2011 (3) TMI 622 - HC - Income Tax

Disallowance - advertisement and publicity expenditure - Preliminary expenditure or revenue expenditure - it clearly emerges that the expenditure on publicity and advertisement is to be treated as revenue in nature allowable fully in the year in which it was incurred. - Once the assessee claims the deduction for the whole amount of such expenditure, even in the year in which it is incurred, and the expenditure fulfils the test laid down under section 37 of the Act, it has to be allowed - Decided in favour of the assessee The stamp duty paid by the assessee is debited to the agreement stamping fee under the major head of Rates and taxes and is claimed as revenue expenditure - Tribunal, however, denounced this reasoning of the Commissioner of Income-tax (Appeals) and accepted the plea that the expenditure incurred had nothing to do with the period of length of time and had no linkage, whatsoever, to any period, the entire expenditure was allowable in the year in which it was incurred - Decided in favour of the assessee Regarding leasehold improvement - It is clear that the Assessing Officer had not gone into the question as to whether the expenditure incurred on leasehold improvements was capital or revenue in nature - assessee has treated part of the said expenditure as capital in nature and depreciation thereon was claimed - Commissioner of Income-tax (Appeals) accepted the stand of the assessee only after verification of the records and arriving at a finding of fact that the expenditure on the afore-said account was revenue in nature - Decided in favour of the assessee

Issues Involved:
1. Expenditure on advertisement and publicity.
2. Expenditure on commission, stamping fee, and direct selling expenses.
3. Expenditure on leasehold improvements.

Detailed Analysis:

1. Expenditure on Advertisement and Publicity:

The primary issue was whether the entire expenditure on advertisement and publicity incurred by the assessee in the assessment years 2001-02 and 2002-03 should be allowed under section 37(1) of the Income-tax Act. The Assessing Officer (AO) had amortized the expenditure over five years, considering it to have an enduring benefit. The Commissioner of Income-tax (Appeals) upheld this view, relying on the judgment of the Madras High Court in Madras Fertilizers Ltd. v. CIT. However, the Income-tax Appellate Tribunal (ITAT) reversed this decision, stating that section 35D was inapplicable as the expenditure did not fall under preliminary expenses and should be allowed under section 37 of the Act, citing CIT v. Salora International Ltd.

The Delhi High Court agreed with the ITAT, emphasizing that the expenditure was incurred wholly for business purposes and did not revert back to the assessee. The court referenced the Supreme Court's judgment in Empire Jute Co. Ltd. v. CIT, which clarified that expenditure facilitating trading operations without creating fixed capital should be treated as revenue expenditure. The court also noted that the concept of deferred revenue expenditure does not exist in income-tax law unless the assessee chooses to spread the expenditure over ensuing years, as in Madras Industrial Investment Corporation Ltd. v. CIT.

2. Expenditure on Commission, Stamping Fee, and Direct Selling Expenses:

The AO had spread the expenses on commission, stamping fee, and direct selling over three years, arguing that the financing periods for hire-purchase agreements ranged from less than one year to five years. The Commissioner of Income-tax (Appeals) upheld this, noting that the assessee spread the income over the financing period. However, the ITAT allowed the entire expenditure in the year incurred, stating that these expenses had no linkage to any period and were incurred once for all.

The Delhi High Court upheld the ITAT's view, agreeing that these expenses were business expenditures incurred in the year in question and should be allowed under section 37 of the Act. The court reiterated the reasoning applied to the advertisement and publicity expenditure.

3. Expenditure on Leasehold Improvements:

For the assessment year 2002-03, the assessee claimed Rs. 1,52,24,029 as revenue expenditure on leasehold improvements. The AO capitalized this expenditure, allowing 10% depreciation, noting that the assessee had capitalized similar expenses in the previous year. The Commissioner of Income-tax (Appeals) and the ITAT allowed the expenditure as revenue, after verifying the nature of the expenses.

The Delhi High Court dismissed the Revenue's appeal, noting that the Commissioner of Income-tax (Appeals) had verified the details and found the expenditure to be revenue in nature. The court emphasized that this was a finding of fact, and no question of law arose from it.

Conclusion:

The Delhi High Court upheld the ITAT's decisions on all three issues, allowing the expenditures on advertisement, commission, stamping fee, direct selling expenses, and leasehold improvements as revenue expenditures incurred in the respective years. The appeals were dismissed, affirming the ITAT's orders.

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