Vildirect: IncomeTax-caselaws-2010-VIL-873--DT

2010-VIL-873--DT

Equivalent Citation: [2010] 4 ITR 649, [2011] 43 SOT 25 (Mum.) (URO)

Income Tax Appellate Tribunal, MUMBAI

ITA No. 6424/Mum/2007, ITA No. 6380/Mum/2007, ITA No. 4529/Mum/2008

Date: 12.02.2010

DCIT

GODREJ TEA LTD.

K.R. Das for the Appellant
M.M. Golvala and Z. Mehta for the Respondent

BENCH

D.K. Agarwal, R.K. Panda, JJ.

JUDGMENT

D.K. Agarwal:

Cross appeals by the revenue and the assessee are directed against the order dated 9.8.2007 passed by the ld. CIT(A) for the Assessment Year 2003-04. The revenue has also preferred appeal for the Assessment Year 2004-05 against the order dated 16.4.2008 passed by the ld. CIT(A). Since facts are identical and grounds in the revenue's appeal are common, all these appeals are disposed of by this common order for the sake of convenience.

2. For the sake of brevity the facts in ITA No.6424/M/07 for Assessment Year 2003-04 in the appeal filed by the revenue are that the assessee company is engaged in the business of manufacturing and selling tea and other products. It filed return declaring a loss of Rs.16,12,68,775/-. During the course of assessment it was interalia observed by the Assessing Officer that the assessee has incurred heavy expenditure on brand promotion amounting to Rs.6,82,43,142/- of which 45,70,112/- was debited to the PandL A/c. for the year under consideration. The balance expenditure of Rs.6,36,73,030/- has been deferred over a period of 3 years as deferred revenue expenditure. However, in its return, the assessee company has claimed the entire expenditure incurred on brand promotion as allowable expenses. Accordingly the assessee was asked to substantiate its claim. The assessee vide its letter dt. 23.11.2005 submitted his explanation which is reproduced as under:

"1. Brand Promotion expenses

During the year under consideration, the assessee company started manufacturing and marketing tea under the brand name 'Godrej'. The company had to incur huge expenses for substantial marketing and promoting the brand. It introduced three brands of tea, on each in the premium, popular and economy segment viz. Godrej Noble House, Godrej Chai House and Inaam Chai. During the year, the company incurred expenses all over India through various means such as - television (expenses were incurred on television advertisements as well as air time), print media and radio. It also incurred expenses on rental for hoardings, launch conference expenses etc. These expenses were incurred as advertisement expenses purely to promote sales and increase brand visibility among the consumers all over India. The statement giving detailed break-up of expenses incurred alongwith the treatment given by the company in its books of accounts is enclosed at Annexure-I. We also enclose at Annexure 2 vouchers and sample bill in respect of advertisement in various newspapers published throughout India, advertisements on various channels in different languages all over the country. We enclose sample bills for ad films, art work charges etc. at Annexure 3."

The assessee further stated that the brand promotion expenditure constitutes revenue expenditure incurred wholly and exclusively for the purpose of business. It has further stated that it is evident from the details, as also from the bills that the expenditure has been incurred for advertisements on several television channels, advertisement films, newspaper advertisement, banners and hoarding rent, etc. It has been contended that by incurring the expenditure, no asset or advantage has been brought into existence. Reliance was placed in Empire Jute Co. Ltd. vs. CIT 124 ITR 1(SC) and Alembic Chemical Works Ltd. vs. CIT 177 ITR 377 (SC) to contend that the concept of "enduring benefit" must respond to the changing economic realities of business. It is stated that when an expenditure is part of the profit earning process and is incurred to enable an assessee to carry on his business more profitably and advantageously, the expenditure can only be in the revenue field. It further contended that expenditure, even if it is for obtaining an advantage of enduring benefit, it is nevertheless on revenue account, if the advantage is in the revenue field. The assessee company also contended that entries in the books of accounts cannot decide the allowability or otherwise of expenses incurred and cited several judgments to support its contention.

