Income Tax Appellate Tribunal - Mumbai
Total Lubricants India Ltd ( Now Known As ... vs Dcit 8(3), Mumbai on 24 January, 2018
1
Total Lubricants
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "H", MUMBAI
Before Shri C.N. Prasad (JUDICIAL MEMBER)
AND
Shri G Manjunatha (ACCOUNTANT MEMBER)
I.T.A No.7021/Mum/2011 - AY 2004-05
I.T.A No.7022/Mum/2011 - AY 2005-06
I.T.A No.7023/Mum/2011 - AY 2006-07
Total Lubricants India Ltd vs The Dy.CIT-8(3), Mumbai
(now known as Total Oil
India Pvt Ltd), 3rd Floor, The
Leela Galleia, Andheri Kurla
Road, Andheri (E), Mumbai-
59.
PAN AAACE2175M
APPELLANT RESPONDEDNT
I.T.A No.6782/Mum/2011 - AY 2005-06
The Addl. CIT-8(3), Mumbai vs Total Finaelf India Ltd
(now known as Total Oil India Pvt Ltd),
3rd Floor, The Leela Galleia, Andheri
Kurla Road, Andheri (E), Mumbai-59.
PAN AAACE2175M
APPELLANT RESPONDEDNT
I.T.A No.6749/Mum/2011 - AY 2006-07
I.T.A No.6794 /Mum/2011 - AY 2007-08
The Addl.CIT, Range 8(3), vs Total Lubricants India Ltd
Mumbai (now known as Total Oil India Pvt Ltd),
3rd Floor, The Leela Galleia, Andheri
Kurla Road, Andheri (E), Mumbai-59.
PAN AAACE2175M
APPELLANT RESPONDEDNT
Assessee by Shri Niraj Sheth
Revenue by Shri M.C. Omi Ningshen
2
Total Lubricants
Date of hearing 17-11-2017
Date of pronouncement 24-01-2018
ORDER
Per Bench :
This bunch of appeals filed by the assessee for the assessment years 2004- 05 to 2006-07 and appeals filed by the revenue for the assessment years 2005- 06 to 2007-08 are directed against separate but identical orders of the CIT(A)-
18, Mumbai dated 03-02-2010, 12-01-2009 and 25-01-2011, respectively. Since facts are identical and issues are common and in some cases, they are inter-connected, these appeals were heard together and are disposed of by this common order, for the sake of convenience.
ITA No.7021/Mum/2011 - AY 2004-05
2. Brief facts of the case are that the assessee company primarily engaged in the business of manufacturing, trading and marketing of industrial and automotive lubricants, etc. The assessment for the assessment year 2004-05 has been completed u/s 143(3) on 12-12-2006 accepting the income of Rs.14,62,98,470 which was originally declared in the return of income. Subsequently, notice u/s 148 dated 26-03-2009 was issued to reopen the assessment by recording reasons which stated that income chargeable to tax to the extent of Rs.60 lakhs being provision made for energy project expenses has been escaped assessment within the meaning of section 147 of the Income-tax Act 1961. In response to notice u/s 148, the assessee, vide its letter dated 22- 04-2009 submitted that the return filed originally on 08-10-2004 may be treated 3 Total Lubricants as the return filed in response to notice u/s 148 of the Act. The case has been selected for scrutiny and accordingly notices u/s 143(2) and 142(1) of the Act were issued. In response to notices, the authorized representative of the assessee appeared from time to time and furnished the details, as called for. The assessee also opposed reopening of assessment to argue that tThe AO referred to the assessment records so as to form an opinion of escapement of income towards provision for energy expenses. The AO, after considering relevant submissions of the assessee and also relying upon certain judicial precedents including the decision of Hon'ble Delhi High Court in the case of Baba Abhay Singh vs DCIT (2001) 117 Taxman 12 (Del) rejected objection raised by the assessee towards reopening of assessment and completed assessment u/s 143(3) r.w.s. 147 on 24-12-2009 determining total income at Rs.15,22,98,466 interalia making addition towards disallowance of provision for energy expenses of Rs.60 lakhs.
3. Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Before the CIT(A), the assessee re-iterated its submissions made before the AO. As regards reopening of assessment, the assessee submitted that on perusal of reasons recorded for reopening of assessment it was abundantly clear that the AO has formed his opinion of escapement of income based on the same set of facts which were available at the time of assessment order originally passed u/s 143(3). Therefore, it is a case of mere change of opinion without there being any tangible material of escapement. Insofar as addition made by 4 Total Lubricants the AO towards disallowance of provision for energy project expenses, the energy project expenses were in the nature of revenue expenses mainly incurred for advertisements and arranging distributors'meeting, press conference, pain ting of boards, wall painting, etc. which were necessary for promotion of new logo of the company, i.e. Total Lubricants India Ltd instead of old one ELF. These expenses are recurring in nature and also made provision on the basis of reasonable estimate of expenditure considering the past events which is evident from the fact that the assessee has incurred actual expenditure of Rs.58,87,731 in the subsequent financial year on the basis of bills and other details submitted by the claimants. The CIT(A), after considering explanations of the assessee and also relying upon the decision of Hon'ble Bombay High Court in the case of Dr Amin's Pathology Laboratory vs ACIT (2002) 252 ITR 673 (Bom) rejected the explanation of the assessee and upheld reopening of assessment by holding that the AO overlooked wrong claim of expenditure made by the assessee in the P&L Account and, therefore, it could not be said that the AO has formed any opinion on this issue at the time of original assessment. The CIT(A) further observed that the claim of the assessee towards provision for energy expenses was not only erroneous but patently inadmissible in law and hence, it could not be allowed to continue as it was because then it would amount to perpetuating a illegality which is impermissible in law and only to remove this error and illegality that the AO resorted to action u/s 147 and remedied the error which was present in the earlier assessment order. Insofar as 5 Total Lubricants addition made by the AO towards provision or energy expenses, the CIT(A) dismissed ground raised by the assessee by holding that the assessee has only created the provision and has not actually incurred or paid any amount and, therefore, the same cannot be allowed. Aggrieved by the order of CIT(A), the assessee is in appeal before us.
