Disallowance u/s 14A restricted to amount of exempt income

United Breweries Limited Vs DCIT (ITAT Bangalore)

ITAT Bangalore held that disallowance under section 14A of the Income Tax Act is restricted to the amount of exempt income earned by the assessee.

Facts- The assessment of the assessee was completed u/s 143(3) r.w.s 92CA and AO made various additions/ disallowance like depreciation on goodwill, disallowance u/s. 14A, 40(a)(ia), 43B, foreign royalty, brand promotion expense. AO also made addition of Rs. 140.49 crore and treated the amount transferred UBL Trust to the assessee as ‘long term capital gain’ and assessed the same to tax.

Aggrieved, the assessee filed an appeal before the first appellate authority. The CIT(A) vide the impugned order dated 20.12.2017, disposed of the appeal of the assessee. The CIT(A) partly allowed the appeal of the assessee.

Aggrieved by the order of the CIT(A), the assessee has filed the present appeal before the Tribunal.

Conclusion- We hold that the disallowance should be restricted to the amount of exempt income earned by the assessee. The amendment to section 14A of the I.T.Act, which states that disallowance u/s 14A of the I.T.Act is to be resorted, whether the assessee earns exempt income or not is only prospective and does apply to the relevant assessment year.

The Hon’ble jurisdictional High Court in the case of CIT v. Gokaldas Images had held that disallowance u/s 14A of the I.T.Act cannot be added to the book profits for the purpose of section 115JB of the I.T.Act. In the light of the dictum laid down by the Hon’ble jurisdictional High Court judgment in the case of Gokaldas Images, we delete 14A disallowance added to the book profit.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This appeal at the instance of the assessee is directed against CIT(A)’s order dated 20.12.2017. The relevant assessment year is 2012-2013.

2. The brief facts of the case are as follows:

The assessee is a limited company engaged in the business of manufacture and sale of beer under different brands like “Kingfisher” and “UB”. For the assessment year 2012-2013, the return of income was filed on 30.11.2012 declaring total income at `Nil’ under the regular provisions of the Income-tax Act and book profit of Rs.245,93,47,150 u/s 115JB of the I.T.Act. The return was subsequently revised on 07.02.2014 and the total income of Rs.132,92,94,900 was declared after set off of losses of Rs.84,49,20,104 (the assessee had declared book profit as declared in the original return). The assessment was selected for scrutiny and notice u/s 143(2) of the I.T.Act was issued on 16.08.2013. The assessment was completed u/s 143(3) r.w.s. 92CA of the I.T.Act vide order dated 31.03.2016. The Assessing Officer made following disallowances / additions to the returned income of the assessee:-

Particulars	Amount in Rs.
Depreciation on goodwill	3,73,88,587
Disallowance under section 14A	1,31,50,663
Disallowance under section 40(a)(ia)	8,24,77,951
Disallowance under section 43B	49,27,979
Foreign royalty	16,56,488
Brand promotion expense	13,76,00,000

3. The A.O. also made an addition of Rs.140.49 crore and treated the amount transferred UBL Trust to the assessee as “long term capital gain” and assessed the same to tax. The A.O. accordingly assessed the income of the assessee at Rs.377,15,30,101 under the normal provisions of the I.T.Act against the income of Rs.132,92,94,900 declared by the assessee in the revised return of income. Accordingly, the A.O. raised demand of Rs.80,38,85,646 (including interest) in the said assessment order.

4. Aggrieved, the assessee filed an appeal before the first appellate authority. The CIT(A) vide the impugned order dated 20.12.2017, disposed of the appeal of the assessee. The CIT(A) partly allowed the appeal of the assessee.

5. Aggrieved by the order of the CIT(A), the assessee has filed the present appeal before the Tribunal, raising the following grounds:-

1. Grounds relating to Depreciation on Goodwill:

1.1 The learned CIT{A) erred in confirming the action of the AO in disallowing Depreciation of INR 3,73,88,587 on Goodwill arising on acquisition of Karnataka Breweries and Distilleries Limited;

1.2 The learned CIT{A) erred in confirming the action of the AO in disallowing Depreciation by blindly relying on the earlier year order, without appreciating the complete facts of the case.

1.3 The learned CIT(A) erred in confirming the action of the AO in disallowing Depreciation ignoring the ruling of Hon’ble Supreme Court and other judicial precedents; and

1.4  The learned CIT{A) erred in confirming the action of the AO without appreciating the fact that Goodwill is an intangible asset thus entitled for depreciation under the provisions of the Act;

2. Grounds relating to disallowance of expenses under section 14A:

2.1 The learned CIT(A) has erred in confirming the action of the AD in disallowing expenses relatable to the earlier year investment of INR 2541 lakhs in relation to exempt dividend income of INR 19 lakhs

2.2 The learned CIT(A) has erred in confirming the action of the AD in invoking Rule 8D of Income Tax Rules, 1962 to compute the expenditure in connection with exempt dividend income ignoring the submissions of the Assessee;

2.3 The learned CIT(A) has erred in confirming the action of the AO in disallowing expenses relatable to the earlier year investment of INR 2541 lakhs even after upholding the principle that disallowance u/s 14A is not warranted if the assessee’s own funds and non-interest bearing funds are more than the investment, without appreciating that the same principle is applicable to the investment of Rs 25411akhs

2.4  The learned CIT(A) has erred in confirming the action of the AO in disallowing expenses relatable to the earlier year investment of INR 2541 lakhs by stating that nothing has been brought on record to establish that the investment was made out of interest free funds, when the details were neither asked for nor an opportunity granted for making submissions in this regard

2.5 The learned CIT(A) has erred in confirming the action of the AO in disallowing expenses relatable to the earlier year investment of INR 2541 lakhs without appreciating that it represented strategic investments made for business

2.6 The learned CIT(A) has erred in confirming the action of the AO in disallowing expenses relatable to the earlier year investment of INR 2541 lakhs by erroneously stating that the investment is for earning income, merely on the basis of surmises and conjectures.

2.7 The learned CIT(A) has erred in confirming the action of the AO in concluding that the disallowance made u/s 14A should be added back to the book profits for the purpose of 115JB of the Act.

3. Grounds relating to Disallowance under section 40(a)(ia):

3.1 The learned CIT(A) has erred in confirming the action of the AO in making disallowance under section 40(a)(ia) amounting to INR 7,34,77,951 by observing that TDS was not made on the year end provisions;

3.2  The learned CIT(A) has erred in confirming the action of the AO in making disallowance under section 40(a)(ia) without appreciating the fact that there was no requirement of making TDS on year end provisions when no credit was given to the identified party;

3.3 The learned CIT(A) has erred in confirming the action of the AO in making disallowance under section 40(a)(ia) without appreciating the rationale of the provisions of the Act and without appreciating that TDS is required only when the income is credited to identified party;

3.4. The learned CIT(A) has erred in confirming the action of the AO in making disallowance under section 40(a)(ia) without appreciating the fact that the year end provisions made by the Assessee is reversed in the subsequent year and the TDS is deposited based on the actual credit given tc the party;

3.5 The learned CIT(A) has erred in confirming the action of the AO in making disallowance under section 40(a)(ia) without considering the decisions of the jurisdictional judicial authorities and erred on relying on a decision where the facts are distinguishable and where the credit was given to identified parties.

3.6 The learned CIT(A) has erred in confirming the action of the AO in making disallowance under section 40(a)(ia) by making an alternative assertion that the provisions are contingent in nature and cannot be allowed as expenditure u/s 37 of the Act, when such a claim was never made either by the AO or by the assessee.

4. Grounds relating to disallowance under section 43B:

4.1. The learned CIT{A) has erred in confirming the action of the AO in making disallowance under Section 43B, an amount of Rs 49,27,979 towards CST payable/ excise duty on closing stock, without appreciating that no such expenditure has been claimed in the P & L account

4.2. The learned CIT{A) has erred in confirming the action of the AO in making disallowance under Section 43B,by erroneously interpreting and applying the Point of Taxation Rules 2011, applicable for service tax

4.3    The learned CIT{A) has erred in confirming the action of the AO in making disallowance under Section 43B,by erroneously holding that by not showing these amounts in the turnover, the assessee has claimed expenditure whereas no such expenses has been claimed.

5. Grounds relating to addition towards withholding tax

5.1 The learned CIT{A) has erred in confirming the action of the AO in making addition of the withholding taxes deducted by foreign enterprises, disregarding the fact that neither TDS certificates nor actual consideration were received

5.2 The learned CIT{A) has erred in confirming the action of the AO in making addition of the withholding taxes deducted by foreign enterprises, disregarding the submission that even if income has to be recognized on gross amount basis, the amounts deducted are to be allowed as deduction u/s 37(1) or under 36(i) or 36{i)(vii) as these are not received at all.

