S. 37(1) — Treatment of deferred revenue expenditure — Expenditure on brand promotion and brand building classified in the books of account as deferred revenue expenditure — Allowable as revenue expenditure.

ITAT ‘A’ Bench, Mumbai

Before D. Manmohan (VP) and

Rajendra Singh (AM)

ITA No. 5781/M/2007

A.Y. : 2003-04. Decided on : 27-5-2009

Counsel for revenue/assessee : Sanjay Agarwal/ Sanjay R.
Parikh

Per Rajendra Singh :

Facts :

The assessee was engaged in the business of manufacturing
and trading of edible and hair oils, cosmetics and hygiene products. For the
relevant year the assessee had incurred total expenditure of Rs.1.53 crore on
brand promotion and brand building. Out of the same, a sum of Rs.33.15 lacs
had been debited to the profit and loss account and the balance amount of
Rs.1.20 crore had been treated as deferred revenue expenditure in the books of
account. In the return of income the assessee had claimed the entire amount of
Rs.1.53 crore as revenue expenditure. According to the AO the accounting
treatment given by the assessee clearly showed that the assessee was to derive
benefits from the said expenditure for a number of years. He therefore
disallowed the amount of Rs.1.20 crore shown by the assessee as a deferred
expenditure and added to the total income. On appeal, the CIT(A) allowed the
appeal of the assessee.

Held :

The Tribunal noted that the Assessing Officer had
disallowed the claim mainly on the basis of the accounting treatment given by
the assessee in the books of accounts. According to it, the advertisement
expenditure was basically incurred for promoting the sale of the products.
While incurring such expenses the assessee may derive some enduring benefits
but as held by the Supreme Court in Empire Jute Co.’s case, test of enduring
benefit was not conclusive in understanding the true nature of expenditure. A
particular expenditure can be considered as capital expenditure only if there
was some advantage in the capital field i.e., when the assessee had
acquired any new assets or any new source of income. In case the expenditure
had been incurred only for conducting the business more efficiently and more
profitably, there being no advantage in the capital field, such expenses had
to be treated as revenue expenditure as held by the Supreme Court in the above
case. In the case of the assessee, by incurring expenditure on advertisement,
it had not acquired any new asset or any new source of income. The expenditure
had been incurred only for better profitability by promoting the sales. Such
expenditure, according to the Tribunal had to be treated as revenue
expenditure, irrespective of the accounting treatment given in the books as
the accounting treatment is not conclusive in understanding the true nature of
expenditure.

Case referred to :

Empire Jute Company (124 ITR 1) (SC).