Assets purchased for showroom of dealer for promoting sale is allowed as Capital Expenditure : High Court

By | September 20, 2021
(Last Updated On: September 20, 2021)
HIGH COURT OF KERALA
Apollo Tyres Ltd.
v.
Deputy Commissioner of Income-tax, Circle 1(1), Ernakulam
S.V. BHATTI AND BECHU KURIAN THOMAS, JJ.
IT APPEAL NO. 26 OF 2013
JULY  29, 2021
Joseph Markose, Sr. Counsel, V. Abraham MarkosBinu MathewMathews K. UthuppachanTerry V. James and Tom Thomas Kakkuzhiyil, Advs. for the Appellant. P.K.R. Menon and Jose Joseph and Christopher Abraham for the Respondent.
S.V.Bhatti, J.
Heard learned Senior Counsel Mr. Joseph Markos and
learned Standing Counsel Mr. Christopher Abraham for parties.
2. M/s.Apollo Tyres Ltd., Kochi/Assessee is the
appellant. The Deputy Commissioner of Income Tax/Revenue is
the respondent. The subject appeal is at the instance of
Assessee from the order of Income Tax Appellate Tribunal (for
short ‘the Tribunal’) Cochin Bench in ITA No.430/Coch/2006
dated 24.08.2012. The substantial questions stated in the
instant tax appeal relate to the Assessment Year 2003-04. The
assessee challenges the order of Tribunal in rejecting the
assessee’s claim made towards showroom expenses; disallowed
depreciation in respect of portion of Gurgaon building rented
out by assessee in favour of its sister concern Apollo
International Ltd; expenditure on club payment towards cost of
services and finally advances written off from the amount
advanced by the assessee for purchase of capital items. The
substantial questions are considered in the same order they are
framed in the appeal.
3. The first question relates to assessee’s claim of
expenditure for purchasing equipments such as wheel balancer,
wheel aligner, wheel changer and tyre changer for the use by
dealers of assessee at Apollo Tyre World showroom. The
assessee claimed that the expenditure incurred for purchasing
the equipment is an expenditure for refurbishing the
showrooms of the company, hence an expenditure incurred to
expand the business opportunities. The Assessing Officer, by
referring to the audit report of assessee/company, found that
the expenditure is in the nature of purchase of equipment, but
not an expenditure incurred by the assessee for refurbishing its
showroom. Having regard to the nature of expenditure, the
Assessing Officer treated the expenditure as capital expenditure
and allowed depreciation of Rs.8,05,009/- and declined the
claim of assessee as revenue expenditure amounting to
Rs.64,40,068/-. The Assessing Officer, while disallowing the
claim, has further noted that the assessee has failed to prove, as
a matter of fact, that the ownership of the equipment was
transferred to the dealer at the time of installation of the
equipment in the respective showrooms. Further, it is recorded
by the Assessing Officer that as long as the ownership is
continued with the assessee, the dealer can merely enjoy the
equipment. The further reasoning is that the equipment is in
the nature of movable property and it is capable of being
reinstalled in any other showroom upon cancellation of original
dealership at a place where the equipment was established.
3.1 The crucial conclusion recorded by the Assessing
Officer is that the ownership of the equipment purchased,
amounting to Rs.64,40,068/-, remained with the assessee.
Therefore, the claim of total amount spent as revenue
expenditure cannot be accepted, but was treated as capital
expenditure and thereon granted depreciation on the amount
claimed by the assessee. The Commissioner of Income Tax
(Appeals), on appeal by the assessee, in Annexure-A2 order
allowed the total claim of assessee as revenue expenditure. The
basis for accepting the claim as revenue expenditure by the
learned Commissioner reads as follow:
“The ownership of these assets will change hands from dealer to
dealer and the assessee company no longer has any right on these
assets once they are erected. (sic) These being the facts of the
claim, I am inclined to accept the claim of the assessee that
even these expenses were initially capital in nature i.e.,
creating of asset of enduring nature but the ownership has
been passed on to the dealer and in the hands of the company it
has to be treated as a sale or publicity expenses and hence
should be allowed as a revenue expense.” (sic installed)
Thus, the total claim has been allowed.
