Kaya Ltd, Mumbai vs Department Of Income Tax

BEFORE S/SHRI B.R.BASKARAN (AM) AND VIVEK VARMA, (JM) सव ी बी.आर.बा करन, लेखा सद य एवं ववेक वमा , या यक सद य के सम आयकर अपील सं./I.T.A. No3175/Mum/2013 ( नधा रण वष / Assessment Year : 2009-10)

Income Tax Officer 9(2)(2), बनाम/ M/s Kaya Ltd., Room No.225, Vs. Second floor, Aayakar Bhavan, Rangsharda, M.K.Road, K C Marg, Bandra (W), Mumbai-400020 Mumbai-400050 (अपीलाथ /Appellant) .. ( यथ / Respondent)

आयकर अपील सं./I.T.A. No3286/Mum/2013 ( नधा रण वष / Assessment Year : 2009-10) M/s Kaya Ltd., बनाम/ Income Tax Officer 9(2)(2), Second floor, Vs. Room No.225, Rangsharda, Aayakar Bhavan, K C Marg, Bandra (W), M.K.Road, Mumbai-400050 Mumbai-400020 (अपीलाथ /Appellant) .. ( यथ / Respondent)

थायी ले ख ा सं . /जीआइआर सं . /PAN/GIR No. :AACCK1045L

अपीलाथ ओर से / Appellant by Ms.Padmaja यथ क# ओर से/Respondent by Shri Nitesh Joshi

सन ु वाई क# तार'ख / Date of Hearing :2.1.2015 घोषणा क# तार'ख /Date of Pronouncement :4.3.2015 2 ITA. No.3175/Mum/2013 & 3286/Mum/2013

आदे श / O R D E R

Per B.R.BASKARAN, Accountant Member:

These cross appeals are directed against the order dated 05-02- 2013 passed by Ld CIT(A)-20, Mumbai and they relate to the assessment year 2009-10.

2. The assessee is in appeal in respect of the following issues:-

(a) Whether the expenditure incurred on advertisement and Sales Promotion is Capital or revenue in nature?

(b) Whether the unaccounted service income of Rs.18.81 crores made by the AO was rightly upheld by Ld CIT(A)?

3. The revenue is in appeal in respect of the following issues:-

(a) Whether the Ld CIT(A) is justified in allowing depreciation on "Advertisement and Sales Promotion Expenses" treating the same as acquisition of intangible rights, instead of treating it as "Deferred revenue expenditure".

(b) Whether the Ld CIT(A) was justified in allowing depreciation on pre-operative expenses claimed to have been incurred on setting up of new branches.

(c) Whether the Ld CIT(A) was justified in deleting the disallowance made u/s 40A(3) of the Act.

4. The first issue in both the parties' appeal arise out of common issue. The assessee company is engaged in the business of providing skin care and weight management services. It also sells skin care products. It has established branches all over the country by name "Kaya Skin Clinics" and "Kaya Life Centres". The assessee claimed expenditure under the head "Advertising & Sales Promotion" to the tune of Rs.17.10 crores. The AO took the view that the assessee has incurred this expenditure only to build its own brand, which will give enduring benefit to the assessee. Accordingly the AO took the view that the expenditure incurred by the assessee should be treated as "deferred revenue expenditure".

3 ITA. No.3175/Mum/2013 & 3286/Mum/2013

Accordingly, the AO allowed 20% of the expenditure and, however, disallowed the balance amount i.e., Rs.13.68 crores as Capital expenditure incurred towards intangible assets "Kaya skin clinic" (i.e.,brand building).

