Charak Pharmaceuticals Vs. Joint Commissioner of Income Tax - Court Judgment

Excerpt:
1. this appeal by the assessee is directed against the order of the c1t(a) on the ground that he has erred in setting aside the order passed by jt. git under section 143(3) of the it act and questioned the allowability of deferred revenue expenditure to the extent of rs. 90,82,297.2. we have heard the rival submissions and carefully perused the orders of the authorities below and documents placed on record.3. briefly stated, on examination of the case records, we find that it was noticed by the git, that the assessee has claimed a sum of rs. 90,82,297 being deferred revenue expenditure. out of rs. 90,82,297 a sum of rs. 62,81,806 were spent for commission and incentive. having observed that commission/ incentive is normally paid after the sales and not paid in advance, the git observed that the ao has wrongly allowed the entire claim of rs. 90,82,297 which were claimed to be deferred revenue expenses without proper investigation. he, accordingly issued a show cause notice under section 263 of the it act calling upon the assessee to show cause as to why the order of the assessment made by the ao should not be enhanced or modified being erroneous and prejudicial to the interests of the revenue. in response to the show cause notice, the assessee submitted the details of payments made for deferred revenue expenses in chart and the copies of bills of the deferred revenue expenses. the git examined the explanations of the assessee, but was not convinced with it and he set aside the assessment order with a direction to finalize the assessment ete novo as per law, after making enquiry and investigation.4. now the assessee has preferred an appeal before the tribunal with the' submissions that during the course of the assessment proceedings, assessee has furnished the detailed explanations with regard to the deferred revenue expenses and the ao has examined the same and after being convinced with it, he allowed the entire claim under section 37(1) of the it act.5. the learned counsel for the assessee has invited our attention to the detailed reply filed by it before the ao which appeared at page no.13 of the compilation of the assessee in which he has explained the deferred revenue expenses comprising of incentive and discounts, price list and catalogue charges or book charges, advertisements and share promotion expenses, professional charges and other expenses. full details of these expenses were also furnished before the ao. the assessee has also explained to the ao that these incentives and discounts were claimed on actual sales and not on account of advances.through his letter dr.. 22nd feb., 1999 the learned counsel for the assessee has explained that all these incentives and discounts debited to revenue expenditure, are basically incurred for the incentive and discounts on sales through various rsas. in normal course of business, it is not. possible for the assessee to sell its ayurvedic products all over india unless there is a widespread marketing of its products.thus, incentives and discounts are offered to such middlemen who are the linkage between the assessee's products and actual consumers.hence, expenditure incurred by the assessee by way of incentives and discounts should be allowed in full to the assessee. the assesaee also filed details of expenses along with letter dt. 22nd dec., 1998. all these evidences were examined by the ao before allowing the claim of the assessee. the learned counsel for the assessee has further invited our attention to the order of the ctt(a) in which he has deleted the additions made by the ao while passing a consequential order. the copy of the order of the cit(a) is also placed on record. the learned counsel for the assessee has contended that the assessee has deferred the revenue expenses to show its book profits, but, in fact he has incurred all these expenses during the year and as such the same are allowable under section 37 of the act. in support of his plea that once the ao has called for the details and explanations with regard to the claim of deferred revenue expenses during the assessment proceedings and allowed the same after verifying the details, explanations, documentary evidence etc., submitted by the assessee, his assessment order cannot be said to be erroneous and prejudicial to the interests of the revenue. the learned counsel for the assessee has relied upon the following judgments.shital trading & investment co. (p) ltd. v. ito (1993) 45 itd 399 (mumbai) 4. dewas silk mills v. cit (2005) 92 ttj (indore)(tm) 481 : (2005) 143 taxman 38 (indore)(tm) 6. the learned counsel for the assessee further invited our attention to the following judgments in support of his contention that mere lack of discussion of the issue in the assessment order would not render the said assessment order erroneous merely because the ao does not meticulously deal with the issues. 3. sunil lamha v. dy. cit (2004) 83 ttj (del) 174 : (2003) 131 taxman 35 (del).the learned counsel for the assessee further contended that the cit cannot revise the orders merely because he disagrees with the conclusion arrived at by the ito. if the ito acts in accordance with law and frames the assessment, the same cannot be treated to be erroneous by the cit simply because the order should have been written more elaborately. in support of this contention, the learned counsel for the assessee has relied upon the decision in the case of cit v.gabrial india ltd. and pate cotton co. ltd. v. asstt.cit (1998) 64 itd 273 (mumbai). it was further contended on behalf of the assessee that where there are two views possible in a case, then, mere fact that the ao has taken one view which is not acceptable to the cit, the cit cannot hold the assessment order as erroneous and prejudicial to the interests of the revenue. in support of this contention, the learned counsel for the assessee has relied upon the following judgments.jhulelal land development corpn. v. dy. cit (1996) 56 itd 345 (mumbai) 2. ajay choudhary v. dy. cit (2001) 70 ttj (del) 220 : (2000) 74 itd 350 (del).the learned counsel for the assessee further contended that the cit cannot substitute his own opinion where the view taken by the ao is also a possible view. in support of this plea, the learned counsel for the assessee has relied upon the order of the gabriel india ltd. (supra) and rayon silk mills v. cit and c7t v. smt.d. valliawwal .7. the learned departmental representative on the other hand has placed reliance upon the order of the cit and also invited our attention to the fact that the assessee did not file complete details before the ao, as such, the cit was justified in setting aside his order.8. having carefully perused the orders of the lower authorities and the aforesaid judgments referred to by the assessee, we find that during the course of the assessment proceedings, the assessee has claimed the deduction of all these expenses which were claimed to be deferred revenue expenses in the p&l a/c prepared for the purpose of companies act. during the course of the assessment proceedings, in response to query raised by the ao, the assessee placed the detailed explanations as to why the deduction of these deferred revenue expenses was claimed under section 37 of the it act. the details of expenses were also placed before the ao. the ao has examined the same and after being convinced with it, he allowed the claim of the assessee, after having noticed that all these expenses which were claimed by the assessee are allowable expenses under section 37(1) of the it act. it is also noticed from the order of the cit that he has observed that incentives and discounts were claimed in advance without effecting the sale, whereas the facts are otherwise, as the incentives and discounts were claimed after the sales was effected. the details of incentives and discounts were furnished before the ao. other expenses were also explained to the ao during the course of the assessment proceedings. we have also carefully examined the order of the cit(a) which was passed in second round where consequential order disallowing the claim of the assessee, was passed by the ao and we find that the cit(a) examined the issue and allowed the claim of the assessee. it is not the case of the revenue that method of accounting adopted by the assessee is not permissible under the law. if the assessee is permitted under companies act to maintain its accounts and to claim the entire expenses as deferred revenue expenses and part of it is debited to the p&l a/c, the revenue cannot disallow the claim of the assessee that he has treated it to be deferred revenue expenses in the p&l a/c if the expenses are allowable under section 37(1) of the it act. for the purpose of it act, we have to examine the nature of the expenses. if the nature of the expenses are allowable as incurred for business purposes, ot should be allowed in to irrespective of the fact that it was claimed to be deferred revenue expenditure for the purpose of the companies act or to show higher book profit to its shareholders. since the ao has applied his mind while dealing with the issues and duly considered the explanations of the assessee, we do not agree with the findings of the cit that the assessment order is erroneous and prejudicial to the interests of the revenue. we, therefore, hold that cit exceeded his jurisdiction under section 263 of the it act. we, therefore, quash his order.

