Income Tax Appellate Tribunal - Hyderabad
Amar Raja Batteries Ltd. vs Asstt. Commissioner Of Income Tax on 27 April, 2004
ORDER
J. Sudhakar Reddy, Accountant Member
1. This appeal filed by the assessee is directed against the order of the CIT(A), Tirupati, dated 29.10.2001 for the assessment year 2000-2001.
2. There are three issues that arise for consideration in this appeal. The first issue is the claim for deduction under Section 35(2AB) of the Income-tax Act, 1961. The Assessing Officer restricted the allowance of expenditure on scientific research to 100% as against the weighted deduction of 125% claimed by the assessee.
3. The learned counsel for the assessee fairly conceded that the assessee could not file the copy of the certificate of exemption from the prescribed authority, i.e. Secretary, Department of Scientific Research and Industrial Research, Government of India, and that he is not eligible for weighted deduction. Alternatively, he submitted that his claim for deduction under Section 80IB should be enhanced by treating the expenditure under Section 35(2AB) as Rs. 1,22,92,369 only. He brought to our notice that while granting relief under Section 80IB, the assessing officer deducted an amount of Rs. 1,53,66,711 (i.e.125%) as Research and Development Expenditure. The learned Departmental Representative-CIT agreed that the claim for deduction under Section 80IB should be worked out on the expenditure actually allowed under the head 'research and development expenditure'. He submits that the issue may be remitted back to the file of the assessing officer for verification of facts and consequent passing of the requisite order.
4. On a careful consideration of the facts and circumstances of the case, we set aside the issue to the file of the assessing officer with a direction to recompute the deduction under Section 80-IB by recalculating the business income from Industrial Battery Division. This alternate ground of the assessee is allowed for statistical purposes. The ground claiming weighted deduction of 125% Under Section 35(2AB) is hereby dismissed.
5. The second issue is whether the following incomes can be said to have been derived from the industrial undertaking, for the purposes of computing the deduction under Section 80IB.
(a) Interest received Rs. 9,26,149 (b) Credit Balances Written Back Rs. 22,64,796 (c) Claims received Rs. 21,56,247 (d) Miscellaneous Income Rs. 2,62,140 We may deal with the above items hereunder-
.1. As for interest received of Rs. 9,26,149, after considering the rival contentions, we respectfully follow the decision of the Supreme Court in the case of Pandian Chemicals (262 ITR 270), and dismiss the ground of the assessee on this aspect.
.2. As for credit balances written back of Rs. 22,64,796 the break up is given at. pages 29 and 30 of the assesses's paper-book. It can be seen that the excess sales tax has been credited in two cases, i.e. MTNL and Bharat Cellular Ltd. and that excess provision was made for purchases and that such excess provision for purchases and expenditure were written back. There is no dispute of the fact that in these cases, the amount of sales tax as well as excess provision made for purchases and expenses were on revenue account, and were routed through the Profit & Loss Account. Thus, the payments and provision enhanced the cost of production and on write back of these things, income should be held to have been derived from the industrial undertaking. We accordingly accept the claim of the assessee in this behalf, and direct the assessing officer to recompute the deduction under Section 80IB, by including these amounts as income derived from industrial undertaking.
.3. As for claims received of Rs. 21,56,247, from the break up of this furnished at 33 of the assessee's paper-book, it can be seen that these claims were received from insurance company towards damages caused to the assessee's goods i.e. batteries during transportation. Thus, these insurance claims were received on revenue account. In. these circumstances, the issue is covered in favour of the assessee by the decision of the Delhi Bench of the Tribunal in Dy. CIT v. Metro Tyres Ltd. (79 ITD 557) and the decision of this Bench of the Tribunal in Ratnam Poultry (P) Ltd. v. Dy. CIT (ITA No. 696/Hyd/99) vide order dated 26.2.2004. The expenditure based on which the insurance amount is paid is booked to the Profit & Loss Account and has gone to reduce the profit derived from the undertaking. Even if this receipt is to be taken as that which is not derived from industrial undertaking, then also net of income, i.e. income minus expenditure has to be taken and this would be 'nil'. In other words, gross insurance receipt can never be taken. Thus, respectfully following the same, wherein this Bench relied on relied on the Hon'ble Supreme Court decision in Raghuvanshi Mills Ltd. (22 ITR 484), we allow the grounds of the assessee on this aspect and direct the assessing officer to recompute the deduction under Section 80IB taking this income also as derived from industrial undertaking.
.4. As for Miscellaneous Income of Rs. 2,62,145, details of the same are given at page 35 of the assessee's paper-book, as under-
"Bad Debits written off in earlier years recovered 32,271 Free Samples received from Indian Lead Limited Accounted for 18,458 Sale of news papers 90 Interest received from APSEB Deposit 77,254
-------
128,073
Interest received from Sale proceeds
for delayed remittance 19,475
Profit of sale of Misc. Assets 1,592
Rent received (already disallowed) for
Claiming 80IA deduction) 113,000
-------
262140
-------"
On a careful consideration of the matter, we give our findings with regard to various items noted above hereunder, and allow the ground of the assessee on this issue in part.