5. The Ld CIT(A) also took the view that the expenses incurred by the assessee are not purely towards advertising its products and services, but they have been incurred for expanding the business base by launching new clinics and propagating brand name "Kaya Skin clinics". He further observed that, in every clinic centre, there is a big glow sign board displaying advertisement of Kaya Skin Clinics, which means the brand name is being advertised and not the latent feature of services. Accordingly he held that the assessing officer has rightly pointed out the fact that, basically, the assessee promotes the brand name instead of services and products. It was seen that the assessee has been promoting its brand name through its brand ambassador, being a model named "Riddhhima Kapoor" and hence the Ld CIT(A) held that the assessee has only promoted the brand as its business strategy. He also took the view that the big glow sign board displaying the name of "Kaya Skin Clinic"

cannot be presumed to be having temporary benefits. Accordingly, the Ld CIT(A) held that the assessing officer was right in holding that the publicity is nothing but brand development involving enduring benefit to the assessee. Accordingly he held that the expenditure incurred on brand building is to be considered as Capital Expenditure.

6. Since the Ld CIT(A) held the advertisement expenses have been incurred towards Brand building and the same constitutes Capital expenditure, he also held that the same constitutes intangible asset eligible for depreciation @ 25%. Accordingly he directed the AO to allow depreciation @ 25%.

7. The main submission of the assessee was that it was required to incur advertisement and sales promotion expenses continuously every 4 ITA. No.3175/Mum/2013 & 3286/Mum/2013

year. He further submitted that the assessee has been incurring the expenditure on advertisement and sales promotion since its inception, i.e., since the assessment year 2004-05 onwards. He further submitted that the expenditure incurred in AY 2004-05 constituted 41.63% of the turnover, whereas during the year under consideration, it has come down to 18.05%. The Ld A.R also invited our attention to a table, wherein the assessee had analysed the percentage of advertisement expenditure over the amount of turnover from AY 2004-05 to 2014-15. He further submitted that the concept of deferred revenue expenditure is not applicable while computing the total income under the Income tax Act, as held by the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd Vs. CIT reported in 225 ITR 802(SC). He further submitted that the tax authorities are not correct in presuming that the advertisement expenses incurred by the assessee has resulted in brand building, since the result of advertisement could not be measured in a scientific manner. He further submitted that there is uncertainty over the period for which the said advertisement programme shall have effect. The Ld A.R also furnished following contentions in the written submissions given to us:-

"(a) The Assessee submits that the expenditure on advertisement and sales promotion incurred by it is revenue in nature and has been incurred in the ordinary course of its business. The expenditure has been incurred towards advertisements of the services offered by it in TV, Radio, print media and art work charges etc. A bare perusal of the sample advertisements placed at pages 135 to 137 of the Paper Book and sample invoices at pages 123 to 134 shows that the advertisements are focused towards promotion of the services relating to skin treatment and weight management provided by the Assessee. Further, no enduring benefit is derived from such advertisements as such expenditure has to be incurred on a regular basis year after year.

(b) The expenditure on advertisement and sales promotion is not for the purposes of creation of any brand name as:

5 ITA. No.3175/Mum/2013 & 3286/Mum/2013

(i) the Assessee's brand has already been created in the earlier years as, as at 3 1.03.2009 it had Kaya Skin Clinics functioning at 74 locations and Kaya Life Centres at 4 locations in India. Further, for the year under consideration its turnover from business stood at Rs. 118.37 crores. It has a customer base of over 50,000.

(ii) the matter of the advertisement is the service rendered by the Assessee and not brand creation (see sample advertisements at pages 135 to 137 of the paper book) and audio visual clip of an advertisement on the television separately provided on a CD after the hearing on 04.08.2014;

(iii) appointment of a brand ambassador for advertising its products and services does not mean that the nature of the expenditure incurred is for creation of brand. Brand ambassador is chosen because of her beauty and skin which co-relates to the assessee's business.

(iv) displaying the glow sign board Kaya Skin Clinic outside its outlet does not lead to the conclusion that the Assessee is creating the brand name;

(v) advertisement and sales promotion exercise provides a stimulus to the potential customer to buy services and products offered by the Assessee. However, the advertisement may fail to induce the desired behaviour and, hence, it is appropriate to charge the same off as revenue expenditure.

