2011 (7) TMI 775 - AT - Income Tax

Capital or revenue expenditure - corporate film making - assesse incurred Rs. 1,25,000/- as corporate filmmaking charges and claimed the same as sales promotion expenses - Held that the categorical finding of the CIT(A) is that it has been held in various decisions that the expenditure incurred in making of advertisement film is an expenditure of revenue in nature - Decided in favor of the assessee Regarding addition - assessee had written off advance made to suppliers at Rs. 70,367/- and inter corporate deposit placed with Alpic finance Ltd. Rs. 48,00,000/-, amount not recovered from debtors Rs. 72,552/- and accrued interest on inter corporate deposits Rs. 8,60,274/- aggregating to Rs. 58,03,193 - Held that the matter is remitted back to AO to examine the issue whether interest received on inter-corporate deposits offered for taxation as business income or not, whether placement of inter-corporate deposits was the normal course of business or not and decide, the entire issue pertaining to addition of Rs. 58,03,193/- consisting of advance made to suppliers at Rs. 70,367/- and inter corporate deposit placed with Alpic Finance Ltd. Rs. 48,00,000/-, amount not recovered from debtors Rs. 72,552/- and accrued interest on inter-corporate deposits Rs. 8,60,274/-, de-novo after providing reasonable opportunity of being heard to the assessee in the matter - Appeal is partly allowed

Issues Involved:
1. Classification of corporate film making expenses as revenue or capital expenditure.
2. Allowability of irrecoverable amounts written off as bad debts or business loss.

Issue-wise Detailed Analysis:

1. Classification of Corporate Film Making Expenses:
The first issue pertains to whether the expense incurred on corporate film making, amounting to Rs. 1,25,000/-, should be classified as revenue expenditure or capital expenditure. The Assessing Officer (AO) disallowed the expense, treating it as capital in nature, arguing that it provided an enduring benefit to the assessee company in terms of enhanced sales. However, the assessee contended that the expense should be allowed as a deduction under section 37(1) of the Income Tax Act, which pertains to expenditures incurred for business purposes not covered by sections 30 to 36.

The Commissioner of Income Tax (Appeals) [CIT(A)] held that the public memory is short and the effect of advertising films does not last long, thus classifying such expenditure as revenue in nature. The CIT(A) referenced various judicial decisions supporting this view and concluded that the expenditure was allowable as revenue expenditure.

Upon appeal, the Tribunal upheld the CIT(A)'s decision, finding no infirmity in the order that deleted the disallowance of Rs. 1,25,000/-. The Tribunal agreed that the expenditure incurred in making advertisement films is of a revenue nature, thereby dismissing the revenue's ground of appeal on this issue.

2. Allowability of Irrecoverable Amounts Written Off:
The second issue involves the deletion of an addition of Rs. 57,30,641/- related to irrecoverable amounts written off by the assessee. The AO observed that these amounts included advances to suppliers, inter-corporate deposits, amounts not recovered from debtors, and accrued interest on inter-corporate deposits. The AO disallowed these claims, arguing that such debts could only be allowed as bad debts if they were passed through the trading account of the assessee company. The AO further noted that the inter-corporate deposits were capital losses, allowable only if the assessee was in the money-lending business, as per judicial precedents.

The CIT(A) reversed the AO's decision, allowing the claims as bad debts or business losses. The CIT(A) found that the advances to suppliers were made in the ordinary course of business and became irrecoverable, thus qualifying as business losses. Regarding the inter-corporate deposits, the CIT(A) noted that these were placed in the normal course of business, and interest on these deposits had been regularly offered for taxation in preceding years. The CIT(A) concluded that the irrecoverable amounts were allowable as bad debts or business losses, referencing various judicial decisions supporting this view.

Upon appeal, the Tribunal found contradictory findings between the AO and CIT(A) regarding whether the interest on inter-corporate deposits was offered for taxation as business income. The Tribunal remitted the matter back to the AO to re-examine the issue, specifically whether the interest received on inter-corporate deposits was offered for taxation as business income and whether the placement of these deposits was in the normal course of business. The Tribunal directed the AO to decide the issue de novo after providing a reasonable opportunity of being heard to the assessee.

Conclusion:
The Tribunal dismissed the revenue's appeal regarding the classification of corporate film making expenses, affirming the CIT(A)'s decision to treat it as revenue expenditure. However, the Tribunal remitted the issue of irrecoverable amounts written off back to the AO for a fresh examination, thereby treating the appeal as partly allowed for statistical purposes.

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