Case Law Details
ITAT, AHMEDABAD BENCH `C’ AHMEDABAD
ACIT Vs. Core Healthcare Ltd. Core Towers,
ITA Nos. 573/Ahd/2003 and 1195/Ahd/2004,
Decided on: January 22, 2010
RELEVANT PARAGRAPH
3.3 we have heard both the parties and gone through the facts of the case. As pointed out by the ld. AR , a co-ordinate Bench in the assessee’s own case for the AYs. 1994-95 and 1995-96 vide order dated 19-06-2009 in ITA No.1492 & 1493/Ahd/2000 concluded a similar issue as under:
Advertisement Expenses
“10. Ground No.4 in the appeal for the A.Y. 1994-95 and Ground No.2 in the appeal for the A.Y. 1995- 96 relate to the dis allowance of advertisement expenses. So far as the assessment year 1994- 95 is concerned, there are two amounts which have been disallowed viz. Rs. 1,61,01,602/- and Rs. 42,62,418/-. So far as Rs. 1,61,01,602/- is concerned, the same was incurred on a special advertisement campaign launched by the assessee for creating a corporate image and to make the public aware about the various expansion and diversification of the projects and to protect and enhance the image of the company. In the accounts the assessee treated the expenditure as deferred revenue and debited only 1/4th of the same. In the return, the assessee claimed the entire expenditure as revenue in nature. So far as the expenditure of Rs. 42,62,418/ – is concerned, the same was incurred for launching a new product manufactured by the assessee viz., an eye drop 1195 & 573/Ahd/2004& 7 CO 88/Ahd./2008 formulation. So far as the expenditure on the special campaign is concerned, the issue is covered in favour of the assessee by the judgement of the Honourable Gujarat High Court in the assessee’s own case for the A.Y. 1992-93, reported in 308 ITR 263. In this judgement it has been held, applying the judgements of the Supreme Court in Empire Jute Company Ltd. Vs. CIT (1980) 124 ITR 1 and Alembic Chemical Works Co. Ltd. Vs. CIT, (1989) 177 ITR 377 that the nature of the advantage derived by the advertisement campaign has to be considered in a commercial sense and the test of enduring benefit should not be applied blindly or mechanically. It was held that the advertisement expenses incurred to create a brand image were allowable as revenue expenditure. Respectfully following the judgement of the Honourable Gujarat High Court in the assessee’s own case, we confirm the decision of the CIT(A), so far as the expenditure of Rs.1,61,01,602/ – is concerned.
11. As regards the advertisement expenses incurred to advertise the eye drop formulations newly manufactured by the assessee, the same ratio should follow, in our humble opinion. This cannot stand on a different footing and the judgement cited above, in our humble opinion is equally applicable. Therefore, respectfully following the same, we confirm the decision of the CIT(A) in respect of this expenditure also. Thus Ground No.4 in the appeal for the A.Y. 1994-95 is dismissed.
12. The same issue has been raised by the department in Ground No.2 in its appeal for the A.Y 1995- 96. For this year, the advertisement expenses incurred is Rs. 3,37,62,420/ -. In line with our decision for the A.Y. 1994- 95, we confirm the decision of the CIT(A) to allow the expenditure as revenue in nature and dismiss the ground.”
Employment Cost & Other expenses
“18. We have carefully considered the facts and the rival submissions. We note from page-95 of the assessment order that the AO has not connected any expenditure to any particular unit of the assessee so that it can be said that the expenditure disallowed in the assessments were incurred only with the reference to the Sachana unit. Be that as it may, in order to determine whether the Sachana unit is an entirely new business or is part of the existing business of the assessee, it is necessary to see whether there is unity of control, common finance, common administration, common staff etc. amounting to dove-tailing, interlacing and interdependence between the two activities. The annual report of the directors’ of the assessee company for the year ended 31-3-1994, relevant to the assessment year 1994-95 is at page 188 of the paper book filed by the assessee. The directors have reported to the share holders that the company was in the process of implementing a rupees 450 crores investment plan which involves manufacture of medical disposable and devices, small volume of parenterals (i.e. IV fluids), total parentarels nutrition products, renal are products and expansion of the capacity for IV fluids. They have also reported that an investment of Rs.131.69 crores has already been made and the first phase involving increase in capacity of IV-fluids and SVPs. was already in production for quite sometime. It was further reported that the company has mobilised Rs.98 crores through a public-cum-right issue in 1993 to part finance the Sachana project. This shows two things. Firstly it shows that the Sachana unit is also manufacturing products which are in the same line of business which the assessee is already carrying on. Secondly it shows that the Sachana project was partly financed by a public-cum-right issue made by the assessee company, which shows financial dove- tailing. The financial interlacing and dove-tailing is also shown by the balance sheet of the company as on 31-3-1994 which is