4. The Ld.AR for the assessee submitted that the Ld.CIT(A) was erred in upholding re-assessment without appreciating the fact that the AO has reopened the assessment merely on change of opinion without there being any fresh tangible material which came subsequent to completion of original assessment which suggested escapement of income. The Ld.AR referring to the reasons recorded for reopening of assessment submitted that the AO, referring to the assessment records and financial statements for the year under consideration formed a reasonable belief of escapement of income. Therefore, it is obvious that there is no fresh material in the possession of the AO and hence, it is a case of mere change of opinion which is not permissible under law. The Ld.AR made an alternative argument inasmuch as the reopening was based on information submitted at the time of original assessment proceedings. The Ld.AR made further arguments inasmuch as re-assessment order passed by the AO is void ab initio and liable to be quashed as notice issued u/s 148 of the Act to invoke the re-assessment proceedings is invalid as u/s 151(2) of the Act, the notice should be issued after seeking approval from Joint Commissioner, however, in this case, the approval is received from the Commissioner of 6 Total Lubricants Income-tax. In support of this argument, he relied upon various judgements including the decision of Hon'ble Bombay High Court in the case of Ganshyam K Khabrani vs ACIT 346 ITE 443 (Bom). The following case laws are also relied upon by the Ld.AR:-
i. Motital Todi vs ACIT ITA No.2910/Mum/2013 (Mum Trib) ii. CIT vs Kelvinator of India Ltd 320 ITR 561 (SC) iii.ICICI Hom Finance Co. Ltd vs ACIT (210 Taxman 47 (Bom) iv. Asian Paints Ltd vs DCIT 308 ITR 195 (Bom) v. Cartini India Ltd vs ACIT 179 Taxman 157 (Bom) vi. DSJ Communication Ltd vs DCIT 222 Taxman 129 (Bom)
5. Insofar as addition made by the AO towards provision for energy expenses, the Ld.AR submitted that the assessee has made provision for energy expenses which is incurred mainly for promoting the new logo of the assessee as the assessee has changed its logo from ELF to Total on merger of two entities and such expenditure has been incurred for organising events, arranging distributors' meetings, press conference, painting of boards, etc. which cannot be considered as capital expenditure as the assessee has not derived any enduring benefit out of such expenditure and also not created any new asset. The Ld.AR further submitted that the assessee has made provision for expenses based on reasonable estimate on the basis of past events which is evident from the fact that the assessee has incurred an amount of Rs.58.87 lakhs in the subsequent year out of the total provision of Rs.60 lakhs, therefore, the AO was 7 Total Lubricants incorrect in disallowing the expenditure.
6. On the other hand, the Ld.DR strongly supported the order of CIT(A). The Ld.DR further submitted that the AO has rightly reopened the assessment which is evident from the fact that the reasons recorded for reopening of the assessment clearly says that there is an escapement of income on account of provision for energy expenses which was not subject matter of regular assessment. The Ld.DR further submitted that it is not necessary for the AO to write assessment at the time of issue of notice u/s 148 and what requires to be seen is whether the AO has formed a reasonable belief on the basis of material. In this case, the material available with the AO which may be within the assessment record or from outside the records but such materials suggest escapement of income. Therefore, the AO was right in reopening the assessment. Insofar as addition made by the AO towards disallowance of provision for energy expenses, the assessee failed to prove that provision created is an ascertained liability and such liability is accrued for the relevant financial year. Therefore, the AO was right in disallowing provision created and his order should be upheld.
7. We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The AO reopened the assessment on the ground that income chargeable to tax had been escaped assessment in respect of provision for energy expenses which was not considered in the original assessment. The AO further observed that the 8 Total Lubricants expenditure claimed by the assessee towards provision for energy expenses is not only erroneous but patently inadmissible in law as it should not be allowed to continue as it was because then it would amount to perpetuating illegality which is impermissible in law. It is the contention of the assessee that reopening is bad in law as it was mere change of opinion without there being any tangible material in the possession of AO to form a reasonable belief of escapement of income which is evident from the fact that the AO is referring to the assessment records in the reasons recorded for reopening of assessment. The assessee further contended that the provision for energy expenses was subject matter of regular assessment which is evidenced from the fact that the AO has called for necessary details in respect of miscellaneous expenses and for which the assessee has furnished necessary details. Once the assessee has furnished the details, it is considered that the AO has considered this expenditure, therefore, subsequent reopening of assessment on the very same issue that too, without any tangible material is a mere change of opinion which is not permissible in law.
