IN HIGH COURT OF DELHI AT NEW DELHI Date of decision: 14th November, 2014. ITA Nos. 536/2014, 537/2014 & 588/2014 COMMISSIONER OF INCOME TAX DELHI ( CENTRAL) -III .Appellant Through Mr. Balbir Singh, Sr. Standing Counsel with Mr. Abhishek Baghel, Advocate. versus HARI CHAND SHRI GOPAL Respondent Through CORAM HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE V. KAMESWAR RAO SANJIV KHANNA, J. (ORAL) We have heard learned counsel for Revenue at some length, but do not find any ground or reason to interfere with impugned order dated 3rd January, 2014 in view of facts of present case. 2. respondent herein is individual and assessment years involved are 2003-04, 2004-05 and 2005-06. Search and seizure action under Section 132 of Income Tax Act, 1961 (Act, for short) was carried out on Gopal Zarda group including M/s. Gopal Corporation Ltd. 3. respondent-assessee was not subjected to search and seizure operations but subsequently on satisfaction note recorded by ITA 536/2014 Page 1 of 8 Assessing Officer of M/s. Gopal Corporation Ltd., proceedings under Section 153C of Act were initiated. 4. Order under Section 153C of Act, refers to agreements between respondent assessee and M/s S. Gopal & Co. and M/s Flakes N Flavourz and factual position that said companies had paid and respondent assessee had received royalty of Rs.54,63,751/-, Rs.63,57,509 and Rs.1,56,07,563/- for assessment years 2003-04, 2004-05 and 2005-06, respectively. On quantum of royalty received, there was no dispute and Assessing Officer did not make any addition. Assessing Officer, however, observed that respondent assessee had incurred substantial expenditure on advertisements and legal and professional fee that was not justified and exorbitant as it constituted substantial percentage of receipts by way of royalty. We are not reproducing finding of Assessing Officer in detail as it is quoted in paragraph No.6 below. 5. stand of respondent assessee was that expenditure on advertisement etc. was in fact and actually incurred. quantum should not be disputed as payments were made to unrelated third parties like Zee Telefilms, News Television India Ltd., SET India Ltd. etc. said expenditure was towards sales promotion, brand building, brand awareness etc. of incense sticks, namely, Joie Agarbatti and not for tobacco products. agreements with M/s S. Gopal & ITA 536/2014 Page 2 of 8 Co. and Flakes-N-Flavourz was not in respect of Joie Agarbatti or incense sticks but in respect of tobacco and related products. Thus, there was no co-relation between two agreements and advertisements or brand building expenditure incurred. Assessing Officer did not agree and in order under Section 153C held that only 1% of expenditure towards brand building expenditure etc. should be allowed and balance 99% should be disallowed as it was not relatable to business activity of respondent-assessee. 6. Commissioner of Income Tax (Appeals) dealt with issue in great depth and detail. Discussing reasoning given by Assessing Officer and factual matrix, Commissioner of Income Tax (Appeals) came to following conclusion in ITA No.537/2014 for assessment year 2003-04:- However even on merits it is seen that entire addition to income has been based on premise that expenditure claimed on account of advertisement expenses for Rs. 40,22,736/- (this is 1/5th of total expense of Rs.2,01,13,684/- spent on advertisement by appellant of it's new product Joie Agarbatti and Incense stick in FY 2000-01) was not justified to be allowed as this expenditure should have been incurred by assessee's (Parties) who has entered brand lease agreement with appellant firm. reason being that when assessee is entitled to fixed percentage of turnover there is no apparent reason why appellant should incur such expenditure on advertisement which is about 73% of royalty receipts (Rs. 54,63,571) in year under consideration. AO is of view that reason ITA 536/2014 Page 3 of 8 for booking above advertisement expenses in case of assessee firm is apparently to inflate profit of brand lease holder companies that is M/s. S. Gopal and Company; M/s Flakes and Flavourz and M/s Gopal Corporation ltd. which are being run in industrially backward area and are entitled to claim of deduction u/s 80 IB of IT Act. It has thus been concluded that advertisement expenditure in appellant's case is basically arrangement for claiming deduction u/s 37(1) and consequently only 1% of such expense has been allowed and balance 99% which works out to Rs. 39,82,509/- has been disallowed holding same as advertisement expense not solely and exclusively for business. basic contention of appellant is that above presumption of AO is factually incorrect and is based on conjecture and surmises. That appellant received royalty from M/s S Gopal & Co. and M/s Flakes and Flavourz during year which was against brand lease agreement for Tobacco & Tobacco related products and had not entered into any brand lease agreement for use of trade mark and copyright license for Joie brand incense Sticks. In this connection appellant has enclosed copy of reply filed by him before AO (in response to questionnaire issued on 05.10.10 and 29.10.10) where said fact was submitted before AO also. appellant has also enclosed copy of Trade Mark & Copyright License Agreement dated 26.07.1999 which it had entered with M/s S Gopal & Co. as also Trade mark and Copyright license agreement dated 19.01.04 which it had entered with M/s Flakes and