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Commissioner Of Income Tax v. Salora International Limited

Delhi High Court

Aug 18, 2008

Judgment

Subsequent
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CaseIQ

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Summary of Opinion: C.M. No. 1581/2007 (delay) in I.T.A. No. 173/2008

Factual and Procedural Background

This opinion addresses (1) an application for condonation of delay in filing an appeal (C.M. No. 1581/2007) and (2) the admission and preliminary disposal of I.T.A. No. 173/2008.

Regarding the condonation application: there was a delay of approximately 12 days (the application mentioned 9 days). The stated cause of delay was administrative: the CCIT had directed obtaining the opinion of the senior standing counsel (letter dated 16 November 2007). The senior standing counsel gave his opinion on 27 November 2007 and forwarded it on 28 November 2007 to CCIT-III. The CCIT-III was taken ill and subsequently passed away; the file was handed to another CCIT who approved filing the appeal only on 4 December 2007 and forwarded the file on 5 December 2007. The application asserted the delay arose from these circumstances and not from intentional or avoidable conduct by the appellant.

Regarding I.T.A. No. 173/2008: one principal issue concerns advertising expenditure of approximately Rs. 3.08 crores. The Assessing Officer treated one-third of the expenditure as capital (enduring nature) and allowed two-thirds as revenue expenditure. The Commissioner of Income-tax (Appeals) allowed the entire amount as revenue expenditure. The Income-tax Appellate Tribunal (the Tribunal) confirmed the Commissioner (A) and held the advertising expense had a direct nexus with business and was necessary to meet competition; it accordingly allowed the whole amount as revenue expenditure. The Tribunal noted the Supreme Court decision in Empire Jute Co. Ltd. v. Commissioner Of Income Tax [1980] 124 ITR 1 on circumstances where enduring-benefit test may break down.

Legal Issues Presented

Whether the delay in filing the appeal should be condoned in view of the administrative events surrounding the obtaining and forwarding of the senior standing counsel's opinion and the passing away of the CCIT-III.
Whether the advertising expenditure of approximately Rs. 3.08 crores is revenue expenditure (allowed in full by Commissioner (A) and Tribunal) or partly capital in nature as assessed by the Assessing Officer.
Whether the Tribunal was correct in law in deleting the addition of Rs. 25,29,431 (made by the Assessing Officer) by amortizing the expenditure towards professional fees paid to M/s. Eicher Consultants Services Ltd. (Rs. 31.62 lakhs) for the project of Supply Chain Management & Human Resource Revenue—Engineering, and in allowing only a deduction of one-fifth as expenditure in the year under assessment.
Whether the Tribunal was correct in law in holding that an unutilized amount of DEPB of Rs. 4,13,661 would be allowed as expenditure under section 37(1) of the Income-tax Act, 1961, and could be allowed as a loss.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Empire Jute Co. Ltd. v. Commissioner Of Income Tax [1980] 124 ITR 1	The Supreme Court held that there could be cases where expenditure, even if incurred for obtaining a benefit of an enduring nature, may nevertheless be on the revenue account; in such cases the test of "enduring benefit" may break down.	The Tribunal noted this decision in support of treating the advertising expenditure as revenue in nature. The present court observed the Tribunal's conclusion on advertising expenditure and found no occasion to interfere.
CIT v. Woodward Governor India P. Ltd. [2007] 294 ITR 451	Decided questions (referred to as proposed questions Nos. 2(e) and (f) in the opinion) — the court had decided these questions against the Revenue and in favour of the assessee.	The present court noted that proposed questions Nos. 2(e) and (f) have already been decided by this court in that case and, consequently, found that no substantial questions of law arise on that issue in the present appeal.

Court's Reasoning and Analysis

On the condonation application: after hearing counsel, the court accepted the factual narrative that the delay resulted from the process of obtaining the senior standing counsel's opinion and the intervening illness and death of the CCIT-III, followed by reassignment to another CCIT who approved the filing. The court concluded these circumstances fully explained the delay and that it was not intentional or avoidable on the part of the appellant; accordingly, the delay deserved to be condoned.

On the substantive appeal (I.T.A. No. 173/2008):

The court summarized the positions of the authorities below regarding the advertising expenditure: the Assessing Officer treated one-third as capital and allowed two-thirds as revenue; the Commissioner (Appeals) treated the whole amount as revenue expenditure; the Tribunal confirmed the Commissioner (Appeals), finding direct nexus with the business and necessity to make products known to the market to avoid business suffering.
The Tribunal relied on the principle in Empire Jute that the enduring-benefit test may not always dictate capital treatment. On review, the court held the Tribunal's decision on the advertising expenditure did not call for interference and therefore found no substantial question of law on that aspect.
Proposed questions Nos. 2(e) and (f) were held to be covered by this court's earlier decision in CIT v. Woodward Governor India P. Ltd. [2007] 294 ITR 451 (decided against the Revenue). Consequently, no substantial question of law arose on those points.
The court identified two substantial questions of law that required consideration (relating to amortisation of professional fees paid to M/s. Eicher Consultants Services Ltd. and the DEPB unutilized amount treated under section 37(1)). The court admitted the appeal for consideration on these two questions.
The court prescribed case management directions: appellant to file paper books within three months; parties may file documents that were part of the record before the authorities below within four weeks.

