Case Law Details

Case Name : Four Seasons Wines Ltd. Vs DCIT (ITAT Bangalore)
Appeal Number : ITA Nos.2567 & 2568/Bang/2017
Date of Judgement/Order : 08/03/2021
Related Assessment Year : 2011-12 & 2012-13

Four Seasons Wines Ltd. Vs DCIT (ITAT Bangalore)

Disallowance of interest expenses justified for Borrowed money invested in equity without any commercial expediency

The first common issue urged in both the years relate to disallowance of interest expenditure u/s 36(1)(3) of the Income-tax Act,1961 [‘the Act’ for short]. The facts relating to the same are stated in brief. The A.O. noticed that the assessee has borrowed funds from banks and other entities and paid interest thereon. He further noticed that the assessee has made investments in other companies namely Wines Society of India Pvt. Limited (WSIPL) and other companies without collecting interest from them. Hence the A.O. disallowed proportionate interest expenditure of Rs.24 lakhs in assessment year 2011-12 and Rs.41.04 lakhs in assessment year 2012-13. In the appellate proceedings, the Ld. CIT(A) noticed that the assessee has given two separate loan/investment in M/s. WSIPL and the assessee has collected interest from the one of the loans. Accordingly he deleted interest disallowance relating to the loan on which interest was received. The Ld. CIT(A) noticed that the assessee could not establish commercial expediency in making the investment in WSIPL. Accordingly, he confirmed interest disallowance in respect of remaining amount of loans in both the years under consideration.

Disallowance of interest expenses justified for Borrowed money invested in equity without any commercial expediency

FULL TEXT OF THE ORDER OF ITAT BANGALORE

The appeals filed by the assessee are directed against the orders passed by the Ld. CIT(A)-3, Bengaluru and they relate to the assessment years 2011-12 & 2012-13.

2. None appeared on behalf of the assessee. We notice that the Registry has sent notice of hearing by registered post on an earlier occasion and the same has been returned back by the postal department with the noting “left”. Hence, the bench has directed the revenue to serve the notice. Ld. CIT(DR), vide his letter dated 4.3.2021, has reported to the Tribunal that the notice has been served upon the assessee. Under these circumstances, we are constrained to proceed to dispose of these appeals ex-parte, without the presence of the assessee.

3. Since common issues are urged in these appeals, both the appeals were heard together and are being disposed of by this common order for the sake of convenience.

4. We heard Ld. D.R. and perused the record. The assessee is engaged in the business of manufacture and sale of wines.

5. The first common issue urged in both the years relate to disallowance of interest expenditure u/s 36(1)(3) of the Income-tax Act,1961 [‘the Act’ for short]. The facts relating to the same are stated in brief. The A.O. noticed that the assessee has borrowed funds from banks and other entities and paid interest thereon. He further noticed that the assessee has made investments in other companies namely Wines Society of India Pvt. Limited (WSIPL) and other companies without collecting interest from them. Hence the A.O. disallowed proportionate interest expenditure of Rs.24 lakhs in assessment year 2011-12 and Rs.41.04 lakhs in assessment year 2012-13. In the appellate proceedings, the Ld. CIT(A) noticed that the assessee has given two separate loan/investment in M/s. WSIPL and the assessee has collected interest from the one of the loans. Accordingly he deleted interest disallowance relating to the loan on which interest was received. The Ld. CIT(A) noticed that the assessee could not establish commercial expediency in making the investment in WSIPL. Accordingly, he confirmed interest disallowance in respect of remaining amount of loans in both the years under consideration.

6. Before us, no material was placed by the assessee to contradict the findings recorded by Ld. CIT(A) on this issue. Accordingly, we do not find any reason to interfere with the order passed by Ld. CIT(A) on this issue in both the years under consideration.

7. The next common issue relates to disallowance of advertisement expenses in both the years. The A.O. noticed that the assessee has incurred huge amount of expenses on these advertisement expenses. In assessment year 2011-12, the turnover of the assessee was Rs.14.91 crores while the advertisement expenses were Rs.7.09 crores, which worked out to 50% of the sales. In assessment year 2012-13, the advertisement expenses incurred by the assessee worked out to 40% of the turnover. The A.O. took the view that the assessee has not proved the nexus between advertisement expenses incurred by it and the commercial expediency in incurring the same. Accordingly, he took the view that a portion of advertisement expenses needs to be disallowed. Accordingly, he disallowed 25% of the advertisement expenses incurred by the assessee in both the years under consideration, which worked out to Rs.1.77 crores and Rs.2.38 crores respectively in AY 2011-12 and 2012-13. The Ld. CIT(A) also confirmed the same.

8. We heard Ld. D.R. on this issue and perused the record. From the orders passed by the tax authorities, we notice that the assessee has explained the object behind incurring huge advertisement expenses. It was explained that per person consumption of wine in India was only 10ml. per year, while the global per capital consumption of wine is 4.50 ltrs. Accordingly, considering the huge opportunity, the assessee has incurred huge advertisement expenses. It was also submitted that the assessee’s market share is increasing every year and within a short span of 4 years, it has reached 2nd position in terms of market share. We notice that the above said explanation was not convincing to both the tax authorities.

