IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. I.T.R. No. 2 of 2000 DATE OF DECISION : 22.04.2008 Commissioner of Income Tax (Central), Ludhiana .... APPLICANT-REVENUE Versus M/s Liberty Group Marketing Division, Karnal ..... RESPONDENT-ASSESSEE I.T.A.s No. 9 of 2002, 79, 200, 201 of 2005, 159, 160 of 2006, 452, 453, 527 and 528 of 2007 DATE OF DECISION : ____.04.2008 Commissioner of Income Tax (Central), Ludhiana .... APPELLANT-REVENUE Versus M/s Liberty Group Marketing Division, Karnal ..... RESPONDENT-ASSESSEE CORAM :- HON'BLE MR. JUSTICE SATISH KUMAR MITTAL HON'BLE MR. JUSTICE RAKESH KUMAR GARG Present: Mr. Sanjiv Bansal, Advocate, for the Revenue. Mr. R.P. Sawhney, Senior Advocate, with Mr. Saurav Khurana, Advocate, for the Assessee. * * * SATISH KUMAR MITTAL, J. This judgment shall dispose of one Income Tax Reference i.e. ITR No. 2 of 2000 -2- ITR No. 2 of 2000, sought by the Revenue, and ten Income Tax Appeals i.e. I.T.A.s No. 9 of 2002, 79, 200, 201 of 2005, 159, 160 of 2006, 452, 453, 527 and 528 of 2007, filed by the Revenue, in which the common questions of facts and law are involved, pertaining to different assessment years of one group of the assessee. In ITR No. 2 of 2000, which is arising from the decision of the Income Tax Appellate Tribunal (Delhi Bench `A' New Delhi) (hereinafter referred to as `the Tribunal') in case of the assessee for the assessment year 1988-89, the following substantial question of law has been referred for opinion of this Court : “Whether on the facts and in the circumstances of the case, the Tribunal was justified in confirming the orders of CIT (A) that expenses of Rs.1,86,406/- and Rs. 1,79,833/- debited to Publicity and Advertisement account were of revenue nature.” In all the 10 appeals, filed by the revenue, which are arising from the orders of the Tribunal, pertaining to the different assessment years, the Revenue has raised the following substantial question of law for determination of this Court : “Whether the ITAT was right in law in confirming the order of CIT (A) that the expenses incurred on Glow Sign Boards were of revenue nature?” In three appeals i.e. ITAs No. 200 of 2005, 159 and 160 of 2006, the following additional substantial question of law has been raised by the ITR No. 2 of 2000 -3- Revenue : “Whether the ITAT was correct in law in allowing assessee's claim for deduction under Section 80 I of the Income Tax Act, 1961, when conditions laid down for grant of such deduction were not fulfilled?” In all these 11 cases, the assessee is M/s Liberty Enterprises, Karnal and M/s Liberty Group Marketing Division, Karnal. The assessee is engaged in manufacture and sale of leather-footwears and shoe uppers etc. During the course of assessment in the assessment year 1988-89, the Assessing Officer noticed a debit balance of Rs. 1,89,821/- on account of publicity and advertisement. This debit balance was the cost of neon sign and glow sign boards deployed at various places or given to show rooms. The Assessing Officer treated these expenses as expenses of capital nature and disallowed the same. He further noticed that an amount of Rs. 1,79,833/- was also shown as expenses on advertisement. This amount also included Rs. 98,000/- as cost of production of TV films, Rs. 75,833/- as cost of neon and glow sign boards and Rs. 6,000/- as insurance expenses. The Assessing Officer also treated these expenses as of capital nature by placing reliance on the decision of the Bombay High Court in Commissioner of Income Tax, Bombay City I v. M/s Patel International Film Ltd., 102 ITR 219. Feeling aggrieved against the said disallowance, the assessee filed appeal before the Commissioner of Income Tax (Appeals), Karnal ITR No. 2 of 2000 -4- [hereinafter referred to as `the CIT (A)']. It was contended that the expenses incurred on publicity and advertisement should have been allowed under sub section (3) of Section 37 of the Act. The assessee placed reliance upon the decision of the Himachal Pradesh High Court in Mohan Meakin Breweries Ltd. v. Commissioenr of Income Tax, 118 ITR 101 and contended that as per that decision, the advertisement expenses could never be of capital nature. It was further contended that the expenditure on neon sign and glow sign boards were revenue expenses, as those expenses were incurred for the purpose of business and those expenses should have been allowed as revenue expenses under sub section (1) of Section 37 of the Act. The CIT (A) accepted the contention of the assessee and allowed the expenses claimed as revenue expenses, while making the following observations : “4.3 I have carefully considered the arguments for the appellant and find force in these. In the Himachal Pradesh High Court judgment relied upon for the appellant, it has indeed been held that the expenditure on advertisement and publicity cannot be treated as capital expenditure. The appellant's reliance on the order of the learned CIT (A), Chandigarh in the case of the Atlas Cycle Inds. Ltd. is also valid as the Revenue apparently accepted the findings of the learned CIT (A), Chandigarh in that case to the effect that expenditure on Glow-signs was of a revenue nature. It is also true that the Supreme Court of India ITR No. 2 of 2000 -5- has repeatedly held that where two opinions are possible on an issue the view in favour of the assessee should prevail. The expenditure in question was clearly in the nature of advertisement and publicity. Thus, even if the Bombay High court view is against