at page no. 200 of the paper books. The shareholders funds consisting of share capital and reserves and surplus, which stood at Rs. 1,980.69 lakhs as on 31-3- 1993 has increased to Rs. 14098 lakhs as on 31-3-1994. The increase is of Rs. 120 crores approximately. If we see the assets side of the balance sheet, it shows gross block of fixed assets at Rs. 6508 lakhs and Rs. 8899 lakhs respectively and capital work in progress at Rs. 568 lakhs and 8111 lakhs respectively. The increase in the gross block, expressed in crores of rupees, is Rs. 23 crores and the increase in capital work-in-progress, similarly expressed, is Rs.76 crores. Together, they account for Rs.99 crores. This means that out of the assessee’s funds, Rs.99 crores have gone to the Sachana unit. This shows financial interlacing or interdependence. The balance sheet as on 31-3-1995 (page 144 of the paper book No.II) also shows similar use of the internal funds/accruals. The increase of about Rs.255 crores compared to 31-3-1994 in the shareholders’ funds has been used to finance the gross block of assets of the Sachana project to the extent of about Rs.150 crores and towards capital work-in-progress of Rs.50 crores. Schedule 20 to the balance sheet (page 211 of the paper book) shows that even in respect of IV sets already being manufactured in the assessee’s Ahmedabad unit, the installed capacity has been increased from 400 lakh units as on 31-3-1993 to 1200 lakh units as on 31-3-1994. Thus, there is expansion of the already existing business also. Page 138 of paper book No. II contains the directors’ report for the year ended 31-3-1995 where the directors have reported to the shareholders that the Rs. 450 crore expansion-cum- diversification project is being financed “through leveraging and internal accruals”. This is in conformity with what has been stated above and shown by the balance sheet. It shows financial interlacing and interdependence. The accounts for the year ended 31-3-1996 filed before us (paper book No.III) show that the increase of about Rs. 390 crores in the loan funds from rs.188.77 crores as on 31-3-1995 to Rs.571.74 has gone to finance the gross block and work-in-progress relating to the Sachana unit, to the extent of Rs.160 crores and Rs.120 crores respectively. This also supports the claim that the internal accruals and funds as well as funds borrowed by the company have been used to finance the Sachana unit, showing financial dovetailing. Schedule 21 to the balance sheet as on 31-3-1996 (page 24 of paper book No. III) shows increase in the installed capacity not only in respect of the syringes and disposable plastic infusion sets manufactured by the Sachana unit from `nil’ to 2424 lakh units and 400 lakh units as on 30-6-1996, but also in respect of the I.V.solutions already being manufactured by the assessee, from 2012 lakh units in the earlier year to 2403 lakh units as on 30-6-1996. This also shows that both the activity of manufacturing I.V. solutions (existing business) and the production of syringes and disposable plastic infusion sets in the Sachana unit have been treated as part of an integrated business. 133 of the paper book No.II contains the 8th annual report, i.e., for the year ended 31-3-1995. The directors’ report contains the following passage at page 136:
“On the organisation front, the Company has successfully installed and stabilised divisional profit centre based structure, which comprises Fluid Therapy Division, Pharmaceutical Division, Critical Care Division, Medical Devices Division & International Division. Whereas the divisions operate as independent profit centres manufacturing and/or marketing products in their respective divisions, functions like Finance, Audit, Information Technology, Strategic Marketing, HRD, R&D, Projects, Technical etc. provide a matrix based support to various divisions for efficient operation.” (emphasis supplied)
The emphasised part of the above passage shows that many key functions (mentioned therein) have been centralised and are looking after both the existing units and the unit at Sanchana. In other words, there is a common management or administration which is one of the tests to find out if two or more activities constitute a single business.
20. So far as the staff is concerned, the salaries paid to the staff is debited to the common profit and loss account under the head “employment cost” which includes salaries, wages, bonus, gratuity, staff welfare expenses, contribution to provident and other funds. No distinction is seen maintained in the profit and loss account between different units of the assessee and the staff employed therein. The additional information required to be given by the company u/s 217(2A) of the Companies Act makes no distinction between the staff employed in different units. There is one Chairman and managing director, one whole time director, one Vice- President (Project), one Marketing manager, two Vice-Presidents (Pharmaceutical) , one General Manager, one Material controller etc., inter alia. They are put in charge of all the units, in their respective fields. In other words, there is, say, no material manager separately for the Ahmedabad or Rajpur or Sachana units. Thus, there is common staff for the different units operated by theassessee.