3. However, the AO observed that the assessee in the return has claimed entire expenditure as revenue expenditure but, in the books the assessee has debited Rs.45,70,112/- out of total expenditure of Rs.6,82,43,142/- and the balance expenditure of Rs.6,36,73,030/- has been deferred in the books of the assessee company to be written off over a period of 3 years, thus the assessee cannot blow hot and cold in this manner. The A.O was of the view that the expenditure should be allowed over a period of 3 years in the same manner as has been treated in the books of account and accordingly he disallowed Rs.6,36,73,030/- and added to the income of the assessee. The AO after making some other disallowances completed the assessment at a loss of Rs.8,11,17,664/- vide order dt.30.12.2005 passed u/s.143(3) of the Income tax Act, 1961 (the Act). On appeal, the ld. CIT(A) while observing that the AO had not disputed the expenditure on the ground that it has not accrued during the previous year or that it is not revenue in nature and keeping in view the ratio of decisions including the decision in Madras Industrial Investment Corporation Limited vs. CIT (1997)225 ITR 802(SC) held that in the instant case the brand promotion expenditure mainly consists of expenditure through various media such as T.V. and film, the expenditure has been incurred during the previous year and how this expenditure can be said to be of enduring nature has not been clarified in the assessment order, allowed the claim of the assessee.

4. Being aggrieved by the order of the ld. CIT(A) the revenue is in appeal before us challenging in all the grounds the deletion of disallowance out of brand promotion expenses Rs.6,36,73,030/-.

5. At the time of hearing, the ld. DR while relying on the order of the AO further submits that the ld. CIT(A) ought to have appreciated the fact that the assessee in its books of accounts treated the said expenditure as deferred revenue expenditure and the allowance of total amount during the current year might give a distorted picture of the year. He therefore, submits that the disallowance made by the AO be restored.

6. On the other hand the ld. Counsel for the assessee while relying on the order of the ld. CIT(A) further submits that it is not the case of the revenue that the expenses incurred by the assessee are not revenue in nature. Therefore, in view of the ratio of following decisions wherein it has been held that making of an entry does not determine the allowability of expenditure, if the expenditure is otherwise of allowable in nature and further held that the expenditure incurred on advertisement to create brand image are allowable as revenue expenditure:-

1) CIT vs. Berger Paints (India) Ltd.(No.2)(2002) 254 ITR 503(Cal.),

2) CIT vs. Sakthi Soyas Ltd.(2006) 283 ITR 194(Mad.),

3) DCIT vs. Core Healthcare Ltd.(2009) 308 ITR 263(Guj.),

4) CIT vs. Bhor Industries Ltd.(2003) 264 ITR 180(Bom.),

5) ACIT vs. Ashima Syntex Ltd.(2009) 310 ITR(AT) 1(Ahmedabad) (SB) and

6) ACIT vs. Godrej Foods Ltd. and vice versa in ITA No.232/Ind./04 and C.O. No.51/Ind/04 and others dated 30.3.2007 for Assessment Years 2000-01 to 2002-03.

He, therefore, submits that the order passed by the ld. CIT(A) in deleting the disallowance be upheld.

7. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as the assessee has incurred brand promotion expenses Rs.6,82,43,142/- and out of which it has debited Rs.45,70,112/- in the PandL A/c. and balance expenditure of Rs.6,36,73,030/- has been treated as deferred revenue expenditure over a period of three years. However, in the return of income the assessee has claimed entire brand promotion expenses as revenue expenditure. The AO in view of entries recorded in the books of account treated balance expenditure of Rs.6,36,73,030/- as deferred revenue expenditure and disallowed the same with the observation that the expenses would be allowed in subsequent years as per books of account. On appeal, the ld. CIT(A) while observing that the AO had not disputed that the expenses are not revenue in nature and the expenses have been incurred during the year deleted the disallowance made by the AO. Here it is necessary to take note of the cases on the issue.

