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Income Tax Officer 9(2)(2), Room No.225, Aayakar Bhavan, M.K.Road, Mumbai-400020 Vs. M/s Kaya Ltd., Second floor, Rangsharda, K C Marg, Bandra (W), Mumbai-400050
March, 09th 2015
              ,   "" 
IN THE INCOME TAX APPELLATE TRIBUNAL "A" BENCH, MUMBAI

 BEFORE S/SHRI B.R.BASKARAN (AM) AND VIVEK VARMA, (JM)
     .. ,      ,                                
               ./I.T.A. No3175/Mum/2013
            (   / Assessment Year : 2009-10)


Income Tax Officer 9(2)(2),   / M/s Kaya Ltd.,
Room No.225,                  Vs. Second floor,
Aayakar Bhavan,                   Rangsharda,
M.K.Road,                         K C Marg, Bandra (W),
Mumbai-400020                     Mumbai-400050
    ( /Appellant)             ..  (  / Respondent)



               ./I.T.A. No3286/Mum/2013
            (   / Assessment Year : 2009-10)
M/s Kaya Ltd.,                / Income Tax Officer 9(2)(2),
Second floor,                 Vs. Room No.225,
Rangsharda,                       Aayakar Bhavan,
K C Marg, Bandra (W),             M.K.Road,
Mumbai-400050                     Mumbai-400020
    ( /Appellant)             ..  (  / Respondent)

        . /   . /PAN/GIR No. :AACCK1045L



          / Appellant by             Ms.Padmaja
             /Respondent by          Shri Nitesh Joshi



             / Date of Hearing
                                             :2.1.2015
            /Date of Pronouncement :4.3.2015
                                         2                 ITA. No.3175/Mum/2013 &
                                                                     3286/Mum/2013



                               / O R D E R

Per B.R.BASKARAN, Accountant Member:

      These cross appeals are directed against the order dated 05-02-
2013 passed by Ld CIT(A)-20, Mumbai and they relate to the assessment
year 2009-10.

2.    The assessee is in appeal in respect of the following issues:-
       (a) Whether the expenditure incurred on advertisement and Sales
       Promotion is Capital or revenue in nature?

       (b) Whether the unaccounted service income of Rs.18.81 crores
       made by the AO was rightly upheld by Ld CIT(A)?

3.    The revenue is in appeal in respect of the following issues:-
       (a) Whether the Ld CIT(A) is justified in allowing depreciation on
       "Advertisement and Sales Promotion Expenses" treating the same
       as acquisition of intangible rights, instead of treating it as "Deferred
       revenue expenditure".

       (b) Whether the Ld CIT(A) was justified in allowing depreciation on
       pre-operative expenses claimed to have been incurred on setting
       up of new branches.

       (c)    Whether the Ld CIT(A) was justified in deleting the
       disallowance made u/s 40A(3) of the Act.

4.   The first issue in both the parties' appeal arise out of common issue.
The assessee company is engaged in the business of providing skin care
and weight management services. It also sells skin care products. It has
established branches all over the country by name "Kaya Skin Clinics" and
"Kaya Life Centres". The assessee claimed expenditure under the head
"Advertising & Sales Promotion" to the tune of Rs.17.10 crores. The AO
took the view that the assessee has incurred this expenditure only to build
its own brand, which will give enduring benefit to the assessee.
Accordingly the AO took the view that the expenditure incurred by the
assessee   should   be   treated    as       "deferred   revenue   expenditure".
                                      3                 ITA. No.3175/Mum/2013 &
                                                                  3286/Mum/2013


Accordingly, the AO allowed 20% of the expenditure and, however,
disallowed the balance amount i.e., Rs.13.68 crores as Capital expenditure
incurred towards intangible assets "Kaya skin clinic" (i.e.,brand building).

5.    The Ld CIT(A) also took the view that the expenses incurred by the
assessee are not purely towards advertising its products and services, but
they have been incurred for expanding the business base by launching
new clinics and propagating brand name "Kaya Skin clinics". He further
observed that, in every clinic centre, there is a big glow sign board
displaying advertisement of Kaya Skin Clinics, which means the brand
name is being advertised and not the latent feature of services.
Accordingly he held that the assessing officer has rightly pointed out the
fact that, basically, the assessee promotes the brand name instead of
services and products. It was seen that the assessee has been promoting
its brand name through its brand ambassador, being a model named
"Riddhhima Kapoor" and hence the Ld CIT(A) held that the assessee has
only promoted the brand as its business strategy. He also took the view
that the big glow sign board displaying the name of "Kaya Skin Clinic"
cannot be presumed to be having temporary benefits. Accordingly, the Ld
CIT(A) held that the assessing officer was right in holding that the publicity
is nothing but brand development involving enduring benefit to the
assessee.   Accordingly he held that the expenditure incurred on brand
building is to be considered as Capital Expenditure.

