TaxTMI 
TaxTMI 
2005 (7) TMI 287
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.... 3. The facts giving rise to levy of penalty are as follows: (1) The assessee-company was in business of purchase of frozen marine products and yellow soyabeen during the financial year and in addition providing composite services, management services, etc. for which it was receiving fee from the constituents during the earlier financial year as well as in the current year, as reflected from Sch. 15 'service charges received' showing services of Rs. 4,60,26,931 and Rs. 4,78,41,850 received during the earlier financial year and current year, respectively. The corresponding figures of export sales were Rs. 6,98,44,880 and nil. Thus, it seems that one of business, i.e., export sales was not operative during this year. In addition, the assessee was also deriving dividend income. During this year, i.e., the period relevant to asst. yr. 1998-99, the assessee purchased rights, titles and ownership of two magazines/periodicals namely 'Chemical products finder' and 'Indian architect and builders' owned by M/s Pan Music & Magazines Ltd. (for short 'PMM'), for which an agreement was entered into between the assessee and PMM on 15th Oct., 1997. As per t....
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..... The AO, however, did not agree and by giving a finding, as under, made the addition of Rs. 2,15,00,000 in the total income of the assessee. "8. I have considered the submissions of the Authorised Representative and found that they are not acceptable. The assessee paid the consideration mainly for acquiring the titles of the monthly journals viz., Chemical Product Finder and Indian Architect and Builder. There was no transfer of technical know-how involved in the process of acquisition of the above title. It is only incidental that the existing subscribers of the journals and the advertisers transferred to the assessee-company. The transfer of employees to the assessee-company is only incidental. There is no binding obligation on the part of the subscribers, advertisers and the employees to remain with the assessee after transfer of the title to the assessee. So essentially what is paid towards consideration is mainly for the purpose of acquiring the titles of the above two journals. In a way the assessee acquired trademark or the copyright of the above journals and the assessee is squarely covered by the provisions of s. 35A of the IT Act. 9. The consideration p....
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....th Jan., 2001 written by the AO to the appellant calling for certain information in which the AO has acknowledged that in the return an amount of Rs. 2,15,00,000 has been claimed as incurred towards purchase of publishing rights of journal as revenue expenditure. It is a different matter that in the assessment order as well as in the penalty order the AO has not mentioned this fact creating an impression as if the fact of the expenditure of Rs. 2,15,00,000 has been discovered by the AO during the assessment proceedings. This being so, it is clear that the AO did not make any fresh discovery and what has been discussed in the assessment order was only a different interpretation of the claim made by the appellant. 3.5 While discussing the facts of the case in the detailed penalty order under s. 271(1)(c) the AO has dealt with the issue in sufficient detail. However, what has actually emerged from this discussion in the penalty order is that the consideration paid for acquiring the title for the journals is not revenue expenditure as claimed by the appellant but is a purchase of goodwill, in the nature of capital expenditure and, therefore, covered under the provisions of s. ....
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....f the assessee to make a full and true disclosure. Had the assessment not made under s. 143(3) by issuing notice under s. 143(2), the AO would not have known the true nature of the claim. To dub the expenditure as made for know-how so as to cover the same under the decision in Alembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC) and CIT vs. Aquapump Industries (1996) 132 CTR (Mad) 506 : (1996) 218 ITR 427 (Mad) is misleading and tantamount to filing inaccurate particulars of the claim. Further according to learned Departmental Representative question of two opinions does not arise as the disallowance of the claim was accepted by the assessee as no appeal was filed. Had the assessee declared in the return that he has made payment for purchase of title and the entire running business, the question of claim as revenue expenditure would not have arisen as it was clearly a capital expenditure. According to learned Departmental Representative, the case of the assessee is squarely covered by Expln. 1 to s. 271(1)(c), as the assessee's claim of expenditure as revenue was not bona fide. He clearly wanted to get away under s. 143(1) by showing the paymen....