Holding and Implications

Core Rulings:

The condonation application is allowed and the delay in filing the appeal is condoned.
The appeal is admitted for consideration on two specified substantial questions of law (concerning amortisation of professional fees paid to M/s. Eicher Consultants Services Ltd. and the treatment of an unutilized DEPB amount of Rs. 4,13,661 under section 37(1)).
The court found no substantial question of law arises in respect of the Tribunal's treatment of the advertising expenditure of approximately Rs. 3.08 crores, and proposed questions Nos. 2(e) and (f) were already decided by this court in CIT v. Woodward Governor India P. Ltd.

Implications:

The immediate procedural consequence is that the appeal proceeds on the two admitted substantial questions; other issues identified do not proceed as substantial questions of law in this appeal.
The appellant must file paper books within three months; parties may file documents that were part of the record below within four weeks.
No further relief or decision on the merits of the two admitted questions is recorded in this opinion; they are admitted for the court's consideration. The court did not disturb the Tribunal's conclusion on the advertising expenditure in this order.

This summary is limited to and derived exclusively from the information contained in the provided opinion.

Show all summary ...

C.M No. 1581/2007 (delay) in I.T.A No. 173/2008

1. This is an application for condonation of delay in filing the appeal. Apparently there is a delay of about 12 days in filing the appeal. Although the application mentions only 9 days delay. The reason given for the delay is that the CCIT had directed that the opinion of the senior standing counsel be sought. This was done by a letter dated November 16, 2007. The senior standing counsel had given the opinion on November 27, 2007, and forwarded the same on November 28, 2007, to the CCIT-III. However, the said CCIT was taken ill and, unfortunately, he passed away shortly thereafter. The file was handed to another CCIT who was able to approve the filing of the appeal only on December 4, 2007, and forwarded the file on December 5, 2007. The delay in filing the appeal has occurred because of these circumstances and not because of any intentional or unavoidable delay on the part of the appellant.

2. After hearing the counsel for the parries, we feel that this is a case in which the delay is fully explained and ought to be condoned.

3. The delay is condoned. This application is allowed and it stands disposed of accordingly.

I.T.A No. 173/2008

4. The first issue that is sought to be raised in this appeal pertains to advertising expenditure of approximately Rs. 3.08 crores. According to the Assessing Officer, the expenditure were incurred for launching of its products. The Assessing Officer was of the view that such expenditure was of an enduring nature and, therefore, treated one-third as “capital expenditure” and only allowed the two-thirds of the said amount as “expenditure, to the assessee”. The, Commissioner of Income-tax (Appeals) allowed the entire amount after treating the expenditure as “revenue expenditure”. The findings of the Commissioner of Income-tax (Appeals) were confirmed by the Income-tax Appellate Tribunal by virtue of the impugned order. Particularly, the Tribunal held that there was a direct nexus between the advertising expenditure and the business of the assessee and that the assessee had to incur such expenditure to meet the competition in the Indian market for selling its products in India. A finding was returned that unless the assessee made its products known to the market, its business would suffer. Consequently, the Tribunal held the entire expenditure on advertising to be of a revenue nature and allowed the same. The Tribunal also noted the decision of the Supreme Court in the case of Empire Jute Co. Ltd. v. Commissioner Of Income Tax [1980] 124 ITR 1 wherein the Supreme Court held that there could be cases where the expenditure even if it was incurred for obtaining of a benefit of an enduring nature may, nevertheless, be on the revenue account and, in such cases, the test of “enduring benefit” may break down.

5. We are of the view that the decision of the Tribunal on this aspect of the matter does not call for any interference and, therefore, no substantial question of law arises on this aspect.

6. Proposed questions Nos. 2 (e) and (f) have already been the subject-matter of a decision of this court in CIT v. Woodward Governor India P. Ltd. [2007] 294 ITR 451. This court has decided these questions against the Revenue and in favour of the assessee. So, on this issue also, no substantial questions of law arise.

7. However, we feel that the following two substantial questions of law do arise for our consideration:

“1. Whether the Tribunal was correct in law in deleting the addition of Rs. 25,29,431 made by the Assessing Officer by amortizing the expenditure towards the professional fee to M/s. Eicher Consultants Services Ltd. to the extent of Rs. 31.62 lakhs paid towards the project of supply Chain Management & Human Resource Revenue—Engineering by allowing only a deduction of 1/5th as expenditure in the year under assessment?

2. Whether the Tribunal was correct in, law in holding that unutilized amount of DEPB to the extent of Rs. 4,13,661 would be allowed as expenditure under section 37(1) of the Income-tax Act, 1961, and could be allowed as a loss?”

8. We admit the appeal on the said two questions.

9. No other substantial question of law arises for our consideration. The paper books be filed by the appellant within three months as per the rules. Parties are at liberty to file documents provided that, such documents had formed part of the record before the authorities below. The same may be done within four weeks.