Commissioner Of Income Tax (Central), Ludhiana v. M/S Liberty Group Marketing Division, Karnal

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH. I.T.R. No. 2 of 2000DATE OF DECISION : 22.04.2008 Commissioner of Income Tax (Central), Ludhiana .... APPLICANT-REVENUE Versus M/s Liberty Group Marketing Division, Karnal ..... RESPONDENT-ASSESSEE I.T.A.s No. 9 of 2002, 79, 200, 201 of 2005, 159, 160 of 2006, 452, 453, 527 and 528 of 2007 DATE OF DECISION : ____.04.2008 Commissioner of Income Tax (Central), Ludhiana .... APPELLANT-REVENUE Versus M/s Liberty Group Marketing Division, Karnal ..... RESPONDENT-ASSESSEE CORAM :- HON'BLE MR. JUSTICE SATISH KUMAR MITTALHON'BLE MR. JUSTICE RAKESH KUMAR GARG Present:Mr. Sanjiv Bansal, Advocate, for the Revenue. Mr. R.P. Sawhney, Senior Advocate, with Mr. Saurav Khurana, Advocate,for the Assessee. * * * SATISH KUMAR MITTAL, J. This judgment shall dispose of one Income Tax Reference i.e. ITR No. 2 of 2000, sought by the Revenue, and ten Income Tax Appeals i.e.I.T.A.s No. 9 of 2002, 79, 200, 201 of 2005, 159, 160 of 2006, 452, 453,527 and 528 of 2007, filed by the Revenue, in which the common questionsof facts and law are involved, pertaining to different assessment years ofone group of the assessee. In ITR No. 2 of 2000, which is arising from the decision of theIncome Tax Appellate Tribunal (Delhi Bench `A' New Delhi) (hereinafterreferred to as `the Tribunal') in case of the assessee for the assessment year1988-89, the following substantial question of law has been referred foropinion of this Court : “Whether on the facts and in the circumstances of the case, theTribunal was justified in confirming the orders of CIT (A) thatexpenses of Rs.1,86,406/- and Rs. 1,79,833/- debited toPublicity and Advertisement account were of revenue nature.” In all the 10 appeals, filed by the revenue, which are arisingfrom the orders of the Tribunal, pertaining to the different assessment years,the Revenue has raised the following substantial question of law fordetermination of this Court : “Whether the ITAT was right in law in confirming the order ofCIT (A) that the expenses incurred on Glow Sign Boards wereof revenue nature?” In three appeals i.e. ITAs No. 200 of 2005, 159 and 160 of 2006, thefollowing additional substantial question of law has been raised by the Revenue : “Whether the ITAT was correct in law in allowing assessee'sclaim for deduction under Section 80 I of the Income Tax Act,1961, when conditions laid down for grant of such deductionwere not fulfilled?” In all these 11 cases, the assessee is M/s Liberty Enterprises,Karnal and M/s Liberty Group Marketing Division, Karnal. The assessee isengaged in manufacture and sale of leather-footwears and shoe uppers etc.During the course of assessment in the assessment year 1988-89, theAssessing Officer noticed a debit balance of Rs. 1,89,821/- on account ofpublicity and advertisement. This debit balance was the cost of neon signand glow sign boards deployed at various places or given to show rooms.The Assessing Officer treated these expenses as expenses of capital natureand disallowed the same. He further noticed that an amount of Rs.1,79,833/- was also shown as expenses on advertisement. This amount alsoincluded Rs. 98,000/- as cost of production of TV films, Rs. 75,833/- as costof neon and glow sign boards and Rs. 6,000/- as insurance expenses. TheAssessing Officer also treated these expenses as of capital nature by placingreliance on the decision of the Bombay High Court in Commissioner ofIncome Tax, Bombay City Iv.M/s Patel International Film Ltd., 102 ITR219. Feeling aggrieved against the said disallowance, the assesseefiled appeal before the Commissioner of Income Tax (Appeals), Karnal Feeling aggrieved against the said disallowance, the assesseefiled appeal before the Commissioner of Income Tax (Appeals), Karnal [hereinafter referred to as `the CIT (A)']. It was contended that the expensesincurred on publicity and advertisement should have been allowed undersub section (3) of Section 37 of the Act. The assessee placed reliance uponthe decision of the Himachal Pradesh High Court in Mohan MeakinBreweries Ltd.v. Commissioenr of Income Tax,118 ITR 101 andcontended that as per that decision, the advertisement expenses could neverbe of capital nature. It was further contended that the expenditure on neonsign and glow sign boards were revenue expenses, as those expenses wereincurred for the purpose of business and those expenses should have beenallowed as revenue expenses under sub section (1) of Section 37 of the Act.The CIT (A) accepted the contention of the assessee and allowed theexpenses claimed as revenue expenses, while making the followingobservations : “4.3I have carefully considered the arguments for theappellant and find force in these. In the Himachal Pradesh HighCourt judgment relied upon for the appellant, it has indeed beenheld that the expenditure on advertisement and publicity cannotbe treated as capital expenditure. The appellant's reliance on theorder of the learned CIT (A), Chandigarh in the case of theAtlas Cycle Inds. Ltd. is also valid as the Revenue apparentlyaccepted the findings of the learned CIT (A), Chandigarh in thatcase to the effect that expenditure on Glow-signs