(vi) Salt Brand Solutions was appointed for the purposes of expanding the awareness amongst the people of the services being offered by the Assessee. Engaging such services cannot be regarded as creation of brand image. In any event, the services of Salt Brand Solutions were engaged in May, 2011 and have no relevance to the year under consideration.

(c) Assuming without admitting that benefit resulting from the advertisement and sales promotion expenses endures over a period beyond one year, the Assessee submits that the period of such benefit cannot be ascertained. Therefore, deduction f o r expenditure cannot be spread over a number of years. It is an admitted position that expenditure on advertisement 6 ITA. No.3175/Mum/2013 & 3286/Mum/2013

and sales promotion is revenue in nature. In the grounds of appeal filed by t h e R e v e n u e b e f o r e t h e T r i b u na l t h e y a r e u r g i ng t h a t t h e expenditure should be spread over and not depreciated as a capital asset. Once, it is accepted that the expenditure is revenue in nature it is well settled, in as far as income-tax is concerned, that there is no concept of deferred revenue expenditure (see CIT v. Casio India Ltd. 335 ITR 196 (Del.), CIT v. Citi Financial Consumer Finance Ltd. 335 ITR 29 (Del.), Hindustan Commercial Bank Ltd., In re 21 ITR 353 (All.) and DCIT v. Core Healthcare Ltd. 308 ITR 263 (Guj.). In any event, such expenditure cannot be deferred as the period for which the benefit may flow is not ascertainable. It is also possible that the advertisement may fail to have the desired result.

(d) Assuming without admitting that the expenditure on advertisement and sales promotion is for the purposes of creation of brand name the Assessee submits that in view of the following decisions such expenditure even on creation of brand name has to be allowed as a revenue deduction.

Asian Paints Ltd. vs. Addl. CIT [(Mumbai ITAT) ITA 7801/MUM/2010] Fine Jewellery (I) Ltd. vs. ACIT [(Mumbai ITAT) 19 ITR 746] ACIT vs. Warner Lambert India Ltd. [(Mumbai ITAT) ITA 954 & 3063/Mum/2006] ITO vs. Spice Communications Ltd. [(Delhi ITAT) 35 SOT 78]CIT v. Modi Revlon Pvt. Ltd. 78 DTR 342 (Del.)

(e) If it is held that expenditure incurred by the Assessee on advertisement and sales promotion is to be regarded as capital in nature, then, the Assessee submits that, the CIT(A) has rightly treated it as a depreciable asset and allowed depreciation on the same.

8. During the course of hearing, the Ld A.R also placed reliance on the following case law:-

(a) ITO Vs. Spice Communication (35 SOT 78)(Delhi)

(b) CIT Vs. Geoffrey Manner and Co. Ltd (315 ITR 134)(Bom)

(c) Warner Lamber India (ITA No.954 & 3063/Mum/2006)

(d) Asian Paints Ltd (2013)(37 CCH 177)(Mum)

(e) Fine Jewellery (56 SOT 220)(Mum) 7 ITA. No.3175/Mum/2013 & 3286/Mum/2013

9. On the contrary, the Ld D.R submitted that the "brand name" is an intangible asset and the said view finds support from AS-26, i.e., the accounting standard issued by the Institute of Chartered Accountants of India. He further submitted that the assessee has advertised only the name "Kaya Skin care clinic" and not any particular product/service and hence the Ld CIT(A) was justified in upholding the view taken by the AO that the assessee has incurred advertisement expenses towards brand building only. He further submitted that the brand shall have enduring benefit to the assessee. He also submitted that the assessee has engaged a "Brand ambassador" to market its brand "Kaya Skin clinic". He further submitted that the case law relied upon by the assessee are distinguishable and hence the ratio of those decisions is not applicable to the facts of the instant case.

