The order of the Bench was delivered by
Smt. Asha Vijayaraghavan (Judicial Member).-These are the appeals filed by the Revenue, directed against the order of the Commissioner of Income-tax (Appeals)-V, Hyderabad, for the assessment years 2007-08 to 2009-10.
I. T. A. Nos. 1247 and 1248/Hyd/2014-Assessment years 2007-08 and 2008-09 common issues-FCCB and debenture issue expenses
2. The common ground of appeal raised by the Department for both assessment years 2007-08 and 2008-09 as follows :
Ground Nos. 2 and 3
"2. The Commissioner of Income-tax (Appeals) erred in allowing expenditure on FCCB and debenture issue under section 35D considering the expenditure as public issue.
3. The Commissioner of Income-tax (Appeals) erred in allowing the appeal on expenditure on FCCB and debenture issue under section 35D on the basis that Department accepted in the earlier assessment year 2006-07, whereas foreign currency convertible bonds is investment through SEBI in foreign currency which constitutes capital and hence capital expenditure."
3. We find that the Assessing Officer had disallowed the FCCB and debenture issue expenses in the assessment year 2006-07 and the Commissioner of Income-tax (Appeals) allowed the same. We find that the Department did not file further appeal against the order of the learned Commissioner of Income-tax (Appeals) in the assessment year 2006-07. Hence the Income- tax Appellate Tribunal has held in various decisions that the Department cannot contest/agitate the same issues for subsequent years, if they accepted the order of the Commissioner of Income-tax (Appeals) in the earlier year (i.e., 2006-07), we are of the opinion that the Commissioner of Income-tax (Appeals) has rightly held that the FCCB and debenture issues under section 35D are to be allowed. The relevant portion is the Commissioner of Income-tax (Appeals)'s order in the assessment year 2006-07 is reproduced hereunder :
"The facts are that the appellant incurred an expenditure of Rs. 10,49,79,022 on the debenture and FCCB issue. In the computation of income, the appellant claimed 1/5th of this as allowable expenditure under section 35D. By giving the following reasons, the Assessing Officer disallowed the same :
6 The assessee-company has incurred expenditure of Rs. 10,49,79,022 on account of expenditure on debenture and FCCB issue. The assessee-company in its computation of income has claimed as under :
1/5th of miscellaneous expenses allowable under section 35D not debited to profit and loss 2005-06.
During the course of scrutiny, the assessee was asked to substantiate its claim. The assessee-company vide letter dated December 15, 2008 submitted on December 22, 2008 has stated as under :
During the current financial year under consideration, the company incurred debenture and FCCB issue expenditure of Rs. 10,49,79,022, one-fifth of this expenditure amounting to Rs. 2,09,95,804 was written off under section 35D read with section 37 of the Income-tax Act from the assessment year 2006-07 onwards.
The assessee during this financial year has borrowed foreign capital in fully convertible 'Foreign Currency Convertible Bonds' which is Zero Coupon Convertible Bonds due on 2010 of 54,33,000 US$. The assessee has entered into agreement with M/s. J. P. Morgan Securities Ltd and has raised Rs. 242,34,26,290. As per agreement J. P. Morgan Securities Ltd., has agreed to bring foreign private equity (PE) for Deccan Chronicle Holdings and has submitted that '2.85 per cent. of the aggregate principal amount of the bonds. Such fee shall be deducted from the subscription monies for the bonds'. The total receipt for FCCB, is net of the payments made in London. The foreign currency monies received is net of payments to M/s. J. P. Morgan Securities Ltd., London. The assessee further submitted that the payments is from foreign branch of M/s. J. P. Morgan Securities Ltd., London, hence, no TDS was deducted as the receipt of the total amount from the foreign equity was net of this payment.