6. Grounds related to addition on account of Brand Promotion Expenses:

6.1  The learned CIT{A) has erred in confirming the action of the AO in making addition of Rs 13,76,00,000 in respect of the payment made towards Brand Promotion expenses to Force India Formula One Team Limited, by holding the payment to be capital in nature

6.2 The learned CIT{A) has erred in confirming the action of the AO in making addition in respect of payment towards Brand Promotion expenses, ignoring the commercial and economic rationale of the business of the Assessee;

6.3 The learned CIT{A) has erred in confirming the action of the AO in making addition in respect of payment towards Brand Promotion expenses, by erroneously holding that the objective is enhancement of brand and creation of brand entity and without appreciating the fact that these expenses are to promote the brand and increase the sale of the product

6.4  The learned CIT{A) has erred in confirming the action of the AO in making addition in respect of payment towards Brand Promotion expenses by erroneously holding the assessee gained a new advantage of enduring nature, which conclusion is based on surmises and presumptions without any iota of evidence

6.5 The learned CIT{A) has erred in confirming the action of the AO in making addition in respect of payment towards Brand Promotion expenses, disregarding the various judicial decisions cited by the assessee by merely stating that the decisions are distinguishable on facts, without mentioning how they are distinguishable.

6.6  The learned CIT{A) has erred in confirming the action of the AO in making addition in respect of payment towards Brand Promotion expenses, without appreciating that the learned AO has no jurisdiction to question the commercial expediency for the incurrence of the expenditure

7. Grounds related to addition towards Capital Gains and making the addition u/s 115JB

The learned CIT{A) has erred in confirming the action of the AO in making addition of Rs 140.49 Crores to the income of the income of the assessee, towards alleged capital gains, totally disregarding the facts of the case and the legal principles

7.2 The learned CIT{A) has erred in confirming the action of the AO in adding the long term capital gain derived by a separate legal entity known as UBL Benefits Trust, which is separately assessed as such;

7.3 The learned CIT(A) has erred in confirming the action of the AO in making addition by holding the transactions involved to be a colorable device, without appreciating that all the transactions involved were legal transactions and the amalgamation scheme, which was the trigger for the impugned transactions were duly approved by the Hon’ble High Court

7.4 The learned CIT{A) has erred in confirming the action of the AO in making the addition, disregarding the fact that the UBL Trust had filed its return of income showing the capital gain from the sale of shares and further erred in not adjudicating on this crucial issue by holding that this is academic in nature

7.5 The learned CIT(A) has erred in confirming the action of the AO in making the addition, by making a frivolous observation that there is nothing on record to show that the copy of the amalgamation scheme filed was the exact copy of the scheme approved by the Hon’ble High court

7.6 The learned CIT{A) has erred in confirming the action of the AO in making the addition to the Book profit by treating it as income u/s 115JB of the Act, by erroneously relying on a decision which was on remission of bank loan and distinguishable on facts

7.7 The learned CIT(A) has erred in confirming the action of the, AO in making the addition to the Book profit by treating it as income u/s 115JB of the Act, by erroneously relying on a decision which was on profit on sale of shares and distinguishable on facts, whereas there was no income element in the transaction of the assessee

8. Ground related to short credit of taxes

8.1 The learned CIT(A) has erred in not adjudicating on the ground raised by the assessee that the learned AO erred in not granting credit for tax deducted at source as claimed by the assessee in its return of income

9. Grounds related to demand of Dividend Distribution Tax

9.1 The learned CIT(A) has erred in not adjudicating on the ground raised by the assessee that the learned AO erred in raising a demand of Dividend Distribution tax on the assessee, without adducing any reason

10. Grounds related to additions to Book profit of amounts disallowed u/s 14A

10.1 The learned CIT(A) has erred in confirming the action of the AO in adding back to the book profit, the disallowance made u/s 14A, as was done in normal computation of income, ignoring the decisions relied upon by the assessee

11. The learned CIT(A) has erred in confirming the action of the AO in levying interest under section 234B/ 234C of the Act.

The Assessee submits that each of the above grounds is independent and without prejudice to one another.

The Assessee craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon’ble Tribunal to decide on the appeal in accordance with the law.”

We shall adjudicate the above grounds as under:

Depreciation on Goodwill (Ground 1) (1.1 to 1.4)

6. The assessee in the return of income filed had claimed an amount of Rs.3,73,88,587 as depreciation on ‘goodwill’ at the rate of 25% on the opening WDV of goodwill of Rs.14,95,54,349. The assessee had acquired a brewery, namely, ‘Karnataka Breweries and Distilleries Limited’ through a process of demerger and acquisition at cost of Rs.180.52 crore during the AY 2007-08 and the fair market value of the buildings, land and other assets was at Rs.123.77 crore.  The scheme of amalgamation was sanctioned by the Hon’ble High Court of Karnataka vide order dated 11.06.2007 with effect from 01.04.2006. The purchase consideration paid by the assessee exceeding the fair value of tangible assets and other net current assets was treated as ‘goodwill’.

6.1 The AO in the assessment order has held that the assessee is not eligible to claim depreciation on goodwill. The AO has held that the assessee’s reliance on the judgment of the Hon’ble Supreme Court in CIT v Smifs Securities Ltd reported in 348 ITR 302 (SC) is not correct and relied on the detailed analysis / reasoning provided in the assessment for AY 2007-08 wherein the claim of the assessee was rejected. The AO accordingly disallowed depreciation of Rs.3,73,88,587 claimed by the assessee on ‘goodwill’.

6.2 Aggrieved by the order of the A.O., the assessee raised this issue before the first appellate authority. The CIT(A) followed the order of this Tribunal in assessee’s own cases for AY 2007-08 to 2009-10 vide order dated 30.09.2016 in ITA No.722, 801 and 1065/Bang/2014, and dismissed the grounds of appeal of the assessee. The CIT(A) upheld the disallowance made by the AO.

6.3 Aggrieved by the order of the CIT(A), the assessee has raised the issue before the Tribunal. The learned AR fairly submitted that the Tribunal has decided the issue against the assessee in the cases for AY 2007-08 to 2009-10 (supra) and the decision will apply to the present AY also. The learned AR submits that the assessee has preferred appeal on the allowability of claim of depreciation before the Hon’ble High Court of Karnataka in ITA No.61/2017 and the same is pending adjudication. The learned DR was duly heard.

6.4 In view of the above submission of the learned AR, ground No.1 (1.1 to 1.4) are rejected.

Disallowance u/s 14A of the I.T.Act (Ground 2) (2.1 to 2.7)

7. The assessee had earned dividend income of Rs.19,00,000 in the previous year relevant to the impugned AY 2012-13. The assessee claimed the same as exempt under section 10(34) of the I.T.Act. The AO in the impugned assessment order has made disallowance of Rs.1,31,50,663 under section 14A of the I.T.Act by invoking the provisions of Rule 8D of the Income-tax Rules, 1962 (“Rules”). The AO rejected the contention of the assessee that it had not incurred any expenditure in relation to income not includible in total income.

7.1 Aggrieved by the order of the A.O., the assessee raised this issue before the first appellate authority. The CIT(A) considered the submissions of the assessee and observed that the investments of the assessee for the AY 2012-13 stood at Rs.2547 lakhs out of which, Rs.2541 lakhs were invested in Maltex Malsters Limited, subsidiary company of the assessee since the AY 2007-08. The CIT(A) therefore observed that the investment during the year was only Rs.6 lakhs only and the own fund available during the year is more than sufficient to cover this investment. The CIT(A) therefore provided partial relief and held that disallowance under section 14A is not called for on the value of fresh investment of Rs.6 lakhs made by the assessee during the year. As regards the earlier investment of Rs.2541 lakhs, the CIT(A) upheld the order of the AO disallowing the expenses relatable to the investment as per Rule 8D.

7.2 Aggrieved by the order of the first appellate authority, the assessee has raised this issue before the Tribunal. The learned AR submitted that the AO has made disallowance of Rs.1,31,50,663 under section 14A of the I.T.Act in relation to exempt dividend income of Rs.19,00,000. The learned AR further submitted that it is settled principle that while computing the disallowance, the investments made for strategic business purposes should be excluded. It is also settled principle that only those investments that are generating taxable income should be considered. The learned AR submitted that without prejudice to the above, the disallowance under section 14A of the I.T.Act cannot exceed the exempt income earned. The learned AR placed reliance on the decision of this Tribunal in assessee’s own case for AY 2013-14 wherein, the disallowance has been restricted to the exempt income. Accordingly it is prayed that the disallowance under section 14A of the I.T.Act be restricted to the exempt income after giving effect to the relief of Rs.6,00,000 provided by the CIT(A).

