Ita/55/2010 Of S.gopalakrishnan v. Commissioner Of Income Tax

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE ANTONY DOMINIC & THE HONOURABLE SMT. JUSTICE P.V.ASHA FRIDAY, THE 26TH DAY OF AUGUST 2016/4TH BHADRA, 1938 I.T.A.No.55 of 2010------------------ AGAINST THE ORDER IN ITA 624/2007 of I.T.A.TRIBUNAL,COCHIN BENCHDATED 22-9-09 APPELLANT/RESPONDENT IN ITA:---------------------------- S.GOPALAKRISHNAN, ARSHIK HERBAL REMEDIES (INDIA), SREE VIHAR,TANK ROAD, VANCHIYOOR, THIRUVANANTHAPURAM. BY ADVS.SRI.ANIL D. NAIR SMT.NIVEDITA A.KAMATH RESPONDENT/APPELLANT IN ITA: ---------------------------- COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM. R BY SRI.JOSE JOSEPH, SC, FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 26-08-2016,THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: APPENDIX PETITIONER'S ANNEXURES ANNEUXRE A: TRUE COPY OF THE ASSESSMENT ORDER FORTHE YEAR 2004-2005 DATED 29.12.2007 ISSUED TO THEAPPELLANT. ANNEXURE B: TRUE COPY OF THE ORDER OF THECOMMISSIONER OF INCOME TAX (APPEALS) I,THIRUVANANTHAPURAM DATED 22.2.2007 FOR THE YEAR2004-2005. ANNEXURE C: TRUE COPY OF THE GROUNDS OF APPEALALONG WITH THE STATEMENT OF FACTS FILED BY THERESPONDENT BEFORE THE INCOME TAX APPELLATE TRIBUNAL,COCHIN BENCH, ERNAKULAM. ANNEUXRE D: TRUE COPY OF THE ARGUMENT NOTESUBMITTED BY THE APPELLANT BEFORE THE INCOME TAXAPPELLATE TRIBUNAL, COCHIN BENCH, ERNAKULAM. ANNEUXRE E: TRUE COPY OF THE ORDER O F THE INCOMETAX APPELLATE TRIBUNAL, COCHIN BENCH IN ITANO.624/COCH/2007 DATED 22.9.2009 FOR THE YEAR 204-2005. // TRUE COPY // P.A TO JUDGE ANTONY DOMINIC & P.V.ASHA, JJ. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - I.T.A.No.55 of 2010 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -Dated this the 26[th] day of August, 2016 Antony Dominic, J. JUDGMENT This appeal is filed by the assessee impugning the orderpassed by the Income Tax Appellate Tribunal, Cochin Bench, inI.T.A.No.624/2007 pertaining to the assessment year 2004-2005. 2. On facts, it is relevant to state that for the assessment year2004-2005, the assessee had returned loss of Rs.10,12,980/-. The Assessing Officer, after making additions and disallowances,determined the total income at Rs.50,49,560/-. The appeal filed bythe assessee was allowed by the Commissioner of Income Tax(Appeals). The Revenue challenged the order of the 1[st] AppellateAuthority before the Tribunal. The Tribunal passed the impugnedorder partly allowing the appeal of the Revenue. It is in thesecircumstances, the assessee has filed this appeal, framing thefollowing questions of law for the consideration of this court: i)In the facts and circumstances of the case, oughtnot the Tribunal had allowed the expenditureclaimed on the use of cars and telephone bills adallowable expenditure under Section 37(1) of theAct?not the Tribunal had allowed the expenditureclaimed on the use of cars and telephone bills adallowable expenditure under Section 37(1) of theAct? ii)In the facts and circumstances of the case oughtnot the Tribunal had held that the salary paid tothe wife is an allowable deduction ascontemplated under Section 64(i)(ii) of the Act?not the Tribunal had held that the salary paid tothe wife is an allowable deduction ascontemplated under Section 64(i)(ii) of the Act? iii)In the facts and circumstances of the case oughtnot the Tribunal had held that the research anddevelopment expenses incurred by the appellantfor developing the new product namely “AnoopAnti-dandruff Cream” is an allowable deduction?not the Tribunal had held that the research anddevelopment expenses incurred by the appellantfor developing the new product namely “AnoopAnti-dandruff Cream” is an allowable deduction? ii)In the facts and circumstances of the case oughtnot the Tribunal had held that the salary paid tothe wife is an allowable deduction ascontemplated under Section 64(i)(ii) of the Act?not the Tribunal had held that the salary paid tothe wife is an allowable deduction ascontemplated under Section 64(i)(ii) of the Act? iii)In the facts and circumstances of the case oughtnot the Tribunal had held that the research anddevelopment expenses incurred by the appellantfor developing the new product namely “AnoopAnti-dandruff Cream” is an allowable deduction?not the Tribunal had held that the research anddevelopment expenses incurred by the appellantfor developing the new product namely “AnoopAnti-dandruff Cream” is an allowable deduction? iv)In the facts and circumstances of the case oughtnot the Tribunal had allowed the advertisementexpenses incurred by the appellant as the same isrevenue in nature.not the Tribunal had allowed the advertisementexpenses incurred by the appellant as the same isrevenue in nature. 3. We heard the counsel for the appellant and the Senior Standing Counsel for the Revenue. 