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FLIPKART INDIA PRIVATE LIMITED vs. ASSISTANT COMMISSIONER OF INCOME TAX
N. V VASUDEVAN, JM & JASON P BOAZ, AM.
ITA No. 202/Bang/2018, 693/Bang/2018
Apr 25, 2018
(2018) 52 CCH 0391 BangTrib
(2018) 64 ITR (Trib) 0358 (Bangalore), (2018) 193 TTJ 0685 (Bang)
Legislation Referred to
Section 145(3), 40(A)(2)(a), 48, 50C(1)
Case pertains to
Asst. Year 2015-16
Decision in favour of:
Income—Computation of—Expenditure for acquiring intangible assets—Disallowance—Validity—Assessee-company was wholesale trader/distributor of books, mobiles, computers and related accessories—It filed return declaring loss—AO noticed that Assessee was purchasing goods and selling them to retailers at low cost—AO was of view that action of Assessee in selling goods at less than cost price was not normal business practice—AO held that Assessee followed predatory pricing in order to create marketing intangibles and brand and strategy of selling goods at lower than cost price was to establish customer goodwill and brand value in long run and reap benefits in later years—AO adopted cost approach in which reasonable profit margin was attributed to cost of purchases and to extent profit was foregone by Assessee was to be considered as value of intangible—AO took database for wholesalers dealing in consumer and electronic goods and took profit margins of companies whose turnover was above Rs. 20 crores—Search process yielded average gross profit margin and this was compared with Assessee’s profit margin—AO thereafter arrived at total income of Assessee—CIT(A) confirmed order of AO and also withdrew depreciation on intangible assets allowed by AO while computing total income for reason that though Assessee incurred expenses for creating intangible assets but was not owner of intangible—Held, income which had accrued or arisen could only be subject matter of total income and not income which could have been earned but not earned—AO could not disregard profit or loss as disclosed in profit and loss account, unless he invoked provisions of section 145(3)—It was not case of AO that provisions of section 145(3) were applicable and in such circumstances, AO had no power to go beyond book results—First presumption of AO was that Assessee had incurred expenditure—There was no accrual of any liability on account of any expenditure or actual outflow of funds towards expenditure—One could not proceed on basis of presumption that profit foregone was expenditure incurred and expenditure so incurred was for acquiring intangible assets like brand, goodwill etc.—For creation of intangibles like say goodwill it was not possible to ascertain in terms of money cost of acquisition of goodwill—It was equally impossible to ascertain in terms of money cost of addition or alteration to quality of goodwill which led to increase in its value—It was therefore not possible to say that profits foregone created goodwill or any other intangibles or brand to Assessee—Valuation of shares as per AO was on DCF method and there was no mention in order of assessment regarding values being ascribed to goodwill/brand or intangibles—There was no expenditure incurred by Assessee except those that were set out in profit and loss account—Action of AO in disregarding books results could not be sustained and action of AO in presuming that Assessee had incurred expenditure for creating intangible assets/brand or goodwill was without any basis—Loss as declared by Assessee in return of income should be accepted by AO—Assessee’s appeal allowed.
The AO cannot disregard the profit or loss as disclosed in the profit and loss account, unless he invokes the provisions of Sec.145(3) of the Act. In the present case it is not the case of the AO that the provisions of Sec.145(3) of the Act are applicable. In such circumstances, the question is as to whether the AO had power to go beyond the book results. In our view, the AO was not empowered under the Act to do so.
As laid down by the Hon’ble Supreme Court in the case of Calcutta Discount Company(supra), when one trader transfers his goods to another trader at a price less than the market price, the taxing authority cannot take into consideration the market price of those goods, ignoring the real price fetched. As laid down by the Hon’ble Supreme Court in the case of A.Raman & Co. (supra), income which has accrued or arisen can only be subject matter of total income and not income which could have been earned but not earned.
The first presumption of the AO is that the Assessee had incurred expenditure. As rightly contended by the learned counsel for the Assessee there was no accrual of any liability on account of any expenditure or actual outflow of funds towards expenditure. One cannot proceed on the basis of presumption that the profit foregone is expenditure incurred and further that expenditure so incurred was for acquiring intangible assets like brand, goodwill etc. As pointed by the Hon’ble Supreme Court and the Hon’ble Bombay High Court in the case of B.C.Srinivasa Setty (supra) and Evans Frazer(supra), for creation of intangibles like say goodwill it is not possible to ascertain in terms of money the cost of acquisition of goodwill; it is equally impossible to ascertain in terms of money the cost of addition or alteration to the quality of goodwill which led to the increase in its value. It is therefore not possible to say that profits foregone created goodwill or any other intangibles or brand to the Assesssee. The argument of the learned DR on the existence of intangibles/brands or goodwill was on the basis of purchase of Assessee’s shares at a premium by investors. Despite making losses, the Assessee’s shares were purchased by investors at a high premium. In this regard two instances of purchase by venture capitalists of the shares of the Assessee of Re.1/- in the previous years relevant to AY 15-16 and 14-15 at a premium of Rs.1899/- and Rs.595/- respectively was cited by him. There was no expenditure incurred by the Assessee except those that are set out in the profit and loss account. The question of incurring expenditure on creating intangibles does not arise for consideration at all.
In view of our conclusions that the action of the AO in disregarding the books results cannot be sustained and the further conclusion that the action of the AO in presuming that the Assessee had incurred expenditure for creating intangible assets/brand or goodwill is without any basis, we do not think it necessary to deal with the arguments that even assuming that expenditure was incurred by the Assessee the expenditure for building brand or creating intangible or goodwill is revenue expenditure and allowable as deduction. It is also not necessary for us to go into the question of estimation of quantum of expenditure on creating intangibles, in view of the above conclusions.
For the reasons given above, we hold that the loss as declared by the Assessee in the return of income should be accepted by the AO and his action in disallowing expenses and arriving at a positive total income by assuming that there was an expenditure of a capital nature incurred by the Assessee in arriving at a loss as declared in the return of income and further disallowing such expenditure and consequently arriving at a positive total income chargeable to tax is without any basis and not in accordance with law and the said manner of determination of total income is hereby deleted.
Income which had accrued or arisen could only be subject matter of total income and not income which could have been earned but not earned.
In favour of
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