(a) The amount of bad debts, which were written off in the earlier year, arid recovered during the year, amounting to Rs. 32,281 should be treated as part of the income derived from business. The CIT(A) had himself allowed this in one case, and the Revenue has not come in appeal against the said action of the CIT(A). The outflow, i.e. write off of bad debt, went to reduce the income derived from the industrial undertaking, and inflow goes to increase the income derived from the industrial undertaking. Hence, this issue is allowed.
(b) Similarly, interest received from sale proceeds for delayed remittances of Rs. 19,475 should be taken as income derived from industrial undertaking, as it partakes the character of the sale proceeds itself. Reliance is placed on the decision of the Ahmedabad Bench of the Tribunal in the case of Mayank Electro Ltd. (71 TTJ (Ahd) 612) Hence, this issue is allowed.
(c) Similarly, free samples received from Indian Lead Limited is directly connected with the industrial undertaking, and hence the same should be considered as income derived from industrial undertaking. Hence, this is allowed.
(d) Coming to the other miscellaneous income, i.e. sale of old news-papers amounting to Rs. 90 interest received from APSEB deposit amounting to Rs. 77,254 and profit on sale of miscellaneous assets amounting to Rs. 1,592 cannot be considered as income derived from industrial undertaking. We apply the judgment of the Hon'ble Supreme Court in the case of Pandian Chemicals (supra) in this context, and dismiss the arguments on this issue.
(e) Coming to the rent received of Rs. 1,13,000 claimed by the assessee, the claim of the assessee is that he has already excluded the same, while computing the eligible deduction under Section 80IB, and the assessing officer by disallowing the amount once again, has committed an error, as the amount of rent stood excluded twice -once by the assessee himself and for a second by the assessing officer. We set aside this issue to the file of the assessing officer for verifying the same and redeciding the issue as per law. Consequently, assessee's grounds on this issue are allowed in part.
6. The last issue involved in this appeal is the claim of the assessee on account of advertisement expenditure. The assessee had launched a new product and incurred inaugural advertisement expenditure of over Rs. 1-crore. In the books of account, he has treated the same as deferred revenue expenditure and written off only 1/5th of the same during the year. However, while filing the return of income, he had claimed the entire amount of advertisement expenditure. The assessing officer relied on the entries in the books of account and disallowed 4/5th of the total advertisement expenditure claimed as deduction, and allowed only the expenditure debited to the profit and loss account in this year. On appeal, the CIT(A) confirmed the said disallowance. Hence, the assessee preferred second appeal on this aspect.
7. There is no dispute about the fact that this is an advertisement expenditure incurred for launching a new product and that this is revenue in nature and that the expenditure is laid out wholly and exclusively for the purpose of business. The CIT (A) at page 9 of his order stated that the expenditure has not brought into existence any tangible asset, which can be considered to be of an enduring nature. He goes on to add that such huge expenditure has been incurred by the assessee only to publicise the brand name and the product through out the length and breadth of the country, so that it will remain in the minds of the customers and public. He considered that the advantage of the same for the assessee will last for a period of four/five years and that the disallowance of 4/5ths of the expenditure by the assessing officer is justified.
8. Assessee's case is that there is no concept of deferred revenue expenditure under the Income tax Act, and that the income has to be computed as per Sections 28 to 43 of the Act, and that there is no dispute of the fact that this is a revenue expenditure and that the entries made in the books of account are not determinative of the allowability of otherwise of an expenditure.
9. The Revenue's case is that the assessee himself considered the expenditure as giving him an advantage that would last for about five years, and he had accordingly given treatment in the books of account, and his claim is contrary to the method of accounting followed and the ratio of the decision of the Mumbai Bench of the Tribunal in ITO v. Shreyas Shipping Ltd. (86 ITD 556) and the judgment of the Supreme court in Madras Industrial Investment Corporation v. CIT (225 ITR 802) are in its favour.
10. We have carefully considered the rival submissions. The undisputed fact is that the expenditure is in the revenue field. The only issue to be considered is whether the assessee can claim the entire expenditure in this year itself, even though it had written off this expenditure in the books over a period of five years. The Hon'ble Supreme Court in the case of Madras High Court in Madras Industrial Investment Corporation v. CIT (225 ITR 802 & 803) held as follows-
"..Section 37(1) further requires that the expenditure should not be of a capital nature. The question whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on, or conduct of the business, that it may be regarded as an integral part of the profit-making process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. Any liability incurred for the business of obtaining a loan would be revenue expenditure.
Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purposes of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debenture, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of debentures."
