ACIT Vs Benetton India Pvt. Ltd. (ITAT Delhi)
The assessee submitted that the advances written off is not a capital loss as it is written off as security deposits against the shops obtained on rent. Such write off of security deposits was incidental to the business of the assessee and was for running its operations. It was argued that when the security deposits was forfeited by the lessors, the same had become loss for the assessee, therefore, the same has been claimed as a business expenditure in the books of accounts. He relied on a number of judgments holding that any expenditure incurred in connection with the acquisition of premises on lease should be held to be for the purpose of business of the assessee.
The ld. DR argued that this expense being capital in nature should not be allowed to be written off in the books of accounts and claimed in P&L account. He relied on the judgment of the Hon’ble Delhi High Court in the case of Triveni Engineering in ITA No.56 of 2009 vide order dated 14.09.2010 and the order of the Co-ordinate Bench of ITAT Delhi in the case of Raj Khosla in ITA No. 6581/Del/2016 vide order dated 06.07.2018.
Hon’ble Supreme Court in the case of Badridas Daga vs. CIT (34 ITR 10) Calcutta Co. Ltd. vs. CIT (37 ITR 1) held that “the profit to be assessed are the real profits and they must be ascertained on ordinary principles of commercial training and commercial accounting. The profit should be computed after deducting losses and expenditure incurred for the purposes of business unless such losses or expenditure are expressly, or by necessary implication, disallowed by the Act.”
Hon’ble Supreme Court in the case of CIT vs. Nainital Bank Ltd., 55 ITR 707 (SC) held that “under section 28, the trading loss of a business is deductible in computing the profits earned by a business. However, every loss is not deductible unless it is incurred in carrying out the operation of the business and is incidental to the operation. Whether loss is incidental to the operation of a business or not, is a question of fact to be decided on facts of each case, having regard to the nature of the operation carried on and the nature of risk involved in carrying them out. The degree of the risk or its frequency is not much relevant but its nexus to the nature of the business is material.”
Having gone through the entire judgments quoted by both the parties, provisions of the Act pertaining to interplay between Section 28 and Section 37 and facts of the case, we have no hesitation to hold that the assessee be allowed to claim the loss incurred in forfeiture of security deposits given for lease of rental premises as the expenses are incurred wholly and exclusively for the purpose of business.
FULL TEXT OF THE ORDER OF ITAT DELHI
The present appeal has been filed by the Revenue against the order of ld. CIT(A)-44, New Delhi dated 14.11.2017.
Addition on account of ALP:
2. The ld. CIT(A) deleted the adjustment made by the TPO in connection with international transaction on account of payments expatriates.
3. The TPO held that the case of the assessee failed on need, benefit and rendition test to justify any payment for reimbursements paid to the parent entity.
4. This issue stands adjudicated for the A.Y. 2007-08, A.Y. 2008-09, A.Y. 2009-10 and A.Y. 2010-11 wherein it was held that there was no meaningful analysis or evidence provided by the TPO to hold that entire payment made by the assessee to expatriate should be reduced to zero.
5. For the sake of ready reference, the relevant portion of the order in ITA.No.31/Del/2017 for the A.Y. 2011-12 vide order dated 30.08.2019 is as under:
‘6. Challenging the said deletion of the addition, Revenue is in appeal before us. It is the argument of the Ld. DR that the Ld. CIT(A) committed error in deleting the adjustment on account of expatriate cost holding that there was no meaningful analysis/evidence produced by TPO to hold that the entire royalty payment should be reduced to zero and consequently deleting the addition of Rs.13,74,48,935/-made on this point.
7. AR submitted that while deleting the impugned addition, Ld. CIT(A) made factual verification of the observations made by the learned Assessing Officer and reached a factual finding that the assessee could not have conducted their business with the trademark of ‘Benetton’ without making the impugned payments and as a matter of fact the assessee had been using the technical know-how developed by the associated enterprise in its manufacturing activities on account of use of trademark and technical know-how. Further Ld. CIT(A) followed the decision of the Tribunal in assessee’s own case for the Assessment Year 2006-07 which was followed by the Ld. CIT(A) for the Assessment Years 2007-08 to 2009-10. Ld.AR also produced copy of the order dated 27/10/2017 in assessee’s own case for the Assessment Year 2009-10 in ITA No. 4229/Del/2014 wherein the identical issue was dealt with and answered in favour of the assessee.
8. We have gone through the record in the light of the submissions made on either side. Having considered the facts in their entirety, Ld. CIT(A) found that the entire sale of the 4 assessee has been due to the use of the brand name ‘Benetton” and the assessee has been using the technical know-how developed by the AE in its manufacturing activities on account of use of trademark and technical know-how. Ld. CIT(A) further found that in case of breach of royalty payment, the assessee will not be able to do the business with the trademark of ‘Benetton’ and therefore there was no point or justification in the Ld. TPO holding that the third party will not make any payment for brandon technical know-how as provided by the AE to the assessee. Ld. CIT(A) further found that the assessee is getting designs and sketches, measurement specification, advertising and sales promotion materials, store MBS specification, package information as part of the royalty agreement and therefore, it is not a case where the assessee was not deriving any benefit by use of royalty payment on a net sale.
9. Apart from this, Ld. CIT(A) referred to the decision of the Tribunal on the same issue under identical set of circumstances for the Assessment Year 2006-07 where the benchmarking of the royalty was held at arm’s length by not approving the TNMM analysis by bunching all the international transactions. He further noted that in assessee’s case for the Assessment Years 2007-08 to 2009-10 also, similar approach was follo wed.
10. We have perused the copy of the order dated 27.10.2017 in ITA No.4229/Del/2014 in assessee’s own case where the Revenue preferred the appeal challenging a similar deletion and found that following the consistent view taken in assessee’s own case 5 by the Revenue as well as by the Tribunal, the Tribunal held that employment of the CUP method by the taxpayer in respect of the international transaction relating to the payment of royalty was proper and rule of consistency is required to be followed by the Revenue.
11. Since the facts are similar and issue is identical, we find no reason to take a different view for this assessment year. While respectfully following the consistent view taken by the Tribunal in assessee’s own case for the Assessment Years 2006-07 to 2009- 10, we hold that the impugned addition cannot be sustained and there was no illegality or irregularity in the findings of the Ld. CIT(A). We, therefore, while upholding the findings of the Ld. CIT(A) find the appeal of Revenue as devoid of merits and accordingly dismissed the same.”
6. Since, the matter squarely covered by the order of the Tribunal, the vehement arguments of the ld. DR have been duly considered. However, in the absence of any material change in the factual matrix and legal proposition, we decline to interfere with the order of the ld. CIT(A).
Security deposit written off:
7. During the year, the assessee has entered into a letter of intent for obtaining shops on lease. As per this letter, the assessee was required to pay security deposits at the time of executing this letter of intent. As per the termination clause of the letter, in case the lease has been terminated by the lessee, the entire amount of security deposit shall be forfeited by the lessor.
8. The advances given are as under:
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