Income Tax Appellate Tribunal - Kolkata
Ritika (P)Ltd, Kolkata vs Assessee on 3 July, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL "A" BENCH: KOLKATA
[Before Shri P.K.Bansal, AM & Shri Mahavir Singh, JM]
I.T.A Nos. 1022/Kol/2012
Assessment Year: 2005-06
Ritika Private Ltd. Vs. Dy. Commissioner of Income-tax
138, Beliaghata Road Central-12, Kolkata
Kolkata-700 015
(PAN:AABCR 5510N)
I.T.A Nos. 867/Kol/2012
Assessment Year: 2005-06
DCIT, Circle-12, Kolkata Vs. M/s Ritika Pvt. Ltd.
(Appellant) (Respondent)
Date of hearing: 29.05.2015
Date of pronouncement: 03.07.2015
For the Assessee : Shri D.S. Damle, FCA
For the Revenue: Shri Pinaki Mukherjee, Sr. DR
ORDER
Per Shri Mahavir Singh, JM:
These cross-appeal by assessee and Revenue are arising out of common order of CIT(A)-XXX, Kolkata vide Appeal No. 178/CIT(A)-XXX/Cir-12/2011-12 dated 31.01.2012. Assessment was framed by DCIT, Circle-12, Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as "the Act") for Assessment Year 2005- 06 vide order dated 31.12.2007.
First we take up assessee's appeal in ITA No.1022/K/2012.
2. The only issue in the appeal of assessee is against the order of CIT(A) confirming the disallowance of foreign travel expenses. For this, assessee has raised following 3 grounds:-
"1. For that on the facts and in the circumstances of the case and in law, the Ld. CIT(Appeals)erred in disallowing foreign travel expenses of Rs.17,79,751/- in computing business income of the appellant.
2. For that on the facts and in the circumstances of the case and in law, the Ld. CIT(Appeals) failed to correctly appreciate that foreign travel expenses were incurred for appellant's business purposes and hence allowable as deduction from the profits of the business.2 ITA Nos.1022 & 867/K/2012
Ritika Pvt. Ltd. AY 2005-06
3. For that on the facts and in the circumstances of the case and in law, the disallowance of foreign travel expenses be deleted and/or reduced."
3. Briefly stated facts are that assessee is engaged in the business of manufacturing of readymade garments and outfits. During the course of assessment proceedings, the AO required the assessee to furnish the details of foreign travel expenses and assessee vide letter dated 04.12.2007 filed details, which reads as under:-
"Divya Sharma Merchandiser 2,03,980 Amrish Kumar Director 5,79,901 Ashvin Kumar Director 2,05,337 Ritu Kumar 2,18,663 Ritu Kumar 5,17,670 Divya Sharma Merchandiser 54,200 Total 17,79,751 Apart from the above, assessee has not filed any details and accordingly AO disallowed the foreign travel expenses of Rs.17,79,751/-. Aggrieved, assessee preferred appeal before CIT(A), who confirmed the action of the AO in disallowing the foreign travel expenses by observing in para-5.3, which reads as under:-
"5.3 Therefore, from the above, it is seen that the foreign travel expenses are mainly towards travelling of the Directors and considering the large amount of expenses the AO has asked for justification to establish the business nature of this foreign travel made by the Directors and one Merchandiser/employee of the company. It is seen that although certain evidences required to be submitted like copies of letters written to Foreign Embassy may not be available with the Appellant and absence of the same would not be enough justification for holding that these traveling expenses were not for business purposes, however the Appellant could have provider other corroborative evidences to establish the same. The AO had given the appellant more than one opportunity to establish along with evidence that the amounts in question have been incurred for the purpose of business which he asked the Appellant to file vide notice u/s. 142(1) dated 15.06.2007 and order sheet noting dated 11.12.2007. However, it is seen that neither in assessment proceedings nor in Appeal proceedings could the Appellant provide any form of corroborative evidence to establish the business purpose or business nature of these visits, other than general explanation about the business of the Appellant and how the foreign travels were for market development etc. While it is true that the AO should not step into the shoes of business man to decide how he should run his business."
Aggrieved, now assessee is in second appeal before us.
