Commissioner Of Income Tax-I v. M/S. Majestic Auto Ltd

In the High Court of Punjab and Haryana, Chandigarh. ITA No. 109 of 2008 Date of Decision: 20.01.2009 Commissioner of Income Tax-I ....Appellant. Versus M/s. Majestic Auto Ltd. ....Respondent. Coram:- Hon'ble Mr.Justice J.S. Khehar Hon'ble Mr. Justice Nawab Singh Present: Mr. Rajesh Sethi, Advocate for the appellant. ... J.S. Khehar, J. (Oral). Through the instant appeal, the appellant has impugned theorder dated 23.1.2007 passed by the Income Tax Appellate Tribunal,wherein the Income Tax Appellate Tribunal has accepted the contentionadvanced by the respondent – assessee, that a sum of Rs.2,57,41,375/-incurred by the assessee in engaging M/s. Coopers and Lybrands, for asystem study of the respondent – assessee was a revenue expense, and assuch, was liable to be included by the respondent – assessee whilecomputing expenses at its hands. It is in view of the aforesaid conclusiondrawn by the Income Tax Appellate Tribunal, that the instant appeal hasbeen preferred by the Revenue, suggesting the following substantialquestions of law: -- “(i) Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was justified in law in holdingthat while payments made to M/s. Coopers and Lybrands for astudy and report on reorganization of core business of assesseecompany and improving its market share and profitabilityresulted in a benefit derived by the assessee for a number ofyears, the same was not in the nature of capital expenditure? (ii) Whether on the facts and circumstances of the case, theIncome Tax Appellate Tribunal was justified in law in holdingthat payments made to M/s. Coopers and Lybrands, wererevenue in nature even though a new line of business (scooter)was being set up and scope of study and advice by consultants,spread over three financial years, was not only for existingbusiness? (iii) Whether on the facts and in law, the Income Tax AppellateTribunal erred in not taking note of provisions of Sections 35(D)(1)(ii) and 35(D) (2)(a)(iii) while treating payment ofRs.1,62,93,000/- made to M/s. Coopers and Lybrands asrevenue expenditure? Before delving upon the issue involved, it would be pertinent tomention that the respondent – assessee filed a return of its income on30.11.1998, depicting losses to the tune of Rs.10,36,61,189/-. In theassessment order passed on 28.3.2001, the Assessing Officer completed theassessment at a loss of Rs.2,57,41,375/-. In the instant order, expenses tothe tune of Rs.1,62,93,000/- allegedly incurred by the respondent – assesseeas payments made to M/s. Coopers and Lybrands, for a study and report onreorganization of core business, of the respondent – assessee and for improving its market share and profitability, was treated as a capitalexpense, and as such, was ordered to be deducted from the losses depictedin the return dated 30.11.1998. The order passed by the Assessing Officer dated 28.3.2001 wasassailed by the respondent – assessee before the Commissioner of IncomeTax by preferring an appeal. The appeal preferred by the respondent –assessee was, however, dismissed by an order dated 10.1.2003. Dissatisfiedwith the order passed by the Commissioner of Income Tax dated 10.1.2003, the respondent – assessee approached the Income Tax Appellate Tribunal. On this occasion, the Income Tax Appellate Tribunal by its order dated23.1.2007, arrived at the conclusion that the expenditure of Rs.1,62,93,000/-incurred by the respondent – assessee as payment made to M/s. Coopers andLybrands for a study and report on reorganization of core business of therespondent – assessee and for improving its market share and profitability,was a revenue expenditure, and as such, arrived at the conclusion that thededuction made on account of the aforesaid expense from the losses shownby the respondent – assessee in its return dated 30.11.1998, by theAssessing Officer was not justified. The Revenue has preferred the instant appeal against the orderrendered by the Income Tax Appellate Tribunal dated 23.1.2007. During the course of hearing, learned counsel for the appellantadvanced three submissions. The submissions advanced by the learnedcounsel for the appellant, are being dealt with hereunder sequentially in themanner they were advanced before us. The first contention of the learned counsel for the appellant isbased on Section 35 (D) of the Income Tax Act, 1961 (hereinafter referred to as the 1961 Act). Pointed reference was made by the learned counsel forthe appellant to sub-section (2) (a) (iii) thereof. Section 35 D of the 1961Act is being extracted hereunder: -- “Amortisation of certain preliminary expenses. 