9. We notice that the assessee has incurred the advertisement expenditure according to its wisdom/strategy from the point of view of the businessman. It is a well settled proposition of law that the tax authorities cannot sit in the arm chair of the businessman and decide the manner of conducting the business of the assessee. We notice from the assessment order that it is not the case of the A.O. that advertisement expenses incurred by the assessee are not genuine/bogus. The AO has formed the view that the advertisement expenses are huge vis-à-vis its Sales revenue. In our view, it should not be the reason for making estimated disallowance. Under these set of facts, we are of the view that the A.O. was not justified in disallowing part of advertisement expenditure on estimated basis and the Ld. CIT(A) was not justified in confirming the same. Accordingly, we set aside the order passed by Ld. CIT(A) on this issue in both the years under consideration and direct the A.O. to delete the disallowance in both the years under consideration.

10. The assessee has urged one more issue in assessment year 2013-14, which relates to disallowance of business promotion expenses. We heard Ld. D.R. on this issue and perused the record. The A.O. noticed that the business promotion expenses of Rs.13.07 lakhs incurred by the assessee was in the nature of capital expenditure and the same has resulted in creation of an asset of enduring nature. Accordingly, he disallowed the business promotion expenses treating the same as capital expenditure.

Before Ld. CIT(A), the assessee furnished breakup details of business promotion expenses as given below:

Sl.No. Particulars Amount in Rs.
1 Import pass fees 78,658
2 Trade sampling 1,450
3 Hologramer charges 1,27,963
4 Demurrage charges 3,08,029
5 Cash discount 9,794
6 Business promotion and others 7,82,046

11. The assessee also furnished additional evidences in support of the above expenses. Hence, Ld. CIT(A) called for a remand report from A.O., wherein the A.O. expressed the view that item no.1 to 6 mentioned in the table aggregating to Rs.5,25,894/- is revenue in nature. With regard to the remaining amount of Rs.7,82,046/-, the A.O. submitted as under:

3. Regarding the business promotion and others (item 6) of Rs.7,82,046/-, the following facts are relevant.

  • The assessee company had launched four season range only in 2008-09 and in a short span of 4 years, the company achieved considerable market share.
  • Promotional expenses had been incurred for the purpose of expanding the existing business, not as part of day to day business activities.
  • Business promotion expenses helped the assessee to increase the revenue earning capacity

12. The Ld. CIT(A) directed the A.O. to delete the addition of Rs.5,25,894/- mentioned in sl.nos.1 to 5 of the table (referred above), since the A.O. himself has accepted the same as revenue in nature. With regard to remaining amount of Rs.7,82,046/-, the Ld. CIT(A) took the view that 25% of the same may be treated as capital in nature. However, he sustained addition of Rs.5,86,535/- out of the above said amount of Rs.7,82,046/- and deleted the balance amount of Rs.1,95,571/-. Aggrieved the assessee has filed this appeal before us.

13. We heard Ld. D.R. and perused the record. The Ld. CIT(A) has discussed about the details of expenditure of Rs.7,82,046/- as under:

6.4 A perusal of the details of the business promotion expenses shows that it includes expenditure on purchase of bottle stand for display, expenditure on display and testing in wine festivals, press table for rooms, purchase of glass corner, shower curtains, soap dispenser, bathroom fittings, artificial stones, crockery, flower vase etc., in addition to expenditure on various meetings, travel to various places including abroad, food expenses and travel expenses of various guests. Thus, it cannot be said that the entire expenditure of Rs.7,82,046/– is revenue in nature. A part of the expenditure relates to purchase of assets and another part of the expenditure, which has been incurred for various business meetings can be said to have been incurred for business promotion. The expenditure on business promotion can partly be considered as of revenue nature and partly capital in nature. While discussing the issue of expenditure on advertisement, 25% of the expenditure has been treated as capital in nature. Since the appellant is in the initial stage of its business and admits (para 5.1) that it was incurring expenditure to make its presence felt in the market, an expenditure of 25% of Rs.7,82,04/– is treated as capital in nature. So, an addition of Rs.5,86,535/– is sustained and disallowance of balance amount of Rs.1,95,511/– is deleted. Thus the appellant gets a relief of Rs.7,21,405/-. Considering the above, the ground of the appeal 7 of the appellant is partly allowed.”

A perusal of the above said observations of Ld. CIT(A) would show the nature of expenses incurred by the assessee are towards purchase of certain articles, which are for promoting the business of the assessee. In our view, those kind of articles would not give rise to creation of asset of enduring nature. Accordingly, we are of the view that the Ld. CIT(A) was not justified in sustaining addition of part of business promotion expenses. Accordingly, we set aside the order passed by Ld. CIT(A) on this issue and direct the A.O. to delete the disallowance of entire amount of business promotion expenses.

14. In the result, both the appeals of the assessee are partly allowed.

Order pronounced in the open court on 8th Mar, 2021.

Download Judgment/Order

More Under Income Tax

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

October 2021
M T W T F S S
 123
45678910
11121314151617
18192021222324
25262728293031