2014 (3) TMI 104 - AT - Income Tax

Deletion of disallowance of advertisement expenses Nature of Expenses Capital OR Revenue Held that - CIT(A) held that the appellant has incurred expenses in respect of advertisement and sales promotion expenses during the current year - As against this, the appellant as shown sales -These expenses comprise of various expenses including expenditure on advertisement published in the magazine, media, designing and printing charges of posters, banners, catalogues expenditure incurred for participation in exhibition and branding at distributors and dealers showrooms etc. - The details of each invoice alongwith the purpose for such expenditure was furnished before the expenses were routine operational expenses for the purpose of sale promotion - None of these expenditure could be held to be instrumental in creating permanent assets or enduring benefits to the appellant company Relying upon Commissioner of Income-tax Versus Casio India Ltd. 2011 (5) TMI 511 - Delhi High Court - the expenditure on publicity and advertisement is to be treated as revenue nature allowable fully in the year, in which it was incurred the addition made by AO set aside. Deletion of shortage of closing stock Held that - CIT(A) held that the Assessee has furnished the details of shortage of such 3,558 units of items and informed that out of such short items, 3394 items were issued to the distributors on free of cost basis for display and training purpose - The appellant company also furnished details with name and address with location of its distributors across the country, numbering 94 in all - The appellant has furnished proper item-wise record of such items which were provided to the dealers for display/training - some of the items may have been damaged or lost during transit, therefore such a shortage due to damage or loss is not considered reasonable keeping in view the magnitude of such shortage, being 0.12% of the total sales and hence cannot it be held as an unusual loss - the shortage of 164 units on account of damaged or lost items as a normal loss in the course of business of trading of sanitary-ware items across India to various distributors - no contrary material has been found or placed on record by the revenue and otherwise the conclusion drawn by CIT(A) is found to be just and appropriate there is no reason to interfere in the findings of the CIT(A) Decided against Revenue.

Summary

Issues Involved:
1. Deletion of disallowance of advertisement expenses.
2. Deletion of addition made on account of shortage of closing stock.

Issue-Wise Detailed Analysis:

1. Deletion of Disallowance of Advertisement Expenses:

The first issue pertains to whether the advertisement expenses of Rs. 3,47,34,870/- should be treated as capital expenditure or revenue expenditure. The Assessing Officer (A.O.) argued that these expenses were for brand building and should be capitalized, allowing only 1/5th of the expenditure for the current year. The assessee contended that these were routine operational expenses for sales promotion, including advertisements in magazines, media, posters, banners, and participation in exhibitions, which did not create any capital assets or provide enduring benefits. The CIT(A) agreed with the assessee, noting that similar expenses in subsequent years led to increased sales, and ruled that these expenses were revenue in nature. The Tribunal upheld the CIT(A)'s decision, citing that the expenses were routine operational expenses necessary for business efficiency and did not create enduring benefits.

2. Deletion of Addition Made on Account of Shortage of Closing Stock:

The second issue involves an addition of Rs. 82,83,024/- due to a reported shortage of 3,558 items in the closing stock. The A.O. treated this shortage as sales made out of the books, applying an average sale price to the missing items. The assessee explained that the shortage was due to goods issued to distributors for display, training purposes, and losses due to damage or transit. The CIT(A) found this explanation credible, noting that issuing goods for display is a common practice in the sanitary-ware industry and that the loss of 164 items (0.12% of total sales) was minimal and normal. The Tribunal upheld the CIT(A)'s decision, stating that the A.O. had no evidence to support the claim that the items were sold outside the books.

Conclusion:

The Tribunal dismissed the revenue's appeal, concurring with the CIT(A)'s findings that the advertisement expenses were revenue in nature and the shortage in closing stock was adequately explained and justified as a normal business loss. The order was pronounced in open court on 21st Feb., 2014.