6.    Since the Ld CIT(A) held the advertisement expenses have been
incurred towards Brand building and the same constitutes Capital
expenditure, he also held that the same constitutes intangible asset
eligible for depreciation @ 25%. Accordingly he directed the AO to allow
depreciation @ 25%.

7.    The main submission of the assessee was that it was required to
incur advertisement and sales promotion expenses continuously every
                                      4                 ITA. No.3175/Mum/2013 &
                                                                  3286/Mum/2013


year.    He further submitted that the assessee has been incurring the
expenditure on advertisement and sales promotion since its inception, i.e.,
since the assessment year 2004-05 onwards. He further submitted that
the expenditure incurred in AY 2004-05 constituted 41.63% of the
turnover, whereas during the year under consideration, it has come down
to 18.05%. The Ld A.R also invited our attention to a table, wherein the
assessee had analysed the percentage of advertisement expenditure over
the amount of turnover from AY 2004-05 to 2014-15.                He further
submitted that the concept of deferred revenue expenditure is not
applicable while computing the total income under the Income tax Act, as
held by the Hon'ble Supreme Court in the case of Madras Industrial
Investment Corporation Ltd Vs. CIT reported in 225 ITR 802(SC). He
further submitted that the tax authorities are not correct in presuming that
the advertisement expenses incurred by the assessee has resulted in
brand building, since the result of advertisement could not be measured in
a scientific manner. He further submitted that there is uncertainty over
the period for which the said advertisement programme shall have effect.
The Ld A.R also furnished following contentions in the written submissions
given to us:-

        "(a) The Assessee submits that the expenditure on advertisement
        and sales promotion incurred by it is revenue in nature and has
        been incurred in the ordinary course of its business. The expenditure
        has been incurred towards advertisements of the services offered by
        it in TV, Radio, print media and art work charges etc. A bare perusal
        of the sample advertisements placed at pages 135 to 137 of the
        Paper Book and sample invoices at pages 123 to 134 shows that the
        advertisements are focused towards promotion of the services
        relating to skin treatment and weight management provided by the
        Assessee. Further, no enduring benefit is derived from such
        advertisements as such expenditure has to be incurred on a regular
        basis year after year.

        (b) The expenditure on advertisement and sales promotion is
        not for the purposes of creation of any brand name as:
                               5                 ITA. No.3175/Mum/2013 &
                                                           3286/Mum/2013





       (i)    the Assessee's brand has already been created in the
       earlier years as, as at 3 1.03.2009 it had Kaya Skin Clinics
       functioning at 74 locations and Kaya Life Centres at 4
       locations in India. Further, for the year under consideration
       its turnover from business stood at Rs. 118.37 crores. It has
       a customer base of over 50,000.

       (ii)   the matter of the advertisement is the service
       rendered by the Assessee and not brand creation (see
       sample advertisements at pages 135 to 137 of the paper
       book) and audio visual clip of an advertisement on the
       television separately provided on a CD after the hearing on
       04.08.2014;

       (iii)  appointment of a brand ambassador for advertising its
       products and services does not mean that the nature of the
       expenditure incurred is for creation of brand. Brand
       ambassador is chosen because of her beauty and skin which
       co-relates to the assessee's business.

       (iv) displaying the glow sign board Kaya Skin Clinic outside
       its outlet does not lead to the conclusion that the Assessee is
       creating the brand name;

       (v)   advertisement and sales promotion exercise provides a
       stimulus to the potential customer to buy services and
       products offered by the Assessee. However, the
       advertisement may fail to induce the desired behaviour and,
       hence, it is appropriate to charge the same off as revenue
       expenditure.

       (vi) Salt Brand Solutions was appointed for the purposes of
       expanding the awareness amongst the people of the services
       being offered by the Assessee. Engaging such services cannot
       be regarded as creation of brand image. In any event, the
       services of Salt Brand Solutions were engaged in May, 2011
       and have no relevance to the year under consideration.