35D. (1) Where an assessee, being an Indian company or aperson (other than a company) who is resident in India, incurs,after the 31st day of March, 1970, any expenditure specified insub-section (2)-- (i) before the commencement of his business, or (ii) after the commencement of his business, in connection withthe extension of his industrial undertaking or in connectionwith his setting up a new industrial unit, the assessee shall, in accordance with and subject to theprovisions of this section, be allowed a deduction of an amountequal to one- tenth of such expenditure for each of the tensuccessive previous years beginning with the previous year inwhich the business commences or, as the case may be, theprevious year in which the extension of the industrialundertaking is completed or the new industrial unit commencesproduction or operation. Provided that where an assessee incurs after the 31[st] day ofMarch, 1998, any expenditure specified in sub-section (2), theprovisions of this sub-section shall have effect as if for thewords “an amount equal to one-tenth of such expenditure foreach of the ten successive previous years”, the words “anamount equal to one-fifth of such expenditure for each of the five successive previous years” had been substituted. (2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of the followingclauses, namely:- (a) expenditure in connection with- (i) preparation of feasibility report; (ii) preparation of project report; (iii)conducting market survey or any other survey necessary forthe business of the assessee; (iv) engineering services relating to the business of theassessee: Provided that the work in connection with the preparation ofthe feasibility report or the project report or the conducting of market survey or of any other survey or the engineeringservices referred to in this clause is carried out by the assesseehimself or by a concern which is for the time being approved inthis behalf by the Board; (b) legal charges for drafting any agreement between theassessee and any other person for any purpose relating to thesetting up or conduct of the business of the assessee; (c) where the assessee is a company, also expenditure- (i) by way of legal charges for drafting the Memorandum andArticles of Association of the company; (ii) on printing of the Memorandum and Articles ofAssociation; (iii) by way of fees for registering the company under the provisions of the Companies Act, 1956; (iv) in connection with the issue, for public subscription, ofshares in or debentures of the company, being underwritingcommission, brokerage and charges for drafting, typing,printing and advertisement of the prospectus; (d) such other items of expenditure (not being expenditureeligible for any allowance or deduction under any otherprovision of this Act) as may be prescribed. (3) Where the aggregate amount of the expenditure referred toin sub-section (2) exceeds an amount calculated at two andone-half per cent- (a) of the cost of the project, or (ii) on printing of the Memorandum and Articles ofAssociation; (iii) by way of fees for registering the company under the provisions of the Companies Act, 1956; (iv) in connection with the issue, for public subscription, ofshares in or debentures of the company, being underwritingcommission, brokerage and charges for drafting, typing,printing and advertisement of the prospectus; (d) such other items of expenditure (not being expenditureeligible for any allowance or deduction under any otherprovision of this Act) as may be prescribed. (3) Where the aggregate amount of the expenditure referred toin sub-section (2) exceeds an amount calculated at two andone-half per cent- (a) of the cost of the project, or (b) where the assessee is an Indian company, at the option ofthe company, of the capital employed in the business of thecompany, the excess shall be ignored for the purpose ofcomputing the deduction allowable under sub-section (1). Provided that where the aggregate amount of expenditurereferred to in sub-section(2) is incurred after the 31[st] day ofMarch, 1998, the provisions of this sub-section shall haveeffect as if for the words “two and one-half percent”, the words“five percent” had been substituted. Explanation.-In this sub-section,- (a) "cost of the project" means- (i) in a case referred to in clause (i) of sub- section (1), theactual cost of the fixed assets, being land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings),which are shown in the books of the assessee as on the last dayof the previous year in which the business of the assesseecommences; (ii) in a case referred to in clause (ii) of sub- section (1), theactual cost of the fixed assets, being land, buildings, leaseholds,plant, machinery, furniture, fittings and railway sidings(including expenditure on development of land and buildings),which are shown in the books of the assessee as on the last dayof the previous year in which the extension of the industrialundertaking is completed or, as the case may be, the newindustrial unit commences production or operation, in so far assuch fixed assets have been acquired or developed inconnection with the extension of the industrial undertaking orthe setting up of the new industrial unit of the assessee; (b) "capital employed in the business of the company" means-(i) in a case referred to in clause (i) of sub-section (1), theaggregate of the issued share capital, debentures and long-termborrowings as on the last day of the previous year in which thebusiness of the company commences; (ii) in a case referred to in clause (ii) of sub- section (1), theaggregate of the issued share capital, debentures and long-termborrowings as on the last day of the previous year in which theextension of the industrial undertaking is completed or, as thecase may be, the new industrial unit commences production oroperation, in