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....use of saving money from litigation and not for the reason that that assessee did not have a case. The learned counsel for the assessee also relied on the decision of Tribunal in Rupam Mercantile Ltd. vs. Dy. CIT (2004) 85 TTJ (Ahd)(TM) 609 : (2004) 91 ITD 237 (Ahd)(TM). 6. In his rejoinder, the learned Departmental Representative submitted that if assessee's case was covered by the decision of Hon'ble Supreme Court in Alembic Chemical Works Co. Ltd.'s case, then it was more prudent for him to fight out. The fact that no appeal was preferred even before the CIT(A) shows that the decision of Hon'ble Supreme Court was not at all applicable on the facts of the case. The learned Departmental Representative reiterated that note given in the computation sheet of income was misleading and was not bona fide. The assessee wanted, by giving inaccurate particulars by way of note, to get his return accepted under s. 143(1). The fact that issue was not contested shows that there was no debate and no debatable issue was existing. 7. We have heard the rival submissions and considered the facts and materials on record. The main issues involved in this case are: (i) w....
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....Ex gratia 3,02,661 Employers and employees contribution to PF/Pension 1,06,361 Employers and Employees contribution of ESIC 14,102 Municipal tax Baroda 54,845 Purchase tax 5,484 Provision for gratuity 90,987 Publication Expenses considered separately 71,66,667 1,26,02,040 1,10,32,236 Less: Expenditure of publication rights (refer note: 5) 2,15,00,000 (1,04,67,764) 12. The balance sum of Rs. 1,43,33,333 was taken in the balance-sheet under the head 'Miscellaneous expenditure' (and became part of Rs. 1,43,69,161) stating this sum as 'deferred revenue expenditure'. Thus, after adding the said sum, the assessee claimed in the computation of income, entire sum of Rs. 2.15 crores as revenue expenditure in the year under consideration. 13. Now let us examine whether the claim of the assessee that entire expenditure be allowed in one year is in any way supported by the decisions relied upon by the assessee. In Alembic Chemical Works Co. Ltd.'s case, the proposition laid down by t....
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....in the place of the old process and old plant. On a reference, the High Court held that the sum of Rs. 2,39,625 was not a revenue expenditure. On appeal to the Supreme Court: Held, reversing the decision of the High Court, (i) that there was no material before the Tribunal to come to the finding that the appellant had obtained under the agreement a 'completely new plant' with a completely new process and a completely new technical know-how from Meiji. The business of the appellant from the commencement of its plant in 1961 was the manufacture of penicillin. Even after the agreement, the product continued to be penicillin and the agreement with Meiji stipulated the supply of the 'most suitable sub-cultures' evolved by Meiji for purposes of augmentation of the yield of penicillin. (ii) That there was no material for the Tribunal to hold that the area of improvisation was not a part of the existing business or that the entire gamut of the existing manufacturing operations for the commercial production of penicillin in the appellant's existing plant had become obsolete or inappropriate in relation to the exploitation of the new subcultures of the h....
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.... any clear line of demaraction. However, some broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might reasonably be held to fall. These tests are generally efficacious and serve as useful servants; but as masters they tend to be over-exacting.' (iii) 'The question in each case would necessarily be whether the tests relevant and significant in one set of circumstances are relevant and significant in the case on hand also. Judicial metaphors are narrowly to be watched, for, starting as devices to liberate thought, they end often by enslaving it.' The idea of 'once for all' payment and 'enduring benefit' are not to be treated as something akin to statutory conditions; nor are the notions of 'capital' or 'revenue' a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs to be flexible so as to respond to the changing economic realities of business. The expression 'asset or advantage of an enduring nature' was evolved to emphasise the element of a sufficient degree of durability approp....
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....s Co. Ltd. (1999) 155 CTR (Mad) 192 : (2000) 242 ITR 150 (Mad). On the other hand, if there was an initial contribution by way of purchasing technical know-how, the amount attributable to such know-how as initial contribution would not be an expenditure much less a revenue expenditure under s. 37(1). It is so held in Eimco KCP Ltd. vs. CIT (2000) 159 CTR (SC) 137 : (2000) 242 ITR 659 (SC). While making the claim of entire sum as revenue expenditure, the assessee had also relied on the decision in CIT vs. Aquapump Industries. In this case, facts and the decision of Hon'ble Madras High Court are as under: "There is no single definitive criterion which, by itself, is determinative as to whether a particular expenditure is capital or revenue. The "once for all" payment test is also inconclusive. What is relevant is the purpose of the expenditure and its intended object and effect, considered in a commonsense way having regard to business realities. In a given case, the test of "enduring benefit" might break down. Expenditure to acquire knowledge cannot be disallowed merely because knowledge dies hard. It is only where the expenditure bears on the fixed capital or other cap....