(c) Assuming without admitting that benefit resulting from the
advertisement and sales promotion expenses endures over a period
beyond one year, the Assessee submits that the period of such
benefit cannot be ascertained. Therefore, deduction
f o r expenditure cannot be spread over a number of years. It
is an admitted position that expenditure on advertisement
                                           6                   ITA. No.3175/Mum/2013 &
                                                                         3286/Mum/2013


     and sales promotion is revenue in nature. In the grounds of
     appeal filed by t h e R e v e n u e b e f o r e t h e T r i b u na l t h e y a r e
     u r g i ng t h a t t h e expenditure should be spread over and
     not depreciated as a capital asset. Once, it is accepted that
     the expenditure is revenue in nature it is well settled, in as far
     as income-tax is concerned, that there is no concept of deferred
     revenue expenditure (see CIT v. Casio India Ltd. 335 ITR 196 (Del.),
     CIT v. Citi Financial Consumer Finance Ltd. 335 ITR 29 (Del.),
     Hindustan Commercial Bank Ltd., In re 21 ITR 353 (All.) and DCIT
     v. Core Healthcare Ltd. 308 ITR 263 (Guj.). In any event, such
     expenditure cannot be deferred as the period for which the
     benefit may flow is not ascertainable. It is also possible that the
     advertisement may fail to have the desired result.


     (d) Assuming without admitting that the expenditure on
     advertisement and sales promotion is for the purposes of creation of
     brand name the Assessee submits that in view of the following
     decisions such expenditure even on creation of brand name has to be
     allowed as a revenue deduction.

              Asian Paints Ltd. vs. Addl. CIT [(Mumbai ITAT)
              ITA 7801/MUM/2010]
               Fine Jewellery (I) Ltd. vs. ACIT [(Mumbai ITAT) 19 ITR 746]
              ACIT vs. Warner Lambert India Ltd. [(Mumbai ITAT)
              ITA 954 & 3063/Mum/2006]
              ITO vs. Spice Communications Ltd. [(Delhi ITAT)
              35 SOT 78]CIT v. Modi Revlon Pvt. Ltd. 78 DTR 342 (Del.)

     (e) If it is held that expenditure incurred by the Assessee on
     advertisement and sales promotion is to be regarded as capital in
     nature, then, the Assessee submits that, the CIT(A) has rightly
     treated it as a depreciable asset and allowed depreciation on the
     same.

8.    During the course of hearing, the Ld A.R also placed reliance on the
following case law:-
              (a) ITO Vs. Spice Communication (35 SOT 78)(Delhi)
              (b) CIT Vs. Geoffrey Manner and Co. Ltd (315 ITR 134)(Bom)
              (c) Warner Lamber India (ITA No.954 & 3063/Mum/2006)
              (d) Asian Paints Ltd (2013)(37 CCH 177)(Mum)
              (e) Fine Jewellery (56 SOT 220)(Mum)
                                        7                ITA. No.3175/Mum/2013 &
                                                                   3286/Mum/2013




9.       On the contrary, the Ld D.R submitted that the "brand name" is an
intangible asset and the said view finds support from AS-26, i.e., the
accounting standard issued by the Institute of Chartered Accountants of
India.    He further submitted that the assessee has advertised only the
name "Kaya Skin care clinic" and not any particular product/service and
hence the Ld CIT(A) was justified in upholding the view taken by the AO
that the assessee has incurred advertisement expenses towards brand
building only. He further submitted that the brand shall have enduring
benefit to the assessee. He also submitted that the assessee has engaged
a "Brand ambassador" to market its brand "Kaya Skin clinic". He further
submitted that the case law relied upon by the assessee are
distinguishable and hence the ratio of those decisions is not applicable to
the facts of the instant case.

10.      We heard the parties and perused the record. Before us, the Ld A.R
placed reliance on the decision rendered by Delhi bench of ITAT in the
case of Spice Communication (supra).         The head notes given for that
decision reads as under:-

      "Business expenditure--Capital or revenue expenditure--
      Advertising and sales promotion expenditure--Expenditure
      incurred partly towards brand building in brand building and,
      hence, an acquisition of an intangible asset--AO adding 10 per
      cent of the expenditure, i.e., Rs. 3,50,50,300 to the income of
      the assessee on account of disallowance which is of capital
      nature as being relatable to brand building--Assessee has not
      acquired any brand from any outside party--No justification
      for the addition