10. We heard the parties and perused the record. Before us, the Ld A.R placed reliance on the decision rendered by Delhi bench of ITAT in the case of Spice Communication (supra). The head notes given for that decision reads as under:-

"Business expenditure--Capital or revenue expenditure-- Advertising and sales promotion expenditure--Expenditure incurred partly towards brand building in brand building and, hence, an acquisition of an intangible asset--AO adding 10 per cent of the expenditure, i.e., Rs. 3,50,50,300 to the income of the assessee on account of disallowance which is of capital nature as being relatable to brand building--Assessee has not acquired any brand from any outside party--No justification for the addition

Held :

It is not in dispute that the assessee is in the business of providing cellular mobile services under its own self-generated brand "Spice"

since 1997. The assessee's business of providing cellular mobile services is undoubtedly a highly competitive business, and assessee has to provide services in a competitive environment. This is also not in 8 ITA. No.3175/Mum/2013 & 3286/Mum/2013

dispute that the assessee has incurred expenditure towards advertisement and sales promotion in course of carrying on its business activities. The AO has allowed 90 per cent of the expenses as revenue expenditure and allocated 10 per cent towards capital by observing that 10 per cent of expenses have been incurred towards brand building. The AO has not been able to justify as to how the 10 per cent of the total advertisement and sales promotion expenses can be allocated towards capital expenditure when the assessee has not acquired any brand from any outside party. The expenditure on advertisement and sales promotion constituted expenditure incurred on press advertisement, hoardings, neon signs, brochures, etc. The press advertisements could not be considered as capital asset acquired by the assessee. Similarly, putting hoardings and neon signs could not also be considered on capital field. These expenditures do not lead to create any capital asset to the assessee. Even there is no benefit of enduring nature so to treat the expenses as capital expenditure. Since by incurring expenditure on advertisement and sales promotion, the assessee has not acquired any fixed capital asset, but these expenditures were incurred for earning better profits, and for facilitating assessee's operation of providing cellular mobile services, there exist direct nexus between the advertisement and sales promotion expenses and the carrying out of the business activity of the assessee. There is not any justification in interfering with the order of the CIT(A) in deleting the disallowance of 10 per cent of expenses towards advertisements and sales promotion incurred by the assessee for smooth functioning and carrying on assessee's business effectively, proficiently and profitability. The order of the CIT(A) is, thus, upheld on this issue."

Though the Ld D.R tried to distinguish this decision by submitting that the AO, therein, had taken only 10% of the expenses in the Capital field, yet we are of the view, the ratio of the above said decision squarely applies to the instant case.

11. It is also pertinent to note that the Hon'ble jurisdictional Bombay High Court in the case of Geoffrey Manner and Co. Ltd (supra) has laid down the following ratio to determine the nature of advertisement expenses:-

"5. In our opinion the correct test to be applied in such a case would be, that if the expenditure is in respect of an ongoing business of the assessee and there is no enduring benefit it can be treated as revenue 9 ITA. No.3175/Mum/2013 & 3286/Mum/2013

expenditure. If, however, and if it is in respect of business which is yet to commence then the same cannot be treated as revenue expenditure as expenditure is on a product yet to be marketed. Considering the above, in our opinion the judgment in Patel International Film Ltd. (supra) is clearly distinguishable. The CIT(A) and the Tribunal on the facts of this case were clearly within their jurisdiction in holding that the expenditure was by way of revenue expenditure as it was in respect of promoting ongoing products of the assessee herein."

In the instant case, there is no dispute between the parties that the assessee has started business in AY 2004-05 and hence the expenditure has been incurred by the assessee for an ongoing business.

12. The Hon'ble Punjab and Haryana High Court has also considered an identical issue in the case of CIT Vs. Liberty group marketing division (315 ITR 125) and the ratio of the said decision was followed by the jurisdictional High Court in the case of Geoffrey Manner & Co. Ltd (supra). For the sake of convenience, the head notes given by the ITR in the case of Liberty group marketing division are extracted below:-

"Business expenditure--Capital or revenue expenditure-- Advertisement expenditure on glow sign boards--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--Glow sign board is not an asset of permanent nature but requires frequent replacement--Expenditure on glow sign boards is made by assessee with an object to facilitate the business operation--Hence, expenditure is allowable revenue expenditure

Held :

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, 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 10 ITA. No.3175/Mum/2013 & 3286/Mum/2013

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.--CIT vs. Madras Auto Service (P) Ltd. (1998) 148 CTR (SC) 398 : (1998) 233 ITR 468 (SC) applied."