8. Having heard both the sides and considered material available on record, we find merit in the arguments of the assessee for the reason that reasons recorded by the AO to reopen assessment clearly suggest that the AO has referred to assessment records to form a reasonable belief of escapement of income without there being any tangible material which came to the AO subsequent to completion of assessment. As could be seen from the reasons 9 Total Lubricants recorded for reopening of assessment, the AO on going through the assessment records noticed that the assessee claimed certain expenses towards energy expenses and according to him, this is not an admissible expenditure. Except this, the AO is not referring to any material which came to his possession subsequent to completion of assessment to form a reasonable belief of escapement of income on account of provision for energy expenses. We further notice that the issue of provision for energy expenses was subject matter of regular assessment passed u/s 143(3) wherein the AO has called for necessary evidences and after satisfying with the explanation chose not to make any addition in this regard. Therefore, once the issue has been considered in the original assessment, then there is no scope for the AO to reopen the assessment on the same issue that too without any new material. Hence, we are of the considered view that this is only a case of mere change of opinion of the AO to reopen the assessment based on the material already available on record, which is not permissible under law. This legal proposition is further strengthened by the judgement of Hon'ble Supreme Court in the case of CIT vs Kelvinator of India Ltd (supra) wherein the Hon'ble Supreme Court observed that change of opinion is an incomplete test to check abuse of power by the AO. Hence, after April 1, 19089, the AO is barred to reopen provided there is a tangible material to come to the conclusion that there is escapement of income from assessment. We further notice that the assessee had relied upon the decision of co-ordinate bench in the case of General Machinery and Technical Services Ltd vs ACIT in 10 Total Lubricants ITA No.1176/Mum/2011 wherein the co-ordinate bench, after considering various case laws including the decision of Hon'ble Bombay High Court in the case of Ralliwolf India Ltd vs ACIT, observed as under:-
7.
As could be seen from the above reasons recorded for the reopening of assessment, the Assessing Officer on going through the records noticed that assessee claimed certain expenditure towards repairs and maintenance and according to him this is not an admissible expenditure. Therefore he was of the opinion that there is escapement of income within the meaning of Sec. 147 of the Act by the assessee. On going through the reasons recorded, we find that no tangible materials have come on record after completion of assessment so as to believe that the income of the assessee has escaped assessment. It is only from the records the Assessing Officer came to the conclusion that the expenses are not allowable and therefore there is escapement of income. In our considered view, this is only a mere change of opinion of the Assessing Officer to reopen the assessment based on the materials already available on record which it is not permissible under law. The Hon'ble Bombay High Court in the case of Rallis India Ltd (supra] considering the decision of Hon'ble Supreme Court in the case of CIT Vs Kelvinator of India (supra) held as under:
"We are conscious of the circumstance that in the present case the reopening of assessment is sought to be effected within a period of four years of the expiry of the relevant assessment year. However, it is now a well settled position of law that a mere change of opinion would not justify the Assessing Officer in seeking a recourse to the powers under sections 147 and 148 and there must be tangible material before the Assessing Officer to prove that income chargeable to tax has escaped assessment. The principle that there must be tangible material on the basis of which an assessment is sought to be reopened even within a period of four years is now established in view of the judgment of the Hon'ble Supreme Court in CIT vs. Kelvinator of India Ltd.(2010) 320ITR 561. The Supreme Court has held thus(page 564):
"Therefore, post April 1, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words 'reason to believe' failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to reopen 11 Total Lubricants assessments on the basis of 'mere change of opinion', which cannot be per se reason reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain precondition and if the concept of 'change of opinion' is removed, as contended on behalf of the Department, then, in the garb of reopening of the assessment, review would take place. One must treat the concept of 'change of opinion' as an inbuilt test to check abuse of power by the Assessing Officer. Hence, after April 1, 1989, the Assessing Officer has power to reopen, provided there is 'tangible material' to come to the conclusion that there is escapement of income from assessment."
In the present case, there was an absence of tangible material on the basis of which the assessment could have been reopened. The reason which weighed with the Assessing Officer is extraneous to the basis on which the deduction can legitimately be claimed under section 36(l)(vii). This is a case of a mere change of opinion without any tangible material. The reopening of the assessment on this ground is hence unsustainable." Following the said decision we hold that the reassessment is ** bad in law for the reason that no tangible material has come on record suggesting escapement of income and it is only a mere change of opinion of the Assessing Officer to reopen the assessment based on the materials already available on record, it is not permissible under law. This ground of appeal is allowed."
9. In this view of the matter and considering the ratios of the case laws discussed above, we are of the view that re-assessment order passed by the AO is bad in law as reopening of assessment was based on mere change of opinion without any tangible material in his possession suggesting escapement of income. Therefore, we quash the re-assessment order passed by the AO.