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.... purchaser the said title as described above while the purchaser have agreed to purchase the said title from the seller and use the title and the information in the course of its business on the terms and conditions hereinafter appearing. Now this MoU witnesseth and it is hereby agreed, recorded, confirmed and acknowledged by and between the parties as under: The buyer agrees to purchase and the seller agrees to sell the said title for a price aggregating Rs. 15 lakhs (Rupees fifteen lakhs only) (shall hereinafter be called the "purchase price"), free from all charges, liens and encumbrances, together with all rights and benefits attached thereto w.e.f all charges, liens and encumbrances, together with all rights and benefits attached thereto w.e.f. first day of November, 1977. The total purchase price shall be paid for the use of the title for publishing this journal and to provide the technical knowledge and information for publishing the same with the right to get existing subscribers and advertisers of the journal and for running of the existing business. The purchaser shall pay to the seller the total purchase price for the purchase of the t....
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....es relating to the said titles would be absorbed by the buyer after the mid-night of 31st Oct., 1997 at the gross remuneration as detailed in Sch. II. The buyer reserves the right to re-designate such employees having regard to their existing organisation and are free to assign duties as per their requirement. The buyer would not be responsible for any financial liabilities of the employees pertaining to the period prior to mid-night of 31st Oct, 1997. (h) The seller would enter into a rental contract with the buyer with regard to space occupied by the employees related to the titles being transferred at the same terms and conditions, which are presently enjoyed by the title, The contract would be renewed at the end of three years from the date hereof subject to mutual consent with a 15 per cent increase in the rental terms. The seller states that there are no disputed/pending liabilities with regard to said titles prior to the date hereof and undertakes to indemnify the buyer all liabilities, which may arise with regard to the said title pertaining to prior period to the date hereof. The seller would be responsible for the publication of the title for th....
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....e of the expenditure that is relevant and not the description given to it by the assessee in his books of account or other documents. (ii) CIT vs. Madras Auto Service (P) Ltd. (1998) 148 CTR (SC) 398 : (1998) 233 ITR 468 (SC) The general principles applicable in determining whether a particular expenditure is capital or revenue expenditure are as follows: (1) Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment; (2) Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether; (3) Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what....
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.... the previous year. The appellant-assessee was a company registered under the Indian Companies Act. It was incorporated in the year 1965. Two companies, Eimco, an American company, and K.C.P. Ltd., an Indian company, promoted the appellant-company. The authorised capital of the appellant was Rs. 1,00,00,000 consisting of 10,00,000 equity shares of Rs. 10 each. Each of them agreed to subscribe Rs. 4,70,000, out of which each would have to pay initially a sum of Rs. 2,80,000 towards its contribution. Towards its share, Eimco contributed technical know-how. It valued the know-how, etc., at a sum of Rs. 2,35,000 and paid the balance in cash as its contribution. The board of directors of the appellant allotted equity shares of Rs. 2,35,000 being the value of the know-how, to Eimco by resolution passed on 29th April, 1968. In the asst. yr. 1969-70, the appellant claimed deduction of Rs. 2,35,000 as revenue expenditure paid to Eimco towards consideration for supply of technical know-how. The ITO treated that amount as a capital expenditure and allowed 1/14th of the said amount as allowable expenditure under s. 35A of the Act. The appellant challenged that order before the AAC on the groun....
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....pinion, and has not been, on the facts of the assessee's case, that expenditure incurred on acquiring a new business, a source of income, an asset and benefit of enduring nature could be revenue in nature. 22. In one of the cases relied upon by the assessee i.e., Rupam Mercantile Ltd. vs. Dy. CIT decided by Third Member, the question involved was whether penalty under s. 271(1)(c) can be imposed where assessee had claimed entire interest expenditure in one year on issue of debentures whereas such expenditure was held to be deferred and allowable in six years, on the basis of decision of Hon'ble Supreme Court in Madras Industrial Investment Corpn. Ltd. vs. CIT (1997) 139 CTR (SC) 555 : (1997) 225 ITR 802 (SC). The assessee contested the case and lost in Tribunal. Penalty was levied for wrong claim for filing inaccurate particulars of income. Hon'ble JM confirmed the penalty but Hon'ble Vice President/AM cancelled the penalty and Hon'ble President as Third Member concurred with Hon'ble Vice President. The penalty was finally cancelled on the basis of facts of that case. The assessee-company in that case had agreed as per contract to give up front discount o....
