TMI Blog2005 (2) TMI 451X X X X Extracts X X X X X X X X Extracts X X X X ..... c") was a company engaged in the business of financial services. The assessee used to hold a substantial part (49 per cent) of the share capital of ITC Classic through its various subsidiary companies. The assessee had also permitted ITC Classic to use its brand name of "ITC", which has been a very renowned corporate brand name in India for the last several decades. In the mid of 1990s, due to recession and turmoil in financial services sector, ITC Classic suffered huge losses amounting to Rs. 285 erores for financial year 1996-97 and Rs. 74 crores for the half-year ended 30th March, 1997. While exploring possibilities of revival of ITC Classic, it became obvious to the management of ITC Classic as well as the assessee, being the chief promoter, that instead of functioning as an independent entity, it would need expertise to survive in a more competitive environment and the same could only be possible through a strong alliance, e.g., merger with an established player in the financial services sector. The management of ITC Classic and its promoter, i.e., the assessee, identified ICICI as one such strong institution in the financial services sector, who could revive the business of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urn of income. However, later on, the assessee made a claim for the said sum as deduction under s. 37(1) of the Act while computing the business profits, before the AO vide their letter dt. 15th Jan., 2001. The AO disallowed the said sum in the scrutiny assessment mainly on the following grounds, namely: (a) The assessee did not claim the said sum in the return of income and it was just an afterthought on the part of the assessee to make this claim at this late stage of assessment proceedings. (b) Even on merits, the assessee had not been able to establish as to how the expenses incurred for merger of ITC Classic with ICICI had such a direct nexus with the carrying on of business of the assessee-company that the impugned expenses will be treated as wholly and exclusively for the purpose of the business of the assessee and hence the said sum was not allowable as deduction under s. 37(1) of the Act while computing the business profits, as not having been laid out wholly and exclusively for the purposes of its business. (c) The assessee has spent the amount for the amalgamation of another independent entity, wherein the assessee was having only minority shareholding through its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court had held in the said cases that an assessee is entitled to raise a new claim for the first time even before the CIT(A) and Tribunal, respectively, there was no reason as to why the assessee could not make a claim for the first time at the assessment stage before the AO even though no claim was made in the return of income. The IT Department has not challenged the said observations of the CIT(A) before the Tribunal either through a cross-objection or even as part of the oral arguments made by the learned Departmental Representative. Therefore, on this technical point, there is no doubt or dispute and accordingly, we proceed to go to consider the merits of the case. 4.1 We find that on merits, the CIT(A) has passed a detailed and reasoned order for the asst. yr. 1998-99, while for the asst. yr. 1999-2000, he has only followed the order passed for the asst. yr. 1998-99. The learned Authorised Representative of the assessee by relying on several judicial pronouncements, annual report of ITC Classic, resolution passed for incorporation, etc. submitted that when ITC Classic experienced severe financial problems in the mid-nineties, to protect the ITC name and goodwill, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said expenditure incurred by the assessee-company. The learned Authorised Representative further placed reliance on the decisions of the Hon'ble Supreme Court rendered in the cases of CIT vs. Nainital Bank Ltd. and CIT vs. Delhi Safe Deposit Company Ltd. to contend that expenditure incurred even without any legal obligation But with a view to protect the goodwill of business and the confidence of the business fraternity, would per se be deductible under s. 37(1) of the Act. He submitted that there could be no dispute with respect to the fact that expenditure incurred with a view to protect goodwill or the confidence of the business fraternity was per se in the nature of revenue expenditure allowable as deduction under s. 37(1) of the Act. The learned Authorised Representative was fair enough to point out that the only issue which fell for consideration in the instant case was whether the same principle would hold good where the expenditure was incurred in order to protect the goodwill of the assessee, where the chances of the same being tarnished was a fallout of business lapses caused not by the assessee, but by a group company, which admittedly carried with it, the brand name of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idiary company of the assessee was closed down due to liquidity crisis with the result that the dues of the creditors would not have been met, the goodwill of the assessee-company would have been seriously affected and accordingly, its business prospects would have suffered, and thus the expenditure incurred by the assessee to revitalise the subsidiary company, which had the effect of protecting the goodwill or brand image of the assessee-company, was eligible for deduction while computing the business profits of the assessee, having been laid out wholly and exclusively for the