13. In all the above said cases, it has been held that the expenditure incurred in order to facilitate the business operation and not with the object of acquiring asset of enduring nature is allowable as revenue expenditure. In the instant case, we have already seen that the assessee has been incurring expenditure and sales promotion since AY 2004-05, meaning thereby, the assessee was required to incur those expenses every year in order to retain its position in the market. There should not be any dispute that the assessee is conducting its business in a competitive environment. Further, there is merit in the submission of Ld A.R that it is difficult to assess the period of benefit derived from advertisement and further it is also difficult to ascertain as to whether any "brand name" was created. Hence, we are of the view that the Ld CIT(A) was not correct in law in holding that the assessee has spent the expenditure on advertisement and sales promotion for brand building purpose. In our view, the assessee was right in law in claiming this expenditure as revenue expenditure. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the AO to allow the entire amount spent on advertisement and sales promotion as revenue expenditure.

14. Since we have upheld the view of the assessee, the examination of the questions as to whether the same constitutes "deferred revenue expenditure" or "Capital asset, being intangible asset eligible for depreciation" do not arise.

11 ITA. No.3175/Mum/2013 & 3286/Mum/2013

15. The next urged by the assessee relates to the assessment of unaccounted service income of Rs.18.81 crores. The AO noticed that the assessee has been consuming its own products (captive consumption) while providing services to its clients. Hence, the AO ascertained the ratio of captive consumption with the service charges income generated by it. In the immediately preceding year, the service income shown by the assessee was 3100 times of the value of captive consumption, whereas during the year under consideration it was only 2614 times. Hence, the AO computed the service charges income of the instant year at 3100 times of the captive consumption at Rs.119.86 crores. The assessee had declared the service charges income at Rs.101.05 crores. Hence the AO treated the difference amount of Rs.18.81 crores as unaccounted income of the assessee. The Ld CIT(A) also confirmed the said addition.

16. The Ld A.R submitted that the assessee is providing 562 different types of services using different types of its products. He further submitted that the assessee is manufacturing 48 types of products and the cost of items range from Rs.5/-per unit to Rs.930/- per unit. The service charges collected would depend upon types of services rendered and the also the types of products used. The type of treatment to be given to a client would also depend upon the skin characteristics. He further submitted there is no standard "Bill of material" as normally available with the manufacturing concerns. Accordingly he submitted that there is no one to one correlation between the quantity of items of beauty care products consumed and the services rendered by the assessee. He also submitted that the assessee is having adequate internal controls and checks in place on the consumption of materials and booking of service income, since all the clinics are following detailed standard procedures right from contacting the client till the completion of the treatment. He further submitted that the assessee is generating adequate documentation 12 ITA. No.3175/Mum/2013 & 3286/Mum/2013

at each stage and hence there is no scope for suppression of income. He further submitted that the assessee, as a part of its sales promotion scheme, would offer certain free and discounted services scheme. Such types of schemes would also consume beauty products and the same would not result in receipt of service charges. Accordingly, he submitted that the tax authorities are not justified in presuming that the service charges income are directly proportional to the cost of captive consumption of beauty materials.

17. The Ld D.R, on the contrary, submitted that the service income reported by the assessee during the current year was lower in proportion than that disclosed in the immediately preceding year. He submitted that the assessee could not properly explain the said difference and hence the Ld CIT(A) was justified in confirming the addition made in the service income.

