Case Law Details

Case Name : ITO Vs. M/s Elka Cosmetic Pvt. Ltd. (ITAT Delhi)
Appeal Number : I.T.A. No. 4704 /Del/2010
Date of Judgement/Order : 13/04/2011
Related Assessment Year : 2006- 07
Courts : All ITAT (4448) ITAT Delhi (984)
ITO Vs. M/s Elka Cosmetic Pvt. Ltd. (ITAT Delhi)- The issue is whether the promotional expenses incurred by a company engaged in business of cosmetics on ‘Testers’, and ‘merchant display’ which were supplied free of cost to the retailers are capital in nature merely because it also promotes goodwill of the company. It was held that  nature of expenditure incurred in the assessee’s line of business is absolutely essential for the day to day conduct of the business of the assessee-company and the same is allowable as revenue expenditure.
DELHI INCOME TAX APPELLATE TRIBUNAL
I.T.A. No. 4704 /Del/2010

Assessment year: 2006- 07

ITO Vs. M/s Elka Cosmetic Pvt. Ltd.,

ORDER

PER A.K. GARODIA, AM:

This is revenue’s appeal directed against the order of Ld CIT(a)- XIII, New Delhi dated 20.8.2010 for assessment year 2006-07.

2. Ground No.1 is general. Ground No.2 of the appeal is as under:-

“2. On the facts and in the circumstances of the case, the CIT(A) has erred in deleting the dis allowance of expenses on account of cost of testers & merchant displays amounting to Rs. 7,28,699/- & Rs.15,216,720/- respectively.

a) ignoring that the facts of the case law of CIT v. Salora International Ltd. 308 ITR  199 as relied upon by CIT(A) are different as in the said case the payments of professional fee tothe consultants were in the picture, which is not at all in this case.

b) in the case under consideration the Assessing Officer has specifically talk about the building up of goodwill by the assessee by incurring those expenses. This aspect remained to be controverted in the appellate order.”

3. Brief facts of the case are that it is noted by the Assessing Officer in the assessment order that the assessee company has debited a sum of .7,28,699/- under the head cost of “Testers Unit”. When the Assessing Officer raised the questions, it was submitted by the assessee before the Assessing Officer that in the cosmetics business, the customers want to try the products on them before purchasing the same. It was submitted that the amount of Rs.7,28,699/- was debited towards cost of Testers Unit because three testers were supplied to retailers along with customs duty and clearing and forwarding charges paid on the same. Similarly, it is noted by the Assessing Officer that the assessee company has debited an amount of Rs. 15,26,72O/- under the head cost of “Merchant Display”. When the Assessing Officer made enquiries, it was submitted by the assessee before the Assessing Officer that the items debited under the head merchant display includes shopping bags, spatula, wipes, lacquer applicators, disposable sponges, disposable lipgloss applicators, disposable liquid liner, MAC plastic bags etc. It was submitted that these materials are also to be supplied free of cost to the retailers in order to promote the sales of the products. The Assessing Officer was not satisfied with the explanation of the assessee. It was held by him that the assessee company has incurred these expenses to earn goodwill which will benefit the business in the long run and bring benefit of enduring nature. He, therefore, disallowed both these items of expenses as capital expenses totaling Rs. 22,55,419/-. Being aggrieved the assessee carried the matter in appeal before Ld CIT (A) who has deleted this dis allowance in full and now the revenue is in appeal before us.

4. It was submitted by the Ld DR of the revenue that the Assessing Officer has made dis allowance on this basis that these expenses are incurred by the assessee to earn goodwill and this aspect has not been considered and decided by Ld CIT(A).It is also submitted that Ld CIT(A) has followed the judgment of Hon’ble Delhi High Court rendered in the case of CIT v. Salora International Ltd. as reported in 308 ITR 199 but this judgment is not applicable in the present case because the facts are different.
5. As against this, Ld AR of the assessee supported the order of Ld CIT(A).

6. We have heard the rival submissions and have gone through the material available on record. We find that this issue has been decided by Ld CIT(A) as per para No.2.1. of his order, which is reproduced below:-

“2.1. I have gone through the facts of the case and submissions made by the appellant company and I find that the nature of expenditure incurred in appellant’s line of business is absolutely essential for day to day conduct of the business of the appellant company and the same is allowable as revenue expenditure. It is also observed that there is a direct nexus between the above referred expenses on “testers” and “merchant display” and in the business of the appellant it has to be necessarily incurred to meet the competition in the market and to sell its product which are high end and advertisement, promotion,. Incentive & freebies driven. That unless the appellant made the efficacy of its products known in the market its business would suffer. It is thus noted from the facts of appellant’s case that it is an instance where the expenditure even if giving enduring benefit the test of enduring benefit breaks down (Empire Jute Co. Ltd. v. CIT (SC) 124 ITR 11. The ratio of the decision of the Delhi High Court in the case of CIT v. Salora International Ltd. at 308 ITR 199 is also applicable to the present case. Applying the ratio of the decisions of the Hon’ble Courts to the facts of the appellant’s case the dis allowance made by the Assessing Officer for Rs. 22,55,419/- ( Rs.7,28,699/- + Rs. 15,26,72O/-) on this account is deleted.”