      Held :

      It is not in dispute that the assessee is in the business of providing
      cellular mobile services under its own self-generated brand "Spice"
      since 1997. The assessee's business of providing cellular mobile
      services is undoubtedly a highly competitive business, and assessee
      has to provide services in a competitive environment. This is also not in
                                         8                 ITA. No.3175/Mum/2013 &
                                                                     3286/Mum/2013


      dispute that the assessee has incurred expenditure towards
      advertisement and sales promotion in course of carrying on its
      business activities. The AO has allowed 90 per cent of the expenses as
      revenue expenditure and allocated 10 per cent towards capital by
      observing that 10 per cent of expenses have been incurred towards
      brand building. The AO has not been able to justify as to how the 10
      per cent of the total advertisement and sales promotion expenses can
      be allocated towards capital expenditure when the assessee has not
      acquired any brand from any outside party. The expenditure on
      advertisement and sales promotion constituted expenditure incurred on
      press advertisement, hoardings, neon signs, brochures, etc. The press
      advertisements could not be considered as capital asset acquired by
      the assessee. Similarly, putting hoardings and neon signs could not
      also be considered on capital field. These expenditures do not lead to
      create any capital asset to the assessee. Even there is no benefit of
      enduring nature so to treat the expenses as capital expenditure. Since
      by incurring expenditure on advertisement and sales promotion, the
      assessee has not acquired any fixed capital asset, but these
      expenditures were incurred for earning better profits, and for
      facilitating assessee's operation of providing cellular mobile services,
      there exist direct nexus between the advertisement and sales
      promotion expenses and the carrying out of the business activity of the
      assessee. There is not any justification in interfering with the order of
      the CIT(A) in deleting the disallowance of 10 per cent of expenses
      towards advertisements and sales promotion incurred by the assessee
      for smooth functioning and carrying on assessee's business effectively,
      proficiently and profitability. The order of the CIT(A) is, thus, upheld on
      this issue."

Though the Ld D.R tried to distinguish this decision by submitting that the
AO, therein, had taken only 10% of the expenses in the Capital field, yet
we are of the view, the ratio of the above said decision squarely applies to
the instant case.

11.      It is also pertinent to note that the Hon'ble jurisdictional Bombay
High Court in the case of Geoffrey Manner and Co. Ltd (supra) has laid
down the following ratio to determine the nature of advertisement
expenses:-
      "5. In our opinion the correct test to be applied in such a case would
      be, that if the expenditure is in respect of an ongoing business of the
      assessee and there is no enduring benefit it can be treated as revenue
                                        9                 ITA. No.3175/Mum/2013 &
                                                                    3286/Mum/2013


      expenditure. If, however, and if it is in respect of business which is yet
      to commence then the same cannot be treated as revenue expenditure
      as expenditure is on a product yet to be marketed. Considering the
      above, in our opinion the judgment in Patel International Film Ltd.
      (supra) is clearly distinguishable. The CIT(A) and the Tribunal on the
      facts of this case were clearly within their jurisdiction in holding that
      the expenditure was by way of revenue expenditure as it was in
      respect of promoting ongoing products of the assessee herein."


In the instant case, there is no dispute between the parties that the
assessee has started business in AY 2004-05 and hence the expenditure
has been incurred by the assessee for an ongoing business.

12.      The Hon'ble Punjab and Haryana High Court has also considered an
identical issue in the case of CIT Vs. Liberty group marketing division (315
ITR 125) and the ratio of the said decision was followed by the
jurisdictional High Court in the case of Geoffrey Manner & Co. Ltd (supra).
For the sake of convenience, the head notes given by the ITR in the case
of Liberty group marketing division are extracted below:-

      "Business expenditure--Capital or revenue expenditure--
      Advertisement expenditure on glow sign boards--Expenditure
      incurred by the assessee on glow sign boards does not bring
      into existence an asset or advantage for the enduring benefit
      of the business--Glow sign board is not an asset of permanent
      nature but requires frequent replacement--Expenditure on
      glow sign boards is made by assessee with an object to
      facilitate the business operation--Hence, expenditure is
      allowable revenue expenditure

      Held :

