Printing of Newspaper amounts to production & manufacture

Brief Facts of the Assessee:

There are 3 matters involved in the appeal filed.

• 1^st Matter – The assessee is engaged in the business of printing & publishing of Newspaper and Periodicals. During the course of Assessment, the Assessing Officer (herewith “AO) noticed that the assessee had claimed other expenses /general expenses for which no complete bills and vouchers were maintained by the assessee. The AO held that no verification was possible to judge whether all expenses have been incurred for the purpose of business only. Hence, a lump sum addition of Rs. 5,00,000/- was made by the AO.
• 2^nd Matter – The Assessee had debited to P&L Account towards Marketing and Survey expenses. The AO selected certain parties and had asked the assessee to produce them for verification which the assessee failed to produce. The assessee had squarely failed to put forth even any reliable document/evidence in respect of the parties which could bear substance of authenticity. Hence, AO disallowed the expenses to the extent of Rs. 67,73,510/-.
• 3^rd Matter – The Assessee had installed machinery for printing of newspapers on which he claimed additional depreciation under section 32(1)(iia) of the Income Tax Act (herewith “the Act”) over and above the normal depreciation. The AO held that the assessee did not manufacture or produce any article or thing. Simply printing the newspaper cannot be termed as manufacture or production. Therefore, he disallowed the additional depreciation claimed by the assessee of Rs. 54,34,045/-.

Held by CIT (A):

• 1^st Matter-The CIT(A) held that the assessee just provided an explanation that the expenses were of general nature and such expenses were not supported by independent corroborative evidences. Hence, addition made by AO is upheld.
• 2^nd Matter-The CIT(A) held that the assessee had failed in discharging the initial onus cast that lay upon it to prove the genuineness of the expenses so claimed. Hence, addition made by AO towards disallowance of marketing and survey expenses is upheld.
• 3^rd Matter-The CIT(A) observed that the assessee had installed printing machines at its branches across India and held that the assessee was printing the roll of paper with the help of machinery and therefore it was producing a new article and thing. Hence, additional depreciation is allowed.
  

Question of Law:

• Whether ad-hoc disallowance can be made out of other/general expenses without appreciating the nature of expenses incurred.
• Whether Marketing and Survey expenses can be disallowed if the assessee has failed to produce the parties for personal investigation.
• Can printing of newspaper be treated as production of a new article or a thing.

 Contention of the Revenue:

•  1^st Matter-With respect to ad-hoc disallowance, the Revenue contented that no complete bills and vouchers were maintained by the assessee. For certain expenses, the assessee was having only self-made vouchers and payments were made in cash. In the absence of complete bills and vouchers, genuineness of such expenses could be verified. Also verification was not possible to judge whether all expenses had been incurred for the purpose of business only in view of provisions of section 37 of the Act.
• 2^nd Matter-With respect to marketing and survey expenses, the Revenue contended that the Assessee could not produce the parties for investigation. The parties were closely related to each other. The parties were not qualified enough to carry out marketing and survey. The amount paid by assesse to such parties was immediately withdrawn from the bank accounts which raise the scope of suspicion.
• 3^rd Matter-The Revenue contented that as per section 32(1)(iia), the benefit of additional depreciation is allowable to the assessee who are engaged in the business of manufacture or production of any article or thing. The assessee did not manufacture or produce any article or thing. It simply printed the newspaper which cannot be termed as manufacture or production. The raw material in the form of newsprint remains only in the form of newsprint. Neither any manufacturing of newsprint work is done nor any other raw material is mixed in the newsprints. Printing on paper does not tantamount to any manufacturing activity as no new commodity comes into existence.

 Contention of the Assessee:

• 1^st Matter-The Assessee contented that the entire expenses were incurred in the normal course of business and their utility to the business could be denied. The Assessee is a private limited company having a separate legal entity with branches across India. Also the AO has not rejected the books of accounts of company and its diverse business activities and no detailed justification for lump sum disallowance was made available.
• 2^nd Matter-The Assessee contented that the entire books of accounts along with the relevant bills/vouchers and other reports including the survey reports were made available for examination. The disallowance made is based on mere conjectures, surmises and suspicion without referring to the credible evidences and material available on record. The Assessee argued that the AO cannot walk into the shoes of the businessman to verify the necessity or the business expediency. Also suspicion howsoever strong cannot take the place of proof.
• 3rd Matter-With respect to claim of additional depreciation, the assesse contented that a Newspaper involves procedure of printing the roll of paper with the help of machinery. Hence, it can be held that a newspaper is a separate and distinct article or thing. He further argued that ‘manufacture’ had not been defined in section 32(1)(iia) of the Act but same can be referred in section 2(29BA) of the Act. Hence, all the conditions as stipulated in section 32(1)(iia) are satisfied and assessee is eligible to claim additional depreciation.

 Held by the Income Tax Appellate Tribunal (“ITAT”):

•  1^st Matter-The ITAT observed that the assessee’s business activities are spread across India. It has separate legal entity as per the Company Law. The Assessee being a private limited company which is an inanimate person, there can be no personal expenditure. Also the AO has not pointed out any specific bill which is personal in nature. The disallowance made by the AO is general. Hence, disallowance is deleted.
• 2^nd Matter-The ITAT observed that the Assessee was able to justify the marketing expenses incurred and had produced necessary documents. Hence, the matter was referred back to AO to to decide afresh after considering the entire evidence and giving the assessee an adequate opportunity of being heard.
• 3^rd Matter-The ITAT contended that newspapers and periodicals are distinct commodity than the paper, printing ink and other ingredients used therein. Since a new commercial product comes into existence, the process involved for such transformation amounts to production and manufacture. Hence, the claim of additional depreciation is allowed.