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Attorney(S)
  • Appellant by: Shri Kantilal B. Parekh
  • Respondent by: Shri Subachan Ram
Judges
  • R.S Syal, A.M
  • Amit Shukla, J.M
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • Appellant by: Shri Kantilal B. Parekh
  • Respondent by: Shri Subachan Ram
Judges
  • R.S Syal, A.M
  • Amit Shukla, J.M
See more information ...
Smart Summary

Structured Summary of the Tribunal Order

Factual and Procedural Background

The appeal was filed by the assessee against an order dated March 24, 2011 passed by the Commissioner of Income-tax under section 263. The assessee is a company engaged in manufacturing and export of jewellery. During assessment proceedings the Assessing Officer (AO) scrutinised expenses shown under "Miscellaneous expenses" aggregating Rs. 2.94 crores (Rs. 2,94,52,315). The AO treated Rs. 17,98,482 of these expenses as capital expenditure (described in the order as repairs and maintenance) and disallowed that amount. A disallowance under section 40(a)(ia) was also made. The return of income showed Rs. 1,09,07,937 but the assessment under section 143(3) was completed at Rs. 1,34,10,580 by order dated December 24, 2008. The Commissioner issued a show-cause notice under section 263 (dated February 24, 2011) contending that the brand-building expenditure for "Nirvana" created an intangible asset and was capital in nature; the Commissioner subsequently passed an order under section 263 cancelling the assessment order. The assessee appealed to the Tribunal.

Legal Issues Presented

  1. Whether the order passed by the Assessing Officer (assessment dated December 24, 2008) was erroneous and prejudicial to the interests of the Revenue such as to justify exercise of revisionary jurisdiction under section 263?
  2. Whether the expenditure incurred for building the brand "Nirvana" (totaling Rs. 2,94,52,315) is capital expenditure (creation of an intangible asset) or revenue expenditure (including deferred revenue expenditure/amortisation)?
  3. Whether the Assessing Officer applied his mind and made adequate enquiries into the brand-building expenses such that the Commissioner could not substitute his own view under section 263?
  4. Whether a debatable or arguable view taken by the Assessing Officer justifies exercise of jurisdiction under section 263?

Arguments of the Parties

Appellant's (Assessee's) Arguments

  • The AO explicitly sought details of the brand-building expenditure (letter dated August 8, 2008) and the assessee furnished full particulars (response dated August 25, 2008). The AO further asked about these details (letter dated November 24, 2008) and the assessee responded (letter dated December 2, 2008), placing all material before the AO.
  • The assessee had itself treated part of the expenditure as reduced in computation (Rs. 98,17,438) and deferred the balance (Rs. 1,96,34,877) as deferred revenue expenditure written off across assessment years, thereby indicating a revenue character as recorded in the books.
  • Because the AO examined the details and reached a definite conclusion (allowing most and disallowing only Rs. 17,98,482), the Commissioner could not invoke section 263 to cancel the assessment order and adopt a different view. Reliance was placed on Tribunal decisions (Manish Kumar v. CIT; Maithan International v. Asstt. CIT; Roshan Lal Vegetable Products (P.) Ltd. v. ITO) to support that position.