7.3 The learned DR supported the orders of the Income Tax Authorities.

7.4 We have heard rival submissions and perused the material on record. We find on identical facts and circumstances the co-ordinate Bench of the Tribunal in assessee’s own case for assessment year 2013-2014 in IT(TP)A No.2569/Bang/2017 (order dated 01.06.2022), had held that the disallowance should be restricted to the amount of exempt income earned by the assessee. The relevant finding of the Tribunal for A.Y. 2013-2014 (which had in turn followed the order of the Tribunal in the case of GMR Enterprises in ITA No.2310/Bang/2019), reads as follows:-

“42. We have heard the rival submissions and perused the material on record. It is settled law that disallowance u/s. 14A cannot exceed the amount of exempt income earned by the assessee. The co-ordinate Bench of this Tribunal in the case of GMR Enterprises (supra) has held as under:-

“3.4 We have heard rival submissions and perused the material on record. It is settled position of law that disallowance cannot exceed the amount of dividend income earned during the relevant assessment year. In this context, the following judicial pronouncements support the stand of the assessee:-

(i) Joint Investments Pvt. Ltd. v. CIT (59 com 295)– it was held that disallowance u/s 14A of the Act is to be restricted to the tax exempt income.

(ii) Daga Global Chemicals Pvt. Ltd. v. ACIT [2015-ITRVITAT-MUM-123) – has held that disallowance u/s 14A r.w. Rule 8D cannot exceed the exempt income.

(iii) M/s. Pinnacle Brocom Pvt. Ltd. v. ACIT (ITA No.6247/M/2012) – has held that disallowance u/s 14A cannot exceed the exempt income.

(iv) DCM Ltd. v. DCIT (ITA No.4567/Del/2012) – held that the disallowance u/s 14A of the Act cannot exceed the exempt income.

3.5 In view of the above settled position, the amount of disallowance u/s 14A of the I.T.Act needs to be restricted to the extent of exempted income earned during the relevant assessment year. As would be evident that in the facts and circumstances of the present case the amount of exempted income of Rs.27,37,47,187 was earned on investment and consequently the amount of disallowance, if at all, to be made is to be restricted to Rs.27,37,47,187.

3.6 However, in this case, the assessee had made disallowance of Rs.145,02,09,668 voluntarily while filing the return of income. In this context, it is important to refer to the judgment of theHon’ble Madras High Court in the case of M/s.Marg Limited v.CIT in Tax Case Appeal Nos.41 to 43 & 220 of 2017 (judgment dated 30.09.2020). The Hon’ble Madras High Court followed the judgment of the Hon’ble Karnataka High Court in the case of Pargathi Krishna Gramin Bank v. JCIT[(2018) 95 taxman.com 41(Kar.)]. In the case considered by the Hon’ble Madras High Court, the assessee therein had made voluntarily disallowance u/s 14A of the I.T.Act more than the dividend income earned and the Tribunal confirmed the disallowance made u/s 14A of the I.T.Act. However, the Hon’ble Madras High Court held that the disallowance u/s 14A of the I.T.Act cannot exceed the exempt income earned during the relevant assessment year. The relevant finding of the Hon’ble Madras High Court reads as follow:-

“20. Before parting, we may also note with reference to the Table of disallowance voluntarily made by the Assessee, which is part of the Paper Book before us for the four assessment years in question. In the Table quoted in the beginning of the order, shows that the Assessee himself computed and offered the disallowance beyondthe exempted income in the particular year, namely AY 2009-10, as against the dividend income of Rs.41,042/-and the Assessee himself computed disallowance under

Rule 8D of the Rules to the extent of Rs.2,38,575/-, which was increased to Rs.98,16,104/- by the Assessing Authority. Similarly, for AY 2012-13, against Nil dividend income, the Assessee himself computed disallowance at Rs.8,50,000/-, which was increased to Rs.2,61,96,790/-.

We cannot approve even the larger disallowance proposed by the Assessee himself in the computation of disallowance under Rule 8D made by him. These facts are akin to the case of Pragati Krishna Gramin Bank(2018) 95 Taxman.com 41 (Kar.) decided by Karnataka High Court. The legal position, as interpreted above by various judgments and again reiterated by us in this judgment, remains that the disallowance of expenditure incurred to earn exempted income cannot exceed exempted income itself and neither the Assessee nor the Revenue are entitled to take a deviated view of the matter. Because as already noted by us, the negative figure of disallowance cannot amount to hypothetical taxable income in the hands of the Assessee. The disallowance of expenditure incurred to earn exempted income has to be a smaller part of such income and should have a reasonable proportion to the exempted income earned by the Assessee in that year, which can be computed as per Rule 8D only after recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure under Section 14A made by the Assessee or his claim that no expenditure was incurred is validly rejected by the Assessing Authority by recording reasonable and cogent reasons conveyed to Assessee and after giving opportunity of hearing to the Assessee in this regard. 22. We, therefore, dispose of the present appeal by answering question of law in favour of the Assessee and against the Revenue and by holding that the disallowance under Rule 8D of the IT Rules read with Section 14A of the Act can never exceed the exempted income earned by the Assesee during the particular assessment year and further, without recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure made by the Assessee with respect to the exempted income is not acceptable for reasons to be assigned the Assessing Authority, he cannot resort to the computation method under Rule 8D of the Income Tax Rules, 1962.” (underlining supplied)

3.7 In view of the above judgment of the Hon’ble Madras High Court in the case of M/s.Marg Limited v. CIT (supra), it is clear that the disallowance u/s 14A of the I.T.Act cannot exceed the exempt income earned during the relevant assessment year irrespective whether larger amount was disallowed by the assessee u/s 14A of the I.T.Act while filing the return of income. Therefore, the AO is directed to restrict the disallowance u/s 14A of the I.T.Act to Rs.27,37,47,187.

3.8 In the result, ground No.II raised by the assessee is allowed.”

43. The assessee in this case has earned a dividend income of Rs.8,57,655 and respectfully following the decision of the coordinate Bench of the Tribunal,(supra), we hold that the disallowance should be restricted to the amount of exempt income earned by the assessee. We direct accordingly.”

7.5 In view of the above order of the Tribunal in assessee’s own case for assessment year 2013-2014, we hold that the disallowance should be restricted to the amount of exempt income earned by the assessee. The amendment to section 14A of the I.T.Act, which states that disallowance u/s 14A of the I.T.Act is to be resorted, whether the assessee earns exempt income or not is only prospective and does apply to the relevant assessment year. In this context, we rely on the order of the ITAT in the case of ACIT v. Bajaj Capital Ventures (P) Ltd. (2022)196 ITD 4 (ITAT Mumbai). It is ordered accordingly.

Disallowance u/s 40(a)(ia) of the I.T.Act Year-end provision (Ground 3) (3.1 to 3.6)

8. The brief facts of this issue are as follows:

The Auditor of the assessee had commented against clause 27(b)(i) that the assessee had not deducted tax at source in respect of provisions created for expenses for the month of March and outstanding as on 31.03.2012. The total expenses quantified by the Auditor was Rs.36,14,498. Out of the year-end provisions of Rs.36,14,67,498 made in the books of accounts according to the assessee, the amount of Rs.28,79,89,551 did not require tax deduction at source. The tax was not deducted on the balance amount of Rs.7,34,77,951, since according to the assessee, the payees were not identifiable. The assessee during the course of the proceedings before the AO had submitted that the taxes have been deducted and remitted before the due date of filing of the return of income and hence no disallowance is called for in respect of the expenditure. The AO disallowed the amount of Rs.8,24,77,951 u/s 40(a)(ia) of the I.T.Act, which were year­end provisions reported in the Form 3CD. The AO disallowed amount of Rs.8,24,77,951 instead of Rs.7,34,77,951 and hence, a rectification application was filed by the assessee. The AO has disposed of the rectification application vide order dated 30.11.2016 and the disallowance has been restricted to Rs.7,34,77,951.

8.1 Aggrieved by the order of the A.O., the assessee has raised this issue before the first appellate authority. The CIT(A) rejected the contentions of the assessee relying on the decision of this Tribunal in the case of IBM India (P) Ltd reported in (2015) 59 taxmann.com 107 and upheld the addition made by the AO in the assessment order.

