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2015 (3) TMI 569 - AT - Income TaxAdvertisement and Sales Promotion - capital v/s revenue expenditure - submission of the assessee was that it was required to incur advertisement and sales promotion expenses continuously every year - CIT(A) held the expenditure incurred for brand building purpose - Held that - he expenditure incurred in order to facilitate the business operation and not with the object of acquiring asset of enduring nature is allowable as revenue expenditure. In the instant case, we have already seen that the assessee has been incurring expenditure and sales promotion since AY 2004-05, meaning thereby, the assessee was required to incur those expenses every year in order to retain its position in the market. There should not be any dispute that the assessee is conducting its business in a competitive environment. Further, there is merit in the submission of Ld A.R that it is difficult to assess the period of benefit derived from advertisement and further it is also difficult to ascertain as to whether any brand name was created. Hence, we are of the view that the Ld CIT(A) was not correct in law in holding that the assessee has spent the expenditure on advertisement and sales promotion for brand building purpose. In our view, the assessee was right in law in claiming this expenditure as revenue expenditure. - Decided in favour of assessee. Unaccounted service income - AO noticed that the assessee has been consuming its own products (captive consumption) while providing services to its clients - assessee contented that the consumption of materials would depend upon the types of services offered, i.e, the product mix would depend upon the type of service, thus, captive consumption of materials cannot be at standard proportion of service income receipts - Held that - there appears to be some merit in the contentions of the assessee. Normally the service receipts are determined on the basis of Fixed costs, variable costs and profit element. The material cost would fall in the category of variable costs. Accordingly, the cost of particular service would normally be determined at Fixed cost Variable cost Profit amount. Hence, comparison of the variable cost to the total service receipts, in our view, may not be right method of approaching issue. Further, when the assessee is offering 562 types of services and since there is a possibility that one unit of product shall be used to many clients, it would also be difficult to establish one to one correlation between the consumption and the service receipt. Hence the rejection of books of account and consequent estimate of income under these set of facts, in our view, is not justified. On the contrary, the claim of captive consumption needs to be examined on an overall basis, i.e., by making test checks. The assessee has claimed to have maintained quantity details of various products. Hence, on a test check basis, the said details can be verified and a decision can be taken. Hence, we are of the view that this issue needs to be restored to the file of the AO with the direction to examine the claim of captive consumption. - Decided in favour of assessee for statistical purposes. Eligibility to claim depreciation on the pre-operative expenses - CIT(A) allowed depreciation - Held that - AO has wrongly disallowed depreciation without any valid reasons when it is establish that there is some expenditure which are preoperative expenses then same are to be amortized or it has to be capitalized in respective assets. AO has not proved beyond doubt as to how such expenses are not related to acquisition of such assets. There is no proper reasoning of the assessment order hence same can not be upheld. On the contrary, Ld. AR has rightly argued that such expenses are attributable to the cost of bringing the assets to its working condition for its use. See Challapalli Sugars Ltd. v. CIT (1974 (10) TMI 3 - SUPREME Court) - Decided in favour of assessee. Disallowance made u/s 40A(3) - AO noticed that the assessee s sister concern named M/s Marico Ltd had incurred certain expenses on behalf of the assessee herein thus expenditure incurred through Journal entries does not fall in any of the exemptions provided under Rule 6DD of the IT Rules - CIT(A) directed the AO to delete the disallowance - Held that - According to Ld CIT(A), the salary was given to the employees by direct credit to their bank accounts. However, the Ld CIT(A) did not refer to any material in support of this conclusion. He has further expressed the view that the payments made through Journal vouchers are not hit by the provisions of sec. 40A(3) of the Act. We are unable to accept the said view. When Marico Ltd was incurring expenses on behalf of the assessee, it is required to comply with the provisions of sec. 40A(3) of the Act. Otherwise, the assessee is required to show that the payments are covered by the exceptions given in Rule 6DD of IT Rules. Since the assessee has claimed that M/s Marico Ltd has incurred expenses through cheque payments wherever necessary, including the salary payment made to seconded employees, we are of the view this issue requires fresh examination at the end of the assessing officer. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the assessing officer for fresh examination. - Decided in favour of revenue for statistical purposes.
Issues Involved:
1. Nature of expenditure on advertisement and sales promotion. 2. Assessment of unaccounted service income. 3. Depreciation on advertisement and sales promotion expenses. 4. Depreciation on pre-operative expenses. 5. Disallowance under section 40A(3) of the Act. Detailed Analysis: 1. Nature of Expenditure on Advertisement and Sales Promotion: The assessee claimed Rs. 17.10 crores as expenditure under "Advertising & Sales Promotion". The AO treated this as "deferred revenue expenditure" allowing only 20% and disallowed Rs. 13.68 crores as capital expenditure for brand building. The CIT(A) upheld this, stating the expenditure was for brand promotion, providing enduring benefits. The assessee argued that the expenditure was routine and necessary for business operations, citing several legal precedents. The Tribunal, referencing the case of Spice Communication and Geoffrey Manner, concluded that the expenditure was for ongoing business operations and not for creating an enduring asset. Thus, it directed the AO to allow the entire amount as revenue expenditure. 2. Assessment of Unaccounted Service Income: The AO added Rs. 18.81 crores as unaccounted income based on the ratio of captive consumption to service income. The assessee argued that the service charges varied based on different services and products used, and discounts and free trials were also offered. The Tribunal found merit in the assessee's contentions, noting the difficulty in correlating material consumption with service income. It directed the AO to examine the claim of captive consumption on a test-check basis and take an appropriate decision. 3. Depreciation on Advertisement and Sales Promotion Expenses: Since the Tribunal upheld the assessee's view that the advertisement and sales promotion expenses were revenue in nature, the questions regarding "deferred revenue expenditure" or "capital asset" eligible for depreciation did not arise. 4. Depreciation on Pre-Operative Expenses: The assessee capitalized Rs. 2.23 crores as pre-operative expenses and claimed depreciation. The AO disallowed this, but the CIT(A) allowed it, citing legal precedents. The Tribunal upheld the CIT(A)'s decision, agreeing that the expenses were attributable to bringing the assets to working condition and thus eligible for depreciation. 5. Disallowance under Section 40A(3) of the Act: The AO disallowed Rs. 8.89 crores incurred by the assessee's sister concern through journal entries, stating it did not comply with Rule 6DD exemptions. The CIT(A) directed the deletion of this disallowance, but the Tribunal disagreed, noting the need for compliance with section 40A(3) and Rule 6DD. It restored the issue to the AO for fresh examination. Conclusion: The assessee's appeal was allowed, and the revenue's appeal was partly allowed. The Tribunal directed the AO to re-examine specific issues, particularly the captive consumption claim and compliance with section 40A(3). The order emphasized the importance of distinguishing between revenue and capital expenditures and ensuring compliance with tax provisions.
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