8. In CIT vs. Berger Paints(India) Ltd.(No.2)(Cal.)(supra), it has been held(page 504 head note):

"Held,(i) that if according to the revenue laws the assessee is entitled to treat a sum as a revenue expenditure, then that legal right of the assessee is not estopped by the treatment given by the assessee to it in its own books of account. Advertisement expenses are normally to be treated as revenue expenditure. The Tribunal was justified in law in allowing a sum of Rs.8,29,723/- as revenue expenditure........."

9. In CIT vs. Sakthi Soyas Ltd. (supra), it has been held(page 195 head note):

"....(ii) That in respect of the project launching expenses amounting to Rs.16,41,125/- also the assessee had spent the money mainly for advertisement through visual and print media and also for designing and printing leaflets, brochures, etc. and hence these expenses were also in the nature of business expenditure entitled for deduction in computing the assessee's income."

10. In DCIT vs. Core Healthcare Ltd.(supra), it has been observed and held at page 269-270 as under:

"In relation to the first item, namely, advertisement expenses, it is not in dispute that the expenditure of Rs.70 lakhs and odd was incurred on a special advertisement campaign. However, that by itself would not be sufficient to determine as to whether the expenditure in question is on revenue account or capital account. The approach of the Commissioner(Appeals) that the expenditure in question was treated as deferred revenue expenditure and hence was capital in nature, cannot be termed to be a correct approach because in so far as the Income-tax Act is concerned, there is no such category of deferred revenue expenditure. Similarly; making of an entry or absence of an entry does not determine the allowability or otherwise of the item of expenditure and the same cannot be considered to be a factor adverse, if the expenditure is otherwise of allowable nature. Every expenditure incurred by a business concern, if incurred for the purpose of business, is bound to result in some benefit, direct or indirect, immediate or after sometime, but the benefit to the business cannot be termed capital or revenue only on the basis of the period for which the benefit is derived by the business. Any benefit resulting to a business need not be confined to the year of expenditure and this is an ordinary incident of a running business. In the case before the Allahabad High Court in Hindustan Commercial Bank Ltd., In re [1952] 21 ITR 353, the expenditure on advertisement has been incurred at the point of time when new branches of the bank had to be opened and inaugurated. It has been held by the Allahabad High court that there is no proposition that the amount spent in a special campaign of advertisement must necessarily be capital expenditure.

The apex court decisions on which reliance has been placed by the Tribunal namely, Empire Jute Co. Ltd.,[1980] 124 ITR 1(SC) and Alembic Chemical Works Co. Ltd., [1989] 177 ITR 377(SC) specifically lay down that the nature of advantage has to be considered in a commercial sense and the test of enduring benefit is not a certain or conclusive test and cannot be applied blindly and mechanically without regard to the particular facts and circumstances of the given case. The expression "asset or advantage of an enduring nature" has been evolved to emphasise the element of a sufficient degree of durability appropriate to the context. The idea of once for all payment and enduring benefit are not to be treated as something akin to statutory conditions.

Applying the aforesaid settled legal position to the facts of the case, it is not possible to agree with the appellant-Revenue that the advertisement expenses incurred by the respondent-assessee at the time of installation of additional machinery in the existing line of business resulted in any enduring benefit, so as to be treated as capital in nature."

11. In CIT vs. Bhor Industries Ltd.(supra), it has been observed and held (page 185):

"....Applying the ratio of judgment of the Supreme Court to the facts of this case, in the present matter, the VRS expenses were incurred by the company to save on the expense. The expense was not referable to any income-yielding asset. It is well settled that, ordinarily revenue expenditure, which is incurred wholly and exclusively for the purpose of business, must be allowed in its entirety in the year in which it is incurred and it cannot be spread over a number of years even though the assessee has written it off in its books over a period of years eventhough the assessee has written it off in its books over a period of years...."