8.2 Aggrieved, the assessee has raised this issue before the Tribunal. The learned AR submitted that that the issue was examined by this Tribunal in assessee’s own case for AY 2008-09 and 2009-10 in the context of revisionary order passed by the CIT under section 263 of the Act. On this very issue, the Tribunal held that the disallowance of year-end provision under section 40(a)(ia) of the I.T.Act is untenable. The learned AR further submits that in the appeal for AY 2013-14 in IT(TP)A No.2569/Bang.2017 (order dated 01.06.2022), the Tribunal has remanded the issue to the AO to verify the payments and taxes deducted thereon. It was stated that the Tribunal has directed the AO to allow the expenditure where TDS has been remitted to the Government account on or before the due date for filing the return of income. The learned AR further submitted that the Tribunal in its recent decision for AY 2010-11 and 2011-12 in assessee’s own case in ITA No.125 & 126/Bang/2020 (order dated 20.10.2022) has allowed the ground of the assessee since taxes were remitted to the Government account before the due date of filing the return of income. However, the learned AR fairly submitted that this issue may be remitted to the A.O. for verification of the facts with similar directions as held by the Tribunal in assessment year 2013-2014 (supra).

8.3 The learned DR supported the orders of the A.O. and the CIT(A).

8.4 We have heard rival submissions and perused the material on record. We find on identical facts and circumstances, the co-ordinate Bench of the Tribunal in assessee’s own case for assessment years 2013-2014 in IT(TP)A No.2569/Bang/2017 (order dated 01.06.2022) has restored the issue to the A.O. with specific directions. The relevant finding of the Tribunal for assessment year 2013­2014 (supra), reads as follows:-

“50. In the present case, we notice that the assessee has furnished the details of subsequent deduction of tax from the year end provisions and the details of payment made before the due date for filing the return of income at pages 528 to 537 of the assessee’s PB. In view of the above discussion and respectfully following the decision of the coordinate Bench of this Tribunal supra, we remand this issue back to the AO to verify the details of payments and tax deducted and allow the expenditure where the TDS is remitted to the Government account on or before the due date for filing the return of income. The assessee may be given a reasonable opportunity of being heard.”

8.5 In view of the above order of the Tribunal in assessee’s own case for assessment year 2013-2014, we remit the issue back to the files of the A.O. The A.O. is directed to comply with the directions of the Tribunal (supra) and take a decision on the issue after affording a reasonable opportunity of hearing to the assessee. It is ordered accordingly.

Disallowance u/s 43B (Ground 4) (4.1 to 4.3)

9. The assessee during the relevant AY 2012-2013 did not remit statutory dues amounting to Rs.7,63,44,091 before the due date of filing of return of income. The assessee accordingly added back a sum of Rs.7,14,16,112 in the computation of income since the same was not allowable under section 43B of the I.T.Act. The differential amount of Rs.49,27,979 (Rs.7,63,44,091 – Rs.7,14,16,112) comprised of CST payable of Rs.48,19,114 and excise on closing stock amount to Rs.1,08,865. The said amounts were not added back by the assessee for the reason that the same were not debited to the P&L account.

9.1 The AO rejected the contention of the assessee and held that the CST, excise duty on closing stock collected and paid are included in the valuation of purchase, sale and inventory, then effect will be nil only if the said amounts are paid within the due date of filing return in terms of section 43B of the I.T. Act. The AO therefore made an adjustment of Rs.49,27,979/-holding that the assessee had not paid the CST, excise duty on closing stock within the due date of filing the return of income and hence the same was disallowable under section 43B of the I.T.Act. The AO therefore did not verify the contention of the assessee that the CST and excise duty amounts were never debited to P&L account.

9.2 Aggrieved by the order of the A.O., the assessee has raised this issue before the first appellate authority. The CIT(A) accepted the contention of the assessee that CST and excise duty were not debited to P&L account. The CIT(A) however held that the assessee has claimed an expenditure which is yet to be paid and is liable to section 43B disallowance [para 7.3 page 23 of the impugned order of the CIT(A)]. The CIT(A) therefore upheld the addition made by the AO.

9.3 Aggrieved by the order of the first appellate authority, the assessee raised this issue before the Tribunal. The learned AR submitted that the amount of CST and excise duty were never claimed by the assessee in its return of income as they were never debited to the P&L account. The learned AR further submitted that the amounts of CST and excise duty are not tax collected and retained by the assessee but liability accrued as per the provisions of the respective statute. The learned AR placed reliance on the judgment of the Hon’ble Delhi High Court decision in CIT v Noble and Hewitt India (P) Ltd reported in 305 ITR 324. The learned AR further submitted that on similar set of facts for AY 2010-11, the AO after verifying that the amounts of CST and excise duty were not debited to P&L account, deleted the addition vide order dated 16.07.2013 passed u/s 154 of the I.T.Act. The learned AR further stated that the Tribunal in its recent decision for AY 2011-12 passed in ITA No.126/Bang/ 2020 (order dated 20.11.2022) has remanded the matter to the AO to verify and allow the claim of the assessee after taking into consideration the rectification order passed for AY 2010-11. The learned AR therefore prayed that direction may be given to the AO to verify if the CST and excise duty were claimed by the assessee by a debit to the P&L account and if there is no debit, it is prayed that the AO may be directed to delete the addition under section 43B of the I.T.Act.

9.4 The learned DR supported the orders of the A.O. and the CIT(A).

9.5  We have heard rival submissions and perused the material on record. We find that on identical facts, the Tribunal in assessee’s own case for assessment year 2011­2012 in ITA No.126/Bang/2020 (supra), remitted the issue to the files of the A.O. The relevant finding of the Tribunal reads as follows:-

“52. Vide Ground No.6 the plea of the assessee is that Rs.4,60,672 disallowed u/s. 43B is not justified since no such expenditure is claimed in the P&L account. We notice that for AY 2010-11, for a similar disallowance, the assessee made petition u/s.154 which was considered by the AO who deleted the disallowance. We therefore remit the issue back to AO with a direction to verify and allow the claim of the assessee taking into consideration the rectification order passed u/s.154 for AY 2010-11. It is ordered accordingly.”

9.6 In view of the aforesaid order of the Tribunal in assessee’s own case for assessment year 2011-2012, we remit the issue back to the files of the A.O. with a direction to verify and allow the claim of the assessee taking into consideration the rectification order passed u/s 154 for A.Y. 2010-2011. It is ordered accordingly.

Withholding tax amount on foreign royalty : (Ground 5)  (5.1 and 5.2)

10. The assessee during the relevant AY 2012-13 received royalty income from Independent Distilleries (Aust) Pty Ltd, Australia and Independent Distilleries (NZ) Ltd, New Zealand amounting to Rs.1,49,08,389. The said amount was received net of withholding tax. The AO during the course of hearing noticed that the assessee has disclosed only 90% of the Royalty amount for taxation on the ground that the balance 10% would represent tax withheld by the payer and the assessee had not received the said amount either in the form of TDS certificate or actual consideration basis till date. The AO added this 10% to the income of the assessee by holding that it is the gross value of consideration that needs to be offered to tax on accrual basis and not the amount net of tax. Accordingly, amount of Rs.16,56,488 has been added to the returned income of the assessee.

10.1 Aggrieved by the order of the A.O., the assessee has raised this issue before the first appellate authority. The CIT(A) rejected the contentions of the assessee and upheld the addition made by the AO in the assessment order. The CIT(A) however directed the AO to consider the claim of the assessee for foreign tax credit in accordance with the relevant provisions of the Act.

10.2 Aggrieved by the order of the CIT(A), the assessee has raised this issue before the Tribunal. The learned AR submitted that the issue was examined by this Tribunal in assessee’s own case for AY 2010-11 and 2011-12 (supra). The learned AR therefore prayed that a similar direction may be taken for the year under consideration as well.

