2010 (12) TMI 580 - AT - Income Tax

Addition - Deferred revenue or revenue expenditure - Scrutiny - assessee had launched a new product and incurred heavy advertisement expenditure - It is not a mandatory expenditure, nor can the period for which the benefit of the expenditure can be derived be estimated with a least reasonable accuracy - The income relatable to that expenditure should arise for a number of years and when a nexus can be definitely found between both income and expenditure, the matching concept comes into play - Held that the expenses are related to acquisition of a brand whereas the expenditure in question is admittedly revenue expenditure in nature which has nothing to do with the brand sold by the assessee - Decided in favour of the assessee

Summary

Issues:
Challenge to correctness of CIT(A)'s orders deleting deferred revenue expenditure on promotion of new products/brands for asst. yrs. 2003-04 and 2004-05.

Detailed Analysis:

Issue 1: Deferred Revenue Expenditure
- The AO questioned the correctness of CIT(A)'s orders deleting deferred revenue expenditure totaling Rs.16,19,87,818 and Rs.2,91,32,638 for the respective assessment years.
- The AO required the assessee to justify why the deferred revenue expenditure should not be disallowed, as the expenses were claimed for promotion of new products/brands.
- The assessee explained that the expenses were incurred for development and promotion of new products/brands, and were treated as deferred revenue expenditure in accordance with consistent accounting policy.
- The AO disallowed the expenditure, citing a contradictory stand taken by the assessee regarding treatment of brand sale proceeds as capital gain.
- The CIT(A) referred to legal precedents emphasizing that revenue expenditure should be fully allowed in the year of incurrence if it is for business purposes, irrespective of accounting treatment.
- The CIT(A) held that the entire expenses, even if deferred, constituted admissible deduction, leading to deletion of the disallowance.
- The ITAT upheld the CIT(A)'s decision, stating that the expenses were revenue in nature and should be allowed in full in the year of incurrence.

Issue 2: Legal Precedents and Analysis
- The ITAT referred to a Co-ordinate Bench decision and the Madras High Court ruling emphasizing that revenue expenditure should be allowed in full in the year of incurrence if it is for business purposes.
- The ITAT highlighted the importance of business necessity and expediency in determining revenue expenditure, as well as the concept of matching costs with revenue.
- The ITAT rejected the AO's argument regarding contradiction in the assessee's stand, clarifying that the expenses were revenue in nature and unrelated to the brand sold by the assessee.
- The ITAT concurred with the Co-ordinate Bench's decision and upheld the CIT(A)'s order, emphasizing that entries in the books of account do not determine the allowability of expenditure.

Conclusion:
- The ITAT dismissed the appeals filed by the Revenue, upholding the CIT(A)'s orders regarding the deletion of deferred revenue expenditure for the assessment years 2003-04 and 2004-05.
- The ITAT found no grounds for interference, affirming that the expenses were revenue in nature and should be fully allowed in the year of incurrence, in line with legal principles and precedents cited during the proceedings.