so far as such capital, debentures and long-term borrowings have been issued or obtained in connection with theextension of the industrial undertaking or the setting up of thenew industrial unit of the company; (c) "long-term borrowings" means- (i) any moneys borrowed by the company from Government orthe Industrial Finance Corporation of India or the IndustrialCredit and 'Investment Corporation of India or any otherfinancial institution which is eligible for deduction underclause (viii) of sub-section (1) of section 36 or any bankinginstitution (not being a financial institution referred to above),or (ii) any moneys borrowed or debt incurred by it in, a foreigncountry in respect of the purchase outside India of capital plantand machinery, where the terms under which such moneys areborrowed or the debt is incurred provide for the repaymentthereof during a period of not less than seven years. (c) "long-term borrowings" means- (i) any moneys borrowed by the company from Government orthe Industrial Finance Corporation of India or the IndustrialCredit and 'Investment Corporation of India or any otherfinancial institution which is eligible for deduction underclause (viii) of sub-section (1) of section 36 or any bankinginstitution (not being a financial institution referred to above),or (ii) any moneys borrowed or debt incurred by it in, a foreigncountry in respect of the purchase outside India of capital plantand machinery, where the terms under which such moneys areborrowed or the debt is incurred provide for the repaymentthereof during a period of not less than seven years. (4) Where the assessee is a person other than a company or aco-operative society, no deduction shall be admissible undersub-section (1) unless the accounts of the assessee for the yearor years in which the expenditure specified in sub-section (2) isincurred have been audited by an accountant as defined in theExplanation below sub-section (2) of section 288, and theassessee. furnishes, along with his return of income for the firstyear in which the deduction under this section is claimed, thereport of such audit in the prescribed form duly signed andverified by such accountant and setting forth such particulars as may be prescribed. (5) Where the undertaking of an Indian company which isentitled to the deduction under sub-section (1) is transferred,before the expiry of the period of ten years specified in sub-section (1), to another Indian company in a scheme ofamalgamation,- (i) no deduction shall be admissible under sub-section (1) in thecase of the amalgamating company for the previous year inwhich the amalgamation takes place; and (ii) the provisions of this section shall, as far as may be, applyto the amalgamated company as they would have applied to theamalgamating company if the amalgamation had not takenplace. 5(A) Where the undertaking of an Indian company which isentitled to the deduction under sub-section (i) is transferred,before the expiry of the period specified in sub-section (i), toanother company under a scheme of demerger:- (i) no deduction shall be admissible under sub-section (i) in thecase of demerged company for the previous year in which thedemerger takes place, and (ii) the provisions of this section shall as far as may be, appliedto the resulting company, as they would have applied to thedemerged company, if the demerger had not taken place. (6) Where a deduction under this section is claimed andallowed for any assessment year in respect of any expenditurespecified in sub-section (2), the expenditure in respect of which deduction is so allowed shall not qualify for deduction underany other provision of this Act for the same or any otherassessment year.” (i) no deduction shall be admissible under sub-section (i) in thecase of demerged company for the previous year in which thedemerger takes place, and (ii) the provisions of this section shall as far as may be, appliedto the resulting company, as they would have applied to thedemerged company, if the demerger had not taken place. (6) Where a deduction under this section is claimed andallowed for any assessment year in respect of any expenditurespecified in sub-section (2), the expenditure in respect of which deduction is so allowed shall not qualify for deduction underany other provision of this Act for the same or any otherassessment year.” Based on sub-section (2)(a)(iii) extracted above, it is the vehementcontention of the learned counsel for the appellant, that the expensesincurred by the respondent – assessee in making payments to M/s. Coopersand Lybrands, must be treated as expense incurred for conducting “marketsurvey or any other survey necessary for the business of the assessee.” Unfortunately, learned counsel for the appellant could not invite ourattention to any part of the pleadings or any of the orders rendered by theRevenue Authorities, wherefrom it could be concluded, that theengagement of M/s. Coopers and Lybrands by the respondent – assesseewas aimed at conducting market survey or any other survey necessary forthe business of the assessee. The substantial questions of law framed by theassessee in the instant appeal, however, reveal that the report submitted byM/s. Coopers and Lybrands, whose