12. In ACIT vs. Godrej Foods Ltd. and vice versa in ITA No.232/Ind./04 and C.O. No.51/Ind/04 and others(supra), it has been observed and held

".. It is also settled law that book entries are not determinative factor to deal with the income/expenditure whether taxable or deductible. The provisions of law have to be taken into consideration. The ld. CIT(A) has correctly relied on the decisions of the Hon'ble Supreme Court referred to above in support of his findings. The advertisement expenditure as claimed by the assessee in this case is clearly revenue expenditure in nature. There is no law provided under the Income tax Act to say that revenue expenditure is deferred revenue expenditure. One it is held as revenue expenditure, it has to be allowed in the year under consideration in which it was incurred wholly and exclusively for the purpose of business....."

13. In ACIT vs. Ashima Syntex Ltd.(2009) 310 ITR(AT) 1(Ahmedabad) (SB) the Special Bench of the Tribunal while considering the decision of Hon'ble Supreme Court in Madras Industrial Corp Ltd. vs. CIT (1997) 225 ITR 802 observed and held as under (page-15):

".....This judgment relied upon by the ld. Departmental Representative itself clarifies that though the taxpayer may have written off the expenditure in its books of account over a period say of five years, it must be allowed in its entirety in the year in which it was incurred, if it is revenue expenditure, and if it is wholly and exclusively incurred for the purposes of business. In the case under consideration, there is nothing to suggest that with this expenditure, any asset, tangible or intangible, has been created. There is no evidence on record regarding accrual of any specific revenue in the years under consideration or subsequently over a defined period with the incurring of the said expenditure. The Assessing Officer himself admitted the portion of expenditure debited in the profit and loss account as revenue expenditure. In these circumstances, we do not find any justification to interfere with the findings of the ld. Commissioner of Income tax (Appeals)."

14. Applying the ratio of aforesaid settled legal position to the facts of the present case we are of the view that making of an entry or absence of an entry does not determine the allowability or otherwise of the item of expenditure and the same can not be considered to be a factor adverse, if the expenditure is otherwise of allowable nature. It is not the case of the revenue that the expenditure incurred by the assessee on brand promotion are not revenue in nature or have not been incurred wholly and exclusively for the purpose of business. There is nothing to suggest that with this expenditure, any asset tangible or intangible, has been created. There is no law under the Act to say that the revenue expenditure is deferred revenue expenditure. The A.O himself admitted the portion of expenditure debited in the PandL Account as revenue expenditure. This being so, we are of the view that the expenditure incurred by the assessee on brand promotion are allowable as revenue expenditure. Accordingly, we are inclined to uphold the finding of the ld. CIT(A) in deleting the disallowance made by the AO. The grounds taken by the revenue are, therefore, rejected.

ITA No.4529/M/08(Assessment Year: 2004-05)(Revenue's Appeal):

15. At the time of hearing it has been agreed by both the parties that the facts, issue and their plea in the present appeal for the assessment year 2004-05 are the same as in the appeal for the Assessment Year 2003-04, therefore, the issue may be decided accordingly.

16. After hearing the rival parties and perusing the material available on record and in the absence of any other contrary material placed on record by the revenue we following our finding recorded in para - 14 of this order hold that the expenses incurred by the assessee on brand promotion are allowable as revenue expenditure. We order accordingly. The grounds taken by the revenue are therefore, rejected.

ITA No.6380/M/07(Assessment Year : 2003-04)(Assessee's Appeal):

17. At the time of hearing the ld. Counsel for the assessee submits that he may be allowed to withdraw the assessee's appeal which was not objected to by the ld. DR.

18. That being so, and keeping in view the petition filed by the ld. Counsel for the assessee to seek permission of the Bench to withdraw the assessee's appeal, the appeal filed by the assessee is treated as dismissed being withdrawn.

19. In the result all the appeals stand dismissed.

Order pronounced in the open court on 12.2.2010.

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.