Income Tax Appellate Tribunal - Chennai
Refex Industries Ltd., Chennai vs Assessee on 9 September, 2014
आयकर अपील य अ धकरण, 'सी' यायपीठ, चे नई
IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH, CHENNAI
डॉ. ओ.के. नारायणन, उपा य एवं ी वकास अव थी, या यक सद य के सम
BEFORE Dr. O.K. NARAYANAN, VICE PRESIDENT &
SHRI VIKAS AWASTHY, JUDICIAL MEMBER
आयकर अपील सं. / I.T.A. No. 972/Mds/2014
नधारण वष / Assessment Year : 2009-10
M/s.Refex Industries Ltd., Deputy Commissioner of
(Formerly Refex Refrigerants Ltd) Income Tax,
No.20, Mooker Nallamuthu Vs Company Circle-V(3),
Street, George Town, CHENNAI
CHENNAI - 600 001
[PAN: AACCR 2495 P]
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ क ओर से / Appellant by : Shri M. Narayanan,
यथ क ओर से / Respondent by : Shri Durgesh Sumrott, CIT
सन
ु वाई क तार ख / Date of hearing : 09-07-2014
घोषणा क तार ख / Date of Pronouncement : 09-09-2014
आदे श / O R D E R
PER VIKAS AWASTHY, J.M:
The appeal has been filed by the assessee impugning the order of Commissioner of Income Tax, Chennai dated 18-03-2014 passed u/s.263 of the Income Tax Act, 1961 (herein after referred to as 'the Act') relevant to the Assessment Year (AY) 2009-10. 2 I.T.A. No. 972/Mds/2014
2. The assessee is a manufacturer of industrial gases. The assessee filed its return of income for the AY. 2009-10 on 30-09-2009 declaring its total income as `95,55,830/-. The case of assessee was selected for scrutiny and notice u/s.143(2) of the Act was issued. During the course of scrutiny assessment, the Assessing Officer made certain additions/dis-allowances in the income returned by the assessee. The assessment order was passed on 28-12-2011. Thereafter, the Commissioner of Income Tax issued show cause notice u/s.263 with the following observations.
"1) You have claimed deduction of `1,99,13,832/- being Branch Building Expenses which are shown under Deferred Revenue Expenses and have been written off in full. The Brand Building Expenditure is capital in nature and the Assessing Officer has allowed the expenditure wrongly.
2) In the Statement of Income, you have deducted an amount of `34,63,022/- towards Preliminary Expenses u/s.35D of the IT Act. However, in the assessment order dated 23.12.2010 for the AY.2008-09, the Preliminaryt Expenses were restricted to `16,09,408/- whereas you have claimed deduction of `34,63,022/-. The Assessing Officer has wrongly allowed excess deduction in `18,53,614/-.3 I.T.A. No. 972/Mds/2014
In view of the above discussion, the assessment order dated 28.12.2011 passed by the Assessing Officer for the AY.2009- 10 is erroneous and prejudicial to the interest of revenue. Please state why the Brand Building Expenses of `1,19,13,382/- may not be disallowed being capital expenditure. Also state why the excess deduction claim to the extent of `18,53,614/- made u/s.35D of the IT Act may not be disallowed".
In reply to show cause notice, the assessee filed written submissions. The Assessing Officer during the course of assessment proceedings, questioned advertisement expenditure of `1,99,13,832/- claimed by the assessee as 'Revenue Expenditure'. The Assessing Officer after considering the written submissions of the assessee accepted the same and allowed the advertisement expenditure as 'Revenue Expenditure' in full. Not satisfied with the reply of assessee, the Commissioner of Income Tax vide impugned order directed the Assessing Officer to dis- allow expenditure of `1,99,13,832/- and treat the same as capital in nature.
Aggrieved by the order of Commissioner of Income Tax , the assessee has come in appeal before the Tribunal. 4 I.T.A. No. 972/Mds/2014
3. Shri M.Narayanan, appearing on behalf of the assessee submitted that the advertisement expenditure questioned by the Commissioner of Income Tax was considered by Assessing Officer during scrutiny assessment. Now, the Commissioner of Income Tax has raised this question only on the basis of audit objection. The AR placed on record a copy of audit objection made by the office of the Directorate General of Audit (Central). The ld.AR submitted that the Commissioner of Income Tax has not applied his independent mind on the issue and has merely transplanted the audit objection while issuing notice u/s.263 of the Act. The ld.AR of the assessee also placed on record a copy of the letter dt.27-12-2011 filed before the Assessing Officer, giving reasons as to why advertisement expenditure incurred during Financial Year (FY) 2008-09 was considered as 'Revenue Expenditure'. The ld.AR further contended that the view taken by the Commissioner of Income Tax is merely a different view which he cannot substitute over a possible view taken by the Assessing Officer u/s.263 of the Act. In order to support his contentions, the ld.AR placed reliance on the decision of Chandigarh Bench of the Tribunal in ITA No.690/Chd/2010 in the case of Sh.Jaswinder Singh Vs. CIT decided on 09-03-2012.