10. Insofar as merits of the case under appeal, since we have already held that the reopening of assessment is bad in law, we are not inclined to go into the 12 Total Lubricants merits of disallowance of provision for energy expenses as it becomes academic in nature.
10A. In the result, appeal filed by the assessee in ITA No. 7021/Mum/2011 is allowed.
ITA Nos. 6782, 6749,6794 & 7022/Mum/2011
11. The first issue that came up for our consideration from revenue's appeal is disallowance of energy project expenses as capital expenditure. The facts with regard to impugned addition are that the assessee has debited energy expenses under miscellaneous expenses and such expenditure has been incurred for promoting the new logo of Total group on account of merger of the Total group with ELF group as the assessee's group was under obligation to redesign and relaunch the new logo to give due recognition to the merger of ELF with Total group and to create awareness in the mind of the customers, dealers, etc. The entire exercise of determining the object cause for establishing the new logo was carried out as the Total group had in a pre-condition to the merger with ELF made a stipulation that the entire ELF group of companies provide the expenses in the accounts of the year ending 31-03-2014. The assessee had incurred the above expenditure to hold meetings, events, etc. at local levels across India which involved expenditure on travel, stay, food, event management, etc. The AO has disallowed expenditure incurred by the assessee on the ground that the expenditure incurred by the assessee towards promoting new logo is capital expenditure which derives enduring benefit to the assessee. 13
Total Lubricants The AO further observed that the assessee has incurred expenditure in consequence to the merger which in itself was entered into for yielding enduring benefits to the company, therefore, observed that expenditure incurred for promotion of new logo is not a revenue expense, but certainly, a capital expenditure, therefore, disallowed expenditure claimed by the assessee. While doing so, the AO has relied upon certain judicial precedents including the decision of Hon'ble Gujarat High Court in the case of Gujarat Mineral Development Corporation Ltd vs CIT (1983) 143 ITR 822 (Guj) and observed that to ascertain whether expenditure is in the nature of capital expenditure or revenue expenditure, the Court has laid down certain tests as per which when expenditure is incurred only once and for all and with a view to bringing into existence an asset or an advantage for the enduring benefit of the trade ordinarily, such expenditure is a capital expenditure.
12. Aggrieved by the addition made by the AO, the assessee carried the matter in appeal before the first appellate authority and reiterated its submissions made before the AO to argue that the expenditure incurred under the head energy project expenses is revenue in nature as the assessee has incurred various expenditure for promotion of new logo on account of merger of Total Group with ELF group which cannot be considered as capital expenditure as the assessee has not derived any enduring benefit or not created any new asset. The CIT(A), after considering relevant submissions of the assessee and also relying upon the decision of Mumbai Tribunal in the case of Ewac Alloys vs DCIT 14 Total Lubricants (1992) 42 ITD 218 (Mum) observed that the expenditure incurred by the assessee is of revenue nature and it does not lead to acquisition of new asset. The CIT(A) further observed that expenditure incurred for replacement of logo with new logo does not create any new asset and expenditure is a revenue expenditure.
13. The Ld.DR submitted that the Ld.CIT(A) erred in treating energy project expenses as revenue expenditure instead of capital expenditure without appreciating the fact that the assessee has incurred various expenses on creation of new logo which gives enduring benefit to the assessee. The Ld.DR further submitted that promotion of notified brand or logo is certainly a one time expenditure which is not recurring in nature. Therefore treating such expenditure as revenue in nature certainly goes against the settled principles of law by various courts including the Hon'ble Supreme Court in the case of a Assam Bengal Cement Co Ltd vs CIT (1995) 27 ITR 34 (SC) where it was categorically held that primary test is to see whether any enduring benefit has resulted. If this test is of no avail, test of fixed or circulating capital has to be applied. In this case, on perusal of the expenditure incurred by the assessee, it is abundantly clear that expenditure incurred by the assessee is one time expenditure and out of such expenditure is getting enduring benefit, therefore, it cannot be considered as revenue expenditure.
14. The Ld.AR for the assessee, on the other hand, submitted that expenditure incurred under energy project expenses was incurred to build awareness of the 15 Total Lubricants logo of company and the said expenditure is a routine expense and does not lead to creation of new asset. The Ld.AR further submitted that the assessee has incurred expenditure for various purpose including advertisement, organizing events, meeting with dealers which are all in the nature of recurring expenditure. Therefore, the same cannot be considered as capital expenditure which gave enduring benefit to the assessee. The Ld.AR, in this regard, relied upon the following judgements :-
1.Empire Jute Co. td vs CIT 124 ITR 1 (SC)
2. Ewac Alloys vs DCIT 42 ITD 218 (Mum)
3. CIT vs Thakur Tobacco Products Ltd 87 TTJ 306 (Pune)
4. CIT vs Brilliant Tutorial Private Ltd 292 ITR 399 (Mad)
15. We have heard both the parties, perused the materials available on record and gone through the orders of authorities below. The AO disallowed energy project expenses on the ground that expenditure incurred towards promotion of new logo is capital in nature which gives enduring benefit to the assessee. It is the contention of the assessee that expenditure incurred by the assessee towards energy project expenses was incurred to build awareness of the logo of the company on account of merger of Total group with ELF group, therefore, this cannot be considered as capital in nature.