Judgment:
1. This appeal by the assessee is directed against the order of the C1T(A) on the ground that he has erred in setting aside the order passed by Jt. GIT under Section 143(3) of the IT Act and questioned the allowability of deferred revenue expenditure to the extent of Rs. 90,82,297.

2. We have heard the rival submissions and carefully perused the orders of the authorities below and documents placed on record.

3. Briefly stated, on examination of the case records, we find that it was noticed by the GIT, that the assessee has claimed a sum of Rs. 90,82,297 being deferred revenue expenditure. Out of Rs. 90,82,297 a sum of Rs. 62,81,806 were spent for commission and incentive. Having observed that commission/ incentive is normally paid after the sales and not paid in advance, the GIT observed that the AO has wrongly allowed the entire claim of Rs. 90,82,297 which were claimed to be deferred revenue expenses without proper investigation. He, accordingly issued a show cause notice under Section 263 of the IT Act calling upon the assessee to show cause as to why the order of the assessment made by the AO should not be enhanced or modified being erroneous and prejudicial to the interests of the Revenue. In response to the show cause notice, the assessee submitted the details of payments made for deferred revenue expenses in chart and the copies of bills of the deferred revenue expenses. The GIT examined the explanations of the assessee, but was not convinced with it and he set aside the assessment order with a direction to finalize the assessment ete novo as per law, after making enquiry and investigation.

4. Now the assessee has preferred an appeal before the Tribunal with the' submissions that during the course of the assessment proceedings, assessee has furnished the detailed explanations with regard to the deferred revenue expenses and the AO has examined the same and after being convinced with it, he allowed the entire claim under Section 37(1) of the IT Act.

5. The learned counsel for the assessee has invited our attention to the detailed reply filed by it before the AO which appeared at page No.13 of the compilation of the assessee in which he has explained the deferred revenue expenses comprising of incentive and discounts, price list and catalogue charges or book charges, advertisements and share promotion expenses, professional charges and other expenses. Full details of these expenses were also furnished before the AO. The assessee has also explained to the AO that these incentives and discounts were claimed on actual sales and not on account of advances.

Through his letter dr.. 22nd Feb., 1999 the learned counsel for the assessee has explained that all these incentives and discounts debited to revenue expenditure, are basically incurred for the incentive and discounts on sales through various RSAs. In normal course of business, it is not. possible for the assessee to sell its ayurvedic products all over India unless there is a widespread marketing of its products.

Thus, incentives and discounts are offered to such middlemen who are the linkage between the assessee's products and actual consumers.