assessee's business. The learned Authorised Representative invited our attention to the specific observations of the House of Lords at p. 770 of the Report that the expenditure incurred was not to improve the value of goodwill but to save it from extinction and, therefore, the same was allowable as a revenue deduction. The learned Authorised Representative submitted that the facts involved in the instant case of the assessee were similar to those involved to the case before the House of Lords. Having relied upon the judgment of the House of Lords, the learned Authorised Representative went further to refer t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f s. 37(1) of the Act, or in other words, whether the said expenditure can be held to be revenue in nature and further as having been laid out wholly and exclusively for the purposes of the assessee's business so as to warrant necessary deduction under the said section. 8. We find considerable force in the submissions of the learned Authorised Representative that in view of the principles laid down by the Hon'ble Supreme Court in the cases of CIT vs. Nainital Bank Ltd. and CIT vs. Delhi Safe Deposit Company Ltd., expenditure incurred by an assessee with a view to protect the goodwill of its business, is a revenue expenditure laid out wholly and exclusively for the purposes of the assessee's business, thus eligible to deduction under s. 37(1) of the Act. The only point to consider in the instant case, as stated above, is whether the aforesaid principle shall hold good even in a case where the expenditure is incurred in order to protect the goodwill of the assessee, when the chances of the same being tarnished is a fallout of business lapses caused not by the assessee, but by a group company, which admittedly carried with it, the brand name of the assessee. We agree with the submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the House of Lords was absent in the instant case of the assessee and ITC Classic. The learned Authorised Representative has refuted the said observations of the CIT(A) and we agree with his submissions that the distinction tried to be brought out by the CIT(A) is not correct. In our view, ITC Classic was entirely dependent on the brand name of "ITC", as would be evident from the explanatory statement annexed with the notice sent to the shareholders of ITC Classic for holding the annual general meeting in 1993, containing the proposal to change the name of the company from Classic Financial Services Enterprises Ltd. to ITC Classic Finance Ltd., wherein it was stated that the change in name signified a greater and more focused commitment of the "ITC" brand to the said company (the said explanatory statement had been placed before us as part of the paper book pp....(sic). We have also noted earlier that as per the explanatory statement annexed with the notice for holding the EGM sent to the shareholders of the assessee, the management of the assessee considered that the closure of ITC Classic would have had tremendous negative impact on the several investors, who had put money in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... important. Sec. 10(2)(ix) of the Indian IT Act, 1922, when the same was originally enacted, provided for the allowability of "any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits or gains". By the Indian IT (Amendment) Act, 1939, the said s. 10(2)(ix) was amended and renumbered as s. 10(2)(xii), which more or less resembled to s. 37(1) of the Act, as it now stands. Sec. 10(2)(xii) of the 1922 Act was further renumbered as s. 10(2)(xv) by the Indian IT (Amendment) Act, 1946. It is pertinent to note that the case before the Hon'ble Bombay High Court related to the assessment year prior to the amendment made in 1939, when the prerequisite for allowability of the expenditure under the residuary provision of s. 10(2)(ix) of the Indian IT Act, 1922, was that the same should have been incurred solely for the purpose of earning profits or gains, a term, which obviously was much narrower than the wide amplitude of the present s. 37(1) of the Act, namely, incurred wholly and exclusively for the purposes of business. An expenditure incurred to protect goodwill of the assessee caused due to the misdeeds of another party may no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dditional grounds of appeal for allowability of the said sums, by relying upon certain judicial precedents. In the appeals relating to all the three assessment years, the CIT(A) has refused to admit and adjudicate upon the said additional grounds on the logic that the assessee had not preferred such claims at the assessment stage. Thus, in none of the appeals relating to the three assessment years, the CIT(A) had adjudicated upon the merits involved in the relevant claim of the assessee. Aggrieved by such action on the part of the CIT(A) for each of the said assessment years, the assessee is in appeal before the Tribunal. 13. We have noted from the orders of the CIT(A) passed for the three assessment years that the assessee had placed reliance upon the decisions of the Hon'ble Supreme Court rendered in the cases of National Thermal Power Company Ltd. vs. CIT and Jute Corporation of India Ltd. vs. CIT to contend that an assessee is entitled to prefer a new claim for the first time even before the Tribunal and the CIT(A) and thus the impugned claims made by the assessee for the first time before the CIT(A) should have been admitted and adjudicated upon. The CIT(A) held that the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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