      The expenditure incurred by the assessee on glow sign boards does
      not bring into 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 of permanent nature. It has a short life. The
      materials used in the glow sign boards decay with the effect of
      weather. Therefore, it requires frequent replacement. The Tribunal has
      also recorded a finding that the assessee has to incur expenditure on
      glow sign boards regularly in almost each year. This fact itself shows
                                      10               ITA. No.3175/Mum/2013 &
                                                                 3286/Mum/2013


      that the advantage accrued from the use of the glow sign boards is not
      of enduring nature. Thus, the expenditure by the assessee on these
      glow sign boards did not bring into existence any asset or advantage
      for the enduring benefit of the business. The assessee has spent the
      expenditure on the glow sign boards with an object to facilitate the
      business operation and not with an object to acquire asset of enduring
      nature. Therefore, the said expenditure was of revenue nature and the
      Tribunal has rightly treated the same as of revenue nature.--CIT vs.
      Madras Auto Service (P) Ltd. (1998) 148 CTR (SC) 398 : (1998) 233
      ITR 468 (SC) applied."

13.     In all the above said cases, it has been held that the expenditure
incurred in order to facilitate the business operation and not with the
object of acquiring asset of enduring nature is allowable as revenue
expenditure. In the instant case, we have already seen that the assessee
has been incurring expenditure and sales promotion since AY 2004-05,
meaning thereby, the assessee was required to incur those expenses every
year in order to retain its position in the market. There should not be any
dispute that the assessee is conducting its business in a competitive
environment. Further, there is merit in the submission of Ld A.R that it is
difficult to assess the period of benefit derived from advertisement and
further it is also difficult to ascertain as to whether any "brand name" was
created. Hence, we are of the view that the Ld CIT(A) was not correct in
law in holding that the assessee has spent the expenditure on
advertisement and sales promotion for brand building purpose.         In our
view, the assessee was right in law in claiming this expenditure as revenue
expenditure.    Accordingly, we set aside the order of Ld CIT(A) on this
issue and direct the AO to allow the entire amount spent on advertisement
and sales promotion as revenue expenditure.

14.     Since we have upheld the view of the assessee, the examination of
the questions as to whether the same constitutes "deferred revenue
expenditure" or "Capital asset, being intangible asset eligible for
depreciation" do not arise.
                                    11                 ITA. No.3175/Mum/2013 &
                                                                 3286/Mum/2013




15.   The next urged by the assessee relates to the assessment of
unaccounted service income of Rs.18.81 crores. The AO noticed that the
assessee has been consuming its own products (captive consumption)
while providing services to its clients. Hence, the AO ascertained the ratio
of captive consumption with the service charges income generated by it.
In the immediately preceding year, the service income shown by the
assessee was 3100 times of the value of captive consumption, whereas
during the year under consideration it was only 2614 times. Hence, the
AO computed the service charges income of the instant year at 3100 times
of the captive consumption at Rs.119.86 crores.         The assessee had
declared the service charges income at Rs.101.05 crores. Hence the AO
treated the difference amount of Rs.18.81 crores as unaccounted income
of the assessee. The Ld CIT(A) also confirmed the said addition.




16.   The Ld A.R submitted that the assessee is providing 562 different
types of services using different types of its products.         He further
submitted that the assessee is manufacturing 48 types of products and the
cost of items range from Rs.5/-per unit to Rs.930/- per unit. The service
charges collected would depend upon types of services rendered and the
also the types of products used. The type of treatment to be given to a
client would also depend upon the skin characteristics. He further
submitted there is no standard "Bill of material" as normally available with
the manufacturing concerns. Accordingly he submitted that there is no
one to one correlation between the quantity of items of beauty care
products consumed and the services rendered by the assessee. He also
submitted that the assessee is having adequate internal controls and
checks in place on the consumption of materials and booking of service
income, since all the clinics are following detailed standard procedures
right from contacting the client till the completion of the treatment. He
further submitted that the assessee is generating adequate documentation
                                    12                 ITA. No.3175/Mum/2013 &
                                                                 3286/Mum/2013


at each stage and hence there is no scope for suppression of income. He
further submitted that the assessee, as a part of its sales promotion
scheme, would offer certain free and discounted services scheme. Such
types of schemes would also consume beauty products and the same
would not result in receipt of service charges. Accordingly, he submitted
that the tax authorities are not justified in presuming that the service
charges income are directly proportional to the cost of captive
consumption of beauty materials.

17.   The Ld D.R, on the contrary, submitted that the service income
reported by the assessee during the current year was lower in proportion
than that disclosed in the immediately preceding year. He submitted that
the assessee could not properly explain the said difference and hence the
Ld CIT(A) was justified in confirming the addition made in the service
income.