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....so recognized by the Hon'ble Gujarat High Court by admitting the appeal on substantial question of law. However, in the present case there is no scope of any debate. The assessee did not consider that it has any case for even not filing an appeal before the CIT(A). Merely because an assessee holds a view contrary to establish legal views and decisions, would not lead to the belief that there is also a second opinion possible and assessee had acted bona fide thereon. An opinion based on incorrect application of provisions of the Act or of judicial pronouncements cannot become the basis of claim and deduction and computation of income. If that is so, then correct computation of income and allowance of claims/deduction in accordance with law can only be done when an assessment is undertaken by issue of notice under s. 143(2). The taxpayer will, before that, be at liberty to make claims of allowance and deduction as they think on the basis of opinion they form by incorrect appreciation and application of law and decisions. Such attempts will, if become common, have serious repercussions on the revenue administration. In an environment where legislature has bestowed a faith on the t....
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....claim would have been restricted to one third as per auditor's advice, there could be some semblance of bona fide even though the opinion of the auditors is not according to law as entire expenditure is prima facie disallowable. (c) Even on the basis of the facts declared by the assessee, the expenditure would only be capital as the note below "computation sheet of income" does not show the period and nature and does not indicate that there was an acquisition of absolute rights and not merely use of the right. (d) Facts were shown half and distorted so as to make them appear that they fit into the decisions in Alembic Chemical Works Co. Ltd.'s case and Aquapump Industries' case. Had the note mentioned in the return that it is purchasing a new running business, above decision would not have any application and it could not have been claimed as a revenue expenditure. (e) There is a fair probability that the return would pass through summary assessment. 26. Now let us see, whether the case of the assessee is covered under Explanation to s. 271(1)(c). The section and Explanation read as under: "271.(1) If the Assessing Officer or the C....
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....e, the titles in journals were acquired for use only for limited period and would revert back to the original owner as the facts were in Alembic Chemical Works Co. Ltd.'s case. Had the assessee disclosed that the rights in journal were purchased in perpetuity as absolute owner to the exclusion of previous owner, ratio of Alembic Chemical Works Co. Ltd.'s case could not have been applied. The claim is made on the basis of filing inaccurate particulars and against the advice of the auditors. When full particulars of the claim are brought on record, no debatable issue would arise. No two views were possible and, hence the assessee chose not to contest the treatment that it is a capital expenditure. 29. The assessee had offered an explanation that his claim is covered by decisions of Alembic Chemical Works Co. Ltd.'s case and Aquapump Industries' case. Such explanation is not substantiated during scrutiny assessment inasmuch as he could not prove that the facts of Alembic Chemical Works Co. Ltd.'s case and Aquapump Industries' case are similar to his own case. Secondly, the claim was not found bona fide as mentioned in preceding paras. Further, it is also men....
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....e claim for deduction was not tenable and genuine. Therefore, the assessee could not be said to have reverted the presumption, which arose against it in the light of the Explanation to s. 271(1)(c) of the IT Act, 1961. The penalty for concealment was held to be valid. 33. In CIT vs. Coromandel Indag Products (P) Ltd. (2003) 183 CTR (Mad) 90 : (2004) 265 ITR 611 (Mad) the claim under s. 35(1)(iv) was made which was found to be incorrect, hence, the levy of penalty was justified. 34. In Addl. CIT vs. Jeevan Lal Sah (1994) 117 CTR (SC) 130 : (1994) 205 ITR 244 (SC) on which Revenue has relied in the grounds of appeal, it has been held that burden of proof has been shifted on the assessee to prove that failure to return correct income did not arise from fraud or gross or wilful neglect. In the present case, it cannot be said that the burden is discharged. 35. In CIT vs. Smt. Vilasben Hasmukhlal Shah (1991) 99 CTR (Guj) 151 : (1991) 192 ITR 214 (Guj) it has been held that where an income is shown in Part IV of the return and claimed to be exempt as prize money in cross-word competition, it does not amount to rebutting presumption that assessee furnished inaccurate particulars o....