7. From the above para of Ld CIT(A)’s order, we find that a clear finding has been given by Ld CIT(A) that the nature of expenditure incurred in assessee’s line of business is absolutely essential for day today conduct of the business of the assessee company and the same is allowable as revenue expenditure. This findings of Ld CIT(A) could not be controverted by the Ld DR of the revenue and hence, in the light of these facts, we hold that there is no infirmity in the order of Ld CIT(A). Ld CIT(A) has referred in the same para that the ratio of the decision of Hon’ble Delhi High Court rendered in the case of CIT v. Salora International Ltd. (supra) is also applicable in the present case but that is not the only basis for deletion of this dis allowance. The main basis of deletion is that the expenses incurred by the assessee are absolutely essential for day today conduct of the business of the assessee company. Hence, this objection of Ld DR is not proper that Ld CIT(A) has not considered this objection of the Assessing Officer that these are for earning goodwill. When it is held by Ld CIT(A) that these are essential business expenses, this objection of the Assessing Officer stands rejected that these expenses are for earning goodwill. Moreover, when we examine the facts in the case of CIT v. Salora International Ltd. (supra), we find that the facts of that case are also similar although not identical. In that case, the expenditure in dispute was for launching of its products by the assessee. In that case also, the Assessing Officer was of the view that such expenditure was of an enduring nature and he treated 113rd of the expenses as capital expenditure and allowed remaining 213rd of the expenditure. Under these facts, it was held by the Tribunal that there was direct nexus between the advertising expenditure and the business of the assessee and held that entire expenditure on advertisement is of revenue nature and allowed the same. Hon’ble High Court of Delhi has confirmed this Tribunal order in that case. In the present case also, we have noted that clear finding has been given by ld CIT(A) that the expenses incurred by the assessee company has a direct nexus with the business carried on by the assessee and hence, the ratio of this judgment is applicable in the present case also. We, therefore, decline to interfere in the order of Ld CIT(A). This ground of the revenue is rejected.

8.  Ground No.3 of the revenue’s appeal is as under:-

“On the facts and in the circumstances of the case, the CIT(A) has erred in deleting the dis allowance of expenses on account of promotional expenses of  Rs. 38,23,227/-.

a) ignoring that the Assessing Officer has specifically mentioned that the complete details of the said expenses were not filed by the assessee during the assessment proceedings.

b) without appreciating that even when the remand report was called on the said particular point, the then Assessing Officer has mentioned that merely a ledger copy of account of the said expenses has been forwarded to him and the full names and addresses of the concerned parties are not ascertainable from the details filed. No details of the said expenses including details as to whether the assessee has contracts with the said parties remained to be furnished before Assessing Officer even at the appellate stage. Thus, the specific adverse comments of the Assessing Officer as mentioned in the remand report remained to be addressed in the appellate order.”

9. Brief facts of the case are that it is noted by the Assessing Officer on page No.2 of the assessment order that the assessee company was asked to furnish details of payments made where the provisions of section 40(a)(ia) of the Act are applicable and details of TDS payment thereof. Thereafter, it is noted by the Assessing Officer that the assessee company has filed details of TDS only on expenses under the head salary, legal and professional expenses and such details for other expenses were not given. Thereafter, it is observed by the Assessing Officer that the assessee company did not furnish the complete details of expenses debited under the head “Promotional Expenses: amounting to Rs. 38,23,227/- and it also did not furnish the details of TDS on this amount. The Assessing Officer disallowed this expenses of .38,23,227/- by invoking the provisions of section 40(a)(ia) of the Act. Being aggrieved the assessee carried the matter in appeal before Ld CIT (A) who has deleted this dis allowance and now the revenue is in appeal before us.