21. The above facts and figures, which are not in question, do show that the various businesses and units of the assessee have to be treated as constituting a single or same business. It should also be remembered that all the items manufactured by the assessee in its various units are products of the pharmaceutical or healthcare industry. Accordingly, the expenditure incurred by the assessee was rightly allowed as deduction in computing its profits from the business for both the years. We confirm his decision.
22. The learned DR has pointed out that the order of the Tribunal for the AY 1993-94 on this point is against the assessee and it should not be changed. He has relied on the judgement of the Honourable Gujarat High Court in CITv Vadilal Dairy International Ltd (2008) 7 DTR 371 (Guj.). A careful and respectful reading of the judgement shows that in that case neither the Assessing Officer nor the CIT(A) nor even the Tribunal had recorded any finding that common staff was employed by the assessee for both the existing unit and the new unit. The assessee was manufacturing ice-cream and the new unit was set up in Sinnar, Maharashtra, for the procurement of milk, the contention being that it was a case of backward integration and thus both the units constituted the same business. It was submitted before the Honourable High Court on behalf of the assessee that it had employed common staff, that there was common administration, interconnection, interlacing and interdependence between the two units with respect to financial transactions. The Honourable High Court observed that in relation to this submission, none of the departmental authorities or the Tribunal has recorded any finding while holding that the Sinnar unit was a separate and independent unit. The submission of the assessee was therefore not accepted. It will be appreciated that the judgement turned on the facts of the case before the Honourable High court where the assessee was unable to show that there was interlacing, interdependence or dovetailing between the different units of the assessee so far as staff or finances were concerned. In the case before us, however, the assessee has adduced enough material, to which we have alluded earlier, to show that there was unity of control, common management, common staff, common finances and thus interlacing, dovetailing and interdependence showing that all its units constituted a single or same business. Thus, the present case stands on a different footing on facts and evidence.
23. As regards the order of the Tribunal for the AY 1993-94, it is not disputed on behalf of the assessee that the decision of the Tribunal on a similar point has been accepted by it but it is submitted that the facts herein are different. It is contended that the order of the Tribunal for the AY 1993-94 on this point is based on the earlier order for the AY 1992-93 which is reported in (2001) 78 ITD 1 (TM). In paragraph 13 of this order for the AY 1992-93, the only question, it is pointed out, that was decided was whether expenditure by way of salaries, wages, travelling expenses, telephone & telex expenses, lease rent charges, insurance premium etc. were directly linked to the erection of three new machines and if so, whether they could be allowed u/s 37 as revenue expenditure. It is argued before us that the question whether the Sachana unit is a totally separate business, not forming part of the existing business of the assessee and whether the Sachana unit was only an expansion of the existing business of the assessee was not before the Tribunal and was therefore not decided. It is accordingly contended by the learned counsel for the assessee that in the light of the different nature and complexion of the question that has arisen for decision for the years now under appeal and the additional or changed factual position as shown by the evidence adduced for the years under appeal, the grounds have to be decided in favour of the assessee.
24. We find force in the contention. As pointed out by the learned counsel for the assessee, and rightly so, the controversy before the Tribunal in the AY 1992-93 was whether the various items of expenditure were directly related to the erection of the three machines in that year and hence should be capitalised. There is no mention in paragraph 13 of the order of the Tribunal reported in (2001) 78 ITD 1 (TM) about the Sachana unit nor does it appear to have been argued before the Tribunal in that year that this unit was only an expansion of the existing business of the assessee and not a new or separate business. For the years under appeal, the question that was debated before us was whether the said unit can be said to constitute a separate or new business and not an expansion of the existing business. It is this question that has been decided by us to the effect that the Sachana unit is only an expansion of the existing business as there is interlacing, interdependence and interconnection between the existing business and the new unit and such dovetailing covers the finance, staff, management and administration and accounts. We have also found that there is unity of control in the sense that there is only one Chairman and Managing Director and one board of directors controlling/ managing all the businesses. Having regard to the different nature and complexion of the question for the years under appeal, it is held that the earlier orders of the Tribunal for the AYs 1992-93 and 1993-94 cannot come to the aid of the revenue. Thus Ground No.5 for the AY 1994-95 and ground No.3 for the AY 1995- 96 are dismissed.