10.3 The learned DR supported the orders of the A.O. and the CIT(A).

10.4 We have heard rival submissions and perused the material on record. We find on similar circumstances, the Tribunal in assessee’s own case for assessment year 2010­2011 (supra) remitted the matter to the files of the A.O. with a direction to allow credit for the tax paid in foreign countries on the doubly taxed income in accordance with the provisions of section 90/91 r.w. Rule 128 based on the documents / evidences submitted by the assessee in this regard. The relevant finding of the Tribunal in assessee’s own case for assessment year 2010-2011 (supra), reads as follows:-

“13. We have heard the rival submissions and perused the material on record. Under the mercantile system of accounting, the income is to be offered to tax on accrual basis and therefore it is the gross income that needs to offered to tax in assessee’s case here. However the assessee is entitled to claim credit for the tax paid on the doubly taxed income in accordance section 90/91 read with Rule 128 of the Income Tax Rules and in the given case, this fact is also held by the CIT(Appeals) that the assessee is entitled for credit for foreign tax paid. Though the assessee has not brought any new evidence on record before us to substantiate the tax deducted by the payer, in the interest of justice, we are of the view that the assessee should be given an opportunity to produce the evidence. Therefore, we remit the issue back to the AO with a direction to allow credit for the tax paid in foreign countries on the doubly taxed income in accordance with provisions of section 90 /91 r.w. Rule 128 based on the documents / evidences submitted by the assessee in this regard. The assessee is directed to submit the relevant documents and cooperate with the proceedings before the AO. This ground is allowed for statistical purposes.”

10.5 In view of the aforesaid order of the Tribunal in assessee’s own case for assessment year 2010-2011, we remit the matter back to the files of the A.O. for taking a decision in the line with the aforesaid order of the Tribunal. It is ordered accordingly.

Addition on account of brand promotion expenses (Ground 6) (6.1 to 6.6)

11. The assessee had entered into a brand promotion agreement dated 04.02.2011 with Force India Formula One Team Limited, a company registered in England (“Force India”). The assessee made a payment of Rs.13,76,00,000 to Force India in the form of advertisement expense to make the assessee’s logo and brand name more visible in the international market and claimed the same as business expenditure under section 37(1) of the Act.

11.1 The AO held that ‘brand’ being an intangible asset, any expense incurred towards development of brand or brand promotion leads to an enduring benefit and should be capitalized. The AO therefore disallowed an amount of Rs.13,76,00,000 and added the same to the returned income of the assessee.

11.2 Aggrieved by the order of the A.O., the assessee has raised this issue before the first appellate authority. The CIT(A) rejected the contentions of the assessee and upheld the addition made by the AO in the assessment order treating the brand promotion expense as capital in nature. The CIT(A) accordingly dismissed the grounds of appeal of the assessee.

11.3 Aggrieved by the order of the CIT(A), the assessee has raised this issue before the Tribunal. The learned AR submitted that the issue is covered by the decision of this Tribunal in the case of United Spirits Ltd in IT(TP)A No.2701/Bang/2017 (order dated 05.04.2022) wherein the very issue of payment of advertisement expenses to Force India has been discussed and the Tribunal has held that such brand promotion expenditure is revenue in nature and allowable as expenditure The learned AR therefore prayed that the payment of Rs.13,76,00,000 paid to Force India is revenue expenditure and hence, the disallowance made by the AO deserves to be deleted.

11.4 The learned DR supported the orders of the A.O. and the CIT(A).

11.5 We have heard rival submissions and perused the material on record. Similar issue has been considered by the Tribunal in the case of United Spirits Limited for the AY 2013-2014 in IT(TP)A No. 2701/Bang/2017 (order dated 05.04.2022) wherein it was held as under:-

“12.6 We have heard rival submissions and perused the material on record. The AO disallowed the sales promotion and advertisement expenses totally amounting to Rs. 44,33,55,403 [36,91,12,995 + 7,42,42,408] for the reason that these expenses are brand promotion expenditures of USL logo, it promotes the brand the assessee, gives enduring benefit and hence capital in nature. The DRP confirmed the action of the AO.

12.6.1  Similar issue has been considered by the Tribunal in assessee’s own case for the AY 2012-13 in IT(TP)A No. 489/B/2017 order dated 29.5.2020 wherein it was held as under:-

“45. We have heard Ld D.R on this issue and perused the record. We notice the issue relating to allowability of expenditure incurred on sponsorship of sports event was considered by the Mumbai bench of ITAT in the case of Samudra Developers Pvt Ltd (ITA 5974/Mum/2013 dated 26­04-2017) and it was held that the same is allowable as revenue expenditure. For the sake of convenience, we extract below the operative portion of the order passed by Mumbai bench of Tribunal on an identical issue:-

“3. Second ground of appeal pertains to deleting the disallowance on account of sponsorship fees and management fees. In the earlier part of our order, we have mentioned the facts about the various disallowances made by the AO including the capitalisation of sponsorship. Treating it as an intangible asset, he allowed depreciation on it @25%.

3.1. The FAA after considering the elaborate submissions of the assessee,held that it had entered into an agreement with the sports company namely India-Win in the month of March, 2010, that the assessee-group became cosponsor of Mumbai Indian IPL cricket team as an associate partner, that as per the agreement the ground logo of the assessee group was displayed permanently in the cricket stadium is also on the playing gear of the players,that in the terms of the agreement and amount of Rs.4.50 crores was paid towards sponsorship fees during the year under consideration, that the sponsorship fees for different years had been apportioned and allocated to 3 entities of the assessee group which were using the brand logo in the ratio of their respective turnovers during the year, that out of the expenditure of Rs. 2.50 crores and amount of Rs. 21.61 lakhs was allocated to the assessee, that the expenditure incurred on IPL sponsorship did not provide it any benefit of enduring nature, that the expenditure had been incurred year after year by the assessee group with a view to get visibility, that it was in nature of some kind of advertisement expenditure, that same should be allowed as revenue expenditure. Referring to the case of Delhi Cloth and General Mills Co.Ltd.(115 ITR 659) of the honorable Delhi High Court, the FAA allowed the appeal filed by the assessee.

3.1.a. With regard to management fee, the FAA observed that there was no doubt about the genuineness of expenditure, that the expenditure was incurred for availing infrastructure facilities administrative support, like manpower recruitment, HR services, uses of computer, telephone, photo copiers, infrastructure set up etc. in order to carryout business operations smoothly, that the parent company had allocated a certain amount to the account of the assessee in the ratio of its turnover. He finally held that expenditure had to be allowed as revenue expenditure.

3.2. Before us, the DR supported the order of the AO and the AR relied upon the order of the FAA. We find that the assessee group had entered into an agreement with India Win, that it was a co- sponsor of Mumbai Indian IPL team, that it had incurred similar expenditure in the subsequent two years, that out of the total expenditure the assessee had claimed a very small proportion under the head sponsorship expenses. Such an expenditure is for advertising the brand name of the Group. Being a recurring expenditure, it had to be allowed as revenue expenditure. We find that in the case of Delhi Cloth and General Mills Co.Ltd.(supra)the Hon’ble Court had held that expenditure incurred for organizing sports events are allowable items of revenue expenditure as such events publicise the names of the sponsor. The AO was not justified in capitalising the expenses. The entire expenditure was rightly allowed by the FAA as revenue expenditure. After going through the details of expenditure incurred by assessee under the head managerial expenses, we are of the opinion that it had not got any enduring benefit from the expenditure incurred nor did the expenditure create any capital asset. Therefore, we do not want to interfere with the order of the FAA. Considering the above, we decide second ground of appeal against the AO.”

46. The Delhi bench of Tribunal has also examined an identical claim in the case of M/s Pepsico India Holdings Pvt Ltd (supra) and the same was allowed as revenue expenditure with the following observations:-

“Re: Disallowance of INR 3,85,15,497/- being sponsorship fees paid to ICC

87. In Grounds No. 7 to 7.3 in I.T.A. No. 1044/DEL/2014 for AY 2009-10, the assessee has challenged the disallowance of INR 3,85,15,497/- being sponsorship fees paid by the assessee to ICC. Our attention was drawn to paras 4 to 4.3 of the final assessment order wherein the said issue has been discussed by the AO. It has been submitted that during the relevant previous year the assessee entered into an agreement dated 20.08.2008 with ICC Development (International) Limited (ICC) for obtaining sponsorship rights in respect of various ICC cricketing events around the world. The assessee paid an amount of Rs. 3,85,15,497/- for sponsoring cricketing events held during 2008 to ICC. The said amount was proposed to be disallowed by the AO in the Draft Assessment Order, for the following reasons: –

(i) Similar expense has been disallowed in the earlier years as part of the Transfer Pricing Adjustment on account of AMP expenses.

(ii) Assessee has been bearing substantial portion of the fees paid to ICC for acquiring sponsorship rights even though benefit of the same is derived by the other entities of the world.