16. Having heard both the sides, we find merit in the arguments of the assessee, for the reason that to decide whether particular expenditure is revenue in nature or capital expenditure it is the settled position of law that if the 16 Total Lubricants expenditure incurred by the assessee is of one time expenditure and such expenditure derives enduring benefit to the assessee or a new asset is created out of such expenditure, certainly, the expenditure is in the nature of capital expenditure. On the other hand, if the expenditure incurred by the assessee is a routine business expenditure incurred in the normal course of business and such expenditure does not lead to creation of any new asset or enduring benefit, then such expenditure is definitely revenue in nature. In this settled legal position, if we examine the expenditure incurred by the assessee towards energy project expenses, we find that the assessee has incurred various expenses for promotion of new logo on account of merger of Total group with ELF group. Such expenditure has been incurred in consequence to merger, which is necessary for creating awareness in the market about the products of the company. We further observe that the assessee has incurred recurring expenditure in the nature of advertisement and publicity, hotel and travelling expenses to organize events and meetings with public and dealers, wall painting, etc. All these expenses are in the nature of recurring expenses which cannot be considered as capital expenditure which gives enduring benefit to the assessee. We further observe that the assessee has not created any new asset by incurring expenses. Therefore, we are of the view that the expenditure incurred by the assessee is revenue in nature for promotion of its new logo.
17. Coming to the case laws relied upon by the assessee. The assessee has relied upon the decision of Mumbai Tribunal in the case of Ewac Alloys vs 17 Total Lubricants DCIT (supra) wherein it was held that expenditure incurred for replacing of old logo with new one does not lead to creation of any new asset and expenditure is revenue expenditure. The replacement of the logo is made with a view to project image of trading / manufacturing house in better manner. The assessee also relied upon the decision of ITAT, Pune in the case of CIT vs Thakur Tobacco Products Ltd (supra). We find that the co-ordinate bench under similar circumstances held that expenditure incurred for popularizing the trade mark and assessee reaping the fruits in subsequent years is revenue expenditure.
18. In this view of the matter and considering the ratios of the case laws relied upon by the assessee, we are of the view that expenditure incurred by the assessee towards energy project expenditure is revenue in nature which was incurred for promotion of new logo. The CIT(A), after considering relevant facts has rightly deleted addition made by the AO. We do not find any error or infirmity in the order of CIT(A). Hence, we are inclined to uphold the findings of the CIT(A) and reject ground raised by the revenue for AYS 2005-06 and 2006-07.
19. The next issue that came up for our consideration is disallowance of advertisement and promotion expenses. The AO has disallowed a sum of Rs.7,29,710 on account of advertisement expenses on gifts given to end- customers on the ground that the assessee has failed to furnish names of the persons, who have been given such gifts and also not provided commercial expediency in giving such gifts. It is the contention of the assessee that 18 Total Lubricants expenses incurred towards advertisement and promotion is incurred towards gifts given to customers to build relations and enhance its feasibility in the market / industry / various stake holders. The gifts are given every year and are a routine business expenditure and allowable u/s 37 of the Act.
20. Having heard both the sides and considered material on record, we find that a similar issue has been considered by ITAT in assessee's own case for the assessment year 2003-04 wherein the issue has been set aside to the file of the AO with a direction to examine the scheme of distribution of gold coin, etc. to the customers and then decide the issue in accordance with law. Therefore, for similar reasons, we set aside the issue to the file of the AO with similar directions and decide the issue in accordance with law. Accordingly, the ground raised by the revenue is allowed for statistical purpose.
21. The next issue that came up for our consideration from revenue's appeal is disallowance of foreign travel expenses. The AO has made adhoc disallowance of 25% of the foreign travel expenses amounting to Rs.4,77,083 on the ground that the assessee has failed to explain the purpose of travelling abroad with necessary evidences. The AO has brought out one or two incidence of similar amount debited in the books of account without any proper evidences. In respect of certain items, the amount of foreign currencies spent with details of the persons spending it and the purpose of spending has not been given, therefore, the AO opined that the assessee has failed to justify foreign travel expenses and hence disallowed 25% of expenditure debited by the assessee. It 19 Total Lubricants is the contention of the assessee that it has filed various details with regard to foreign travel expenses which is mainly incurred by the director and key managerial person for the purposes of business. The assesse further contended that the AO has made adhoc disallowance without giving any reasons thereto which is incorrect.
22. Having heard both the sides and considered material on record, we find that the AO has disallowed 25% of foreign travel expenses without giving any reasons of incorrectness in claim made by the assessee. The assessee has filed various details including ledger extracts to prove that all expenditure have been incurred for the travelling of its directors and key managerial persons for the business purpose. The AO failed to make out any case of non genuine expenditure or expenditure incurred for personal purposes. Therefore, we are of the view that such adhoc disallowance is not in accordance with law. We further observe that the co-ordinate bench has considered similar issue in assessee's own case for the assessment year 2003-04 wherein similar addition has been deleted by holding that adhoc disallowance of foreign travel expenditure is not permissible in law without pointing out any particular visit is of personal nature. The CIT(A), after considering relevant submissions has righty deleted addition made by the AO. We do not find any error in the order of the CIT(A). Hence, we are inclined to uphold the findings of the CIT(A) and reject ground raised by the revenue.