was of arevenue nature. It is also true that the Supreme Court of India has repeatedly held that where two opinions are possible on anissue the view in favour of the assessee should prevail. Theexpenditure in question was clearly in the nature ofadvertisement and publicity. Thus, even if the Bombay Highcourt view is against the appellant, the issue will have to bedecided in favour of the appellant in view of the HimachalPradesh High Court judgment particularly since there is nojudgment on this issue of the jurisdictional High Court i.e.Punjab and Haryana High Court or the Supreme Court of India.Considering these facts, the learned Assessing Officer is held tohave not been justified in treating the expenditure in question tobe of a capital nature. The expenditure in question is held to beallowable as revenue expenditure. The learned AssessingOfficer is directed to allow the same. He shall, however,withdrew the depreciation, if any allowed on this expenditure.”Feeling aggrieved against the said order, the Revenue filedappeal before the Tribunal. The Tribunal dismissed the appeal andconfirmed the order of the CIT (A). Against the said order of the Tribunal,the aforesaid reference (ITR No. 2 of 2000) has been sent to this Courtunder Section 256 of the Income Tax Act, 1961 (hereinafter referred to as`the Act'). In the subsequent years also, the assessee incurred expenses onGlow Sign Boards. For those assessment years also, the Assessing Officer disallowed the claim of the assessee regarding the expenses on Glow SignBoards, by treating the said expenditure as of capital nature, on the groundthat the department has not accepted the decision of the Tribunal in case ofthe assessee for the previous assessment year and against that decision, theReference was pending in this court. However, the CIT (A), by followingthe decision of the Tribunal pertaining to the earlier assessment year,allowed the said expenditure by treating the same as of revenue nature. TheTribunal affirmed the order of the CIT (A). The department, feeling dis-satisfied with those orders, filed these 10 appeals. In the subsequent years also, the assessee incurred expenses onGlow Sign Boards. For those assessment years also, the Assessing Officer disallowed the claim of the assessee regarding the expenses on Glow SignBoards, by treating the said expenditure as of capital nature, on the groundthat the department has not accepted the decision of the Tribunal in case ofthe assessee for the previous assessment year and against that decision, theReference was pending in this court. However, the CIT (A), by followingthe decision of the Tribunal pertaining to the earlier assessment year,allowed the said expenditure by treating the same as of revenue nature. TheTribunal affirmed the order of the CIT (A). The department, feeling dis-satisfied with those orders, filed these 10 appeals. Learned counsel for the Revenue submitted that the Tribunalhas committed an error in holding that the expenses incurred by the assesseeon Glow Sign Boards were not of enduring nature, therefore, the sameshould have been allowed being the expenses of revenue nature. Learnedcounsel submitted that the said expenses brought into existence anadvantage for the enduring benefit of the business. These Glow Sign Boardshave given benefit to the business of the assessee permanently, therefore,these should be found as assets of the assessee giving permanent benefit toits business. Therefore, the expenditure incurred on the Glow Sign Boardsshould be treated as capital expenditure. Learned counsel further submittedthat the expenditure of Rs. 18,000/- in the assessment year 1988-89 onproduction of TV Films for advertisement was also wrongly treated asrevenue expenses. In this regard, learned counsel placed reliance upon thedecision of the Bombay High Court in the case ofM/s Patel International Film Ltd.,(supra). On the other hand, learned counsel for the assessee contendedthat the benefit accrued to the assessee from the expenditure incurred is notof enduring nature. The expenditure on Glow Sign Boards merely facilitatethe business operation of the assessee. The said expenditure is not a longperiod expenditure and the Glow Sign Boards are destroyed or damagedevery year and the assessee has to spend on such Glow Sign Boards on eachyear. Therefore, the expenditure incurred on the Glow Sign Boards is not forthe enduring advantage of the business. Learned counsel referred to thefinding of the Tribunal, where it has been held that the expenditure incurredby the assessee on Glow Sign Boards is being incurred regularly in almosteach year. This finding in itself shows that the Glow Sign Boards, on whichthe expenditure had been incurred every year, were not of permanent nature.Therefore, the expenditure incurred by the assessee is not for acquiring anasset of permanent nature. Learned counsel submitted that the decision ofthe Bombay High Court, as relied upon by learned counsel for the Revenue,is not applicable to the facts and circumstances of the case. In that case, theexpenditure incurred by the assessee for purchasing the film was taken to bethe enduring advantage and thus, the said expenditure was held to be ofcapital nature. Learned counsel submitted