3.2 The Tribunal, on appeal by the Revenue, has
examined the crucial aspect in the finding recorded by the
Commissioner namely, whether, in the manner stated by the
assessee, circumstances as noted by the Assessing Officer and
expanded by the CIT (Appeals), the ownership of equipment, in
fact, is transferred to the dealers. The Tribunal upon
examination of the record has held as follows:
“4. However, from the rival submissions made, it transpires
that the ownership of these assets would continue to remain
with the assessee only. Hence, the view of the Ld CIT(A) is
contrary to the facts. The Ld Counsel placed reliance on the
common order dated 09-09-2009 rendered by this bench in the
assessee’s own case in ITA Nos. 538/Coch/2005, ITA
No.273/Coch/05 and ITA No.25/Coch/04 and submitted that the
Tribunal has considered an identical issue in paragraphs 21-23
of the said order and has taken the view that the expenditure
incurred on renovation of the show rooms is revenue
expenditure.
5. We have carefully considered the Tribunal’s order relied
upon by the Ld A.R. In the said order, the Tribunal has actually
considered the nature of expenditure incurred on interior
decoration of the show rooms and took the view that they are
temporary structures, which cannot be retrieved back.
Accordingly, the Tribunal took the view that the expenditure
incurred on interior decoration is revenue in nature. However,
in the instant case, the assessee has installed equipments,
which can be removed and also can be taken back and reused in
some other place. Hence the facts prevailing in the instant case
is totally different and accordingly the decision of the Tribunal
relied upon by the assessee, in our view, is not applicable.
Further we notice that the assessee would continue to be the
owner of these equipments, though they were installed in the
premises of the dealers’. Hence, we are of the view that they
have to be considered as the Capital assets of the assessee
company. Accordingly, we set aside the order of the Ld CIT(A)
on this issue and restore the disallowance made by the AO.”
4. The assessee challenges the said finding by framing
the following question of law:
“Whether on the facts and in the circumstances of the
case, the Tribunal is justified in law in holding the
expenditure of Rs.56,35,059/- incurred by the assessee,
in the showroom of its dealers for the purpose of
promoting the sale of products of the company as
capital expenditure on the ground that ownership of
these assets was retained by the assessee?”
5. Senior Counsel Mr. Joseph Markos argues that the
Tribunal fell in serious error by verifying the ownership of the
equipment when this fact was concluded by the well considered
order by the CIT (Appeals). According to him, the expenditure
incurred by the assessee towards purchase of equipment, in the
circumstances of the case, partakes the character of revenue
expenditure. The amount was spent by the assessee to
refurbish the showroom of the dealers known as Apollo Tyre
World and this expense is in the nature of enhancing the sales
and turnover of the assessee. By drawing the analogy of
circumstances considered by this Court in ITA No.280/2013
Rajan Jewellery case, it is argued that the total expenditure
claimed by the assessee should be allowed as revenue
expenditure but not a portion of it as depreciation by treating
the expenditure as capital expenditure.
6. Per contra, Standing Counsel Mr. Christopher
Abraham argues that the crucial aspect in determining the
expenditure is the nature of investment or utility derived by
the assessee. It is stated, it is one aspect of the matter to state
that the existing showroom has been refurbished by changing
the interiors and providing aesthetic value to a showroom. So
expenses incurred on account of such commercial
contingencies/designs once are met by the assessee the return
of asset, on which amount was expended, is not possible finally
into the hands of the assessee. These expenses are more or less
treated as expenses incurred as revenue expenditure. In the
case on hand, the expenses incurred are towards purchase and
establishment of equipment, such as wheel balancer/wheel
aligner/wheel changer/tyre changer. The equipment, as rightly
noted by the Tribunal, is movable equipments. The ownership
is an important aspect in such expenditure. The equipment is
also used by the respective dealers over a period of time but not
booked against one year. Unless and until the ownership is
stated to have been transferred in favour of the dealer and the
assessee claims to have any interest in the movable property;
according to him, the finding recorded by the Tribunal is
justifiable in the circumstances of the case and any other view
virtually amounts to reappreciating the findings of fact without
any material on record.