On verification it is seen that as per agreement J. P. Morgan Securities Ltd., has received 1539627 US $ as a fee. The assessee has submitted that the private equity was facilitated by J. P. Morgan Securities Ltd., London. That is to say that the net receipt for FCCB issue is foreign currency convertible bond is net of commission/brokerage paid. This expenditure is already claimed by the assessee, hence 35D is not applicable in this case.
Hence, the expenditure attributable to FCCB is already excluded in the receipts. No expenditure/allowance can be given in this transaction. For the reasons cited above, 35D cannot be allowed and hence the claim of the assessee is being disallowed."
4. The learned Commissioner of Income-tax (Appeals) held as follows :
"6.1 During appeal proceedings, the appellant stated that during the year the company incurred an expenditure of Rs. 2.59 crores on debenture issue and Rs. 7.91 crores on foreign currency convertible bonds. This total expenditure amounting to Rs. 10.50 crores was adjusted against the share premium account. Being deferred revenue expenditure, the claim was made under section 35D of the Act and one fifth of the expenditure was claimed. The following written submissions were given by the appellant:
'The Assessing Officer in page 3 of the order has stated that "2.85 per cent. of the aggregate principal amount of FCCB bonds and such fee shall be deducted from the subscription monies of the bonds". The gross proceeds of the issue was Rs. 242 crores and the net pro ceeds was Rs. 234 crores, difference Rs. 7.91 crores was paid towards issue expenses. The Assessing Officer further states that the net receipt for FCCB bonds is net of commission/brokerage paid and since this expenditure is already claimed by the assessee, section 35D is not applicable.
This is an incorrect conclusion, the company has accounted for the gross proceeds of Rs. 242 crores under the head FCCB bonds account, issue expenditure of Rs. 7.91 crores was reduced it from the securities premium account as it is permitted under section 78 of the Companies Act in the reserves and surplus side of the balance-sheet and not by way of debit in the profit and loss account.
In the computation of income the company has separately claimed the deduction of 1/5th of the expenditure of Rs. 209 lakhs. Hence the conclusion of the Assessing Officer that the expenditure is a double claim, i.e., once debited in the profit and loss account and the second time in the computation of income is incorrect.'
6.2 I have considered carefully the facts and circumstances. The Assessing Officer has not stated anywhere that the deduction under section 35D is not allowable. Rather the only reason for making the addition is that the appellant has claimed double deduction, i.e., once by excluding the expenditure from the receipt and secondly by way of deduction under section 35D. In the present case, I find that the Assessing Officer is factually incorrect in stating that a portion of the expense has to be debited to the profit and loss account. None of the expense finds a place in the profit and loss account. The expense in question is capital in nature and cannot be taken to the profit and loss account. The expenses have been taken directly to the balance-sheet as is clearly seen from the statement of accounts submitted the appellant. Once the fundamental presume of the Assessing Officer is incorrect, it is clear that the appellant has not claimed any double deduction; rather it has been claimed only once. Moreover, the issue of actual allowability of deduction under section 35D is not the subject matter of disallowance. Therefore, keeping in view the above facts and circumstances, the claim of the appellant is allowable and the addition is ordered to be deleted."
5. Hence, we dismiss ground Nos. 2 and 3 for the assessment years 2007-08 and 2008-09.
Ground No. 4
"4. The Commissioner of Income-tax (Appeals) ought to have considered that the expenditure on issue of qualified institutional buyers are not public issue."