23. The next issue that came up for our consideration from assessee's appeal 20 Total Lubricants for AY 2005-06 is disallowance of provision for excise liability. The AO has disallowed provision for excise liability on the ground that provision created by the assessee is in the nature of contingent liability which does not accrue for the relevant financial year. The AO further observed that even otherwise, deduction on account of excise duty is governed by the provisions of section 43B of the Act, such expenses are allowed only on actual payments basis. Since the assessee has failed to file any evidence of payment of excise duty within the prescribed period provided u/s 43B, disallowed expenditure. It is the contention of the assessee that the provision was made on prudent basis after receipt of showcause notice from excise department and such provision is in accordance with AS-29. The assessee further contended that though it has made a provision in the impugned assessment year, the same has been reversed in the assessment year 2007-08 and was offered to tax.
24. Having heard both the sides and considered material on record, we do not find any merits in the arguments of the assessee for the reason that the liability of provision for excise duty is governed by the provisions of section 43B and such liability is allowed either on provision, if such provision is paid on or before due date of furnishing return of income or on actual payment in the year in which such payment has been made. In this case, the assessee has made provision for the financial year relevant to AY 2005-06 and such provision has been reversed in the subsequent financial year. From this it is abundantly clear that the provision created by the assessee towards excise liability is not accrued 21 Total Lubricants for the relevant financial year. Therefore, we are of the considered view that the AO was right in disallowing provision for excise liability. Hence, we uphold the addition made by the AO and reject ground raised by the assessee.
25. The next issue that came up for our consideration from assessee as well as revenue's appeal for AY 2006-07 is disallowance of provision for schemes debited to advertisement and publicity expenses on account of schemes approved by the marketing department. The facts with regard to the impugned addition are that the assessee has made provisions for advertisement and sales promotion towards amount payable on various schemes managed by the company, as approved by the marketing department. The company is consistently following mercantile system of accounting and also booked all the expenses on the basis of schemes launched. Actual expenses are booked against the provision for expenses as and when the same are incurred. The AO has disallowed provision for schemes on the ground that the assessee has made provision for expenses even though such liability is not accrued to the assessee for the relevant assessment year. The AO further observed that the assessee failed to provide any details to justify provision for expenses including the basis of the budget or the actual expenses incurred on the programme and the dates on which such expenditure has been incurred. Thus, it was clear that while some activity might have been undertaken for the purpose of boosting sales, but no actual expense was incurred during the year for such scheme and no further details relating to such schemes of expenses incurred in the period immediately 22 Total Lubricants following the relevant previous year have also been furnished by the assessee. In short, there was no actual liability for payment / incurring of such expenditure during the previous year. The AO further observed that even in mercantile system of accounting, only those expenses / liabilities which have been accrued can be claimed whereas in this case, no ascertained expenses have been incurred or have been accrued. With these observations and also by relying upon certain judicial precedents including the decision of Hon'ble Supreme Court in the case of CIT vs New India Mining Corporation Ltd 243 ITR 640 observed that provisions made for advertisement expenses represents unascertained liability and no actual liability exists during the previous year and, therefore, the same is disallowed and added back to the total income.
26. Aggrieved by the order of AO, assessee preferred appeal before CIT(A). Before CIT(A), assessee reiterated its submissions made before AO. The CIT(A), after considering relevant submissions of the assessee observed that the provision for schemes debited under the head 'advertisement and schemes'expenses'is deductible on payment basis. Thus, the CIT(A) directed the AO to allow expenditure incurred by the assessee towards provision for schemes on payment basis and accordingly for the AY 2006-07 the CIT(A) directed the AO to allow an amount of Rs.2,98,62,688 (Rs.4,17,62,688 - Rs.1.19 crores) being difference between provision made for AY 2005-06 and provision made for AY 2006-07. However, the CIT(A) confirmed addition made by the AO towards disallowance of provision created for AY 2006-07. 23
Total Lubricants
27. The Ld.AR for the assessee submitted that the Ld.AO was erred in disallowing provision for sales promotion and schemes without appreciating the fact that such expenditure has been provided in the books of account on the basis of past events and as approved by the marketing department based on the schemes launched by the company for promoting its products. The Ld.AR further submitted that the assessee has a highly competitive business of lubrication oil with competition from Exide, Castrol and other oil companies necessarily to promote its products through advertisements and giving incentives to dealers. The sales promotions are done through media hoardings, incentives, programmes, schemes and events. The assessee has made provision in the accounts on the basis of budgets prepared by marketing departments as per the schemes announced and approved by the company. The budget prepared by the marketing department has been approved by the management and the said budget has been distributed zone-wise to the clearing and forwarding agents. The expenditure incurred by various zones on the basis of schemes / programmes approved by the management has been booked in the relevant financial year as the liability is accrued and only quantification of the same is done at a future date as and when the bills are received from the respective parties. The said bills are booked in the subsequent year against provision account. In this regard, the Ld.AR relied upon the decision of Hon'ble Supreme Court in the case of Rotork Controls India Pvt Ltd vs CIT 314 ITR 62(SC ). The assessee also relied upon the decision of Calcutta Co Ltd 24 Total Lubricants vs CIT (1959) 37 ITR 1.