Respondent's (Department's) Arguments

  • The Departmental representative contended that the AO had not made adequate enquiries: the assessment order did not discuss the brand-building expenditure, which indicates lack of proper inquiry.
  • Even if the question of capital/revenue character was debatable, revision under section 263 could be invoked. The representative relied on case law to support the propositions that (i) assessment made without proper enquiry may be erroneous and prejudicial to Revenue and (ii) on debatable issues the Commissioner may exercise revisionary jurisdiction.
  • Tribunal decisions (Jehan Numa Palace Hotel P. Ltd. v. CIT; D & H Secheron Electrodes Ltd. v. Dy. CIT) were cited to support the correctness of the Commissioner’s action in reopening the matter under section 263.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC) Assessment is erroneous if AO failed to make enquiries which ought to have been made; AO accepted claim in a stereotyped manner. Cited in the Commissioner’s order to criticise the AO for not enquiring; Tribunal noted the principle but concluded AO did make enquiries in this case.
Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC) Similar to Rampyari Devi — failure to make requisite enquiries can render assessment erroneous. Cited by the Commissioner; Tribunal examined whether AO had made requisite enquiries and found that AO had indeed examined the brand-building details.
Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) If AO, after applying law and examining details, takes one of the permissible views, that does not make the order erroneous merely because another view could be taken. Applied by the Tribunal to hold that where AO applied his mind and took a permissible view, section 263 could not be invoked to substitute the Commissioner’s view.
CIT v. Max India Ltd. [2007] 295 ITR 282 (SC) Affirms the principle that an assessment adopting one of the courses permissible in law cannot be treated as erroneous or prejudicial merely because an alternative approach might have produced more revenue. Relied upon by the Tribunal in concluding AO’s conclusion was a permissible view; therefore the Commissioner’s order under section 263 was not sustainable.
Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) Tests to distinguish capital and revenue expenditure (including enduring benefit test) are not conclusive; enduring benefit may still amount to revenue expenditure depending on commercial nature of advantage. Applied by the Tribunal to assess the nature of the brand-building expenditure and to conclude that enduring benefit alone does not automatically make expenditure capital; expenditure here facilitated trading operations and did not create a distinct profit-making asset.
Jehan Numa Palace Hotel P. Ltd. v. CIT [1999] 70 ITD 552 (Indore) Tribunal authority cited by Department to support that revision may be justified where assessment lacks proper enquiry or on debatable issues. Not adopted by the Tribunal as determinative; the Tribunal found AO had carried out enquiries, distinguishing the present facts from circumstances warranting revision under section 263.
D & H Secheron Electrodes Ltd. v. Dy. CIT [1999] 70 ITD 214 (Indore) Similar Tribunal authority cited for the proposition that revision can be justified if assessment is without proper inquiry. Cited by Department; Tribunal reviewed the factual record and concluded AO had applied mind and made inquiries, so these authorities did not support the Commissioner’s order in this case.
Manish Kumar v. CIT [2012] 134 ITD 27 (Indore) Tribunal authority cited by assessee for the proposition that once AO has examined issues and reached a conclusion, Commissioner should not invoke section 263 to take a different view. Relied upon by the assessee and noted by the Tribunal in support of the finding that AO had applied mind and the Commissioner could not substitute his view under section 263.
Maithan International v. Asstt. CIT [2012] 134 ITD 393 (Kol.) Same proposition as above: limits on revision under section 263 where AO has considered and decided the issue after enquiries. Cited by the assessee and considered by the Tribunal as consistent with the conclusion that the AO had applied mind.
Roshan Lal Vegetable Products (P.) Ltd. v. ITO [2011] 51 SOT 1 (ASR) Tribunal authority cited by assessee to show that Commissioner cannot exercise section 263 to take a different view after AO has examined matter. Referenced by the Tribunal when concluding that AO's examination and conclusion precluded the Commissioner from invoking section 263 in the present facts.

Court's Reasoning and Analysis

The Tribunal's analysis proceeded in these main steps (all based on the material recorded in the order):