4. Before us, Ld counsel for the assessee filed a comparative chart of foreign travels expenses incurred by assessee over the years wherein the AO exactly allowed the foreign travel expenses and the said relevant chart reproduced as under:-
3 ITA Nos.1022 & 867/K/2012Ritika Pvt. Ltd. AY 2005-06 Ritika Pvt. Ltd.
Assessment Year : 2005-06 Comparative chart of Foreign Travel Expenses incurred over the years No. Asstt.year Foreign Allowed by Disallowed Remarks Export Total turnover Travel AO by AO turnover Expenses 1 AY2002-03 6,86,598 6,86,598 0 Fully allowed 14,02,908 24,06,56,910 by the AO 2 AY2003-04 17,73,357 17,73,357 0 Fully allowed 47,22,937 27,01,79989 by the AO 3 AY2004-05 17,40,537 0 17,40,537 Under appeal 91,03,115 30,63,84,054 with ITAT 4 AY2005-06 17,79,751 0 17,79,751 Under appeal 38,28,734 33,90,56,161 with ITAT 5 AY2006-07 8,95,585 8,95,585 0 Assessment u/s 32,57,607 32,33,75,738 143(1) 6 Ay2007-08 6,09,872 6,09,872 0 Assessment u/s 40,16,288 41,13,82,681 143(3) 7 AY2008-09 12,04,921 12,04,921 0 Assessment u/s 76,16,133 41,03,03,545 143(3) 8 AY2009-10 1,16,025 1,16,025 0 Assessment 62,94,948 39,95,92,499 u/s143(3) 9 AY2010-11 20,93,266 20,93,266 0 Assessment u/s 1,02,59,013 41,94,36,685 143(1) 10 AY2011-12 19,40,372 19,40372 0 Assessment u/s 84,90,057 43,04,61,783 143(3) In view of the above, Ld. counsel for the assessee stated that when all along these foreign travels were allowed and assessee has particularly incurred these expenses for the business purpose and there is no element of personal in nature, the same should have been allowed. According to Ld. counsel for the assessee the directors or merchandisers have travelled and for which these foreign travels were incurred. On the other hand, Ld. DR heavily relied on the order of CIT(A) and that of AO.
5. We have heard rival submissions and gone through the facts and circumstances of the case. We find that AO himself from AYs 2002-03 to 2011-12 except in AY 2004-05 and 2005-06 the foreign travels have been allowed. Even the assessee is engaged in manufacturing and export of ready-made garments and outfit and assessee has disclosed the turnover of its exports, it is imperative on the part of assessee to send its Directors or Merchandisers to earn export orders from the outside India and for that purpose, assessee has to incur these expenses. Accordingly, we are of the view that these 4 ITA Nos.1022 & 867/K/2012 Ritika Pvt. Ltd. AY 2005-06 expenses are genuine business expenses and no part of it can be disallowed and accordingly this issue of assessee's appeal is allowed.
Coming to Revenue's appeal in ITA No.867/Kol/2012.
6. The only issue in this appeal of Revenue is against the order of CIT(A) in restricting the disallowance at Rs.2,32,092/- as against the disallowance made by AO at Rs.7118,403/-. For this, Revenue has raised following ground No.1:-
"1. That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in restricting the disallowance of capital expenditure under the head repair and maintenance from Rs.71,18,403/- to Rs.2,32,092/- ignoring the decision of ITAT, Kolkata in the assessee's own case for the AY 2004-05."
7. Briefly stated acts are that AO during the assessment proceedings required the assessee to explain the debit of amount of Rs.1,65,01,881/- towards maintenance & repair in the profit and loss account. The assessee vide letter dated 05-10-2007 furnished the state-wise expenditure under the head 'maintenance & repairs' as under:-
"Kolkata Rs. 59,95,800/-
Delhi Rs. 24,88,255/-
Gurgaon Rs. 25,31,478/-
Mumbai Rs. 49,07,060/-
Madras Rs. 1,80,186/-
Amritsar Rs. 77,949/-
Chandigarh Rs. 1,22,970/-
Ludhiana Rs. 1,11,771/-
Bangalore Rs. 86,412/-
Rs.1,65,01,881/-
The assessee filed complete details state-wise expenditure under the head 'maintenance and repairs' and explained before the AO that in earlier year this expenditure was allowed by ITAT for AY 2003-04 partly. The assessee explained before the AO that this expenditure is how important for the business of the assessee and it helps in increase in business, which reads as under:-
"The repairs and maintenance expenditure are mainly made for renovation of the shops situated throughout India. The lesser part of it is expended for the repairs and maintenance of the office premises.
