Case Law Details

Case Name : Red Chillies Entertainment Pvt. Ltd. Vs Asstt. Commissioner of Income Tax (ITAT Mumbai)
Appeal Number : ITA no.5271/Mum./2013
Date of Judgement/Order : 31/05/2016
Related Assessment Year : 2010–11
Courts : All ITAT (6378) ITAT Mumbai (1905)

Brief facts are, the assessee a company engaged in production of feature films and Television programs. For the assessment year under consideration, assessee filed its return of income on 30th September 2009, declaring loss of Rs. 5,84,57,272. During the assessment proceedings, the Assessing Officer noticed that assessee has debited an amount of Rs. 6,59,613 to the Profit & Loss account on account of certification expenses. He, therefore, called upon the assessee to justify the claim. In response to the query raised, it was submitted by the assessee that ISO 27001 and ISO 9001:2008 certification are valid for a period of three years but they are neither intangible fixed asset nor transferrable. Hence, the expenditure incurred for obtaining such certificate is revenue in nature as the certificates can be withdrawn if the assessee does not adhere to the requirement of the certificates. The Assessing Officer, however, did not find merit in the submissions of the assessee. He observed, the fact that the assessee has made payment for certificate which is valid for three years, denotes that it is for enduring benefit hence, it is capital in nature. Accordingly, he disallowing claim of deduction, he treated it as part of the assessee’s capital asset and allowed depreciation @ 25% by treating it as intangible asset. As a result, the excess claim of Rs. 4,94,710, was added back to the income of the assessee.

Though the assessee challenged the disallowance before the learned Commissioner (Appeals), he also confirmed the addition. While doing so, the learned Commissioner (Appeals) further observed that as the certificates were issued on 28thApril 2009, the deduction cannot be claimed in the impugned assessment year.

Learned Authorised Representative submitted, merely because the certificate was issued for three years, it cannot be considered to be of enduring nature. Learned Authorised Representative submitted, since the certificate do not create any asset either tangible or intangible and there is no accretion to the capital asset of the assessee, the expenditure incurred cannot be considered to be capital in nature. Contesting the allegation of the learned Commissioner (Appeals) that the expenditure does not pertain to the impugned assessment year, learned Authorised Representative submitted only because the certificate was issued on 28th April 2009, could not make the expenditure inadmissible because the expenditure was incurred during the relevant previous year. In support of his contention that the expenditure incurred on certification is revenue in nature, the assessee relied upon the following decisions.

i) CIT v/s Infosys Technologies Ltd. [2012 349 ITR 582 (Kar.);

ii) CIT v/s Infosys Technologies Ltd. [2012] 349 ITR 606 (Kar.);

iii) CIT v/s Upper India Steel Mfg. & Engg. Co. Ltd. [2014] 227 Taxman 173 (P&H);

iv) CIT v/s Empire Jute Co. Ltd. [1980] 124 ITR 001 (SC);

Learned Departmental Representative relied upon the decisions of the learned Commissioner (Appeals) and the Assessing Officer.

We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied It is evident from the order of the Departmental Authorities that they have considered the expenditure to be capital in nature because the certificate is valid for three years. However, in our view, that cannot be a ground to treat the expenditure as capital in nature unless it creates an asset of enduring nature. Neither the Assessing Officer nor the learned Commissioner (Appeals) has established on record that by obtaining the certificate, the assessee created any asset of enduring nature. On the other hand, the decisions relied upon by the learned Authorised Representative as referred to above have held that sum paid by the assessee for obtaining ISO certificates are revenue expenditure. Therefore, following the rulings of Hon’ble Karnataka High Court as referred to above, we allow assessee’s claim of deduction. As far as the allegation of learned Commissioner (Appeals) that the expenditure does not pertained to the impugned assessment year, we are not convinced with the same. As rightly pointed out by the learned Authorised Representative, there is no dispute that the expenditure was incurred during the relevant previous year. That being the case, assessee is eligible to claim the deduction.

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