2011 (12) TMI 50 - HC - Income Tax

Revenue or Capital Expenditure - advertisement expense of Rs.1,36,88,928/-. - enduring benefit to the business of assessee. - Held that - The advertisements published/displayed may not be of relevance or significance after lapse of time in a highly competitive market, wherein the products of different companies compete and are available in abundance. Advertisements and sales promotion are conducted to increase sale and their impact is limited and felt for a short duration. No permanent character or advantage is achieved and is palpable, unless special or specific factors are brought on record. - Expenditure are revenue in nature - decided against the revenue.

Summary

Issues:
1. Nature of advertisement expenses - Revenue or capital expenditure?

Analysis:
The case involves an appeal under Section 260A of the Income Tax Act, 1961 against the Tribunal's order regarding the nature of advertisement expenses incurred by the respondent assessee in the assessment year 2004-05. The Assessing Officer initially treated the advertisement expenses as of capital nature, considering them to provide enduring benefits to the business. However, the CIT (A) and the Tribunal held that the expenses were revenue in nature, justifying them as necessary for sales promotion in a competitive market where sales were sluggish. The Tribunal emphasized that advertisement expenses to increase sales are typically treated as revenue expenditure due to their short-term impact in a competitive market.

The High Court, in its judgment, noted that the Assessing Officer did not delve into the factual aspects, nature, or purpose behind the advertisement expenditure. The Court agreed with the findings of the CIT (A) and the Tribunal that the expenses were revenue in nature. It highlighted that advertisement expenses for consumer products are part of the profit-earning process and are not considered capital outlay. The Court emphasized that such expenses are periodic, aimed at attracting customers in a competitive market, and do not provide enduring benefits or permanent advantages. The judgment stressed that in a competitive market, advertisement expenses are necessary to maintain consumer attraction and are not incurred for setting up profit-earning machinery.

Furthermore, the Court considered the financial position of the respondent company, noting heavy cumulative losses and the absence of profits. Even in the year under assessment, the company incurred a significant loss. Taking into account the factual matrix and the nature of advertisement expenses in the context of the business environment, the Court dismissed the appeal, affirming that the expenses were revenue in nature and not of capital nature. The judgment concluded that the advertisement expenses were an ongoing expense necessary for sales promotion in a competitive market, where the impact of advertisements is short-lived and aimed at increasing sales rather than providing enduring benefits.