that the purchasing of a film andexpenditure on Glow Sign Boards cannot be compared, as the benefitarising from the expenditure on the Glow Sign Boards cannot be said to beenduring benefit to the business of the assessee. After considering the rival submissions made by learnedcounsel for the parties, we are of the opinion that the Tribunal was right inconfirming the order of the CIT (A) and treating the expenditure incurred onGlow Sign Boards as of revenue nature. After considering the rival submissions made by learnedcounsel for the parties, we are of the opinion that the Tribunal was right inconfirming the order of the CIT (A) and treating the expenditure incurred onGlow Sign Boards as of revenue nature. Section 37 (1) of the Act provides that `any expenditure (notbeing expenditure of the nature described in sections 30 to 36 and not beingin the nature of capital expenditureor personal expenses of the assessee),laid out or expended wholly and exclusively for the purposes of the businessor profession shall be allowed in computing the income chargeable underthe head “Profits and gains of business or profession.”' For claimingdeduction under this section, one of the conditions is that the expenditureshould not be in the nature of capital expenditure. The question whether aparticular expenditure incurred by the assessee is of capital or revenuenature is always a complex and intricate issue. Such a question has to beconsidered and answered in the facts and circumstances of each case. InAssam Bengal Cementv.CIT27 ITR 34 (Supreme Court), it was held thatif the expenditure is made for acquiring or bringing into existence an assetor advantage for the enduring benefit of the business, it is properlyattributable to capital and is of the nature of capital expenditure. If on theother hand it is made not for bringing into existence an asset or advantagebut for running the business or working it with a view to produce the profitsit is a revenue expenditure. If any such asset or advantage for the enduringbenefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the incomeof the concern or whether the payment was made once and for all or wasmade periodically. The aim and object of the expenditure would determinethe character of the expenditure whether it is a capital expenditure or arevenue expenditure. It was further held that the expressions `enduringbenefit' or `of a permanent character' were introduced to make it clear thatthe asset or the right acquired must have enough durability to justify itsbeing treated as a capital asset. In Bombay Steam Navigation Co. (1953) Private Ltd. v.Commissioner of Income Tax, Bombay,(1965) 56 ITR 52, it was observedthat if the expenditure is so related to the carrying on or conduct of thebusiness that it may be regarded as an integral part of the profit-earningprocess, then such expenditure is to be taken as revenue expenses. InLakshmiji Sugar Mills Co. P. Ltd.v.Commissioner of Income Tax, NewDelhi,(1971) 82 ITR 376, it was held that if the expenditure is made not forthe purpose of bringing into existence any asset or advantage but forrunning the business or working it with a view to produce the profit, it is arevenue expenditure. It was held that the criteria has to be applied from thebusiness point of view and on a fair appreciation of the whole situation. InCommissioner of Income Taxv.Madras Auto Service (P) Ltd.,(1998) 233ITR 468, it was held as under : “the general principles applicable in determining whether aparticular expenditure is capital or revenue are as follows : (1) “the general principles applicable in determining whether aparticular expenditure is capital or revenue are as follows : (1) Outlay is deemed to be capital when it is made for the initiationof a business, for extension of a business, or for a substantialreplacement of equipment; (2) Expenditure may be treated asproperly attributable to capital when it is made not only onceand for all, but with a view to bringing into existence an assetor an advantage for the enduring benefit of a trade. If what isgot rid of by a lump sum payment is an annual businessexpense chargeable against revenue, the lump sum paymentshould equally be regarded as a business expense, but if thelump sum payment brings in a capital asset, then that puts thebusiness on another footing altogether; (3) Whether for thepurpose of the expenditure, any capital was withdrawn, or, inother words, whether the object of incurring the expenditurewas to employ what was taken in as capital of the business.Again, it is to be seen whether the expenditure incurred waspart of the fixed capital of the business or part of its circulatingcapital.” Considering the above principle of law, in the present case, it isto be seen as to whether the expenditure incurred by the assessee on GlowSign Boards was with a view to bringing into existence an asset or anadvantage for the enduring benefit of the business. In our opinion, theexpenditure incurred by the assessee on Glow Sign Boards does not bringinto existence an asset or advantage for the enduring benefit of the business, which is attributable to the capital. The Glow Sign Board is not an asset ofpermanent nature. It has a short life. The materials used in the Glow SignBoards