88. Aggrieved by the addition proposed by the AO, the assessee had filed objections before the DRP. The DRP vide directions dated 20.12.2013 upheld the action of the AO, on the ground, that the expenditure was benefitting all the entities across the globe and hence, it could not be said to have been incurred wholly and exclusively for the business of the assessee.

89. The learned counsel for the assessee submitted that the said disallowance was unwarranted since the said expense was incurred in view of the fact that major viewership of cricket is in the Indian subcontinent. He also referred to various newspapers reports which demonstrated the popularity of the sport in India to support the aforesaid contentions. It was also submitted that the assessee company has consistently promoted its range of products using cricket as an advertising platform. It was also to our notice that payment of sponsorship fees to ICC was remitted by the assessee after deduction of tax at source as instructed by the Income Tax Department. Further, the assessee had obtained the approval of the Ministry of Youth Affairs and Sports for sponsoring the events covered under the agreement. Copy of the order under section 195 of the Act and the approval received from the Ministry of Youth Affairs and Sports has been enclosed at pages 247 to 249 and 224 of the paper-book respectively. He further submitted that the expenditure was wholly and exclusively for the business of the assessee company and had not been disputed by the revenue. Any incidental benefit that may arise to any other person or entity cannot be a bar for allowance of expenditure under section 37 of the Act, as per the settled position of law. Reference in this regard was made to the decisions of the Hon’ble Supreme Court of India in CIT vs. Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC), Sasson J. David and Co. P. Ltd vs. CIT 118 ITR 261(SC) and SA Builders Ltd. vs. CIT 288 ITR 1(SC). He further submitted that the Revenue cannot step into the shoes of an assessee to determine the commercial expediency of an expenditure incurred by it.

90. On the other hand, the learned DR relied upon the order of the AO and the DRP in support of his contentions.

91. After considering the rival submissions and on perusal of the impugned orders, we find that, here the disallowance of Rs.3,85,15,497/- has been made on account of sponsorship fee by the assessee to the ICC on the ground that similar expenditure was disallowed in the earlier years as part of Transfer Pricing Adjustment on account of AMP expenses; and secondly, assessee has been bearing substantial portion of the fees to the ICC for acquiring the sponsorship rights even though benefit of the same is derived by either entity of the world. The contention raised by the learned counsel that since major viewer of cricket is an Indian subcontinent looking to its mass popularity in India, the assessee company has been consistently promoting its range of products using cricket as an advertisement platform. The said payment has been made after obtaining the approval of Ministry of Health Affairs and Sports and after deducting TDS u/s.195. Once the expenditure has been incurred wholly and exclusively for the purpose of business which fact has not been disputed by the Department, then even if some incidental benefit which may arise to any other entity cannot be a bar for allowance of expenditure u/s. 37. Under the principle of commercial expediency such an expenditure has to be seen from the angle, whether the decision taken by the assessee for paying sponsorship fees was for the purpose of business or not. Here in this case, the commercial expediency has not been doubted but rather it has been held by the AO that in all the years transfer pricing adjustments has been made on this score and benefit is arising to the other AEs also. What is relevant for an expense to be allowable as revenue expense is that, whether it has been incurred during the course of business and is for the purpose of business. Benefit factor to other related parties is relevant under transfer pricing provision and not while allowability of business expense u/s 37(1). It is well known fact that companies use sports event as a platform to advertise their range of products as it has a very high viewership. Any such incurring of expenditure is ostensibly for promotion of business only and hence, no disallowance is called for.

Accordingly, Grounds No.7 to 7.3 in ITA No.1044/Del/2014 pertaining to A.Y. 2009-10 are allowed.”

47. We notice that the co-ordinate benches are consistently holding the view that the expenditure incurred on sponsoring of sports events are intended to promote business only and hence the same is allowable as expenditure. The allowability of brand promotion expenses was examined by Hon’ble Delhi High Court in the case of Modi Revelon P Ltd (supra) and the relevant discussions made by the High Court are extracted below:-

“22. As far as the second aspect, i.e. expenditure for promotion of the brand is concerned, there is no doubt that the dealer’s functions extend to advertising the products of the assessee, manufactured by the sister concern. On this aspect, Section 37 of the Income-tax Act would be relevant. The said provision reads as follows:

“SECTION 37 GENERAL:

(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.

Explanation : For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.

(2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.

The applicable test as to what constitutes expenses “laid out or expended wholly and exclusively for the purposes of the business or profession” was explained in Gordon Woodroffe Leather Manufacturing Co. v. CIT [1962] Supp. (2) SCR 211. The correct approach, said the Court, which has to be taken in all such cases is to see whether:

“was the sum of money expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business”

Again, in Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261/ 1 Taxman 485 (SC) the Supreme Court outlined the correct test of commercial expediency as the guiding principle to decide whether the expenditure was to facilitate profits, as follows:

(iii) that the sum of money was expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the assessee”

In Smith Kline & French (India) Ltd. v. CIT [1992] 193 ITR 582/[1991] 59 Taxman 357 (Kar.), it was held that in normal commercial sense and in common parlance sales promotion and publicity are activities aimed at gaining goodwill in the market. They need not be confined to media propaganda but can involve indirect approaches. The judgment of a Division Bench of this Court in CIT v. Adidas India Marketing (P.) Ltd. [2010] 195 Taxman 256 (Delhi) has recognized that brand promotion exercises undertaken through media campaigns, schemes, programmes etc are essential for propagation of the brand. The necessity (or lack of it) is not something which income tax authorities can go into; as long as it is voluntarily undertaken by the business enterprise for profit earning, it would be entitled to claim relief under section 37(1).

23. In the present case, the AO was conscious of the fact that brand promotion expenses are a necessary ingredient in marketing strategies. Therefore, he allowed about 50 per cent of those expenses. However, the reasoning for disallowance of the rest, i.e. that the assessee could claim only a proportion of such expenses, since advertising expenses were to be borne by the sister concern dealer, and that the proportion was in respect of its territory, was not upheld. This Court does not see any fallacy in the Tribunal’s approach or reasoning, on this aspect. One is not unmindful of the concerns of a business which engages in sale of consumer items, and faces continuous competition. Brand promotion enhances the visibility of given products or services, and are often perceived as conferring a competitive advantage on those who adopt those strategies or schemes. Expenditure towards that end is based on pure commercial expediency, which the revenue in this case, ought to have recognised, and allowed. The revenue’s arguments on this point too are insubstantial.”

48. The observations made by the Hon’ble jurisdictional Karnataka High Court in the case of CIT vs. ITC Hotels (2014)(47 taxmann.com 215) on the concept of “enduring benefit” is relevant here and the same is extracted below:-

“6. The first substantial question of law relates to a sum of Rs.10 lakhs, which were paid by the assessee as a license fee for the use of central court yard, having marble, (for short “Court Yard”) in Lallgarh Palace (for short ‘Palace’). It appears that there was a Memorandum of Understanding (for short ‘MOU’) between the Assessee and Maharaja Ganga Sinhji Charitable Trust (for short the “trust”). The assessee, as per the MOU, had acquired a right to use the court yard for their business of hotel, being run in the palace, more efficiently and profitably. The question is whether the expenditure of Rs.10 lakh resulted in any addition to the fixed capital of the assessee. According to the Revenue, the assessee had acquired right to use the court yard apart from the palace, and thus, had acquired an advantage of enduring benefit of a trade. In other words, the expenditure incurred by the assessee for the use of court yard is in the capital field and it cannot be said to have been incurred to facilitate trading operation of the assessee.

7. Learned Counsel appearing for both the sides placed reliance upon the judgment of the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69, in support of their contentions. Mr. Aravind, learned counsel for the Revenue tried to distinguish the ratio laid down by the Supreme Court in this case on the basis of factual matrix involved therein. As against this, learned counsel appearing for the respondent/assessee placed reliance upon the principle laid down by the Supreme Court in the said judgment.

8. We have perused the judgment. We find ourselves in agreement with the learned counsel appearing for the respondent/assessee. It would be relevant to reproduce the relevant observation made by the Supreme Court, in the said judgment, which, in our opinion, support the case of the respondent/assessee to contend that the expenditure of Rs. 10 lakhs would be on revenue account. The relevant observation in the case of Empire Jute Co. Ltd. (supra) reads thus:

‘The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the Courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties.

One celebrated test is that laid down by Lord Cave L.C. in Atherton Vs. British Insulated & Helsby Cables Ltd. (1925) 10 Tax Cases 155 (HL), where the learned Law Lord stated :

“…when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite condition) for treating such an expenditure as properly attributable not to revenue but to capital”.