Ritu Kumar was recognized and held in respect as the first fashion designer of India. Ritu Kumar is the brand name in India and her products bears class and are extraordinary and unique. To market these products needs unique commercial efforts. Her collections are first displayed through grand shows and then sold to the customers through retail shops.5 ITA Nos.1022 & 867/K/2012
Ritika Pvt. Ltd. AY 2005-06 Therefore, these shops have to be renovated each time a new collection is offered for sale. The renovation, the furniture, the lighting and the sound system used in these shops should be perfectly in harmony to highlight each new collection to its maximum potential to the buying customers. This is a highly sensitive job and can be executed only with the help of experts. The renovations under taken are on the basis of the collection to be introduced. This is the most important factor which results in high expenditure in the repairs and maintenance account."
But the AO was not convinced with the full explanation and accordingly he disallowed the expenditure of Rs.71,18,403/-. Aggrieved, assessee preferred appeal before CIT(A).
8. The CIT(A) after considering the Tribunal's decision for AY 2002-03 resticted the disallowance at Rs.2,32,092/- by observing in para 1.2.& 1.3 which reads as under:-
"1.2 The Appellant's submissions have been considered. It is also seen that the issue was considered by the Hon'ble ITAT in the Appellant's own case for Assessment Year 2002- 03 vide order dated in Appeal No. wherein the Hon'ble ITAT has gone into the details of similar expenditure disallowed by the AO on the same grounds in that year. It was after considering all aspects, the Hon'ble ITAT held in para 2 of its order as under:
'the authorities below had justified the disallowance on the ground that expenditure includes cost of machinery & furniture and therefore, not allowable. From the details furnished we find that some items included under this head represented cost of fixed assets which were independent of the leased premises they were not embedded or not intricately related to the premises. These expenses represented cost of assets which could be separately used. On careful perusal, we find that the following items represented cost of assets:
(a) Cost of Sofa and loose furniture Rs.1,58,900
(b) Cost of CC TV Manual and Colour TV etc. Rs.4,32,750
(c) Public address system, Fire Alarm,
Amplifiers and CD Players Rs.1,23,149
Rs.6,14,799
In our opinion, expenditure of Rs.6,14,799/- was cost of equipments and furniture and, therefore, would not fall within the expression "repairs", "replacements', "renovations" etc. These assets were business assets installed in the business premises and did not have character of revenue expenditure. We, therefore, hold that to the extent of Rs.6,14,799/- the AO was justified in holding the expenditure as capital in nature and the remaining expenditure of Rs.76,08,250/- [Rs.82,23,049 - Rs.6,14,799] is held to be revenue expenditure. We, however, find that in respect of cost of depreciable assets the AO did not allow depreciation. Accordingly, the AO is directed to allow depreciation with reference to Rs.6,14,799/- being the cost of depreciable assets at the appropriate rates and recomputed the income accordingly.' Therefore from the above decision it is seen that the Hon ITAT has held that the expenditure towards cost of equipment and furniture not falling within the expressions "repairs", "replacement", "renovation' did not have character of revenue expenditure an these assets were business assets installed in the business premises. In respect of the remaining expenditure in that year which included expenditure relating to repair and renovation of existing furniture and fixtures, it was held by the ITAT that the expenditure was incurred only for enabling the assessee to carry on its business more effectively and 6 ITA Nos.1022 & 867/K/2012 Ritika Pvt. Ltd. AY 2005-06 profitably and therefore was revenue in nature. It is also held by them that wherein assessee carried repairs, renovation, reconstruction etc., to the lease premises with the view to facilitate carrying of business more efficiently and profitably the expenditure is revenue in nature because such expenditure doe not result in creation of any asset belonging to the assessee. It is also seen from the submission of the Appellant that the Department's Appeal against Tribunal's above order in ITAT No. 41 of 2009 before the Hon'ble Calcutta High Court has been dismissed on 29.07.2009. Therefore, applying the ratio and decision of Hon'ble ITAT on the details of expenditure provided by the Appellant in respect of expensed held by the AO to be of capital in nature have been examined and considered within the parameters of the decision of the Hon ITAT.