6. With respect to ground No. 4 for the assessment year 2008-09, we find that the Assessing Officer has not disallowed for the assessment years 2006-07 and 2007-08. However, the Assessing Officer has disallowed the expenditure on the issue of qualified institutional buyers for the assessment year 2008-09 which has been allowed by the Commissioner of Income-tax (Appeals) holding as under :
"5. I have gone through the factual and legal contentions of the appellant in support of its argument that the deduction was claimed under section 35D read with section 37 i.e., both under sections 35D and 37. I agree with the argument of the appellant that the language used in section 35D is so plain and unambiguous that the only condition laid down in that section is that the issue should be offered for public subscription and the mode of placement is immaterial. Thus, the only issue for consideration is whether QIB can be called 'public' or not. After a careful and comprehensive consideration of the relevant provisions of the Company Law, Securities Contract (Regulation) Rules, SEBI Guidelines/Instructions, I am of the considered opinion that QIBs constitute 'public' and accordingly, the subscription made by the amount to public subscription. In this view of the matter and also considering the facts with regard to the utility of funds raised through QIB issue, I hold that the issue expenditure, to the extent attributable to the funds utilised for extension of the appellant's undertakings, is eligible for deduction under section 35D. So far as the remaining funds, utilised for modernisation and working capital requirements of the appellant's business are concerned, I have considered both factual and legal submissions of the applicant, in support of its contention that the expenditure was in the nature of revenue expenditure since the primary object and intent of raising these funds was to meet the operational requirements, in order to run the business more efficiently and profitably. The hon'ble High Court of Delhi, after analysing plethora of case law on this subject, had laid down certain broad guidelines, in the case of CIT v. J. K. Synthetics Ltd. [2009] 309 ITR 371 (Delhi), to decide whether a particular expenditure is capital or revenue in nature. Tested against these broad legal principles, I am of the opinion that there is considerable force in the arguments of the appellant-company that the expenditure claimed by it clearly falls in the revenue field. These guidelines were impliedly approved by the hon'ble Supreme Court, in view of the fact that the special leave petition filed against this decision was dis missed. There is also merit in the argument of the appellant-company that the facts of its case are distinguishable from those in the case of Brooke Bond, for the detailed reasons submitted by it, and therefore its claim cannot be denied by relying on that decision. It was further claimed that though the entire expenditure was allowable in one year under section 37, the same was treated as deferred revenue expenditure and claimed over five years, starting from the assessment year 2007-08. The concept of deferred revenue expenditure is now legally recognised by various judicial authorities and in fact, this was upheld even in the case of the appellant by my predecessor, while deciding the appeal for assessment year 2006-07. In view of the above facts, Ihold that the expenditure of Rs. 2,07,00,112 claimed for assessment year 2008-09 is allowable under sections 35D and 37. As the claim of this expenditure under section 35D read with section 37 is in order, the disallowance on this account is deleted."
7. We find that during the year 2007-08, the company incurred debenture expenses of Rs. 2.07 crores and QIB issue expenditure of Rs. 8.28 crores, both totalling to Rs. 10.35 crores. The expenditure referred to above of Rs. 10.35 crores was adjusted against the share premium account as per the provision of the Companies Act. However, the expenditure being deferred revenue expenditure falls within the ambit of section 35D read with section 37 of the Income-tax Act which is eligible to be charted to profit and loss account. Accordingly as per the provisions of section 35D of the Income- tax Act, one-fifth of the QIB issue expenditure i.e., Rs. 207 lakhs was written off. Qualified Institutional Buyers (QIBs) are a class of investors as a part of the large investor community and the companies sought for QIB issues because the funds can be raised within a short span. This is an extremely important investment for larger investors and since the buyers are only a class of investors, the issue of shares to QIB have been considered as public issue. The expenses in connection with public issue of shares or debentures of the company are allowable. Reliance is placed on CIT v. Shree Synthetics Ltd. [1986] 162 ITR 819 (MP). Hence on the merits of the issue, the QIB expenditure can be treated as revenue expenditure and eligible for deduction under section 35D of the Income-tax Act is confirmed. Hence on merits of the issue as well as the fact that the same issue has been allowed in the earlier years and the Department cannot came upon in appeals in the subsequent years would be the reason to dismiss the Departmental appeal. We confirm the order of the Commissioner of Income-tax (Appeals) with respect to qualified institutional buyers expenses and dismiss the Departmental appeal on this issue. In the result, the Departmental appeal for the assessment years 2007-08 and 2008-09 are dismissed.
