Brief of the case
In the present facts of the Case there are three vital issues in which the Hon’ble Tribunal held that expenses like Telephone expenses, Diwali Expenses, Travelling Expenses, Vehicle Running, Event management Expenses, Staff Training Expenses and other expenses are business expenses and should not be treated as personal expenses as a Ltd. company is a inanimate person and there cannot be any personal expenses attributed to it. Also, the principle of consistency have to be followed. Also, it was held that the publication of newspaper is a manufacture as it is a distinct product and distinct commodity.
Facts of the Case
In the present case there were several issues. Brief facts are that Assessee is a private limited company engaged in the business of printing & publishing of newspaper & periodicals. Regular books of accounts were maintained which were supported by vouchers and record and were duly audited. During the course of impugned assessment proceedings ld. AO asked about the genuineness and business expediency of various expenses incurred, assesse claims to have filed all the relevant details and explanation in this behalf. Nature, genuineness, business expediency, and regular incurrence of these expenses is claimed to be demonstrated by the assesse. Ld. AO however did not agree with the submissions made huge disallowances out of various heads of expenditure in all these years. Aggrieved assessee preferred first appeals contending that multiple disallowances were made by AO purely on the basis of adhocism, suspicion, assumptions, and without assigning specific reasons.
Then further in order to maintain its business standing, prospects and development i.e. improve reader base, meet with the local competition particularly from another newspaper in the State and for other commercial reasons, it was felt as a business necessity to undertake aggressive marketing and survey operations on regular basis. Accordingly service of various independent agencies was hired for conducting door to door survey about news quality, suggestions for improvement of coverage and compilation of information from the readers about preference between the competing newspapers of Rajasthan area.
Contention of the Assessee
That all the expenditure raised in these appeals have been allowed in all the years till 2004-05. There was no allegation of any noncooperation. Without finding any specific defect in the compliance or books of accounts, ld. AO merely on suspicions and by summary observations disallowed 5% of entire expenditure amounting to Rs. 38,37,508/-, which is purely based on sweeping and vague observations which are common for all AYs.
It is vehemently contended that no defects in books of accounts are alleged in these years and in view of this demonstrative history the issues about these expenses being wholly and exclusively incurred for business were consistently allowed. It was further contended that this is a travesty of justice that a inconsistent view have been taken by department which have seriously violate the of principle of consistency according to the Judgment in Radh Swami Satsang 193 ITR 321 in which it was held that principle of consistency being squarely applicable to Income Tax proceedings.
Assessee as per regular practice incurred expenditure on scheme gifts, freight and cartage, travelling, publicity expenses, event and fair expenses etc. This also was incurred on the meetings of the advertisement and selling agents by the assesse organized for business consideration to get proper field feedback and apprise them of periodical commercial targets. These were incurred as a regular feature for dealers as a business policy with the motive to boost its sales. Advertisement receipts are the backbone of media business which could not be achieved without the participation of advertisement agencies. The ld. Counsel relied on the Judgment of CIT Vs. Modern Bakeries India Ltd. reported in 249 ITR 465 in which assessee incurred expenses on account of lunch and dinners served to the guests from various branches which stood disallowed. The Hon’ble High Court held that the expenditure incurred for extending customary courtesy to persons connected with the assessee’s business is in fact incurred for the purpose of its business, they are not cover under the word “entertainment” and therefore, the same is an allowable expenditure because it was necessary for its efficient conduct of business. Further, the assessee made contentions about the different expenses like Telephone expenses, Diwali Expenses, Travelling Expenses, Vehicle Running, Event management Expenses, staff Training Expenses and other different expenses are related to Business and they are not used for personal purposes.
For AY 2006-07, it is vehemently contended that the disallowance has been made despite the fact that assessee had already paid Fringe Benefit Tax (FBT) on most of the expenses. This double taxation demonstrates the perfunctory attitude of the department.