18.   We have heard the rival contentions and perused the record. The
main contention of the assessee is that the consumption of materials
would depend upon the types of services offered, i.e, the product mix
would depend upon the type of service. Thus, according to the assessee,
the captive consumption of materials cannot be at standard proportion of
service income receipts. Another submission made was that the assessee
has offered discounts and free trials during the year under consideration.
However, the Ld CIT(A) has observed that the assessee has not
substantiated its claim of discounts and free trials. Further the AO has
pointed out that the invoices were not signed or authenticated by any of
the clients and hence those vouchers were self serving invoices.            It
appears that the assessee has claimed that it is having quantitative details
for captive consumption. However, the Ld CIT(A) has observed as under
in this regard:-
                                       13                 ITA. No.3175/Mum/2013 &
                                                                    3286/Mum/2013


      "Further I find no force in the argument that there is quantitative
      details of captive consumption because there is no details on record
      which can be one to one correlated. When there is complete failure on
      the part of the assessee to correlate the consumption with receipts,
      there is no propriety to claim that there is opening balance, production,
      purchase, sale and closing stock."

During the course of appellate proceedings before Ld CIT(A), it appears
that the assessee has furnished details of 17 types of services (claimed to
be major services). However, the Ld CIT(A) has taken the view that the
furnishing of details of 17 services out of 562 services cannot explain the
difference in receipts.

19.     However, we are of the view that there appears to be some merit in
the contentions of the assessee.            Normally the service receipts are
determined on the basis of Fixed costs, variable costs and profit element.
The material cost would fall in the category of variable costs. Accordingly,
the cost of particular service would normally be determined at Fixed cost +
Variable cost + Profit amount. Hence, comparison of the variable cost to
the total service receipts, in our view, may not be right method of
approaching issue. Further, when the assessee is offering 562 types of
services and since there is a possibility that one unit of product shall be
used to many clients, it would also be difficult to establish one to one
correlation between the consumption and the service receipt. Hence the
rejection of books of account and consequent estimate of income under
these set of facts, in our view, is not justified. On the contrary, the claim
of captive consumption needs to be examined on an overall basis, i.e., by
making test checks.

20.     The assessee has claimed to have maintained quantity details of
various products. Hence, on a test check basis, the said details can be
verified and a decision can be taken. Hence, we are of the view that this
issue needs to be restored to the file of the AO with the direction to
                                     14                ITA. No.3175/Mum/2013 &
                                                                 3286/Mum/2013


examine the claim of captive consumption. Accordingly, we set aside the
order of Ld CIT(A) on this issue and restore this issue to the file of the AO
with the direction to examine the claim of captive consumption on a test
check basis and take appropriate decision in accordance with the law.

21.   The next issue urged by the revenue relates to the eligibility of the
assessee to claim depreciation on the pre-operative expenses. During the
year under consideration, the assessee had capitalized expenses to the
tune of Rs.2.23 crores and claimed depreciation thereon.           The said
expenditure consisted of rent, audit fee, salary, professional fees, travel,
designing etc. The AO took the view that these expenses neither form
part of assets nor they can, per se, be considered to be fixed asset.
Accordingly he disallowed the depreciation claimed by the assessee. The
Ld CIT(A), however, allowed the depreciation.       Hence, the revenue is
aggrieved by his decision.


22.   We heard the parties on this issue and perused the record. The Ld
CIT(A) has allowed the claim of the assessee with the following
observations:-
      "6.3 I have considered the finding of the AO and rival submission
      of the appellant carefully. I find that AO has wrongly disallowed
      depreciation without any valid reasons when it is establish that there
      is some expenditure which are preoperative expenses then same
      are to be amortized or it has to be capitalized in respective assets.
      AO has not proved beyond doubt as to how such expenses are not
      related to acquisition of such assets. There is no proper reasoning in
      para 7.4 of the assessment order hence same can not be upheld.
      On the contrary, Ld. AR has rightly argued that such expenses are
      attributable to the cost of bringing the assets to its working
      condition for its use. The reliance placed in the cases of Challapalli
      Sugars Ltd. v. CIT 98 ITR 167(SC). Gujarat High Court in Arvind
      Mills Ltd. v. CIT 112 ITR 64(Guj) Bombay High Court in CIT v.
      Polychem ltd. 98 ITR 574 (Bom), CIT V/s Nirlon Synthetic Fibres &
      Chemicals Ltd 137 ITR 1 (Bom) and CIT V/s J.M.A. Industries Ltd
      129 ITR 373( Delhi) supports the contention of the appellant. If such
      expenditure is not to be capitalized then it would be allowed as
                                      15                 ITA. No.3175/Mum/2013 &
                                                                   3286/Mum/2013