Hence, expenditure incurred by the assessee by way of incentives and discounts should be allowed in full to the assessee. The assesaee also filed details of expenses along with letter dt. 22nd Dec., 1998. All these evidences were examined by the AO before allowing the claim of the assessee. The learned counsel for the assessee has further invited our attention to the order of the CTT(A) in which he has deleted the additions made by the AO while passing a consequential order. The copy of the order of the CIT(A) is also placed on record. The learned counsel for the assessee has contended that the assessee has deferred the revenue expenses to show its book profits, but, in fact he has incurred all these expenses during the year and as such the same are allowable under Section 37 of the Act. In support of his plea that once the AO has called for the details and explanations with regard to the claim of deferred revenue expenses during the assessment proceedings and allowed the same after verifying the details, explanations, documentary evidence etc., submitted by the assessee, his assessment order cannot be said to be erroneous and prejudicial to the interests of the Revenue. The learned counsel for the assessee has relied upon the following judgments.Shital Trading & Investment Co. (P) Ltd. v. ITO (1993) 45 ITD 399 (Mumbai) 4. Dewas Silk Mills v. CIT (2005) 92 TTJ (Indore)(TM) 481 : (2005) 143 Taxman 38 (Indore)(TM) 6. The learned counsel for the assessee further invited our attention to the following judgments in support of his contention that mere lack of discussion of the issue in the assessment order would not render the said assessment order erroneous merely because the AO does not meticulously deal with the issues.

3. Sunil Lamha v. Dy. CIT (2004) 83 TTJ (Del) 174 : (2003) 131 Taxman 35 (Del).

The learned counsel for the assessee further contended that the CIT cannot revise the orders merely because he disagrees with the conclusion arrived at by the ITO. If the ITO acts in accordance with law and frames the assessment, the same cannot be treated to be erroneous by the CIT simply because the order should have been written more elaborately. In support of this contention, the learned counsel for the assessee has relied upon the decision in the case of CIT v.Gabrial India Ltd. and Pate Cotton Co. Ltd. v. Asstt.

CIT (1998) 64 ITD 273 (Mumbai). It was further contended on behalf of the assessee that where there are two views possible in a case, then, mere fact that the AO has taken one view which is not acceptable to the CIT, the CIT cannot hold the assessment order as erroneous and prejudicial to the interests of the Revenue. In support of this contention, the learned counsel for the assessee has relied upon the following judgments.Jhulelal Land Development Corpn. v. Dy. CIT (1996) 56 ITD 345 (Mumbai) 2. Ajay Choudhary v. Dy. CIT (2001) 70 TTJ (Del) 220 : (2000) 74 ITD 350 (Del).

The learned counsel for the assessee further contended that the CIT cannot substitute his own opinion where the view taken by the AO is also a possible view. In support of this plea, the learned counsel for the assessee has relied upon the order of the Gabriel India Ltd. (supra) and Rayon Silk Mills v. CIT and C7T v. Smt.

D. Valliawwal .

7. The learned Departmental Representative on the other hand has placed reliance upon the order of the CIT and also invited our attention to the fact that the assessee did not file complete details before the AO, as such, the CIT was justified in setting aside his order.

8. Having carefully perused the orders of the lower authorities and the aforesaid judgments referred to by the assessee, we find that during the course of the assessment proceedings, the assessee has claimed the deduction of all these expenses which were claimed to be deferred revenue expenses in the P&L a/c prepared for the purpose of Companies Act. During the course of the assessment proceedings, in response to query raised by the AO, the assessee placed the detailed explanations as to why the deduction of these deferred revenue expenses was claimed under Section 37 of the IT Act. The details of expenses were also placed before the AO. The AO has examined the same and after being convinced with it, he allowed the claim of the assessee, after having noticed that all these expenses which were claimed by the assessee are allowable expenses under Section 37(1) of the IT Act. It is also noticed from the order of the CIT that he has observed that incentives and discounts were claimed in advance without effecting the sale, whereas the facts are otherwise, as the incentives and discounts were claimed after the sales was effected. The details of incentives and discounts were furnished before the AO. Other expenses were also explained to the AO during the course of the assessment proceedings. We have also carefully examined the order of the CIT(A) which was passed in second round where consequential order disallowing the claim of the assessee, was passed by the AO and we find that the CIT(A) examined the issue and allowed the claim of the assessee. It is not the case of the Revenue that method of accounting adopted by the assessee is not permissible under the law. If the assessee is permitted under Companies Act to maintain its accounts and to claim the entire expenses as deferred revenue expenses and part of it is debited to the P&L a/c, the Revenue cannot disallow the claim of the assessee that he has treated it to be deferred revenue expenses in the P&L a/c if the expenses are allowable under Section 37(1) of the IT Act. For the purpose of IT Act, we have to examine the nature of the expenses. If the nature of the expenses are allowable as incurred for business purposes, ot should be allowed in to irrespective of the fact that it was claimed to be deferred revenue expenditure for the purpose of the Companies Act or to show higher book profit to its shareholders. Since the AO has applied his mind while dealing with the issues and duly considered the explanations of the assessee, we do not agree with the findings of the CIT that the assessment order is erroneous and prejudicial to the interests of the Revenue. We, therefore, hold that CIT exceeded his jurisdiction under Section 263 of the IT Act. We, therefore, quash his order.