7. The substantial question of law as framed refers to
whether the Tribunal is correct in treating the expenditure as
capital expenditure on the ground that ownership of these
assets was retained by the assessee. The question, in our
considered view, begs the conclusion recorded by the Tribunal
without actually pointing out the infirmity or error committed
by the Tribunal in this behalf. It is not the case of assessee that
expenditure is treated as revenue expenditure inasmuch as the
expenditure is made over for utility by respective dealers upon
purchase of equipment.
7.1 The findings of fact recorded by the Tribunal are
based on record and warranted. The case relied on by the
assessee in Rayan Jewellery case is distinguishable on
circumstances to consideration. So the decision does not assist
the assessee to treat the entire expenditure as revenue
expenditure. The auditor’s report is referred to by the
Assessing Officer for coming to the conclusion that the
expenditure made by the assessee towards purchase of
equipment, such as wheel balancer/wheel aligner/wheel
changer/tyre changer, is capital expenditure but not revenue
expenditure. The spreadover utility or utilization of equipment
over a period of a few years is not disputed. The location of
equipment could be in the shops of respective dealers or the
dealers were allowed to use the equipment, that cannot be
understood as divesting the ownership of assessee on the
equipment. The Commissioner, as rightly pointed out by the
Tribunal, assumed something more than what is either
available in the circumstances of the case or made out literally a
new case in favour of the assessee. For the above reasons we
are of the view that the question does not fall within the scope
of Section 260A of the Act. Hence the question is answered in
favour of the Revenue and against the assessee.
8. Next question deals with expenditure incurred on
account of payments towards club membership and service
charges amounting to Rs.1,48,212/- by the assessee. The extent
to which the expenses can be claimed by the assessee is
considered by this Court in the case of assessee for the
Assessment year 2002-2003 reported in Commissioner of IncomeTax v. Apollo Tyres Ltd1
. At page 106 of the judgment of this Court
in ITA No.1347/2009, the issue was considered and answered
against the assessee. The operative portion which has bearing
for answering the question of law reads as follows:
“The finding arrived at by the Tribunal is well supported by
reasons. The amount spent for acquiring membership in the
clubs stands on a different pedestal from the amounts incurred
for availing materials supplied or service provided in the clubs.
This Court finds that the said issue is to be answered in favour
of the assessee. It is declared accordingly.”
8.1 The assessee is entitled to claim only the membership
fee but not the amount spent by the assessee for availing the
services of goods etc. in the club. In the case on hand, the
finding is that it is not for membership. Having regard to the
findings of fact recorded, the question is answered in favour of
the Revenue, against the assessee.
9. Substantial question no.3 relates to disallowance of
part depreciation claimed by the assessee of Gurgaon building
aggregating to Rs.25,27,505/- in relation to the let out portion
to Appolo International Ltd. The assessee challenges the
following finding recorded by the Tribunal.
“13. We notice that the AO had made similar disallowance in
respect of claim of bonus payment in assessment year 2002-03,
i.e., provision created for the year ending 31.3.2001 was paid
during the year relevant to the assessment year 2002-03 and
was claimed in that year. The matter was taken to Tribunal and
the Tribunal, after considering the provisions of sec. 438, has
held as under in the assessee’s own case in ITA
No.429/Coch/2006 & 377/Coch/2009 in its order dated 05-10-
2002.
“57. The proviso to sec. 438 gives further concession that
if payment in respect of any of the items referred in sec.