Assessment Year 2009-10
8. The first ground is general in nature. With respect to the second ground that "The Commissioner of Income-tax (Appeals) erred in allowing the claim of expenditure on account of the editorial content and brand right expenditure amounting to Rs. 90.80 lakhs as revenue expenditure even though the expenses were incurred for acquisition of right having enduring benefit as such capital in nature", the issue has been dealt with in the assessment year 2006-07, which is as follows :
The Assessing Officer held as below :
"The assessee has paid Rs. 9.08 crores as content rights to M/s. Asian Age Holdings Ltd. The assessee was asked to submit the details and it has submitted vide its submissions dated December 15, 2008 as under :
'Advances paid to AAHL towards purchase of past editorial con tent was reflected as receivable from AAHL, part of these payments were subsequently capitalised as brand 8s editorial content purchase under the group 'miscellaneous expenditure' to be written off in the financial year 2005-06. These amounts are offered as income in AAHL in earlier years which was capitalised in DCHL books in current year.'
On scrutinisation, it was found that these expenditures were not made during the relevant financial year, these payments were made for purchase of content and brand rights of Asian Age Holdings Ltd., Newspaper Company in Delhi, which was subsequently acquired by Deccan Chronicle Holdings Ltd.
While scrutiny proceedings it was found that the assessee has not taken this as an intangible capital asset. They have taken under the head as "miscellaneous expenditure" to be written off under the head current liabilities and provisions. As per profit and loss account, under the head sales and administrative expenses Rs. 45.20 lakhs under the composite head of miscellaneous expenditure they have been claimed as revenue expenditure.
As these expenditures have not been claimed under section 35A, nor capitalised under the head assets, it cannot be taken as revenue expenditure for the relevant financial year. Hence, an amount of Rs. 45.20 lakhs is disallowed, not being a revenue expenditure."
8.1. The Commissioner of Income-tax (Appeals) held as follows :
"During appeal proceedings, the appellant contended that it had paid Rs. 9.08 crores for content rights to M/s. Asian Age Holdings. This amount was taken to the balance sheet and the company adopted an accounting policy to write off its expenditure over a period of 10 years. In view of the above, the said expenditure was being written off every year. It was stated that the amount could be taken has deferred revenue expenditure and allowed or it could be capitalised as an intangible asset so as to allow amortisation at 25 per cent. The following are the important portions of the arguments of the appellant :
'The company adopted an accounting policy to write off this expenditure over a period of 10 years i.e., 120 months, keeping in view the utility of such brand right and editorial content which amounted to Rs. 45,20,000 and formed part of the miscellaneous expenditure written off which was debited to profit and loss account.'
The Assessing Officer disallowed the expenditure on the grounds that the expenditure has not been claimed under section 35A. It is pertinent to note are ephemeral and transitory in nature in as much as they are a part of a continuous process and need to be expended in order to generate and increase the brand recall and sustain it in the minds of customer. The Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC) has itself observed that 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.
The expenditure is essentially revenue in nature and the decision to treat the same as deferred revenue only represents a management decision taken in view of the magnitude of the expenditure involved. There have been a slew of recent judgments of various Benches of the Income-tax Appellate Tribunal wherein the above issue has been addressed directly and almost universally the decision has been in favour of the assessees. More particularly reference may be made in this context to the following judgments :
Amar Raja Batteries Ltd. V ACIT[(2004) 91 ITD 280 (Hyd)]
JCIT V. Modi Olivetti Ltd [(2005)4 SOT 859 (Delhi)]
ACIT Vs. Medicamen Biotech Ltd [(2005) 1 SOT 347 (Delhi)]
Hero Honda Motors Ltd v. Joint Commissioner of Inco9me Tax [(2005)
Charak Pharmaceuticals v. JCIT [(2005) 4SOT 393 (Mumbai)]
Alternatively, the acquisition costs could have been capitalised under the head "fixed assets" as "intangible assets" and amortised over a period of time at a rate of 25 per cent. If the intangible asset was amortised under section 32, the charge to profit and loss account would be Rs. 227 lakhs instead of Rs. 45.20 lakhs.'