4. Although by order dated 29[th] March 2010, notice has been issued only on question Nos.3 and 4, having heard the submissionsmade at the Bar and on going through the orders impugned, we feelthat the four questions of law framed in the appeal memorandum deserve to be considered. 5. Insofar as the first question regarding the expenditureclaimed on the use of cars and telephone bills are concerned,reading of Annexure A assessment order shows that the assessee,who is the manufacturer of ‘Anoop Hair Oil’, on the basis of a secretformula developed by the assessee himself had entrusted themarketing of the product to M/S Godrej. Assessee had a fleet ofcars comprising of one Mercedez Benz van, four Mercedez Benzcars, one Maruti Wagon R and 2 Fiat Palio. In respect of these cars,he had incurred a total expenditure of Rs.22,15,189/-. TheAssessing Officer disallowed 50% thereof and allowed only 50% asexpended for business purposes. The disallowance was reduced to5% by the 1[st] Appellate Authority and the Tribunal set aside theorder of the 1[st] Appellate Authority and restored the order passedby the Assessing Officer. 6. Reading of the order passed by the Tribunal shows that ithas endorsed the conclusion of the Assessing Officer that the 8 carswere maintained by the assessee as his personal fad. It was alsofound that the assessee has not maintained any log register orother materials to establish that all these 8 cars were used by theassessee exclusively for the purpose of carrying on his business. 7. Insofar as the telephone bills, the expenses of which werealso claimed by the assessee are concerned, the Assessing Officerhas disallowed 50%. The 1[st] Appellate Authority has reduced it to5% and the Tribunal has restored the order of the Assessing Officer.On this issue also, the Tribunal has held that the findings in respectof the disallowance of the car expenditure equally applied. Herealso, the Tribunal has found that the assessee has not maintainedproper data base to verify whether all the phones were used for thepurpose of his business. The aforesaid conclusions of the Tribunalregarding the cars and the telephone bills show that these are factual conclusions and do not give rise to any question of law forthe consideration of this court. 7. Insofar as the telephone bills, the expenses of which werealso claimed by the assessee are concerned, the Assessing Officerhas disallowed 50%. The 1[st] Appellate Authority has reduced it to5% and the Tribunal has restored the order of the Assessing Officer.On this issue also, the Tribunal has held that the findings in respectof the disallowance of the car expenditure equally applied. Herealso, the Tribunal has found that the assessee has not maintainedproper data base to verify whether all the phones were used for thepurpose of his business. The aforesaid conclusions of the Tribunalregarding the cars and the telephone bills show that these are factual conclusions and do not give rise to any question of law forthe consideration of this court. 8. Next issue is concerning the disallowance of the salarypaid to the assessee’s wife. The findings of the Assessing Officer inparagraph 6 of the assessment order is that the assessee had paidan amount of Rs.81,000/- to his wife. This was sought to bejustified by the assessee’s Authorized Representative bycontending that the assessee had imparted the secret formula of hismedicines to her and hence the salary was paid. The AssessingOfficer found that such payment of salary cannot be regarded asone covered by the proviso to Section 64(1)(ii) of the Income TaxAct and disallowed the same. However, this finding was vacated bythe 1[st] Appellate Authority and the Tribunal has set aside the orderof the 1[st] Appellate Authority and restored the order of theAssessing Officer. 9. The learned counsel appearing for the appellantchallenged the finding of the Tribunal by relying on the provisionsof Section 64(1) (ii) and the decision of the Andhra Pradesh HighCourt in Batta Kalyani v. Commissioner of Income Tax [154 ITR 59]. 10. Section 64(1)(ii) provide that in computing the totalincome of any individual, there shall be included all such income asarises directly or indirectly to the spouse of such individual by wayof salary, commission, fees or any other form of remunerationwhether in cash or in kind from a concern in which such individualhas a substantial interest. This provision is followed by a provisowhich states that nothing in sub clause (ii) shall apply in relation toany income arising to the spouse where the spouse possessestechnical or professional qualifications and the income is solelyattributable to application of his or her technical or professionalknowledge and experience. 