aquapump Industries' case. Such explanation is not substantiated during scrutiny assessment inasmuch as he could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usion of previous owner. 32. In Electrical Agencies Corpn vs. CIT (2001) 171 CTR (Del) 521 : (2002) 253 ITR 619 (Del) the Hon'ble Delhi High Court held that Tribunal had taken note of the factual aspects and noted that the claim for deduction was not tenable and genuine. Therefore, the assessee could not be said to have reverted the presumption, which arose against it in the light of the Explanation to s. 271(1)(c) of the IT Act, 1961. The penalty for concealment was held to be valid. 33. In CIT vs. Coromandel Indag Products (P) Ltd. (2003) 183 CTR (Mad) 90 : (2004) 265 ITR 611 (Mad) the claim under s. 35(1)(iv) was made which was found to be incorrect, hence, the levy of penalty was justified. 34. In Addl. CIT vs. Jeevan Lal Sah (1994) 117 CTR (SC) 130 : (1994) 205 ITR 244 (SC) on which Revenue has relied in the grounds of appeal, it has been held that burden of proof has been shifted on the assessee to prove that failure to return correct income did not arise from fraud or gross or wilful neglect. In the present case, it cannot be said that the burden is discharged. 35. In CIT vs. Smt. Vilasben Hasmukhlal Shah (1991) 99 CTR (Guj) 151 : (1991) 192 ITR 214 (Guj) it has been hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts which were required to be disclosed fully and truly for determination of tax liability has been disclosed either in part or are not accurate in the sense that if remaining part of the facts i.e., accurate and full facts are brought on record then the decision arrived at by the assessee about a claim or about taxability of an item would go against the assessee. In the present case, the assessee disclosed those parts of the total facts, which would justify its claim and bring some semblance with Alembic Chemical Works Co. Ltd.'s case. It clearly showed 'actus rea', if not a complete 'mens rea'. If the case of the assessee does not fit completely in the first part i.e., 'concealed particulars of income' which embraces within its scope some element of 'mens rea' as the word 'concealed' has been used in that part in cl. (c) of s. 271(1) his case would certainly fall within the domain of 'actus rea' as he has filed 'inaccurate and incomplete particulars'. 38. Thus, we hold that the assessee has filed inaccurate particulars for claiming the deduction and explanation furnished was not bona fide. We therefore, uphold the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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