  1. Examination of Procedural Record: The Tribunal examined the assessment record and found that the AO had specifically queried the brand-building expenditure (queries dated August 8, 2008 and November 24, 2008), the assessee supplied detailed explanations and supporting material on August 25 and December 2, 2008, and the AO scrutinised those details.
  2. AO's Conclusion: After examining the details the AO reached a conclusion that only Rs. 17,98,482 should be disallowed as capital expenditure; the AO allowed the remainder (significant part) as revenue expenditure or treated it as deferred revenue expenditure written off over assessment years.
  3. Legal Standard for Section 263: The Tribunal reiterated the twin requirements for invoking section 263 — (i) the AO's order sought to be revised must be erroneous, and (ii) it must be prejudicial to the interests of the Revenue. Both conditions must be satisfied for exercise of revisional jurisdiction.
  4. Permissible Views and Precedent: The Tribunal applied settled Supreme Court authorities (Malabar Industrial Co. Ltd. and CIT v. Max India Ltd.) to hold that where the AO, after applying the law and examining details, adopts one of the courses permissible in law, that does not make his order erroneous merely because an alternative view exists or because the alternative might yield more revenue.
  5. Capital vs. Revenue Character: The Tribunal examined the nature of the brand-building expenditure through the lens of Empire Jute (which warns against treating the enduring-benefit test as conclusive). The Tribunal observed that even if brand-building gives some enduring advantage, that does not automatically convert the expenditure into capital; the commercial nature of the advantage matters. The Tribunal found on facts that the expenditure helped augment sales and profit and did not create a distinct tangible or intangible asset of enduring character.
  6. Application to Present Facts: Concluding that the AO had applied his mind, made enquiries, and taken a permissible legal view (disallowing only part of the claimed expenditure), the Tribunal held that the Commissioner’s order under section 263 was not sustainable — the twin conditions for revisional jurisdiction were not met.

Holding and Implications

Holding: The Tribunal set aside/cancelled the impugned order passed under section 263 and allowed the assessee's appeal. The appeal filed by the assessee was allowed.

Implications:

  • Direct effect on the parties: The Commissioner's order under section 263 (dated March 24, 2011) cancelling the assessment was quashed; the assessment as completed by the AO (order dated December 24, 2008) stands subject to the AO's original conclusions (including disallowance of Rs. 17,98,482).
  • Broader legal implication: The Tribunal applied established Supreme Court authorities to reaffirm that where the AO has applied his mind and adopted a permissible view after enquiries, revision under section 263 is not justified merely because a different view could be taken. The opinion does not purport to lay down a new legal principle or expand existing law beyond the application of cited precedents.
Show full summary ...

    Fine Jewellery (India) Ltd. Unit No. G-6, Gem & Jewellery Block, Seepz, Andheri (East), Mumbai-400096 v. Acit-8(1), Aayakar Bhawan, Marine Lines, Mumbai-400020

    ORDER

    Amit Shukla, Judicial Member - This appeal has been preferred by the assessee which is directed against the order dated March 24, 2011 passed by the learned Commissioner of Income-tax-8, Mumbai under section 263.

    2. The brief facts of the case are that the assessee is a company which is engaged in the business of manufacturing and export of jewellery. During the course of the assessment proceedings, while examining the details of expenses relating to the head "Miscellaneous expenses" for sums aggregating to Rs. 2.94 crores, the Assessing Officer took the view that out of the said sum, a sum of Rs. 17,98,482 on account of repairs and maintenance is capital expenditure and disallowed the same. Besides this, disallowance of section 40(a)(ia) was also made. Thus as against the return of income of Rs.1,09,07,937, the assessment was completed at an income of Rs.1,34,10,580 under section 143(3) vide order dated December 24, 2008. The said order have been sought to be cancelled by the learned Commissioner of Income-tax under section 263. Against this the assessee has come in appeal before us.

    3. The learned Commissioner of Income-tax had issued a show-cause notice under section 263 dated February 24, 2011 on the ground that the expenses of Rs. 2.94 crores was for the creation of brand "Nirvana" which is nothing but capital expenditure for creating an intangible asset. In response, the assessee submitted that looking to the details and nature of expenses, which has been incorporated in pages 2 and 3 of the impugned order, goes to show that these expenditure are purely revenue in nature. Further, it was submitted that out of expenditure of Rs. 2,94,52,315, a sum of Rs. 98,17,438 has already been reduced in the computation of income by the assessee and the balance amount of Rs. 1,96,34,877 has been treated as deferred revenue expenditure, which has been written off partly in the assessment year 2007-08 and partly in the assessment year 2008-09. Thus the assessee-company has claimed the entire amount as revenue expenditure and has written off in three assessment years.

