2015 (9) TMI 4 - AT - Income Tax

Allowability of expenditure incurred by the assessee on brand building - revenue v/s capital expenditure - Held that - There is no force in the argument of the ld. DR that the brand building expenditure shall be always treated as capital expenditure. As the expenditure has not resulted in capital asset, so has to be recorded as expenditure in capital field. It should be noted that the assessee had to incur this kind of expenditure year after year so as to keep the product in market otherwise when the advertisement was not followed up subsequently even the advantage secured from earlier advertising would get dissipated . Just because an expenditure is debited in books towards brand building, which it purportedly is, and statutory recognition has since been accorded to such an intangible asset, as a brand would not by itself imply that an advantage in the capital field, or of enduring value to the business has, arisen to the assessee upon incurring the expenditure. Rather, the business being competitive and prudence and conservatism being fundamental accounting assumptions, capitalization of such expenses or ascribing lasting abiding value to such expenses, could only be done on sound footing and cogent basis.( Alembic Chemical Works vs. CIT (1989 (3) TMI 5 - SUPREME Court). In our opinion the expenditure cannot be attributed to capital expenditure on brand building. Accordingly, we are inclined to uphold the order of the CIT(A) and dismiss the grounds taken by revenue. - Decided in favour of assessee.

Summary

Issues Involved:
Allowability of expenditure incurred on "brand building" for assessment year 2007-08.

Analysis:

Issue 1: Nature of Expenditure - Capital or Revenue
The primary issue in this case revolves around determining whether the expenditure incurred by the assessee on "brand building" should be treated as capital or revenue expenditure. The Assessing Officer (AO) initially treated the expenditure as capital, resulting in an addition to the assessee's income. However, the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, stating that the expenditure was routine operational expenses necessary for product launching and should be allowed in its entirety. The Revenue challenged this decision.

Issue 2: Enduring Benefit and Capital Expenditure
The Departmental Representative (DR) argued that the significant amount spent on brand building for launching a new product resulted in enduring benefits, making it capital expenditure. The DR relied on various judgments to support this argument. Conversely, the assessee contended that the expenditure did not result in acquiring any tangible or intangible asset of enduring benefit, thus qualifying as revenue expenditure. The Tribunal analyzed the nature of the expenditure based on established principles.

Issue 3: Determining Capital vs. Revenue Expenditure
The Tribunal examined the expenditure in detail, noting that it included various expenses related to sales promotion, staff welfare, advertisement, and other operational costs. The Tribunal emphasized that the purpose of the expenditure should be considered to determine its nature. It highlighted key factors such as the intention to acquire an enduring asset, the benefit derived for the business, and the distinction between capital and revenue expenditure based on the nature of the asset or advantage acquired.

Final Decision
After thorough analysis, the Tribunal concluded that the expenditure on brand building did not result in the creation of any new capital asset or enduring benefit to the business. The Tribunal noted that the accounting treatment and statutory recognition of the expenditure as "brand" did not automatically classify it as capital expenditure. Emphasizing the competitive business environment and accounting principles, the Tribunal upheld the CIT(A)'s decision to treat the expenditure as revenue expenditure. Consequently, the Revenue's appeal was dismissed.

Overall, the judgment clarifies the distinction between capital and revenue expenditure based on the purpose, benefit, and nature of the expenditure, providing a comprehensive analysis of the case and relevant legal principles.