1.3 On detailed examination of the expenses considered by the AO as capital in nature, , it is seen that major part of the expenses are in the nature of repairs and renovation and are revenue in nature within meaning of the guidelines laid down by the Hon'ble ITAT for the test of this expenditure. Out of this expenditure of Rs.71,18,403/-, it is found that only expenditure of Rs.8,000/- at 21, Central Market Punjabi Bag, New Delhi for installation of CCTDV and Rs.1,89,300/- at 9, High St. Phoenix, Mumbai for loose furniture as well as Rs.34,792/- for Projector for Store totaling Rs.2,32,092/- only can be considered to be in the nature of capital expenditure representing cost of assets which can be considered as business assets installed in the business premises. Therefore, he disallowance by the AO is upheld only to this extent and the remaining amount of Rs.68,86,311/- is to be treated as revenue expenditure. The AO is however directed to allow depreciation on the above amount taken to be capital expenditure.
This ground of appeal is allowed to the above extent."
Aggrieved, Revenue is in appeal before us.
9. We have heard the rival submissions and gone through the facts and circumstances of the case. We find that the ITAT in assesses's own case has held that the expenditure towards cost of equipment and furniture not falling within the expressions "repairs", "replacement", "renovation' did not have character of revenue expenditure and these assets were business assets installed in the business premises. But in respect of the remaining expenditure in that year which included expenditure relating to repair and renovation of existing furniture and fixtures and it was held that the expenditure was incurred only for enabling the assessee to carry on its business more effectively and profitably and therefore was revenue in nature. It is further held by ITAT that wherein assessee carried repairs, renovation, reconstruction etc., to the lease premises with the view to facilitate carrying of business more efficiently and profitably the expenditure is revenue in nature because such expenditure doe not result in creation of any asset belonging to the assessee. Further, Hon'ble Calcutta High Court has confirmed ITAT decision and the department's appeal against Tribunal's above order in ITAT No. 41 of 2009 has been dismissed on 29.07.2009. Therefore, applying the ratio and decision of Hon'ble ITAT on the details of expenditure in respect of expensed held by the AO to be 7 ITA Nos.1022 & 867/K/2012 Ritika Pvt. Ltd. AY 2005-06 of capital in nature have been examined and considered within the parameters of the decision of the ITAT. We find on detailed examination of the expenses considered by the AO as capital in nature, it is seen that major part of the expenses are in the nature of repairs and renovation and are revenue in nature in this year also. Out of this expenditure of Rs.71,18,403/-, it was found that only expenditure of Rs.8,000/- at 21, Central Market Punjabi Bag, New Delhi for installation of CCTDV and Rs.1,89,300/- at 9, High St. Phoenix, Mumbai for loose furniture as well as Rs.34,792/- for Projector for Store totaling Rs.2,32,092/- only can be considered to be in the nature of capital expenditure representing cost of assets which can be considered as business assets installed in the business premises. Therefore, we upheld the order of CIT(A) restricting the disallowance at Rs.2,32,092 and the remaining amount of Rs.68,86,311/- treating as revenue expenditure. Accordingly, the appeal of revenue is dismissed.
10. In the result, appeal of assessee is allowed and that of Revenue is dismissed.
11. Order is pronounced in the open court on 03.07.2015 Sd/- Sd/-
(P.K. Bansal) (Mahavir Singh)
Accountant Member Judicial Member
*Dkp/.P.S. Dated : 3rd July, 2015
Copy of the order forwarded to:
1. ASSESSEE -Ritika Private Ltd, 138 Beliaghata Road, Kolkata -700 015 2 Revenue - DCIT, Circle-12, Kol, 3, Government Place (W), Kolkata-01
3. The CIT(A), Kolkata
4. CIT, Kolkata.
5. DR, Kolkata Benches, Kolkata /True Copy, By order, Asstt. Registrar.