Flavourz. It has been submitted that in both these agreements "Trade Mark and copyright License" between appellant and these parties is with regard to providing technical knowhow, experience and expertise in selecting curing, maturing, processing blending and formulating, chewing tobacco mouth fresher, kiwam and pan chatni. argument being made by appellant is thus that there was no trade mark/copy right agreement between appellant and parties from whom royalty has been received during year with reference to user of trade mark/copy right ITA 536/2014 Page 4 of 8 license in case of Joie Agarbattie. Thus appellant has argued that there did not arise question of not debiting advertisement expenses for advertising Joie Agarbattie, brand for which was being owned by appellant and trade and Copyright license of which had not been parted with to third party. To put it differently, assessee has not debited advertisement expenses of other parties in its own books, as user of trade mark license of joie Agarbattie had not been granted in favour of these parties during year. appellant has also submitted details of advertisement expenditure incurred by these entities in respective years. I have gone through contention of appellant as also trade mark & Copyright license agreement which it has entered with M/s S. Gopal & Co. & M/s Flakes and Flavourz and from same it is noted that there is no reference to grant of license for user of Joie Agarbatti brand in these agreements and therefore question that expenses of these concerns have wrongly/incorrectly booked in case of appellant is not found to be substantiated. I also find substance in contention of appellant that claim of said expense of Rs. 2,01,13,684/- in equal portion in 5 assessment year beginning with AY 2000-01 is not prejudicial to interest of revenue and am in agreement with submission that decision of Hon'ble ITAT Ahmadabad in case of M/s Aqua Mineral P. Ltd. Vs. Cit 96 ITD 417 are based on different set of facts and are not applicable to facts of instant case. In result disallowance made for Rs. 39,82,509/- in case of appellant is directed to be deleted as no evidence has been brought on record by AO that said firms M/s S Gopal & Co and M/s Flakes and Flavourz were engaged in manufacturing of joie brand of incense sticks." 7. In these circumstances, Revenue preferred appeals before Tribunal. Tribunal in impugned order noticing facts found by Commissioner of Income Tax (Appeals) observed that ITA 536/2014 Page 5 of 8 Departmental Representative has not been able to substantiate findings of Assessing Officer. It was also observed that none of documents contained any incriminating evidence/material. 8. During course of hearing before us, we asked learned counsel for Revenue to examine and point out, whether findings recorded by Commissioner of Income Tax (Appeals) on merits were correct and justified. 9. We also notice that Assessing Officer has not observed or held that expenditure was not incurred by respondent-assessee. It has been accepted that expenditure in fact was incurred. undisputed factual position which emerges from appellate orders is that expenditure incurred on advertisement/brand building was in respect of Joie Agarbatti and incense sticks. expenditure was not incurred for brand building/advertisement of tobacco products etc., in respect of which royalty payments were received. Whether or not advertisement or brand building expenditure should have been incurred for Joie Agarbatti and incense sticks was prerogative and right of assessee and Assessing Officer cannot question and challenge same except when challenge is permitted and allowed by statutory provision. Reasonableness and whether assessee was wise and prudent in incurring expenditure, is not within domain of examination by assessing officer, unless permitted and allowed ITA 536/2014 Page 6 of 8 under statute. Expenditure can be disallowed under section 37(1) of Act, if it is held that it was not wholly and exclusively for business and not by adopting subjective standard of reasonableness. [See Commissioner of Income Tax vs.Walchand and Co. Private Ltd (1967) 65 ITR 381, J.K Woollen Manufacturers vs. Commissioner of Income Tax, (1969) 72 ITR 612]. Section 40A(2) of Act has not been invoked and there is no provision which stipulates that advertisement and brand building expenses could be restricted or partly allowed. 10. In view of aforesaid factual position, we do not think that it is fit case to issue notice as it will be futile exercise as factually incorrect findings were recorded by Assessing Officer leading to additions and findings recorded by Commissioner of Income Tax (Appeals) have not been set aside and adversely commented upon by Tribunal. In fact, Tribunal has accepted factual findings and has based their decision in view of said facts. In these circumstances, we need not examine question as to whether any document belonging to respondent-assessee was found during course of search and whether Section 153C of Act was rightly invoked. In this regard, we also record that there has been amendment to Section 153C by Finance (No.2) Act, 2014 with effect from 1st October, 2014. said issues are left open to be ITA 536/2014 Page 7 of 8 decided in appropriate case. 11. appeals are accordingly dismissed. SANJIV KHANNA, J. V. KAMESWAR RAO, J. NOVEMBER 14, 2014 NA ITA 536/2014 Page 8 of 8 Commissioner of Income-tax, Delhi (Central)-III v. Hari Chand Shri Gopal