services had been engaged by therespondent – assessee, pertained to “reorganization of core business of therespondent – assessee and improving its market share and profitability.” Assuch, it is not possible for us to accept that the expenditure incurred by therespondent – assessee can be considered to be an expense falling within thepurview of sub-section (2)(a)(iii) of Section 35(D) of the 1961 Act. It is,therefore, not possible for us to accept the first contention advanced by thelearned counsel for the appellant. The second contention advanced by the learned counsel isbased on Rule 46 (A) of the Income Tax Rules, 1962 (hereinafter referred toas the 1962 Rules). The aforesaid rule pertains to the production of additional evidence before the Deputy Commissioner (Appeals) or theCommissioner of Income Tax (Appeals). In this behalf, it is the submissionof the learned counsel for the appellant, that the Commissioner of IncomeTax (Appeals) while entertaining the appeal preferred by the respondent –assessee, against the order passed by the Assessing Officer dated 28.3.2001,allowed the respondent – assessee to adduce additional evidence. In orderto substantiate the instant contention, learned counsel for the appellant hasplaced reliance on the order passed by the Assessing Officer, wherein thefollowing observations were recorded: -- “The assessee was required to produce proposal dated23.10.1996 entered into with M/s. Coopers Lybrands. Inresponse, the assessee has filed letter dated 23.9.1996. According to this letter, a proposal was made on 4.9.1996which has not been filed by the assessee. As per this letter thetime scales for the individual parts of the assignments are asunder: -- Assignment start 01.10.1996 Strategy document rendered by 25.11.1996 Agreement on strategy by 30.11.1996 Business plan complete by 31.01.1997 Implementation plan complete by 15.04.1997” “The assessee was required to produce proposal dated23.10.1996 entered into with M/s. Coopers Lybrands. Inresponse, the assessee has filed letter dated 23.9.1996. According to this letter, a proposal was made on 4.9.1996which has not been filed by the assessee. As per this letter thetime scales for the individual parts of the assignments are asunder: -- Assignment start 01.10.1996 Strategy document rendered by 25.11.1996 Agreement on strategy by 30.11.1996 Business plan complete by 31.01.1997 Implementation plan complete by 15.04.1997” On the basis of the aforesaid contention, it is the submission of the learnedcounsel for the appellant, that the only material placed by the respondent –assessee before the Assessing Officer, was the letter dated 23.9.1996. It issubmitted by the learned counsel, that inspite of the fact that the respondent– assessee only placed reliance on the aforesaid letter dated 23.9.1996, theappellate authorities took into consideration a host of other material. In this behalf, learned counsel invited our attention to material taken intoconsideration by the appellate authorities by referring to the observationsrecorded by the Commissioner of Income Tax (Appeals) in his order dated10.1.2003, highlighting the following material relied upon by therespondent – assessee: – “1. The assessee company had approached M/s. Coopers andLybrands, a management consultant, to study the performanceof the company and to suggest reorganization of its corebusiness to significantly improve the market share andprofitability. 2. The total work was divided into different phases. 3. The services rendered by M/s. Coopers and Lybrands inrespect of :–respect of :– 1.Business Reforms and its reorganization. Reports cover existing marketing structure and improvement inthe marketing system etc. plus administrative reforms in a vastscale no par of report relating to any suggestion in the nature ofcapital expenditure. A copy of the “Executive Summary” furnished by M/s. Coopersand Lybrands on the areas covered is enclosed. 4. The complete detail of the study conducted by M/s. Coopersand Lybrands has been submitted in 2 volumes running into235 pages the same is being produced before your honour. 5. Copy of letter received from M/s. Coopers and Lybrands isenclosed.” enclosed.” It is not possible for us to accept the second submission 3. The services rendered by M/s. Coopers and Lybrands inrespect of :–respect of :– 1.Business Reforms and its reorganization. Reports cover existing marketing structure and improvement inthe marketing system etc. plus administrative reforms in a vastscale no par of report relating to any suggestion in the nature ofcapital expenditure. A copy of the “Executive Summary” furnished by M/s. Coopersand Lybrands on the areas covered is enclosed. 4. The complete detail of the study conducted by M/s. Coopersand Lybrands has been submitted in 2 volumes running into235 pages the same is being produced before your honour. 