From this judgment, it is very clear that though the assessee has written off the expenditure in its books of account over a period of five years, it must be allowed in its entirety in the year in which it was incurred, if it is revenue expenditure, and if it is wholly and exclusively incurred for the purposes of business. The Hon'ble Supreme Court observed that in certain cases, the facts may justify the assessee to spread over and claim the expenditure over a period of ensuing years.
11. In this case, the assessee had launched a new product and incurred heavy advertisement expenditure. The period for which the assessee can be said to have secured benefit by incurring this expenditure cannot be reasonably estimated. The undisputed fact is that the new product launched may fail to take off in the year of launch itself or may have a long life as a product. There is no way in which it can definitely be estimated that the benefit of the expenditure would last for a particular period of time, and on this count, we agree with the arguments of the learned counsel for the assessee. Reliance placed by the Revenue in the case of Shreyas Shipping Ltd. (supra) does not come to its resuce, for in that case, dry dock and special survey expenses were incurred by the assessee and these expenses have to be incurred statutorily twice over a period of five years. That dry docking in the case of ships is mandatory. The benefit of the expenditure can be reasonably estimated over a period of 2-1/2 years. More over, there was a trade practice in that case and the assessee followed that trade practice and wrote off that expenditure over a period of 2-1/2 years. It is not the case here, as it is not a mandatory expenditure, nor can the period for which the benefit of the expenditure can be derived be estimated with a least reasonable accuracy. The Bombay Bench of the Tribunal distinguished the judgment of its jurisdictional High Court in the case of CIV v. Chowgule & Co. (P) Ltd. (214 ITR 523) holding that in that case it was not a case of current repairs and was also not a case which did not bring into existence or obtain a new or different advantage. Therefore, this decision of the Mumbai Bench of the Tribunal in the case of Shreyas Shipping Ltd. (supra) is distinguishable on facts. Coming to the Supreme Court decision in the case of Madras Industrial Investment Corporation Ltd. (supra), it was a case where the assessee had paid upfront discount for the debentures issued. The lump sum payment of discount which is an upfront, one time payment, secured benefit to that assessee over a number of years. In fact the upfront payment is calculated by discounting the future instalments of interest payable and it is like prepaid interest. The period for which the assessee secured benefit is specified. That assessee by making one time payment had avoided paying interest on debentures in each of the next five years. The annual compulsorily incurable expenditure on interest has been discounted and paid upfront as a one time payment. In fact the entire expenditure of upfront payment in that case does not pertain to one year. Interest is a yearly commitment. Thus on facts the Hon'ble Supreme Court held that interest of that particular year only is to be allowed. Thus, this decision is also distinguishable from the facts of the present case. Thus, both in the case of Shreyas Shipping Ltd (supra) before the Tribunal and in the case of Madras Industrial Investment Corporation (supra) before the Hon'ble Supreme Court, the period for which the assessee secured the benefit has been categorically specified either by way of contractual obligations or by way of statutory requirement. There is no such circumstance in this case. The matching concept, which is heavily relied upon in both the above 'cases, fails in this case. The number of years for which the benefit can be said to have been derived cannot be estimated in this case. Deferment is based on the "Matching Concept", that is Matching costs with revenue. The assessee is required to claim expenses year-wise to the extent of income, which can be said to have arisen from such expenses. Thee income relatable to that expenditure should arise for a number of years and when a (SIC) can be definitely found between the both income and expenditure, the matching concept comes into play. The ratio of the order of the Mumbai Bench cannot be universally applied and as held by the Hon'ble Supreme Court, has to be restricted to the particular facts of that case. The decisions relied by Revenue have limited application and can be invoked when expenditure is incurred in lump sum, essentially to get rid of future annual expenditure which is necessarily to be incurred to carry on the business. This is not a case where annual future mandatory expenditure is done away with by a lump sum upfront expenditure.
12. As for the entries in the books of account are concerned, it is well settled that they do not clinch the issue either way, and they do not determine the allowability or otherwise of the expenditure. The decisions of the Hon'ble Supreme Court in the case of Kedarnath Jute Mills (83 ITR 363) and in the case of India Discounts Ltd. (75 ITR 191, are clear on the issue. If the argument of the learned Departmental Representative that the entries in the books of account are sacroscent and have to be accepted is to be valid, then in the case of depreciation also, the claim of the assessee is to be disallowed, as the depreciation depicted in the books of account is something different from what is claimed and allowed, while computing the income under the Income Tax Act. In the circumstances, this argument of the learned Departmental Representative has necessarily to be rejected. We agree with the submissions of the assessee and hold that the entire advertisement expenditure for product launching is to be allowed in this year.
13. In the light of the above discussion, we delete the disallowance of Rs. 1,03,63,401 made by the assessing officer on account of advertisement expenditure, and decide this issue in favour of the assessee.
14. In the result, appeal of the assessee is partly allowed.