18. We have heard the rival contentions and perused the record. The main contention of the assessee is that the consumption of materials would depend upon the types of services offered, i.e, the product mix would depend upon the type of service. Thus, according to the assessee, the captive consumption of materials cannot be at standard proportion of service income receipts. Another submission made was that the assessee has offered discounts and free trials during the year under consideration. However, the Ld CIT(A) has observed that the assessee has not substantiated its claim of discounts and free trials. Further the AO has pointed out that the invoices were not signed or authenticated by any of the clients and hence those vouchers were self serving invoices. It appears that the assessee has claimed that it is having quantitative details for captive consumption. However, the Ld CIT(A) has observed as under

in this regard:-

13 ITA. No.3175/Mum/2013 & 3286/Mum/2013

"Further I find no force in the argument that there is quantitative details of captive consumption because there is no details on record which can be one to one correlated. When there is complete failure on the part of the assessee to correlate the consumption with receipts, there is no propriety to claim that there is opening balance, production, purchase, sale and closing stock."

During the course of appellate proceedings before Ld CIT(A), it appears that the assessee has furnished details of 17 types of services (claimed to be major services). However, the Ld CIT(A) has taken the view that the furnishing of details of 17 services out of 562 services cannot explain the difference in receipts.

19. However, we are of the view that there appears to be some merit in the contentions of the assessee. Normally the service receipts are determined on the basis of Fixed costs, variable costs and profit element. The material cost would fall in the category of variable costs. Accordingly, the cost of particular service would normally be determined at Fixed cost + Variable cost + Profit amount. Hence, comparison of the variable cost to the total service receipts, in our view, may not be right method of approaching issue. Further, when the assessee is offering 562 types of services and since there is a possibility that one unit of product shall be used to many clients, it would also be difficult to establish one to one correlation between the consumption and the service receipt. Hence the rejection of books of account and consequent estimate of income under these set of facts, in our view, is not justified. On the contrary, the claim of captive consumption needs to be examined on an overall basis, i.e., by making test checks.

20. The assessee has claimed to have maintained quantity details of various products. Hence, on a test check basis, the said details can be verified and a decision can be taken. Hence, we are of the view that this issue needs to be restored to the file of the AO with the direction to 14 ITA. No.3175/Mum/2013 & 3286/Mum/2013

examine the claim of captive consumption. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore this issue to the file of the AO with the direction to examine the claim of captive consumption on a test check basis and take appropriate decision in accordance with the law.

21. The next issue urged by the revenue relates to the eligibility of the assessee to claim depreciation on the pre-operative expenses. During the year under consideration, the assessee had capitalized expenses to the tune of Rs.2.23 crores and claimed depreciation thereon. The said expenditure consisted of rent, audit fee, salary, professional fees, travel, designing etc. The AO took the view that these expenses neither form part of assets nor they can, per se, be considered to be fixed asset. Accordingly he disallowed the depreciation claimed by the assessee. The Ld CIT(A), however, allowed the depreciation. Hence, the revenue is aggrieved by his decision.

22. We heard the parties on this issue and perused the record. The Ld CIT(A) has allowed the claim of the assessee with the following observations:-

"6.3 I have considered the finding of the AO and rival submission of the appellant carefully. I find that AO has wrongly disallowed depreciation without any valid reasons when it is establish that there is some expenditure which are preoperative expenses then same are to be amortized or it has to be capitalized in respective assets. AO has not proved beyond doubt as to how such expenses are not related to acquisition of such assets. There is no proper reasoning in para 7.4 of the assessment order hence same can not be upheld. On the contrary, Ld. AR has rightly argued that such expenses are attributable to the cost of bringing the assets to its working condition for its use. The reliance placed in the cases of Challapalli Sugars Ltd. v. CIT 98 ITR 167(SC). Gujarat High Court in Arvind Mills Ltd. v. CIT 112 ITR 64(Guj) Bombay High Court in CIT v. Polychem ltd. 98 ITR 574 (Bom), CIT V/s Nirlon Synthetic Fibres & Chemicals Ltd 137 ITR 1 (Bom) and CIT V/s J.M.A. Industries Ltd 129 ITR 373( Delhi) supports the contention of the appellant. If such expenditure is not to be capitalized then it would be allowed as 15 ITA. No.3175/Mum/2013 & 3286/Mum/2013

revenue expenditure. AO has not clarified as to how these are not genuine expenditure, therefore the finding of the AO is without any leg. Thus, considering the facts of the case AO is directed to allow the depreciation on various expenses after capitalizing the same to be appropriate account of assets. In view of these the alternative grounds become infructuous."