decay with the effect of weather. Therefore, it requires frequentreplacement. The Tribunal has also recorded a finding that the assessee hasto incur expenditure on Glow Sign Boards regularly in almost each year.This fact itself shows that the advantage accrued from the use of the GlowSign Boards is not of enduring nature. Thus, the expenditure by the assesseeon these Glow Sign Boards did not bring into existence any asset oradvantage for the enduring benefit of the business. The assessee has spentthe expenditure on the Glow Sign Boards with an object to facilitate thebusiness operation and not with an object to acquire asset of enduringnature. Therefore, the said expenditure was of revenue nature and theTribunal has rightly treated the same as of revenue nature. In the assessment year 1988-89, the assessee had spent anamount of Rs. 98,000/- on production of a TV film for advertising theproducts manufactured by it. The said expenditure was disallowed by theAssessing Officer being not of revenue nature, by placing reliance upon thedecision of the Bombay High Court in the case ofM/s Patel InternationalFilm Ltd.,(supra). The CIT (A) allowed the said expenditure by consideringthe same as an expenditure of advertisement and publicity in view of sub-section (3) of Section 37 of the Act, while relying upon the decision of theHimachal Pradesh High Court in the case ofMohan Meakin Breweries Ltd.(supra), where it was held that the expenditure on advertisement andpublicity cannot be treated as capital expenditure. The decision of the CIT In the assessment year 1988-89, the assessee had spent anamount of Rs. 98,000/- on production of a TV film for advertising theproducts manufactured by it. The said expenditure was disallowed by theAssessing Officer being not of revenue nature, by placing reliance upon thedecision of the Bombay High Court in the case ofM/s Patel InternationalFilm Ltd.,(supra). The CIT (A) allowed the said expenditure by consideringthe same as an expenditure of advertisement and publicity in view of sub-section (3) of Section 37 of the Act, while relying upon the decision of theHimachal Pradesh High Court in the case ofMohan Meakin Breweries Ltd.(supra), where it was held that the expenditure on advertisement andpublicity cannot be treated as capital expenditure. The decision of the CIT (A) was affirmed by the Tribunal on the same reasoning. In our view, theexpenditure on production of a TV film was rightly ordered to be deductedon account of advertisement expenditure in view of sub-section (3) ofSection 37 of the Act, which was in force at that time. Sub-section (3) whichhas been omitted by Finance Act 1997 with effect from 1.4.1998 dealt withthree types of expenditure, one on advertisement, second on maintenance ofany residential accommodation and third in connection with travelling by anemployee or other person. It was held that Section 37 (3) of the Actcontemplates a separate and distinct head of deduction viz., expenditure onadvertisement, and this deduction was admissible notwithstanding anythingcontained in sub-section (1) of Section 37. Therefore, keeping in view thefact that the said expenditure was made by the assessee on advertisement,the same was rightly allowed to be deducted from the profit. Thus, we donot find any illegality in the order of the Tribunal, while treating the saidexpenditure as of revenue nature. Now, we consider the following question, which has beenraised by the Revenue in three appeals (ITAs No. 200 of 2005, 159 and 160of 2006), which pertain to the assessment years 1995-96, 1993-94 and 1994-95, respectively : “Whether the ITAT was correct in law in allowing assessee'sclaim for deduction under Section 80 I of the Income Tax Act,1961, when conditions laid down for grant of such deductionwere not fulfilled?” The Assessing Officer disallowed the claim of the assessee on the ground that the assessee does not fulfill the conditions laid down inSection 80 I of the Act regarding number of workers employed inmanufacturing process and finished goods are being got manufactured fromoutside parties by paying them production charges. The CIT (A) reversedthe order of the Assessing Officer in this regard, while holding that thenumber of persons employed by the assessee in units of Agra, Jammu andSaharanpur were more than 20 and in the earlier assessment year, on thesame facts and circumstances, the case was decided in favour of theassessee. The said finding has been affirmed by the Tribunal. Learned counsel for the Revenue could not controvert theaforesaid finding recorded by the CIT (A), which was affirmed by theTribunal. In view of this, we do not find any illegality or infirmity in theorder, passed by the Tribunal, while allowing the claim of the assesseeunder section 80 I of the Act. In view of the above, all the aforesaid substantial questions oflaw raised by the Revenue are answered in the affirmative i.e. against theRevenue and in favour of the assessee. Income Tax Reference No.2 of 2000is answered against the Revenue and in favour of the assessee, and IncomeTax Appeals No. 9 of 2002, 79, 200, 201 of 2005, 159, 160 of 2006, 452,453, 527 and 528 of 2007are dismissed. ( SATISH KUMAR MITTAL )JUDGE April 22, 2008ndj ( RAKESH KUMAR GARG )JUDGE