28. The Ld.DR, on the other hand, submitted that the Ld.AO was right in disallowing provision for schemes as the said liability is not accrued to the assessee which is evident from the fact that the assessee is creating provision and reversing the same in subsequent financial year. Though the assessee claims to have incurred expenditure against provision in the subsequent year, there is no iota of evidence in the assessment order regarding furnishing of any kind of evidence, therefore, the AO was right in disallowing the provision as it is only a contingent liability but not ascertained liability.
29. We have heard both the parties and gone through the orders of authorities below. The AO disallowed provisions for schemes on the ground that the said liability is not accrued to the assessee for the relevant period. The AO further observed that even in mercantile system of accounting, any deduction towards liability is allowed only when such liability is an ascertained liability which accrued to the assessee for the relevant financial year. In this case, the assessee failed to file any evidence to show that the liability is accrued for the relevant period for the post events which resulted in accrual of liability, whether or not such liability is paid during the relevant financial year. The assessee also not filed any evidence as regards previous pattern of expenditure so as to maintain such a provision. Considering the nature of liability which is yet to crystallise but loaded with uncertainty of the event to cause the liability, therefore, there is no justification to accept the plea of the assessee company to allow such a 25 Total Lubricants deduction. It is the contention of the assessee that it has provided for provision for schemes on the basis of reasonable estimate of liability based on past events which is supported by budget and estimates prepared by marketing department and also approved by management. The assessee further contended that the assessee is in the highly competitive business of lubrication oil necessarily to promote its goods by incurring various expenditure for advertisement and promotion of schemes which has been done in consultation with marketing team and the liability has been quantified on the basis of budgets and estimates. It is not a contingent liability. The assessee has made provision on reasonable estimate and such liability has been incurred in the subsequent year on settlement of bills by the dealers and agents.
30. Having heard both the sides and considered material on record, we do not find any merit in the arguments of the assessee for the reason that though the assessee claims to have provided expenses in its books of account, on the basis of budgets and estimates towards schemes promoted for increase in sales, no evidence has been furnished before the AO to justify that the provision created in the books of account is supported by any evidences. No doubt, in mercantile system of accounting, all expenses and liabilities necessarily to be booked in the relevant financial year whether or not such liability or expenses is paid. If the liability is crystallised or ascertained in the relevant period even if such liability is paid in subsequent year, the same needs to be provided in the books of account. In this case, on perusal of details available on record, we find that the 26 Total Lubricants assessee claims to have made provision on the basis of past events which is supported by budges and estimates made by marketing department. Such practice has been followed in the past. The assessee further contended that it has incurred expenditure against provision in the subsequent year. The assessee has filed paper book which contains details of provision made in the relevant year and expenditure incurred in the subsequent year against such provision. On perusal of the details filed by the assessee, we find that the assessee has made payments against various bills which pertains to next financial year which is evident from the fact that the assessee has furnished a list of expenses on page 92 of paper book. On further verification of the details, we find that many of the bills submitted by the assessee are dated in August and October, 2006. Therefore, we are of the view that when the assesee claims to have made provision on the basis of events which is supported by budgets and estimates made by the marketing wing, making a claim in the subsequent financial year that too after 8-10 months appears to be unusual. If at all any provision is made on the basis of past events on account of non submission of bills and expenses by the claimants, such expenditure has to be related to either for the relevant financial year or the next period, but it should not go beyond one or two months later in the subsequent financial year. Therefore, we are of the considered view that there is no clarity in the details filed by the assessee with regard to the provision created for schemes and subsequent payment of such liability on actual claim.
27
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31. Coming to the case laws relied upon by the assessee. The assessee has relied upon the decision of Hon'ble Supreme Court in the case of Rotork Control India Pvt Ltd vs CIT (supra). We have gone through the case law relied upon by the assessee in the light of the facts of the present case and find that in the case before the Hon'ble Supreme Court , the Hon'ble Court has laid down certain tests to ascertain whether the liability is ascertained or not. As per the finding of the Court, a provision is recognised when (a) an enterprise has an obligation as a result of a past event; (b) it is probable that outflow of resources will be required to settle the obligation; (c) a relatable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognised. Under these facts, the Hon'ble Supreme Court held that in the assessee's case all the conditions are fulfilled as long as provisions are allowable deduction.
32. In the present case, on perusal of the facts available on record it is not clear whether all the 3 conditions stated by the Hon'ble Supreme Court are met or not. Though the assessee claims to have made provisions on the basis of past events and such liability has been paid in the subsequent year, the details filed by the assessee does not throw any light on these aspects. Therefore, we are of the view that the issue needs to be re-examined by the AO in the light of the decision of the Hon'ble Supreme Court in the case of Rotork Control India Pvt Ltd vs CIT (supra), after considering details filed by the assessee with regard to the provision created and subsequent payment of such liability. If the provision 28 Total Lubricants created by the assessee is ascertained liability in terms of the decision of the Hon'ble Supreme Court in the case of Rotork Control India Pvt Ltd vs CIT (supra), then the AO is directed to allow provision for schemes on accrual basis as provided by the assessee. If such liability is not ascertained liability in the light of judgement of Hon'ble Supreme Court, then the AO is directed to allow deductions towards such expenses on payment basis.