10. Ld DR of the revenue supported the assessment order whereas Ld AR of the assessee supported the order of Ld CIT(A).11.     We have heard the rival submissions and have gone through the material available on record. We find that it is noted by the Ld CIT(A) in para No.3 of his order that the assessee company has given break up of the promotional expenses through the paper book on which remand report was called from the Assessing Officer. It is noted by the Ld CIT(A) that the assessee company has categorized these expenses under three category. First category of expenses is those expenses on which tax was deducted and paid and the expenses incurred under this category is .15,57,857/-. In the light of these facts TDS was deducted and paid by the assessee on these expenses of Rs. 15,57,857/-, no dis allowance can be made u/s 40(a)(ia) of the Act and hence there is no infirmity in the order of Ld CIT(A) regarding this part of deletion of dis allowance.

12. The second category is of those expenses on which, tax was not required to be deducted and it is noted by the Ld CIT(A) that list of these items has also been given in the paper book along with the copy of invoices and the same is related to hotel/purchase/supply bills and a credit note in one case and no tax was deductible on these amounts. This finding of Ld CIT(A) could not be controverted by the Ld DR of the revenue that tax was not deductible on this category of expenses totaling Rs. 21,34,680/-. Hence, for this part of dis allowance also, we do not find any infirmity in the order of Ld CIT(A).
13. The third category is of those expenses on which tax was not deducted as the amount paid to each person did not exceed Rs.20,000/- and the total of such expenses is Rs.1,30,693/-. Regarding these expenses also, it is noted by the Ld CIT(A) that the details are given on page No.12 of the paper book. On this aspect also, Ld DR of the revenue could not controvert this finding of Ld CIT(A) and hence regarding this part deletion of dis allowance also, we do not find any infirmity in the order of Ld CIT(A). Hence, ground No.3 of the revenue is also rejected.
14. Ground No.4 of the revenue’s appeal is as under:-

“4. On the facts and in the circumstances of the case, the CIT(A) has erred in deleting the dis allowance of legal expenses of .1,17,83O/- overlooking the fact that the said expenses were substantively incurred for consultation for increase of capital and other capital related matters. It is not appreciated that during the year the capital has been increased from 1 lakh to Rs. 47,79,947/- and the same was received from outside India. It is clearly evident from the impugned bill that the professional mainly charged the fee for making consultation with the RBI.”

15. Brief facts of the case are that it is noted by the Assessing Officer in the assessment order that the assessee company has claimed a sum of  Rs. 1,17,83O/- as legal expenses. Thereafter, it is observed by the Assessing Officer that from verification of details, it was found that these expenses were for consultation for increase of capital and other capital related matters. The Assessing Officer has also observed that the assessee company is not an industrial undertaking and hence these expenses of Rs. 1,17,83O/- are disallowed and added u/s 35D of the Act. Being aggrieved the assessee carried the matter in appeal before Ld CIT (A) who has deleted this dis allowance on this basis that section 35D is not applicable in the present case. Now, the revenue is in appeal before us.

16. Ld DR of the revenue supported the assessment order whereas Ld AR of the assessee supported the order of Ld CIT(A). It is also submitted that copy of bill of M/s Dua Associates is available on pages 13-16 of the paper book regarding payment of Rs. 1,15,177/- out of  Rs. 1,17,83O/- claimed by the assessee as legal expenses.

17. We have heard the rival submissions and have gone through the material available on record. We find that this is a primary objection of the Assessing Officer in the assessment order that these expenses are incurred for consultation for increase of capital and other capital related matters. Thereafter, the Assessing Officer has stated that he is disallowing these expenses u/s 35D of the Income Tax Act, 1961. While deleting this dis allowance, Ld CIT(A) has proceeded on this basis that the provisions of section 35D are not applicable in the present case. But he has not given any finding regarding first aspect i.e. the allegation of the Assessing Officer that these expenses are incurred for consultation for increase of capital and other capital related matters. From the bill of M/s Dua Associates , it is seen that this aspect is not getting cleared as to whether the whole or part of this legal expenses are in connection with increase in capital or other capital related matters as has been alleged by the Assessing Officer. Under these facts, we feel that this matter should go back to the file of the Assessing Officer for a fresh decision. Hence, we set aside the order of the Ld CIT(A) on this issue and restore this matter back to the file of the Assessing Officer for a fresh decision. The assessee has to explain each item for which bill has been raised by M/s Dua Associates and it has to be explained and satisfied that the same is not in connection with increase in capital or other capital related matters. Thereafter, the Assessing Officer should pass necessary order as per law after providing adequate opportunity of being heard to the assessee. This ground of the revenue is allowed for statistical purposes.

18. In the result, the appeal filed by the revenue is partly allowed for statistical purposes.

19. Order pronounced in the open court on the day of 13th April, 2011.

Date. 13.4.2011.

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