3.4 We are of the opinion that the concept of deferred revenue expenditure is essentially an accounting concept and alien to the Act. The relevant provisions of the Act recognise only capital or revenue expenditure. Deferred revenue expenditure denotes expenditure for which a payment has been made or a liability incurred, which is essentially revenue in nature but which for various reasons like quantum and period of expected future benefit etc., is written-off over a period of time e.g. expenditure on advertisement, sales promotion, travelling etc.. Though the nature of such expenditure is revenue, keeping in view the fact that the benefits arising therefrom are expected to be derived over a period of time, stretching sometimes over several accounting years, the taxpayers have been amortising the same over the expected time period over which the benefits are likely to accrue therefrom. Accordingly, only a proportion of such expenditure is amortised in the Profit and Loss Account but an appropriate adjustment is made in the computation of income, claiming the entire as allowable revenue expenditure in terms of provisions of section 37(1) of the Act. The expenditure which is treated as deferred revenue in the books almost in all cases comprises of items, the benefits derived where from are ephemeral and transitory in nature in as much as these are incurred as a part of a continuous process and need to be expended in order to generate and increase the brand recall and sustain it in the minds of customers. Whether or not expenditure is of enduring nature, the Honourable Supreme Court in the case of Alembic Chemical Works Co. Ltd. vs. CIT (1989) 177 ITR 377 has itself observed that “The idea of “once for all” payment and “enduring benefit” are not to be treated as something akin to statutory conditions ; nor are the notions of “capital” or “revenue” a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business. The expression “asset or advantage of an enduring nature” was evolved to emphasise the element of a sufficient degree of durability appropriate to the context.”
3.5 Moreover, the deferred revenue expenditure is essentially revenue in nature and the decision to treat the same as deferred revenue only represents a management decision taken in view of the magnitude of the expenditure involved. For the purpose of allow ability of any expenditure under the Act , what is material is the classification between the capital and revenue and the same does not recognise any concept of deferred revenue expenditure. That is why AO himself allowed the amount debited in the profit and loss account. In a number of judgements viz. Amar Raja Batteries Ltd. v. ACIT [(2004) 91 ITD 280 (Hyd)], JCIT v. Modi Olivetti Ltd. [(2005)4 SOT 859 (Delhi)], ACIT vs. Medicamen Biotech Ltd. [(2005) 1 SOT 347 (Delhi)],Hero Honda Motors Ltd. v. Joint Commissioner of Income Tax [(2005) 3 SOT 572 (Delhi)] and Charak Pharmaceuticals Vs. JCIT (2005) 4SOT 393 (Mumbai)],it has been affirmed that where any expenditure is treated as a deferred revenue expenditure, it presupposes that the concerned expenditure, creating benefit is in the revenue field and is a revenue expenditure, but considering its enduring benefits as well as the fact that it does not result in the creation of any new asset or advantage of enduring nature in the capital field, the same is required to be treated distinctly from capital expenditure. .
3.6. As regards reliance placed by the AO on the judgment of Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v Commissioner of Income Tax, 225 ITR 802 (SC), in that case it has been held that deduction on account of discount on the issue of debentures is allowable on proportionate basis during the period over which these are outstanding. While putting forth such an interpretation, the Department seems to be ignoring one crucial fact in as much as the Honourable Supreme Court dealt with the question of issue of debentures which can be clearly and succinctly identified with and is relatable to a defined time-frame i.e. the period in which the debentures are outstanding and as such can be specifically allocated over defined periods. On the contrary, the nature of expenditure such as advertisement or exhibition, sales promotion or travelling etc.is such that, although the benefit arising therefrom may extend over several accounting periods, the same cannot be clearly and definitively assigned over time since the same is intangible in nature. In fact, the Honourable Supreme Court itself while discussing the issue, in the said case, and distinguishing between various situations has observed that
“….ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years”.
3.10 In the instant case, we find that the expenditure relating to advertisements, sales promotion ,travelling or other marketing and consultancy expenses is in the revenue field. The only issue to be considered is whether the assessee can claim the entire expenditure in this year itself, even though it had written off this expenditure in the books over a number of years. In this connection, we may refer to the decision of the Hon’ble Supreme Court in the case of Madras Industrial Investment Corpn.(supra) , wjerin it was held – “…Section 37(1) further requires that the expenditure should not be of a capital nature. The question whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on, or conduct of the business, that it may be regarded as an integral part of the profit-making process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. Any liability incurred for the business of obtaining a loan would be revenue expenditure. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purposes of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debenture, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of debentures.”
3.11 The aforesaid judgement relied upon by the AO itself clarifies that though the assessee may have written off the expenditure in its books of account over a period say of five years, it must be allowed in its entirety in the year in which it was incurred, if it is revenue expenditure, and if it is wholly and exclusively incurred for the purposes of business. In the case under consideration, there is nothing to suggest that with this expenditure, any asset, tangible or intangible, has been created. There is no evidence on record regarding accrual of any specific revenue in the years under consideration or subsequently over a defined period with the incurring of said expenditure. AO himself admitted the portion of expenditure debited in the profit and loss account as revenue expenditure. In these circumstances, we do not find any justification to interfere with the findings of the ld. CIT(A).