This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in CIT v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC) : TC16R.991, it would be misleading to suppose that in all cases, securing a benefit for the business would be, prima facie, capital expenditure “so long as the benefit is not so transitory as to have no endurance at all. There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case’.

9. It is clear that if the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. In the present case, except the right to use the court yard, no other rights were created in favour of assessee. In other words, the amount paid to the Trust was for the use of the court yard under the MOU for an indefinite future, and therefore, it would be on revenue account. In other words merely because the advantage may endure for an indefinite future would not mean that the expenditure would be on capital account and not revenue. The advance of Rs. 10,00,000/-, in the present case, consists merely in facilitating the assessee’s business operations, enabling the management to conduct their Hotel business more efficiently and profitably. We are, therefore, satisfied that the view taken by the Tribunal in answering this question in favour of Assessee and against the Revenue is correct and deserve no interference by this Court.”

49. Respectfully following the above cited decisions, we set aside the order passed by AO on this issue and direct him to allow the impugned sponsorship expenses as revenue expenditure.”

12.6.2 Following the above order the ITAT in assessee’s own case for assessment year 2012-2013 (supra), we allow deduction of sales promotion and advertisement expenses of Rs. 44,33,55,403. As the entire expenses are allowed as revenue expenditure, the question of depreciation does not arise.”

11.6 Following the above order of the Tribunal in the case of United Spirits Limited (supra), we allow deduction in respect of brand promotion expenses. It is ordered accordingly.

Capital gains and addition u/s 115JB of the I.T.Act  (Ground 7) (7.1 to 7.7)

12. During the financial year 2010-11, the Hon’ble High Court of Madras vide order dated 01.02.2011 sanctioned a composite scheme of amalgamation (“Scheme”) and allowed the amalgamation of the following transferor companies with the assessee, which is the ultimate transferee company in the scheme:

(i) Associated Breweries and Distilleries Limited (“ABDL”)

(ii) Millennium Alcobev Private Limited (“MAPL”)

(iii) Empee Breweries Limited (“EBL”)

The share holding of the transferor companies immediately at the time of amalgamation is provided in the table below:

Transferor	Total share holding	Held by the Assessee	Held by subsidiary of Assessee	Total holding by Assessee (including subsidiaries)
ABDL	10,000     equity     shares   of Rs.100/- each fully paid up	10,000	–	100%
MAPL	1,53,50,000 equity shares of Rs.10/- each fully paid up	61,40,000	15,35,000	50% (76,75,000 shares)
EBL	58,25,370    equity  shares   of Rs.10/- each fully paid up		58,25,370	Since Assessee held only 50% of equity shares of MAPL, Assessee had    only      50%     beneficial ownership in EBL

The effect of the amalgamation is provided in the table below:

Transferor	Effect of amalgamation
ABDL	10,000 equity shares of Rs.100/- each fully paid up held by the Assessee were cancelled
MAPL	Out of 1,53,50,000 equity shares of Rs.10/- each fully paid up, 76,75,000 equity shares held by the Assessee and ABDL were cancelled
EBL	Out of 58,25,370 equity shares of Rs.10/- each fully paid up, 29,12,685 equity shares (50%) held by MAPL were vested with the Trustees of UBL Benefit Trust (“Trust”) to be settled by the Assessee. The share exchange ratio as provided in para 11.3 of the Scheme was 33 equity shares of Re.1 each of the Assessee for every 16 shares of Rs.10/- each held in EBL. Accordingly, 60,07,413 shares of the Assessee were vested with the Trust

12.1 The Trust was to hold the shares of the assessee in trust together with all additions or accretions for the benefit of the Assessee subject to powers, discretions, rights and agreements contained in the Trust Deed (also clause 11.1 of the Scheme). The Trustees could sell, transfer or dispose of shares as such time and in such manner as deemed proper in accordance with the provisions of Trust Deed and the proceeds would be remitted to the Assessee. Thereafter, the obligations of the Trustees were to stand discharged and the Trust was to be terminated in accordance with the provisions of the Trust Deed. During the financial year 2011-12 (AY 2012-13), the Trust sold the entire shareholding in the open market and realized the market value of the shares being Rs.283.56 crore. With the sale of the shares, the object of formation of the Trust came to an end and the net proceeds of Rs.140.49 crore were transferred to the assessee as disbursement to the beneficiary under the Trust. The amount so received was credited by the assessee to the General Reserve in as much as the Trust had accounted for income by way of capital gains and claimed exemption under section 10(38) of the I.T.Act.

12.2 The AO held that the assessee has used a colourable device in the form of the Trust to avoid payment of capital gains tax arising out of sale of the assessee’s shares, by getting the shares allotted to the Trust following the merger / amalgamation. The AO opined that the receipt should have been offered to tax under the head capital gains by the assessee. The AO held that the income of Rs.140.49 forms a part of the P&L account as the transaction has been reported in the Notes to Accounts (para 6.7.6 of AO order). The AO therefore added the amount of Rs.140.49 crore to the total income of the assessee as per the normal computation as well as for the purposes of MAT under section 115JB of the I.T.Act.

12.3 Aggrieved by the order of the A.O. the assessee has raised this issue before the first appellate authority. The CIT(A) rejected the contentions of the assessee and upheld the addition made by the AO in the assessment order. The CIT(A) accordingly dismissed the grounds of appeal of the assessee. The CIT(A) did not rely on the approval granted by the Hon’ble High Court of Madras approving the Scheme by observing that there was nothing on record to show that the copy of the Scheme was the same as was filed with the High Court. The CIT(A) invoked the principle of GAAR to this transaction without specifying whether and how GARR was applicable to the transaction. The CIT(A) has observed that the Hon’ble High Court has not considered the tax implications in the Scheme. The CIT(A) also rejected the argument of the assessee that the Trust had shown capital gains in its return of income and the same has been accepted by the Department, by stating the same to be academic in nature.

12.4 Aggrieved by the order of the first appellate authority, the assessee has raised this issue before the Tribunal. The learned AR submitted that the AO and CIT(A) have failed to appreciate the background of the transaction. It was stated that pursuant to the amalgamation of EBL, it was eligible for allotment of shares of the resultant company (i.e., the Assessee) to the share holder of EBL i.e., MAPL, (Assessee owned 50% of MAPL and hence had 50% ownership right in EBL at the time of approval of the Scheme). By this, the 50% shares of EBL were cancelled and Assessee had to allot the balance 50% shares of its company to itself having acquired MAPL. It was stated that as per the Companies Act, 1956, a company could not hold its own shares and it either has to cancel such share after allotment, in which case, its capital base gets eroded, or, the shares are parcelled out to any other entity (in the present case, the Trust) so that the value of the shares of the resultant company can be capitalized. It was submitted that the action taken by the assessee to allot the shares to the Trust was to protect the capital base and restructuring of the group companies only consolidated the capital base. The learned AR also submitted that it was a direct share holder in ABDL and MAPL where the shares were cancelled. EBL was 100% subsidiary of MAPL wherein, the holding of the assessee 50%. By this, the assessee has only 50% ownership right in EBL for which shares of the assessee were allotted to the Trust and the balance 50% shares were cancelled. Similarly, in MAPL, as per the Scheme, 50% of the share holding of the assessee were cancelled and for the other shareholders, shares of the Assessee were allotted. The learned AR further submitted that the AO and CIT(A) erred in treating the Trust as a ‘colourable device’ without proving that the Trust was a sham or was illegal. Moreover, the AO and CIT(A) have conveniently brushed aside the fact that the Trust had declared the capital gains in its return of income and claimed exemption under section 10(38) of the Act which has been accepted by the Department. It was also submitted that the Trust cannot be branded as a ‘colourable device’ as no provisions of law has been violated by the assessee or the Trust. Further, even if the shares were cancelled without having allotted the same to the Trust, no capital gain would arise to the assessee. The learned AR further contended that the Department has accepted a similar transaction in the case of United Spirits Limited for the AY 2007-08 (refer page 32 to 36 of the paper book filed on 23.05.2022). It was stated that in the present case of the assessee, the Trust has paid securities transaction tax and following the rationale of the Department applied in United Spirits case (supra), the amount cannot be considered again in the hands of the assessee. The learned AR submitted that without prejudice to the above, even if the gains are taxed in the hands of the assessee, they are long term capital gains and are exempt under section 10(38) of the Act. The learned AR therefore prayed that the disallowance of Rs.140.49 crores made by the AO under normal provisions and MAT deserves to be deleted. The submission of the learned AR in brief are summarized as follows :-

i) The AO was wrong in characterizing the transaction as “colorable device” without any substantiation. The transfer of shares did not involve any tax liability and hence the question of “colorable device” to avoid/ evade tax does not arise at all.

