2012 (10) TMI 125 - AT - Income Tax

Order u/s 263 by CIT(A) - Non application of mind by AO - brand building expenditure not inquired by AO - Held that - It is seen that the A.O. has not only raised the query regarding the details of brand building expenses, but has also sought clarification on two occasions and had examined them also. Further on examination of these details he has reached to a conclusion that sum of Rs..17,98,482/- is a capital expenditure. It is further noticed that the assessee has deferred these expenses and claimed it as revenue expenditure in equal amount in the A.Y s 2006-07, 2007-08 and 2008-09. Thus there was a complete application of mind by the A.O. while examining the expenditure under brand promotion and brand building. The expenditure incurred by the assessee is not creating any enduring benefit of an asset but is rather helping the assessee in augmenting its sales and resultantly its profit. Even if it is presumed that the building of brand image of Nirvana is giving advantage of enduring benefit to the assessee, still it would be on revenue account as there is no creation of a tangible or intangible asset of enduring nature to the assessee. Thus from the facts of the case it can be concluded that these expenses incurred by the assessee has not resulted in any kind of addition or augmentation of any profit making asset. Thus the view taken by the A.O. is prima facie correct view and, therefore, no reason to held that such a order is erroneous or it is prejudicial to the interest of the Revenue - in favour of assessee.

Summary

Issues involved:
Assessment of expenses as capital expenditure under brand building and creation of intangible asset, jurisdiction of CIT u/s.263 to revise assessment order, application of correct provisions of law, distinction between capital and revenue expenditure.

Analysis:

1. Assessment of expenses as capital expenditure: The case involved an appeal by the assessee against an order passed by the Ld. CIT-8, Mumbai u/s.263, challenging the treatment of certain expenses as capital expenditure. The expenses in question, amounting to Rs. 2.94 crores, were incurred for the creation of the brand "Nirvana". The AO had disallowed a portion of these expenses as capital expenditure, leading to a higher assessed income. The assessee contended that the expenses were revenue in nature and had been treated as deferred revenue expenditure, written off over multiple assessment years.

2. Jurisdiction of CIT u/s.263: The Ld. CIT invoked the revisionary jurisdiction u/s.263 on the grounds that the expenses incurred for brand building were capital in nature, creating an intangible asset with enduring benefits. The CIT held that the AO's failure to make specific inquiries regarding the nature of these expenses rendered the assessment order erroneous. The CIT referred to precedents emphasizing the importance of making necessary inquiries to determine the nature of expenditures.

3. Application of correct provisions of law: The tribunal analyzed the facts and submissions presented by both parties. It noted that the AO had examined the details of brand building expenses, sought clarifications, and concluded that a portion of these expenses constituted capital expenditure. The tribunal emphasized that the AO's decision, even if resulting in a loss of revenue or presenting debatable issues, should be respected if it was based on a permissible legal course.

4. Distinction between capital and revenue expenditure: The tribunal considered the nature of the expenses incurred by the assessee for brand building. It highlighted that the expenses did not result in the creation of an enduring asset but rather facilitated sales and profit generation. Citing legal precedents, the tribunal emphasized that not every enduring benefit leads to capital expenditure and that the commercial sense and business necessity must be considered in determining the nature of expenses. Ultimately, the tribunal concluded that the expenses were revenue in nature, and the AO's decision was correct, thereby allowing the appeal filed by the assessee.

In conclusion, the tribunal ruled in favor of the assessee, holding that the expenses incurred for brand building were revenue in nature and not capital expenditure, as determined by the AO. The tribunal emphasized the importance of proper inquiries by the AO and upheld the decision based on the correct application of legal provisions and the distinction between capital and revenue expenditure.