On perusal of the order of Ld CIT(A) on this issue, we notice that the first appellate authority has followed the decision of Hon'ble Supreme Court rendered in the case of Challapalli Sugars Ltd (supra). Accordingly, we do not find any infirmity in the decision of Ld CIT(A) on this issue.

23. The next issue urged by the revenue relates to the disallowance made u/s 40A(3) of the Act. The AO noticed that the assessee's sister concern named M/s Marico Ltd had incurred certain expenses on behalf of the assessee herein. Accordingly, the assessee had accounted for the expenses by crediting the account of M/s Marico Ltd, i.e., through Journal entries. The AO took the view the expenditure incurred through Journal entries does not fall in any of the exemptions provided under Rule 6DD of the IT Rules. He further observed that the assessee has not proved that M/s Marico Ltd had incurred expenses otherwise than the account payee cheques or through demand drafts or RTGS. Accordingly, he disallowed the expenses incurred under the head "seconded employees" amounting to Rs.8.44 crores and "Other expenses" amounting to Rs.44.98 lakhs, by invoking the provisions of sec. 40A(3) of the Act. The Ld CIT(A) however, directed the AO to delete the disallowance of expenditure u/s 40A(3) of the Act. The revenue is aggrieved by his decision.

24. We heard the parties and perused the record. The total addition made by the assessing officer was Rs.8.89 crores. According to the assessee, there was totaling error of Rs.1.08 crores and further a sum of Rs.2.00 crore was loan transaction. Thus, the remaining expenses 16 ITA. No.3175/Mum/2013 & 3286/Mum/2013

incurred by M/s Marico Ltd on behalf of the assessee were claimed to be as given below:-

On account of general expenses 44,98,450 On account of secondment employees 5,35,53,850

According to Ld CIT(A), the salary was given to the employees by direct credit to their bank accounts. However, the Ld CIT(A) did not refer to any material in support of this conclusion. He has further expressed the view that the payments made through Journal vouchers are not hit by the provisions of sec. 40A(3) of the Act. We are unable to accept the said view. When Marico Ltd was incurring expenses on behalf of the assessee, it is required to comply with the provisions of sec. 40A(3) of the Act. Otherwise, the assessee is required to show that the payments are covered by the exceptions given in Rule 6DD of IT Rules. Since the assessee has claimed that M/s Marico Ltd has incurred expenses through cheque payments wherever necessary, including the salary payment made to seconded employees, we are of the view this issue requires fresh examination at the end of the assessing officer. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the assessing officer for fresh examination.

25. In the result, the appeal of the assessee is treated as allowed and the appeal of the revenue is treated as partly allowed.

The above order was pronounced in the open court on 4th Mar, 2015.

घोषणा खुले यायालय म* +दनांकः 4th Mar, 2015 को क# गई ।

sd sd ( ववेक वमा / VIVEK VARMA) ( बी.आर.बा करन / B.R. BASKARAN) या यक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER

मंब ु ई Mumbai:4th Mar,2015. 17 ITA. No.3175/Mum/2013 & 3286/Mum/2013

व. न.स./ SRL , Sr. PS

आदे श क !त#ल$प अ%े$षत/Copy of the Order forwarded to :

1. अपीलाथ / The Appellant

2. यथ / The Respondent.

3. आयकर आयुक्त(अपील) / The CIT(A)- concerned

4. आयकर आय1 ु त / CIT concerned

5. वभागीय त न3ध, आयकर अपील'य अ3धकरण, मुंबई / DR, ITAT, Mumbai concerned

6. गाड फाईल / Guard file.

आदे शानस ु ार/ BY ORDER, true copy सहायक पंजीकार (Asstt. Registrar) आयकर अपील'य अ3धकरण, मब ुं ई /ITAT, Mumbai