ii) The transfer of the shares to the Trust, without cancelling the same was only to protect the capital base of the company. It does not involve any tax avoidance/ evasion.

iii) The Trust has shown the “Capital Gains” arising out of the sale of the shares in its Return of Income, which has been accepted by the department. Merely because the Trust was eligible for exemption of the same u/s 10(38) of the Act and claimed the same as exempt, does not make the income taxable in the hands of the assessee.

iv) Having accepted the income as “Capital Gains” in the hands of the Trust, the Revenue could not have added the same as income, in the hands of the assessee, leading to double addition.

v) The CIT(A) has refused to accept the approval of the Scheme granted by the Hon’ble High Court on the specious statement that there was nothing on record to show that the copy of the Scheme was the same as was filed with the High Court, without raising the issue during the appeal proceedings and without asking for such a copy.

vi) The CIT(A) has wrongly observed that the Hon’ble High Court has not considered the tax implications in the Scheme, whereas there was no tax implication at all, to the transaction.

vii) The CIT(A) invoked the principle of GAAR without even specifying whether and how GARR was applicable to the transaction whereas the principles of GAAR are not applicable to the transaction.

viii) The CIT(A) has wrongly held as “academic” the fact that the Trust had shown capital gains in its return of income and the same has been accepted by the Department.

ix) There are several instances, where on similar situations, various companies have adopted this route of forming Trusts to protect the capital base. In such cases, the Hon’ble Tribunals have held that the Income from Capital Gains is not taxable. One such case is Escorts Benefit Welfare Trust, wherein on similar facts, the transaction has been accepted and held as not taxable in the hands of the Trust.

x) Similar transaction in the case of the erstwhile Group company, United Spirits Ltd., has been accepted by the Department. There is no reason or rationale to treat it as taxable income in the case of the assessee.

12.5  The learned DR supported the orders of the A.O. and the CIT(A).

12.6 We have heard rival submissions and perused the material on record. Pursuant to the amalgamation, the assessee issued shares in its own company to UBL Benefit Trust as consideration for 50% beneficial ownership in EBL held through MAPL. The gains realized upon its sale by the Trust were remitted to the beneficiary i.e., the assessee. Considering that the obligations of the trustees were discharged, the trust was terminated in accordance with the provisions of the trust deed. The Assessee credited the net proceeds to the General Reserve as the Trust had accounted for the income by way of capital gains and claimed exemption under section 10(38) of the I.T.Act. It is undisputed that the resultant gains from the transfer of shares have been offered to tax in the hands of the trust and the same has been accepted by the department. Alleging that the Assessee has used a colourable device to avoid payment of capital gains and by applying the provisions of GAAR, the A.O. and the CIT(A) have sought to tax the same income once again in the hands of the Assessee under normal provisions as well as under MAT leading to double taxation which is not permissible. The trust being a separate Assessee under the provisions of the act and considering that the above arrangement has been made pursuant to the scheme granted by Hon’ble High Court, we do not find any infirmity in the arrangement which makes it a colorable device. The Assessee has also submitted that the purpose of the restructuring was to protect the capital base which consolidated pursuant to the above amalgamations. ‘The Ld.AR for the Assessee has rightly pointed out that if the shares were cancelled in the first instance, instead of creating the Trust to hold the same, the same would not have resulted in capital gains. Since under both the arrangements, i.e., cancellation of its beneficial holding or under the Trust, there is no resultant capital gains that will be liable to tax, there is no question of painting the arrangement as colourable device. When the subject income has already been offered to tax by the Trust whereby exemptions have been claimed, the lower authorities have failed to establish the reason why the very same income has to be once again considered in the hands of a different assessee. Even if, for academic reasons, it were to be held that the income of the Trust is the income of the Assessee, given the provisions of section 10(38) of the I.T.Act, there is no reason why the benefit of the exemption cannot be extended to the assessee as well. The Hon’ble Supreme Court in the case of ITO v. Ch. Atchaiah (1996)218 ITR 239 (SC) has held as under with respect to taxation of right person:

“Under the 1961 Act, the Assessing Officer has no option like the one he had under the 1922 Act. He can, and he must, tax the right person and the right person alone. By ‘right person’ is meant the person who is liable to be taxed, according to law, with respect to a particular income ….’

12.7  With respect to the provisions of section 115JB of the I.T.Act, the lower authorities have sought to include the subject amount as a part of ‘book profits’ though the same is added to the General Reserves and not in the profit and loss account. In the event of books of accounts being prepared in accordance with the provisions of the relevant Companies Act, it is well accepted that the AO has no jurisdiction to go behind net profit shown in the profit and loss account except to the extent provided therein. As it has been held above that the said amount is not the income of the Assessee but of the Trust, there is no question of considering it as a part of book profits. On going through the impugned orders there is no effort to establish the same. Given the same, the CIT(A)/AO have erred in disturbing the book profit as considered by the Assessee. It is ordered accordingly.

Short credit of taxes (Ground No.8) (8.1)

13. The assessee in the return of income filed for AY 2012­2013 had claimed TDS credit of Rs.14,19,20,442 and TCS of Rs.5,49,39,354 totaling to Rs.19,68,59,796. The AO restricted the claim to Rs.19,55,21,320. The CIT(A) has not adjudicated this issue though raised as Ground No.20 in the appeal before him.

13.1 Aggrieved by the order of the CIT(A) the assessee raised this issue before the Tribunal. The learned AR submitted that the matter may be remanded to the AO to re-verify and grant the TDS and TCS credit as per the return of income filed for AY 2012-2013.

13.2 We have heard rival submissions and perused the material on record. We restore the issue raised in ground 8 to the files of the A.O. The A.O. is directed to verify and grant TDS and TCS credit as per law. It is ordered accordingly.

Demand on dividend distribution tax (Ground No.9) (9.1)

14. The AO has made addition of Rs.4,39,19,686 without assigning any reasons or discussion. While there is absolutely no discussion on this issue, in the body of the assessment order, this amount has been added in the computation. The CIT(A) has dismissed the ground without giving any reasons by simply stating that the assessee did not adduce any arguments.

14.1 Aggrieved by the order of the first appellate authority, the assessee has raised this issue before the Tribunal. The learned AR submitted that the addition is ad-hoc in as much as there is no reasoning given by the AO. The order passed by the AO dated 30.11.2016 under section 154 of the Act has not included the addition (page 404 of paper book). The assessee however out of abundant caution prays that the AO may be directed to delete the addition as the same does not relate to the facts of the issues related to the order u/s 143(3) passed for AY 2012-13.

14.2 We have heard rival submissions and perused the material on record. The A.O. is directed to examine the issue raised in the above ground and dispose of the matter after affording a reasonable opportunity of hearing to the assessee. It is ordered accordingly.

Disallowance u/s 14A of the I.T.Act added to book profits (Ground No.10) (10.1)

15. The AO has made addition of Rs.1,31,50,663 to the book profits being the disallowance made under section 14A of the Act. The CIT(A) dismissed the ground of the assessee by relying on the decision of this Hon’ble Tribunal in Karnataka State Industrial Infrastructure Development Corporation Ltd (76 taxmann.com 360) and has upheld the addition of 14A disallowance to the book profits.

15.1 Aggrieved, the assessee is in appeal before the Tribunal. The learned AR relied on the decision of the Hon’ble High Court of Karnataka in the case of CIT v Gokaldas Images (ITA No.77/2015) (judgment dated 02.11.2020). The learned AR further submitted that the decision of this Hon’ble Tribunal in Karnataka State Industrial Infrastructure Development Corporation Ltd (supra) has been reversed by the Hon’ble High Court in ITA No183/2017 (judgment dated 08.06.2021). The learned AR, therefore, prayed that the AO may be direct to delete the 14A disallowance added to the book profits.

15.2 The learned DR supported the orders of the A.O. and the CIT(A).

15.3 We have heard rival submissions and perused the material on record. The Hon’ble jurisdictional High Court in the case of CIT v. Gokaldas Images (supra) had held that disallowance u/s 14A of the I.T.Act cannot be added to the book profits for the purpose of section 115JB of the I.T.Act. In the light of the dictum laid down by the Hon’ble jurisdictional High Court judgment in the case of Gokaldas Images (supra), we delete 14A disallowance added to the book profit.

16. In the result, the appeal filed by the assessee is partly allowed.

Order pronounced on this 11^th day of November, 2022.bang