the appellant, the issue will have to be decided in favour of the appellant in view of the Himachal Pradesh High Court judgment particularly since there is no judgment on this issue of the jurisdictional High Court i.e. Punjab and Haryana High Court or the Supreme Court of India. Considering these facts, the learned Assessing Officer is held to have not been justified in treating the expenditure in question to be of a capital nature. The expenditure in question is held to be allowable as revenue expenditure. The learned Assessing Officer is directed to allow the same. He shall, however, withdrew the depreciation, if any allowed on this expenditure.” Feeling aggrieved against the said order, the Revenue filed appeal before the Tribunal. The Tribunal dismissed the appeal and confirmed the order of the CIT (A). Against the said order of the Tribunal, the aforesaid reference (ITR No. 2 of 2000) has been sent to this Court under Section 256 of the Income Tax Act, 1961 (hereinafter referred to as `the Act'). In the subsequent years also, the assessee incurred expenses on Glow Sign Boards. For those assessment years also, the Assessing Officer ITR No. 2 of 2000 -6- disallowed the claim of the assessee regarding the expenses on Glow Sign Boards, by treating the said expenditure as of capital nature, on the ground that the department has not accepted the decision of the Tribunal in case of the assessee for the previous assessment year and against that decision, the Reference was pending in this court. However, the CIT (A), by following the decision of the Tribunal pertaining to the earlier assessment year, allowed the said expenditure by treating the same as of revenue nature. The Tribunal affirmed the order of the CIT (A). The department, feeling dis- satisfied with those orders, filed these 10 appeals. Learned counsel for the Revenue submitted that the Tribunal has committed an error in holding that the expenses incurred by the assessee on Glow Sign Boards were not of enduring nature, therefore, the same should have been allowed being the expenses of revenue nature. Learned counsel submitted that the said expenses brought into existence an advantage for the enduring benefit of the business. These Glow Sign Boards have given benefit to the business of the assessee permanently, therefore, these should be found as assets of the assessee giving permanent benefit to its business. Therefore, the expenditure incurred on the Glow Sign Boards should be treated as capital expenditure. Learned counsel further submitted that the expenditure of Rs. 18,000/- in the assessment year 1988-89 on production of TV Films for advertisement was also wrongly treated as revenue expenses. In this regard, learned counsel placed reliance upon the decision of the Bombay High Court in the case of M/s Patel International ITR No. 2 of 2000 -7- Film Ltd., (supra). On the other hand, learned counsel for the assessee contended that the benefit accrued to the assessee from the expenditure incurred is not of enduring nature. The expenditure on Glow Sign Boards merely facilitate the business operation of the assessee. The said expenditure is not a long period expenditure and the Glow Sign Boards are destroyed or damaged every year and the assessee has to spend on such Glow Sign Boards on each year. Therefore, the expenditure incurred on the Glow Sign Boards is not for the enduring advantage of the business. Learned counsel referred to the finding of the Tribunal, where it has been held that the expenditure incurred by the assessee on Glow Sign Boards is being incurred regularly in almost each year. This finding in itself shows that the Glow Sign Boards, on which the expenditure had been incurred every year, were not of permanent nature. Therefore, the expenditure incurred by the assessee is not for acquiring an asset of permanent nature. Learned counsel submitted that the decision of the Bombay High Court, as relied upon by learned counsel for the Revenue, is not applicable to the facts and circumstances of the case. In that case, the expenditure incurred by the assessee for purchasing the film was taken to be the enduring advantage and thus, the said expenditure was held to be of capital nature. Learned counsel submitted that the purchasing of a film and expenditure on Glow Sign Boards cannot be compared, as the benefit arising from the expenditure on the Glow Sign Boards cannot be said to be enduring benefit to the business of the assessee. ITR No. 2 of 2000 -8- After considering the rival submissions made by learned counsel for the parties, we are of the opinion that the Tribunal was right in confirming the order of the CIT (A) and treating the expenditure incurred on Glow Sign Boards as of revenue nature. Section 37 (1) of the Act provides that `any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession.”' For claiming deduction under this section, one of the conditions is that the expenditure should not be in the nature of capital expenditure. The question whether a particular expenditure incurred by the assessee is of capital or revenue nature is always a complex and intricate issue. Such a question has to be considered and answered in the facts and circumstances of each case. In Assam Bengal Cement v. CIT 27 ITR 34 (Supreme Court), it was held that if the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for bringing into existence an asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be ITR No. 2 of 2000 -9- immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. It