Regarding the issue of “Marketing and survey Expenses” the parties in question were not related to any director and their income in this behalf was disclosed and assessed by their respective returns. Since department itself has accepted their identity, genuineness of existence and accepted their income for rendering these services, there was no question of disbelieving their services in assessee’s hands. It is further submitted that the expenditure being incurred in the day to day business activity and is wholly and exclusively for the purpose of the business for which the AO cannot step into the shoe of the businessman to verify the necessity or the business expediency.
On the third issue of “Whether the publishing of newspaper is Manufacture” the Assessee contended that Printing and publishing of newspaper and periodicals which are the final products emerging out of the activity carried on by the assessee. “Newspapers and periodicals” are clearly identifiable as a “product”, which is distinct from its ingredients i.e. paper and ink. Since a new commercial product is brought into existence, therefore, the process involved is production which amounts to “manufacture” as described in section 2(29BA) of the Income Tax Act, 1961.
Therefore, the Assessee was eligible for deduction u/s 80I(1)(iii).
Contention of the Revenue
The A.O. on the first issue held that the expenses are primarily in the nature of entertainment and as such these expenses cannot be said to have been incurred wholly and exclusively for business purpose. Further the expenditure incurred under these heads, for non-business can neither be denied nor ruled out as evident from the nature of expenses noted in the submission above like food and refreshments, traveling and conveyance, hotel booking. Event & fair and others etc. Even the evidences for distributing the gifts also remains unverified. Regarding the second issue in which there was the question of identity of agencies in which Revenue Contended that the onus of proving the genuineness of expenditure has not been properly discharged by the assessee as the explanation furnished by assessee is full of doubts. The alleged survey reports do not inspire any confidence as it was completed in such a careless manner so as to command such huge expenditure.
Then, regarding the third issue, Revenue contended that the activity carried out by assessee i.e. printing and publishing newspaper does not amount to manufacture or production within the meaning of section 32(1)(iia)of the Income Tax Act,1961. Since the conditions set out in section 32(1)(iia)are not fulfilled, therefore, AO was justified in denying the additional depreciation in AY 2006-07 and 2008-09.
Held by the Tribunal
The Hon’ble Tribunal while giving the decision regarding the first issue in the favour of the assessee relied upon the Judgment of Sayaji Iron and Eng. Co. Ltd. 253 ITR 749 in which it was held that that a ltd. Company being an inanimate entity there cannot be anything personal about it and expenses cannot be disallowed as personal expenses. Also it was observed that the assessee which is a private limited company is a distinct assessable entity as per definition of “person” under s. 2(31) of the Act. Therefore, it cannot be stated that when the vehicles are used by the directors, “even if they are personally used by the directors” the vehicles are personally used by the company, because a limited company by its very nature cannot have any ‘personal use’. The limited company is an inanimate person and there cannot be anything personal about such an entity. Also, keeping the settled law about the principle of consistency, the Hon’ble Tribunal decided that disallowances in the assessment years 2005- 06, 06-07 and 08-09 under appeals, should be deleted.
Regarding the second issue, The Hon’ble ITAT held that Assessee has produced the income tax record of the survey agencies in support of its version and the proper reason has not been given as to why it was ignored by ld. AO & CIT(A). As no cross-examination was allowed which results in the violation of principles of natural justice. Accordingly, the issue of “Marketing and Survey expenses” was sent back to the file of AO to decide afresh after considering the entire evidence and giving the assessee an adequate opportunity of being heard. Regarding the third issue, the Hon’ble Tribunal relied on the judgment of CIT vs. Delhi Press Patra Prakashan Ltd. reported in (2013) 355 ITR 14 (Delhi) in which it was held that “printing” amounts to “manufacture / production” and therefore it was held that the assessee was eligible for deduction u/s 80I(1)(iii). Therefore, the Hon’ble Tribunal held that news papers and periodicals are distinct commodity than the paper, printing ink and other ingredients used therein. Since a new commercial product comes into existence, the process involved for such transformation amounts to production and manufacture. Accordingly, all the issues were decided in the favour of the assessee.