5.2 I have carefully considered the facts and evidence. The appel lant has not shown this asset in the balance sheet. Therefore, it cannot claim depreciation on the same. The appellant has insisted that the expenditure is classified as deferred revenue expenditure, in view of the fact that it cannot be classified as an intangible asset under section 35A and the benefits of this expense are available over a period of many years.
5.2.1 In order to understand whether the accounting treatment given by the appellant is correct or not, one has to understand what exactly is the meaning of deferred revenue expenditure.
5.2.2 Deferred revenue expenditure is essentially an accounting concept denoting expenditure, for which a payment has been made or a liability incurred, which is essentially revenue in nature but which for various reasons (quantum, period of expected future benefit, considerations of impact on the bottom line, etc.,) and also on the 'presumption' that the same will result in benefits over a subsequent period or periods is spread out and written off over a period of time.
Deferred revenue expenditure can comprise diverse components of expenditure and manifest itself in the accounts in a wide variety of ways. For instance in recent years, the rising demand consequent upon the increased purchasing power in the hands of the consumers has led, the business and industrial world to incur major expenditures inter alia on advertisement, sales promotion, etc., with a view to enhance the visibility of their products and thereby increase their top-line. Such expenditure invariably represents either outlays on a major advertising campaign undertaken in different media with a view to enhance the visibility or modify the image of a product; holding of contests to expand the reach and promote sales, celebrity endorsements, one-time sponsorship or mega events, dealership incentives and other such significant sales promotion initiatives which go to increase and expand the brand recall of the products of a particular company (Sanjeeva Narayan ; The Chartered Accountant, May 2006, 1626).
Although the nature of such expenditure is entirely revenue, keeping in view the fact that the benefits arising therefrom are expected to be derived over a period of time, stretching sometimes over several accounting periods, the business world has been prone to treat such expenditure as a 'deferred revenue expenditure' and consequently has been amortising the same over the expected time period over which the benefits are likely to accrue therefrom. Accordingly only a proportion of the same is amortised in the profit and loss account but an appropriate adjustment is made in the computation of income whereby the entire expenditure is claimed as allowable revenue expenditure.
5.2.3 However, coming to the Income-tax Act, fundamentally, only two kinds of expenses are explicitly recognised i.e., capital and revenue. The former is not debited to the profit and loss account and is inexplicably linked to an asset, for which depreciation is allowed every year. On the other hand, revenue expenditure is allowed in one financial year.
5.2.4 The Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC) has itself observed that 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 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.
Thus while, for the purpose of the issue under consideration, the test of the enduring benefit fails at the initial stage itself, and even if the said test were to be explicitly applied it cannot be said that the said expenditure is of a capital nature. Further, no capital assets come into being as a result of the same and consequently the same cannot be classified as a capital expenditure. The expenditure is essentially revenue in nature and the decision to treat the same as deferred revenue only represents a management decision taken in view of the magnitude of the expenditure involved. For the purpose of allowability of any expenditure under the Income-tax Act 1961, what is material is the classification between the capital and revenue and the same does not recognise of any concept of deferred revenue expenditure.
5.2.5 In the case of Bajaj Sevashram Ltd. v. Deputy CIT [2006] 280 ITR 480 (Raj), the hon'ble Rajasthan High Court held that expenditure incurred for advertisement during a year can be debited in parts over several years. The assessee's policy of spreading over the expenses for a number of years was in order.
5.2.6 Coming to this specific expense in question, the first and fore most point is that the Assessing Officer has recognised the expense to be proper and for business purpose. In other words, it is allowable under section 37 of the Act as being for business purpose, although whether it is revenue or capital has to be decided. Therefore, the first conclusion is that the expense has to be allowed being for business purpose. The only question which, therefore, is a subject matter of debate is whether the entire expense is to be allowed as revenue expenditure in one financial year or to be capitalised as an intangible asset with the allowance of depreciation or it is to be treated as genuine and for business purpose, completely disallowing the same is incorrect.