5 I.T.A. No. 972/Mds/2014
4. On the other hand, Shri Durgesh Sumrott, appearing on behalf of the Revenue vehemently supported the impugned order. The ld.DR contended that there is no bar in invoking jurisdiction u/s.263 on the basis of audit objection. In support of his submissions, the ld.DR placed reliance on the decision of the Hon'ble Gauhati High Court in the case of CIT Vs. B&A Plantation and Industries Ltd., reported as 346 ITR 43. The ld.DR further contended that the assessee had incurred expenditure towards brand building. The Hon'ble Madras High Court in the case of CIT Vs. South India Shipping Corporation Ltd., reported as 233 ITR 546 (Mad) has held expenditure on brand building as capital expenditure.
5. We have heard the submissions made by the representatives of both the sides. We have also examined the orders of the authorities below and the decisions on which both sides have placed reliance. The reasons for invoking revisional jurisdiction u/s.263 has already been re-produced herein above. The contention of assessee is that revisional jurisdiction has been invoked merely on the basis of audit objection. The Commissioner of Income Tax has not independently analysed the issue and has merely reproduced the audit objections. The AR of the assessee 6 I.T.A. No. 972/Mds/2014 has placed on record objection raised by Audit Officer. The relevant extract of the audit objection raised by the auditors are re- produced as under:
"The assessee filed the return of income for the AY.2009-10 on 30/09/09 admitting an income of Rs.95,55,830. Subsequently, the case was selected for scrutiny and assessment was completed on 28/12/11 determining an income of Rs.3,96,48,050.
It is seen from the statement of income, the assessee had deducted a sum of Rs.1,99,13,832 being Brand Building Expenses (shown under Deferred Revenue Expenses) written off in full. The above brand building expenditure is capital expenditure in nature. Hence, the above Branch Building expenditure may be disallowed and added back to assessed income.
Further, in the statement of income, the assessee had deducted an amount of Rs.34,63,022 towards preliminary expenses u/s.35D of IT act. However, in the assessment order dated 23.12.10 related to AY. 08-09, the above preliminary expenses u/s.35D was restricted to Rs.16,09,408. The reason for the above restriction is that the Share premium amount also included in the quantified amount and which would not qualify for quantification of eligible amount for purpose of deduction u/s.35D. Thus, the assessee is eligible for deduction u/s.35D only to the extent of Rs.16,09,408. However, the assessee has claimed a deduction of Rs.34,63,022/-. Therefore, the net disallowance on this count 7 I.T.A. No. 972/Mds/2014 is arrived at Rs.18,53,614 (34,63,022 - 16,09,408) and this may be added back to assessed income".
6. A reading of the provisions of section 263 make it unambiguously clear that two conditions must be satisfied before the Commissioner of Income Tax can exercise revisional jurisdiction conferred on him. Firstly, the order passed by the Assessing Officer must be erroneous and secondly, the error must be such that it is prejudicial to the interests of revenue. If either of the two pre-conditions is absent, the Commissioner of Income Tax cannot invoke the provisions of section 263 under the Act.
It is a well settled law, that every loss of revenue as a consequence of an order of the Assessing Officer which is not erroneous cannot be treated as prejudicial to the interest of the revenue. Where two views are possible and the Assessing Officer has taken a view resulting in loss of revenue, it cannot be treated as an erroneous order prejudicial to the interest of the revenue, unless the view of Assessing Officer is contrary to law.
A perusal of records show that the Assessing Officer during the course of assessment proceedings, examined the claim of assessee with respect to expenditure on advertisement. The assessee vide written submissions dt.27-12-2011 explained the 8 I.T.A. No. 972/Mds/2014 reasons for treating advertisement expenditure as 'Revenue Expenditure'. The Assessing Officer after applying his mind, allowed the advertisement expenditure as claimed by the assessee.
7. In the detailed reply filed on 27.12.2011, in paragraph 6, the assessee has explained the characteristics of the advertisement expenditure amounting to ` 1,99,13,832/-. In fact, the entire expenditure has been incurred by the assessee towards promoting its business; as such, it is not possible for sure to hold that the said expenditure was in the nature of a brand building expenditure. The advertisement expenditure being much in volume and also incurred in the initial years of business, the assessee on the prudent principles of accountancy, opted to treat the said expenditure as deferred revenue expenditure and to write off the said amount in equal instalments for five assessment years. In that way, in its regular accounts, the assessee has written off a sum of `39,82,776/-. This has been done for the purpose of true and fair view of the statement of accounts of the assessee company. The Companies Act permits a company to treat its expenditure, if so required, as deferred revenue expenditure. But contrary to that, the Income-tax Act does not treat an expenditure 9 I.T.A. No. 972/Mds/2014 as a deferred revenue expenditure, as such. As far as the Income- tax Act is concerned, an expenditure could be either capital or revenue. Therefore, while computing taxable income, the assessee claimed the entire sum of `1,99,13,832/- as a deduction. The assessee treated it as a revenue expenditure for the purpose of income taxation. This is one of the acceptable methods. As the assessee has incurred the expenditure for advertisement purposes, a view is possible that the expenditure is not capital in nature. It is, after examining these facts and circumstances, that the Assessing Officer has allowed the deduction as claimed by the assessee. The view taken by the assessing authority is one of the possible views. In the Audit Report, the auditors have pointed out that the assessee has deducted a sum of ` 1,99,13,832/- being brand building expenditure written off in full. The auditors have pointed out that the amount was shown under deferred revenue expenditure. The auditors have expressed their own views. That may be correct or may not be correct. But in the present audit note, they have not mentioned as to why this deferred revenue expenditure should be treated as a capital expenditure. A deferred revenue expenditure ipso facto does not become capital expenditure. It is called as deferred revenue expenditure, for the reason that it is not a capital expenditure. Therefore, the audit 10 I.T.A. No. 972/Mds/2014 objection is itself objectionable. An observation in the audit report could be a valid reason for the Commissioner to exercise his jurisdiction under sec.263, if on his examination, he finds that the assessment order is erroneous and prejudicial to the interests of the revenue as pointed out in the audit report. Without such a finding and the audit report also not being clear on that, it is not possible to revise the order of the Assessing Officer.
