TaxTMI 
TaxTMI 
2005 (7) TMI 287
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....: (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 this agreement, the agreed purchase price of these two titles from ....
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....f 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 paid for acquiring the titles of the journals are in the nature of capital expenditure since the asses....
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....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. 35A. It is not clear as to how the AO has reached the conclusion that this is a case of claiming wrong deduction on the basis of furnishing inaccurate partic....
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.... 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 payment made for trademark in the manner covered in the decisions cited by the assessee in the footnote in the computation of income sheet. The learned Departmental Representative....
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.... 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) whether the declaration made by the assessee as a footnote in the computation sheet was complete, accurate and bona fide, (ii) whether there was any debatable issue and assessee has tak....
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....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 the Hon'ble Supreme Court was that where payment is made for acquiring a right which is not enduring, it has necessarily to be allowed as revenue expenditure. The Hon'ble Supreme Court observed as under in this case: "On 8th June, 1961, the appellant, a company engaged in the manufacture of antibiotics and pharmaceuticals, was granted a licenc....
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....pletely 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 high yielding strains supplied by Meiji. The mere improvement in or updating of the fermentation process would not necessarily be inconsistent with the relevance and continuing utility of the existing infrastructure, machinery and plant of the appellant. (iii) That the limitations placed in the agreement on the right of the appellant in dealing with the know-how and the c....
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....ether 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 appropriate to the context. There is also no single definitive criterion which, by itself, is determinative whether a particular outlay is capital or revenue. The 'once for all' payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a commonsense way having regard to the business realities. In a given case, the test of 'enduri....
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....m 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 capital structure of the assessee that it can be regarded as capital in nature. Where the expenditure, although enduring in character has its impact on the running of the business, there can be no doubt that it is revenue expenditure. There was an agreement between the assessee and T under which T agreed to allow the assessee to use its brand name for the production, manufacture and sale of the specified products. In c....
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....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 title referred to above aggregating Rs. 15 lakhs (Rupees fifteen lakhs only) in the following manner: A sum of Rs. 4 lakhs (Rupees four lakhs only) towards advance payment of the total purchase price from the date hereof upon the signing of the agreement, the receipt of which the seller hereby acknowledges. A sum of Rs. 11 lakhs (Rupees eleven lakhs and fifty-four thousand only) as full and final payments towards the total purchase price on 15th Dec., 1997 upon the b....
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.... 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 the months of November, 1997, December, 1997 and January, 1998 at no cost basis with a view to maintain continuity and provide enough time for the buyer to take charge of the entire operation of the publication of the journal." 18. From the above, it is clear that assessee purchased: (i) a running business, (ii) right to publish two titles, (iii) on complete and exclusive ownership basis along with all the rights and benefits attached thereto. As an ancillary to the purchase of titles and running business, the assessee also got detailed list of subscrib....
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....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 was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. (iii) CIT vs. W.S. Insulators of India Ltd. (2000) 243 ITR 348 (Mad) "The assessee entered into an agreement with a Swiss company for the manufacture of insulators, lightning arrestors, coupling capacitors, capacitive voltage transformers and line traps. Under the agreement, know-how was acquired for the manufacture and which had to be provided by the Swiss company which also granted licence to the assessee to manufacture the produ....
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....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 ground that the whole expenditure ought to have been allowed as revenue expenditure. What in effect was done by the appellant in allotting equity shares of Rs. 2,80,000 to Eimco, was to reimburse the contribution by Eimco by way of knowhow, which could never be treated as expenditure, much less an expenditure laid out wholly and exclusively for purposes of the business of the appellant. It was not a case where after the incorporation, the appellant-company in the course of carrying on its business, spent the said amount for acquiring any asset. The High Court had rightly concluded that allotment of equity shares by the appellant to Eimco, in t....
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....: (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 of Rs. 62 per debenture and secondly, Hon'ble Gujarat High Court had admitted the appeal of the assessee under s. 260A on quantum that substantial question of law arises in this case. Hon'ble President, Tribunal as Third Member, held that the contractual agreement entered before the decision of Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd was to be acted upon and a contractual liability can be always be claimed in the return of income. The para 35 of this order is as under: "35. A plea or claim which is held by the Hon'ble High Court to give rise to a substantial question of law, cannot be treated to be frivolous or mala fide as to attract levy o....
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.... 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 taxpayer by enacting provisions of s. 143(1) and revenue administration has declared a policy to accept 100 per cent returns and scrutinise only 2 per cent thereafter, a duty is cast on the taxpayers to claim deduction/allowances in accordance with the provisions of law and on the basis of pronounced judgments fitting on the facts of the case. It will not be proper if claims are made by distorting/or not disclosing full facts and on the basis of incorrect application of Court decisions. Where assessments are likely to be accepted under s. 143(1), 98 per cent probability is that such wrong claim will be accepted. And only if by chance, fall in 2 per cent category of scrutiny, they will surrender or not co....
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....sing 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 CIT(A) in the course of any proceedings under this Act is satisfied that any person- (a) and (b)** (c) has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty,- Explanation 1.- Where in respect of any facts material to the computation of the total income of any person under this Act,- (A) such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the CIT(A) to be false, or (B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, ....
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....9;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 mentioned earlier that all the facts relating to the claim were not disclosed with the return. In this regard, our view is that it is not sufficient that all the facts are disclosed only when called for to do so when notice is issued under s. 143(2). In fact the assessee is duty bound to disclose relevant facts with the return. In the present case, the assessee had withheld vital facts, which had a bearing on taking the decision that the entire claim was capital in nature and was not allowable in one year. The claim in the return would have been bona fide, had the additional facts discovered on scrutiny were not in knowledge of the assessee. This is however not so. 30. In CIT vs. Chemiequip Ltd. (2003) 182 CTR (Bom) 144 : (2004) 265 ITR 265 (Bom) a claim of deduction under s. 80HHC was withdrawn when assessee was asked to file....
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....e 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 of income. 36. Now coming to point that AO has allowed 1/14th of expenditure under s. 35A hence there was an element of allowability and hence bona fide of the assessee. We are of the view that if ITO has in his wisdom covered the case under s. 35A treating the claim as that of copyright, it does not change the nature of expenditure which is basically capital. Only for this reason claim does not become bona fide. For a deduction to be bona fide made, it should be supported by the express provisions of law or by accounting standards or by decisions of High Court/Hon'ble Supreme Court, if facts matrix is similar. If the claim is made by stating half truth thereon and not disclosing relevant and material facts, the disclosure would not be bona fide. 37. Explanation used in cl. (c) of s. 271(1) is 'has concealed the particulars of ....