    4. Further, the Assessing Officer had examined all these expenditure incurred under the brand building in detail and after scrutinising the same, he has made the disallowance of Rs. 17,98,482 only. Lastly, it was submitted that such expenses cannot be held to be on account of capital in nature, as no enduring benefit has been created.

    5. The learned Commissioner of Income-tax after incorporating the submission of the assessee in detail in the impugned order, has rejected the same after holding that such an expense is on account of capital field. The relevant findings and observations of the learned Commissioner of Income-tax is reproduced hereinbelow :

    "7. I have considered the relevant facts and the arguments of the assessee. On perusal of records, it is seen that in response to notice under section 142(1) of the Act, the assessee vide letter dated December 16, 2008 furnished, inter alia, details of amortised expenses. Vide further submission dated December 16, 2008, the assessee furnished the nature, purpose and justification of the brand building expenditure. The assessment order was passed on December 24, 2008 without any reference to or discussion regarding the brand building expenditure. The hon'ble Supreme Court in the case of Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 (SC) and Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC) held that the assessment made by the Assessing Officer would be erroneous merely on the ground of not making enquires which were required to be made in the facts and circumstances of the case and the Assessing Officer has accepted the claim of the assessee in a stereotyped manner. In this context, it is seen that the Assessing Officer merely called for details of the various expenses and no query was raised to whether the expenditure is capital or revenue in nature.

    8. As admitted by the assessee, the expenses have been incurred by the assessee for brand building for its product "Nirvana" as distinct from the other products dealt with by the assessee. Such expenditure is incurred with a view to derive enduring benefit as evident from the fact that the assessee has itself estimated a long life of the product by amortisation of the expenditure on the "matching concept". Thus the expenses were incurred in the course of business and is related to carrying on and conduct of the business as an integral part of the profit-making process is contradicted by the assessee's own claim that an asset by way of a brand known "Nirvana" was being created by it, evidently and admittedly for long-term benefit and hence, the amortisation of the expenses by the assessee in its books of account. Thus, the Assessing Officer has erred in allowing the entire expenditure as a deduction accepting the assessee's claim that the expenditure is revenue in nature even though clearly the expenditure has been incurred to create an asset in the form of brand "Nirvana" and hence is clearly capital in nature."

    6. Learned counsel on behalf of the assessee submitted that the Assessing Officer in the course of assessment proceedings had specifically asked for the details of "brand building expenditure" for sum aggregating to Rs.2,94,52,315, vide letter dated August 8, 2008 and in response to which the assessee has given the entire details on August 25, 2008. The copies of query letter and details as were furnished have been referred to from the paper book. Further the Assessing Officer, vide letter dated November 24, 2008, asked particularly about these details of brand building expenditure and to show cause as to why it should not be capitalised. The assessee in response made submission vide letter dated December 2, 2008 and submitted the entire details of expenditure before the Assessing Officer. All these details have also been placed before us. On this basis he submitted that once the Assessing Officer has examined the entire expenditure and has come to a definite conclusion, the learned Commissioner of Income-tax cannot invoke reversionary jurisdiction under section 263 to cancel the assessment order on the same issue and to take a different view. In support of this contention, reliance was placed on the following decisions :


    (i) Manish Kumar v. CIT [2012] 134 ITD 27/[2011] 16 taxmann.com 212 (Indore) ;
    (ii) Maithan International v. Asstt. CIT [2012] 134 ITD 393/17 taxmann.com 72 (Kol.)
    (iii) Roshan Lal Vegetable Products (P.) Ltd. v. ITO [2011] 51 SOT 1/18 taxmann.com 295 (ASR)