5.2.7 The appellant has not shown this expense as an asset in the balance-sheet. Therefore, depreciation cannot be allowable on it. With regard to the nature of expense, it is to be seen that the appellant acquired the brand 'The Asian age' and rights over past editorial contest for a consideration of Rs. 9.80 crores. There is no doubt about the fact that the brand as well as the past editorial contest will have benefits pertaining to the appellant for more than one financial year.
5.3 In view of the aforementioned judgments of the various courts, it would not be proper to debit the entire amount in one year as it would violate the matching principle. On the other hand, it is clear that the benefits of the expense will accrue to the appellant over many financial years. But, it cannot be quantified accurately as to how much would be the benefit in a particular financial year. Unlike in bonds, where quantifications are simple and accurate, in this case, it is ultimately the judgment of the business head based on realities of the industry and economy which will determine the amount by which or the percentage of benefit available in a particular year. In the present case, the management has decided that the benefits of the expense will accrue to the company over a period of 12 years. The Assessing Officer does not have any contrary information to indicate a shorter or longer period.
5.3.1 In view of the above facts and circumstances, I hold that the expense in question is to be treated a deferred revenue expenditure and allowed as claimed by the appellant. This issue is decided in favour of the appellant."
8.2. With respect to Asian age brand rights and editorial contends rights, we find that the Commissioner of Income-tax (Appeals) has allowed the Asian age brand rights and editorial contents rights in the assessment year 2006-07 and the department did not file appeal accepting the order of Commissioner of Income-tax (Appeals). Hence, we confirm the order of Commissioner of Income-tax (Appeals) where at paragraph 4.2 of the Commissioner of Income-tax (Appeals) has held as follows :
"4.2 I have gone through the detailed submissions of the appellant and the appeal records for the assessment years 2006-07 to 2009-10. After a careful consideration of the same, I am of the opinion that there is merit in the argument of the appellant. As contended by the appellant, the disallowance under dispute was made for the first time for the assessment year 2006-07. On appeal by the assessee, the disallowance was deleted by my predecessor, vide his order in I. T. A. No.0007/Addl. CIT-16/CIT(A)-V/2011-12 dated May 18, 2011, after a detailed discussion of the basis of disallowance and the factual and legal position on the issues under consideration. As the ground for disallowance for the assessment year 2009-10 was same as for the assessment year 2006-07, the decision of my predecessor for that year was followed and relief was granted for this year also, by deleting the disallowance, vide order in I. T. A. Nos. 0284/Addl CIT-16/CIT(A)-V/ 2011-12 dated November 22, 2012 for the assessment year 2009-10. It is an undisputed fact the Department had not contested the order of the Commissioner of Income-tax (Appeals) for the assessment year 2006-07, by filing an appeal before the Income-tax Appellate Tribunal, obviously for the reason that there was no infirmity in the Commissioner of Income-tax's order, both on facts and in law. Thus, the issue stand concluded. In view of the above facts and in conformity with the directions of the hon'ble Income-tax Appellate Tribunal, that the Department cannot agitate the same issues for subsequent years if they were accepted in the earlier assessment year 2006-07, I delete the disallowance of Rs. 90.80 lakhs for the assessment year 2009-10."
8.3. We dismiss the Revenue's appeal as the Department has not filed appeal against the order of the Commissioner of Income-tax (Appeals) for the assessment year 2006-07 and hence is estopped from filing appeal on the same issue in this year (being subsequent year). The Revenue's appeal for the assessment year 2009-10 is dismissed.
9. In the result, the Revenue's appeal for the assessment years 2007-08, 2008-09 and 2009-10 are dismissed.
The order pronounced in the open court on 30th January, 2015.