was further held that the expressions `enduring benefit' or `of a permanent character' were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset. In Bombay Steam Navigation Co. (1953) Private Ltd. v. Commissioner of Income Tax, Bombay, (1965) 56 ITR 52, it was observed that if the expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit-earning process, then such expenditure is to be taken as revenue expenses. In Lakshmiji Sugar Mills Co. P. Ltd. v. Commissioner of Income Tax, New Delhi, (1971) 82 ITR 376, it was held that if the expenditure is made not for the purpose of bringing into existence any asset or advantage but for running the business or working it with a view to produce the profit, it is a revenue expenditure. It was held that the criteria has to be applied from the business point of view and on a fair appreciation of the whole situation. In Commissioner of Income Tax v. Madras Auto Service (P) Ltd., (1998) 233 ITR 468, it was held as under : “the general principles applicable in determining whether a particular expenditure is capital or revenue are as follows : (1) ITR No. 2 of 2000 -10- 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 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.” Considering the above principle of law, in the present case, it is to be seen as to whether the expenditure incurred by the assessee on Glow Sign Boards was with a view to bringing into existence an asset or an advantage for the enduring benefit of the business. In our opinion, 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, ITR No. 2 of 2000 -11- 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 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. In the assessment year 1988-89, the assessee had spent an amount of Rs. 98,000/- on production of a TV film for advertising the products manufactured by it. The said expenditure was disallowed by the Assessing Officer being not of revenue nature, by placing reliance upon the decision of the Bombay High Court in the case of M/s Patel International Film Ltd., (supra). The CIT (A) allowed the said expenditure by considering the same as an expenditure of advertisement and publicity in view of sub- section (3) of Section 37 of the Act, while relying upon the decision of the Himachal Pradesh High Court in the case of Mohan Meakin Breweries Ltd. (supra), where it was held that the expenditure on advertisement and publicity cannot be treated as capital expenditure. The decision of the CIT ITR No. 2 of 2000 -12- (A) was affirmed by the Tribunal on the same reasoning. In our view, the expenditure on production of a TV film was rightly ordered to be deducted on account of advertisement expenditure in view of sub-section (3) of Section 37 of the Act, which was in force at that time. Sub-section (3) which has been omitted by Finance Act 1997 with effect from 1.4.1998 dealt with three types of expenditure, one on advertisement, second on maintenance of any residential accommodation and third in connection with travelling by an employee or other person. It was held that Section 37 (3) of the Act contemplates a separate and distinct head of deduction viz., expenditure on advertisement, and this deduction was admissible notwithstanding anything contained in sub-section (1) of Section 37. Therefore, keeping in view the fact that the said expenditure was made by the assessee on advertisement, the same was rightly allowed to be deducted from the profit. Thus, we do not find any illegality in the order of the Tribunal, while treating the said expenditure as of revenue nature. Now, we consider the following question, which has been raised by the Revenue in three appeals (ITAs No. 200 of 2005, 159 and 160 of 2006), which pertain to the assessment years 1995-96, 1993-94 and 1994- 95, respectively : “Whether the ITAT was correct in law in allowing assessee's claim for deduction under Section 80 I of the Income Tax Act, 1961, when conditions laid down for grant of such deduction were not fulfilled?” The Assessing Officer disallowed the claim of the assessee on ITR No. 2 of 2000 -13- the ground that the assessee does not fulfill the conditions laid down in Section 80 I of the Act regarding number of workers employed in manufacturing process and finished goods are being got manufactured from outside parties by paying them production charges. The CIT (A) reversed the order of the Assessing Officer in this regard, while holding that the number of persons employed by the assessee in units of Agra, Jammu and Saharanpur were more than 20 and in the earlier assessment year, on the same facts and circumstances, the case was decided in favour of the assessee. The said finding has been affirmed by the Tribunal. Learned counsel for the Revenue could not controvert the aforesaid finding recorded by the CIT (A), which was affirmed by the Tribunal. In view of this, we do not find any illegality or infirmity in the order, passed by the Tribunal, while allowing the claim of the assessee under section 80 I of the Act. In view of the above, all the aforesaid substantial questions of law raised by the Revenue are answered in the affirmative i.e. against the Revenue and in favour of the assessee. Income Tax Reference No.2 of 2000 is answered against the Revenue and in favour of the assessee, and Income Tax Appeals No. 9 of 2002, 79, 200, 201 of 2005, 159, 160 of 2006, 452, 453, 527 and 528 of 2007are dismissed. ( SATISH KUMAR MITTAL ) JUDGE April 22, 2008 ( RAKESH KUMAR GARG ) ndj JUDGE