8. The contents of show cause notice and audit report show that the Commissioner of Income Tax solely on the basis of audit objection has invoked his revisional powers u/s.263. From the impugned order or the show cause notice it is not made out as to how the advertisement expenditure allowed as 'Revenue Expenditure' is erroneous. The Commissioner of Income Tax has gone beyond his jurisdiction in invoking the provisions of section 263 to super-impose his view, on one of the possible views taken by the Assessing Officer in allowing the expenditure claimed by the assessee.
9. The ld.DR in order to support his submissions that the audit objection is no bar for invoking provisions of section 263, has placed reliance on the decision of Hon'ble Gauhati High Court in 11 I.T.A. No. 972/Mds/2014 the case of CIT Vs. B&A Plantation and Industries Ltd., (supra). In the said case, the Hon'ble High Court has upheld the revisional jurisdiction exercised by the Commissioner of Income Tax for the reason, the Assessing Officer had failed to take into account the fact that the assessee has already availed the same deductions in earlier AY which was not disputed by the assessee. It was not a case where the revisional authority had substituted its opinion for that of the Assessing Officer. The Assessing Officer had made assessment on wrong assumption of facts and without application of mind. It was under these circumstances the Hon'ble Court had observed that mere fact that the audit party had also raised some objection do not affect the jurisdiction of the revisional authority. The facts of the case on which the DR has placed reliance are entirely different from the facts of the case in hand. In the present case, the Assessing Officer has considered the expenditure claimed by the assessee and after seeking explanation, accepted the claim of the assessee. The Assessing Officer has taken fairly possible view for treating the advertisement expenditure as 'Revenue Expenditure'. It is not a case where the Assessing Officer has proceeded on assumptions and incorrect facts. Therefore, the order of the Assessing Officer cannot be termed as 'erroneous'. Rather, Commissioner of Income Tax without 12 I.T.A. No. 972/Mds/2014 independent application of mind has replicated audit objections in the show cause notice issued u/s.263 of the Act.
10. The Chandigarh Bench of the Tribunal in the case of Sh.Jaswinder Singh Vs. CIT (supra) has held that exercise of revisional power on the basis of audit objection is not tenable in law. The co-ordinate Bench of the Tribunal while coming to such a conclusion has taken into consideration the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT Vs. Sohana Woollen Mills reported as 296 ITR 238 and the decision of the Hon'ble Calcutta High Court in the case of JeewanLal (1929) Ltd., Vs. ACIT reported as 108 ITR 407 (Calcutta).
The Hon'ble Punjab & Haryana High Court in the case of CIT Vs. Sohana Woollen Mills (supra) has held that mere audit objection and merely because a different view can be taken are not enough to say that order of the Assessing Officer is erroneous or prejudicial to the interest of revenue.
11. In the facts and circumstances of the case, we are of the considered opinion that the Commissioner of Income Tax without examining the records and proper application of mind has invoked the provisions of section 263 in disallowing the advertisement 13 I.T.A. No. 972/Mds/2014 expenditure claimed by the assessee. There is nothing on record to suggest that the order of Assessing Officer is not sustainable in law. We do not find any error in the findings of Assessing Officer in accepting the claim of the assessee with regard to treating advertisement expenses as revenue in nature. In view of the above, the impugned order is set aside and the appeal of the assessee is allowed.
Order pronounced on Tuesday, the 09th September, 2014 at Chennai.
Sd/- Sd/-
(डॉ. ओ.के. नारायणन) ( वकास अव थी)
(Dr. O.K. NARAYANAN) (VIKAS AWASTHY)
उपा य /VICE PRESIDENT या यक सद य/JUDICIAL MEMBER
चे नई/Chennai,
दनांक/Dated: 09th September, 2014
TNMM
आदे श क त ल प अ े षत/Copy to:
1. अपीलाथ /Appellant 2. यथ /Respondent
3. आयकर आयु त (अपील)/CIT(A) 4. आयकर आयु त/CIT
5. वभागीय त न ध/DR 6. गाड फाईल/GF