    7. On the other hand, the learned senior Departmental representative submitted that the Assessing Officer has not carried out any enquiry on the other expenses which is borne out from the fact that the same has not been mentioned in the assessment order. Further, he submitted that even if it is a debatable issue, section 263 can be invoked. In support of his arguments, he has relied upon the catena of the case law firstly, on the issue that if the assessment has been done without proper enquiry it is erroneous and prejudicial to the interests of the Revenue and secondly, that on debatable issues, revision under section 263 is justified. He also relied upon the decision of the Tribunal in the case of Jehan Numa Palace Hotel P. Ltd v. CIT [1999] 70 ITD 552 (Indore) and D&H Secheron Electrodes Ltd. v. Dy. CIT [1999] 70 ITD 214 (Indore) . He further contented that mainly because some of the aspects have been verified by the Assessing Officer it cannot be said that the points mentioned by the learned Commissioner of Income-tax in 263 order cannot be again looked into by the Assessing Officer. He, therefore, strongly relied upon the order of the learned Commissioner of Income-tax.

    8. We have carefully considered the rival submissions and also perused the material placed on record. From the assessment records as pointed out by the learned authorised representative, it is seen that the Assessing Officer has not only raised the query regarding the details of brand building expenses, but has also sought clarification on two occasions and had examined them also. Further on examination of these details he has reached to a conclusion that sum of Rs. 17,98,482 is a capital expenditure. It is further noticed that the assessee has deferred these expenses and claimed it as revenue expenditure in equal amount in the assessment years 2006-07, 2007-08 and 2008-09.

    9. Thus, there was a complete application of mind by the Assessing Officer while examining the expenditure under brand promotion and brand building. For invoking the jurisdiction under section 263, it is essential that Commissioner has to be satisfied with a twin conditions, namely, (i) the order of the Assessing Officer, sought to be revised is erroneous ; and (ii) it is prejudicial to the interests of the Revenue. If any one of them is absent, the jurisdiction under section 263 fails. It is also a settled principle of law that if the Assessing Officer, after examining the entire details and after applying the correct provisions of law, adopts one of the courses permissible in law even if it has resulted in loss of revenue or there are two possible views, the Assessing Officer has taken one view, it cannot be treated that the order passed by him is erroneous or prejudicial to the interest of the judgment. This view found support from the decisions of the hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 (SC) and CIT v. Max India Ltd. [2007] 295 ITR 282/166 Taxman 188 (SC) .

    10. Even from the facts of the case it is seen that the expenditure incurred by the assessee is not creating any enduring benefit of an asset but is rather helping the assessee in augmenting its sales and resultantly its profit. Even if it is presumed that the building of brand image of "Nirvana" is giving advantage of enduring benefit to the assessee, still it would be on revenue account as there is no creation of a tangible or intangible asset of enduring nature to the assessee. The hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69 (SC) , has held that no tests for distinguishing between capital and revenue expenditure is paramount or conclusive. There is no all-embracing formula which can provide a ready solution to the problem, whether it is a capital expenditure or revenue expenditure. Their Lordships have held that even tests of enduring benefit at times gets failed as not each and every advantage of enduring nature can be of capital field. The most celebrated observations of their Lordships on this account are reproduced hereinbelow (headnote) :

    "There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit, is therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case."

    11. Further such a payment has also to be seen from the context of business necessity or expediency also. If the outgoing expenditure is so intricately related to carrying on or the conduct of the business that it may be regarded as integral part of the profit-earning process and not for an acquisition of an asset or a right of the permanent character, the possession of which is condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure.

    12. Thus, from the facts of the case we do not find that these expenses incurred by the assessee has resulted in any kind of addition or augmentation of any profit-making asset. Thus the view taken by the Assessing Officer is prima facie correct view and, therefore, we do not find any reason to hold that such an order is erroneous or it is prejudicial to the interests of the Revenue. Thus the conclusion drawn by the learned Commissioner of Income-tax in the impugned order is not tenable both in law and on facts and accordingly we cancel the impugned order passed under section 263. In the result, the grounds taken by the assessee are allowed and the appeal of the assessee is also treated as allowed.

    13. In the result, the appeal filed by the assessee is allowed.

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    Comments

    Fine Jewellery (Indi... v. Acit-8(1), Aayakar B...
    (Jul 31, 2012)