      revenue expenditure. AO has not clarified as to how these are not
      genuine expenditure, therefore the finding of the AO is without any
      leg. Thus, considering the facts of the case AO is directed to allow
      the depreciation on various expenses after capitalizing the same to
      be appropriate account of assets. In view of these the alternative
      grounds become infructuous."

On perusal of the order of Ld CIT(A) on this issue, we notice that the first
appellate authority has followed the decision of Hon'ble Supreme Court
rendered in the case of Challapalli Sugars Ltd (supra). Accordingly, we do
not find any infirmity in the decision of Ld CIT(A) on this issue.


23.   The next issue urged by the revenue relates to the disallowance
made u/s 40A(3) of the Act. The AO noticed that the assessee's sister
concern named M/s Marico Ltd had incurred certain expenses on behalf of
the assessee herein.     Accordingly, the assessee had accounted for the
expenses by crediting the account of M/s Marico Ltd, i.e., through Journal
entries. The AO took the view the expenditure incurred through Journal
entries does not fall in any of the exemptions provided under Rule 6DD of
the IT Rules. He further observed that the assessee has not proved that
M/s Marico Ltd had incurred expenses otherwise than the account payee
cheques or through demand drafts or RTGS. Accordingly, he disallowed
the expenses incurred under the head "seconded employees" amounting
to Rs.8.44 crores and "Other expenses" amounting to Rs.44.98 lakhs, by
invoking the provisions of sec. 40A(3) of the Act. The Ld CIT(A) however,
directed the AO to delete the disallowance of expenditure u/s 40A(3) of
the Act. The revenue is aggrieved by his decision.


24.   We heard the parties and perused the record. The total addition
made by the assessing officer was Rs.8.89 crores.           According to the
assessee, there was totaling error of Rs.1.08 crores and further a sum of
Rs.2.00 crore was loan transaction.         Thus, the remaining expenses
                                       16                   ITA. No.3175/Mum/2013 &
                                                                      3286/Mum/2013


incurred by M/s Marico Ltd on behalf of the assessee were claimed to be
as given below:-
                  On account of general expenses                       44,98,450
                  On account of secondment employees                 5,35,53,850
According to Ld CIT(A), the salary was given to the employees by direct
credit to their bank accounts. However, the Ld CIT(A) did not refer to any
material in support of this conclusion. He has further expressed the view
that the payments made through Journal vouchers are not hit by the
provisions of sec. 40A(3) of the Act. We are unable to accept the said
view. When Marico Ltd was incurring expenses on behalf of the assessee,
it is required to comply with the provisions of sec. 40A(3) of the Act.
Otherwise, the assessee is required to show that the payments are
covered by the exceptions given in Rule 6DD of IT Rules.                Since the
assessee has claimed that M/s Marico Ltd has incurred expenses through
cheque payments wherever necessary, including the salary payment made
to seconded employees, we are of the view this issue requires fresh
examination at the end of the assessing officer. Accordingly, we set aside
the order of Ld CIT(A) on this issue and restore the same to the file of the
assessing officer for fresh examination.

25.        In the result, the appeal of the assessee is treated as allowed and
the appeal of the revenue is treated as partly allowed.


      The above order was pronounced in the open court on 4th Mar, 2015.



            4th Mar, 2015    

      sd                                               sd
(  / VIVEK VARMA)                           ( ..  / B.R. BASKARAN)
     / JUDICIAL MEMBER                      / ACCOUNTANT MEMBER

  Mumbai:4th Mar,2015.

                          17        ITA. No.3175/Mum/2013 &
                                              3286/Mum/2013




. ../ SRL , Sr. PS

        /Copy of the Order forwarded to :
1.  / The Appellant
2.  / The Respondent.
3.    () / The CIT(A)- concerned
4.      / CIT concerned
5.      ,     ,  /
     DR, ITAT, Mumbai concerned
6.     / Guard file.
                                      / BY ORDER,
          true copy
                                 (Asstt. Registrar)
                              ,   /ITAT, Mumbai

 
 
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