438 is made in a particular year before the due date of
filing of the income tax return, then such claim can be
made in the earlier year also for which return is due to be
filed. This seems to be only a further concession and
cannot be read as a restriction that necessarily deduction
has to be claimed in the earlier year which AO had
interpreted. We fail to understand that as to how AO has
referred to the decision of McDowell by observing that in
earlier year, Le. AY 2001-02 there was a loss and that is
why assessee has not claimed any deduction. Even if it is
a case of loss, such loss would have been carried forward
to next year and allowed accordingly. Simply because
assessee has not claimed a particular deduction, it cannot
be said to be a colourable device as envisaged by the
decision of McDowell case. The deduction relates to
payment of bonus which has actually been paid in the
present year and deduction has been claimed as per sec.
43B. Such deduction has been claimed on consistent basis
in the year of payment and, therefore, no adverse
inference should have been taken. In these
circumstances, we find nothing wrong in the order of the
Ld CIT(A) and confirm the same.”
The facts relating to this issue is identical in nature and
accordingly, by following the decision of the co-ordinate bench
referred supra, which was rendered in the assessee’s own case,
we uphold the order of Ld CIT(A) on this issue.
14. The next issue pertains to disallowance of depreciation
and repair charges aggregating to Rs.27,27,505/- relating to the
let out properties. Both the parties have pointed out that a
similar disallowance made in preceding year was confirmed by
the Tribunal in ITA No.426/Coch/2006. By the immediately
following the said order of the Tribunal, we set aside the order
of Ld CIT(A) on this issue and restore the addition made by the
AO.”
9.1 The excerpted finding of the Tribunal in the case on
hand takes us to the consideration of similar issue by the
Tribunal in ITA No.429/Coch/2006. It is not in dispute that the
assessee has accepted the said finding of the Tribunal and
allowed the finding to become final. The Tribunal has merely
followed its earlier view and rejected the claim of petitioner
under this head. No other ground is argued before us to
contend that the view taken, at any rate, is impermissible in
law. By taking note of the circumstances stated by the assessee
in respect of this particular claim, and the consideration by the
Tribunal, we are of the view that the Tribunal has rightly
maintained consistency in this behalf for the Assessment Years
2002-03 and 2003-04. The question raised is answered in favour
of the Revenue and against the assessee.
10. Substantial question No.4 is rejection of claim of
assessee in writing off bad debts. The substantial question
reads as follows:
“Whether on the facts and in the circumstances of the
case, the Tribunal is justified in law in holding that the
debts and advances relating to acquisition of capital
assets written off in the books of accounts aggregating
to Rs.28,67,407/- are not allowable as revenue
expenditure on the ground these are of the nature of
capital loss outside the purview of Section 37(1) or 36(1)
(vii) read with Section 36(2).”
The appeal filed by the Revenue for the AY 2003-2004 as against
the allowance granted under Section 37 towards the bad debts
written off against the advances given for acquisition of
revenue items and dismissed the appeal filed by the Revenue.
The assessee claims that the advances made for acquisition of
capital assets have been written off and they have to be treated
as bad debt. The consideration of this issue by the Assessing
Officer is independent and has completely explained the
circumstances why the claim of assessee cannot be accepted in
this behalf. The Tribunal has considered the scope of applicable
section and also recorded that the expenditure amounting to
Rs.28,67,407/- does not satisfy the test laid down by the
Supreme Court in CIT v. Mysore Sugar Company Ltd2
. We keep in
perspective the principle laid down by the Supreme Court in
Mysore Sugar Company Ltd case and also the circumstances in the
case on hand. We are in full agreement with the reasoning of
the Tribunal while considering the writing off bad debts from
advances made towards capital asset acquisition of the assessee.
The appeal filed by the Revenue, insofar as it related to revenue
expenditure was dismissed and we do not see any other reason
now while applying the same test to accept the claim of the
assessee made towards bad debts written off on advances made.
The question of law does not arise within the scope of appeal
provision, accordingly answered in favour of the Revenue,
against the assessee.
For the above reasons, the appeal filed by the assessee fails
and accordingly dismissed. No order as to costs.
Sd/
_________________
1 (2019) 419 ITR 100
2 (1962) 46 ITR 649 (SC)
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