33. In the result, ground raised by the revenue as well as the assessee are allowed, for statistical purpose.
34. The next issue that came up for our consideration for AY 2006-07 from assessee's appeal is disallowance of provision for bonus and ex-gratia. The assessee has made provision for payment of ex-gratia to one of the employees, Mr. Ramesh Pullur, who retired from service on 31-03-2006. The assessee has made provision for retirement benefits payable to said employees, as such liability is ascertained at the year end and also quantified on the basis of amount payable. The assessee has paid an amount of Rs.57,50,000 towards retirement benefit to the employee on 03-04-2006. In this regard, furnished details of payments alongwith form 16. The AO disallowed provision for bonus and ex- gratia on the ground that the assessee has made a mere provision without any accrual of liability, therefore, it cannot be allowed as deduction. It is the contention of the assessee that provision for bonus / ex-gratia has been made as such liability is ascertained in the relevant year which is evident from the fact that the employee has retired on 31-03-2006 and his retirement benefit has been 29 Total Lubricants paid on 03-04-2006. Though the assessee has made adhoc provision of Rs.80 lakhs, the balance amount of Rs.22,50,000 over and above the actual payment of Rs.57,50,000 has been reversed in the subsequent year. Therefore, the AO was incorrect in disallowing provision created for known and ascertained liability.
35. Having heard both the sides and considered material available on record, we find merit in the arguments of the assessee for the provision created for bonus / ex-gratia payable to retiring employee accrues to the assessee in the relevant financial year which is evident from the fact that the employee retired from service on 31-03-2006. We further notice that the assessee has settled dues payable to employee on 03-04-2006 by cheque. However, even though the assessee knows retirement benefits payable to the assessee, made an adhoc provision of Rs.80 lakhs which is over and above actual payment due to the employee. Since the retirement benefits payable to the employee has been paid on 03-04-2006, the assessee should have made provision for actual liability in its books of account for the relevant financial year. In this case, assessee has made provision of Rs.80 lakhs on adhoc basis though it has paid retirement benefits to the employee at Rs.57,50,000. Therefore, we are of the view that the assessee is eligible for deduction towards provision for bonus / ex gratia to the extent of Rs.57,50,000. Insofar as the remaining amount of Rs.22,50,000, the assessee is not eligible for deduction for the assessment year 2006-07. Since the assessee claims that balance amount has been reversed in the subsequent 30 Total Lubricants financial year and offered to tax, the AO is directed to examine the claim of the assessee and make suitable adjustment, if necessary. Accordingly the ground raised by the assessee is partly allowed.
36. The next issue that came up for our consideration from departmental appeal for AY 2007-08 is disallowance of web portal expenses as capital expenditure. The assessee has made payment of Rs.5 lakhs to SIF for development of web portal to capture data about the secondary sales from depots to ultimate customers. Since said portal run into technical difficulties and become non functional, web portal expenditure have been charged to P&L Account. The AO disallowed expenditure claimed under the head web portal expenses on the ground that expenditure incurred for development of web portal is capital in nature as it has made with a view to bring into existence an asset of an advantage of enduring benefit and it should have that result. Even if the expenditure does not result in creation of an asset, it would not cease to be an expenditure of the nature of capital. It is the contention of the assessee that expenditure incurred for web development portal shall not be treated as capital expenditure since the assessee had to terminate said activity as it was not found to be technically feasible and as such no fixed asset came into existence.
37. Having heard both the sides and considered material available on record, we find merits in the arguments of the assessee for the reason that expenditure incurred for development of web portal does not create any new asset to get enduring benefit to the assessee. The assessee has incurred expenses for 31 Total Lubricants upgradation of already existing web portal which run into technical difficulties and became unfunctional. Therefore, said expenditure cannot be treated as capital expenditure. The CIT(A) after considering relevant facts has rightly deleted addition made made by the AO. We do not find any error in the order of the CIT(A). Hence, we are inclined to uphold the findings of the CIT(A) and reject ground raised by the revenue.
38. In the result, appeal filed by the assessee in ITA o.7021/Mum/2011 for AY 2004-05 is allowed; appeal filed by the assessee in ITA No7022/Mum2011 for AY 2005-06 is dismissed; appeal filed by the revenue in ITA Nos. 6782, 6749 & 6794/Mum/2011 for AYs 2005-06 to 2007-08 arte partly allowed; appeal filed by the assessee in ITA 7023/Mum/2011 for AY 2006-07 is partly allowed, for statistical purpose.
Order pronounced in the open court on 24th January, 2018.
Sd/- sd/-
(C.N. Prasad) (G Manjunatha)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dt : 24th January, 2018
Pk/-
Copy to :
1. Assessee
2. Revenue
3. CIT(A)
4. CIT
5. DR
/True copy/ By order
Asstt. Registrar, ITAT, Mumbai