5. Copy of letter received from M/s. Coopers and Lybrands isenclosed.” enclosed.” It is not possible for us to accept the second submission advanced by the learned counsel for the appellant for the sole reason, thatno challenge has been raised at the hands of the Revenue in the instantappeal assailing the action of the Commissioner of Income Tax (Appeals),in allowing the respondent – assessee to bring to its notice additionalevidence not available before the Assessing Officer, and/or the reliancethereon by the Income Tax Appellate Tribunal. Had the submission madeby the learned counsel for the appellant been actually correct, the instantappeal would definitely have been preferred with a pointed plea on thesubmission advanced by the learned counsel for the appellant. Evenotherwise, we are of the view that the extract from the order passed by theAssessing Officer, reproduced hereinabove (which is the sole basis for theinstant submission) cannot lead to the conclusion that no other material wasplaced by the respondent – assessee before the Assessing Officer, besidesthe letter dated 23.9.1996. In the extract reproduced above, the AssessingOfficer merely notices, that in response to a direction issued by theAssessing Officer to the respondent – assessee to produce the proposaldated 23.10.1996, entered into with M/s. Coopers and Lybrands, therespondent – assessee produced a letter dated 23.9.1996. That, in our view,cannot by itself lead to the inference, that the material referred to by theCommissioner of Income Tax (Appeals) in his order dated 10.1.2003, hadnot been produced by the respondent – assessee before the AssessingOfficer. Thus viewed, we find no merit in the second submission advancedby the learned counsel for the appellant. The last contention advanced by the learned counsel for theappellant was to the effect, that the respondent – assessee is likely to have along term benefit from the report submitted by M/s. Coopers and Lybrands. It is also the contention of the learned counsel for the appellant, that theIncome Tax Appellate Tribunal overlooked the fact, that the scope of studywas spread over a span of three years. It was also submitted, that heavyexpenses were incurred by the respondent – assessee in engaging M/s.Coopers and Lybrands, for the project under reference. It is, therefore, thevehement contention of the learned counsel for the appellant, that theexpenses incurred by the respondent – assessee should be treated as acapital expense and not as a revenue expense. We have considered the last submission advanced by thelearned counsel for the appellant, in the background of the conclusionsdrawn in the impugned order dated 23.1.2007 rendered by the Income TaxAppellate Tribunal. On a perusal of the aforesaid order, it is apparent thatthe Tribunal arrived at the following conclusion: -- Firstly, that the business of the assessee, in respect of which M/s. Coopersand Lybrands was engaged, was in existence for a period of more than threedecades, prior to the said engagement. Secondly, the report given by M/s. Coopers and Lybrands on the basis ofthe study conducted by it, was in regard to the existing business of therespondent – assessee. We have considered the last submission advanced by thelearned counsel for the appellant, in the background of the conclusionsdrawn in the impugned order dated 23.1.2007 rendered by the Income TaxAppellate Tribunal. On a perusal of the aforesaid order, it is apparent thatthe Tribunal arrived at the following conclusion: -- Firstly, that the business of the assessee, in respect of which M/s. Coopersand Lybrands was engaged, was in existence for a period of more than threedecades, prior to the said engagement. Secondly, the report given by M/s. Coopers and Lybrands on the basis ofthe study conducted by it, was in regard to the existing business of therespondent – assessee. Thirdly, M/s. Coopers and Lybrands in its report had not given therespondent – assessee any information or technique for producing any newparts (which were not under the production of the respondent – assesseehereto before) nor did it render any technical know-how in respect of anymanufacturing or processing or production activity of the respondent –assessee. Fourthly, the report rendered by M/s. Coopers and Lybrands resulted in affecting economy and efficiency in the working of the Company formanufacturing and selling of existing items, which gave the respondent –assessee a business advantage; and Fifthly, the expenditure incurred by the respondent – assessee had merelyfacilitated the respondent – assessee's trading operation and enabled it tomanage and conduct the business more efficiently, while leaving the fixedcapital untouched. For the reasons depicted in the order passed by the Income TaxAppellate Tribunal, in respect whereof there is not the slightest dispute, weare satisfied that the pleas advanced by the learned counsel for the appellantdeserve to be rejected. Without controverting the reasons depicted in theorder passed by the Income Tax Appellate Tribunal, some of which arepurely factual conclusions, it is not possible for us to accept the submissionsadvanced by Revenue to return a finding, that the expense incurred by therespondent – assessee in engaging M/s. Coopers and Lybrands, ought to betreated as a capital expense. No other submission was advanced by the learned counsel forthe appellant. For the reasons accorded hereinabove, the questions of lawraised by the Revenue in the instant appeal, are held to be bereft of anymerit. The instant appeal is, accordingly, dismissed. ( J.S. Khehar )Judge ( Nawab Singh ) Judge.