11. Therefore, if the income earned by the wife of theassessee was on account of her technical or professionalknowledge or experience, such income cannot be reckoned incomputing the total income of the assessee. Reading of paragraph6 of the assessment order shows that the very contention of theAuthorized Representative of the assessee was “that the assesseehad imparted secret formula of his medicine to her”. In otherwords, apart from imparting the secret formula to his wife, eventhe assessee did not have a case that the wife was earning hersalary on account of her technical or professional knowledge orexperience. In such a case, the payment made by the assessee tohis wife would not qualify for the benefit of proviso to Section 64(1)(ii). 12. Insofar as the judgment of the Andhra Pradesh HighCourt inBatta Kalyani v. Commissioner of Income Tax [154 ITR 59]isconcerned, findings therein turned on the conclusion of the Assessing Officer that the assessee’s husband was employed tomanage the business of his wife. Insofar as this case is concerned,there is no such finding and, therefore, this judgment is of noassistance to the assessee. In the light of the above, the secondquestion of law has to be answered against the assessee and infavour of the revenue. 12. Insofar as the judgment of the Andhra Pradesh HighCourt inBatta Kalyani v. Commissioner of Income Tax [154 ITR 59]isconcerned, findings therein turned on the conclusion of the Assessing Officer that the assessee’s husband was employed tomanage the business of his wife. Insofar as this case is concerned,there is no such finding and, therefore, this judgment is of noassistance to the assessee. In the light of the above, the secondquestion of law has to be answered against the assessee and infavour of the revenue. 13. Insofar as the third question regarding the expenditureincurred for the Research and Development is concerned, readingof paragraph 7 of the assessment order shows the same wasdisallowed by the Assessing Officer on the finding that evenaccording to the Authorized Representative of the assessee, theexpenditure in question was incurred during the previousassessment year and that the assessee who is following themercantile system of accounting could not have claimed it duringthe assessment year in question. It was this finding which wasultimately sustained by the Tribunal. Since the assessee is admittedly following the mercantile system of accounting, theexpenditure in question could have been claimed only in the year inwhich it was incurred. Therefore, the third question also has to beanswered against the assessee and in favour of the Revenue. 14. The fourth question is regarding the advertisementexpenses incurred by the assessee. Reading of the assessmentorder shows that during the assessment year in question, theassessee had incurred Rs.29,25,000/- as advertisement expenses.This was disallowed on the basis that it is a capital expenditure.While the 1[st] Appellate Authority allowed the appeal of theassessee, the Tribunal has sustained the finding of the AssessingOfficer that the expenditure is in the nature of capital expenditure,relying on the judgment of the Calcutta High Court in the case ofIndian Oxygen Ltd. V. CIT [164 ITR 466]and Gujarat High Court inthe case of CIT v. Mc Graw Ravindra Laboratories (India) Ltd. [132ITR 401]. 15. Insofar as this finding of the Tribunal is concerned, thelearned counsel for the assessee has placed reliance on thejudgment of this court in Commissioner of Income Tax v. AluminiumIndustries Ltd. [214 ITR 541]wherein Division Bench of this courthad occasion to consider whether the advertisement chargesincurred by a company is capital expenditure or revenueexpenditure. That was a case where the assessee had incurredadvertisement expenditure in connection with the inauguration ofits 'relay' project. In that factual background, referring to severalprecedents on the subject it was held that if expenses are incurredfor advertisements for the expansion of the business of theassessee, such expenditure are necessarily revenue expenditure. 16. Since the expenditure in question was incurred inconnection with launching of the assessee's new product,respectfully following the dictum laid down by the decision of thiscourt in Aluminium Industries Ltd. (supra), we answer the 4[th] : 11 : question of law raised in favour of the assessee and against theRevenue. 17. Now, that this court has reversed the finding thatadvertisement expenditure is a capital expenditure and has held itto be a revenue expenditure, and the matter necessarily has to beremitted back to the Assessing Officer for examining thereasonableness of the same. Accordingly, answering the 4[th]question of law in favour of the assessee and against the Revenue,the matter is remitted to the Assessing Officer, who will determinethe reasonableness of the revenue expenditure incurred by theassessee in this regard. The appeal is disposed of accordingly. SD/- ANTONY DOMINIC JUDGE jes SD/- P.V.ASHA JUDGE