2008 (10) TMI 74 - HC - Income Tax

Advertisement expenses incurred by the assessee to create a brand image with enduring benefit are allowable as revenue expenditure - income on sale of empty containers (in which raw materials were purchased) directly relatable to manufacturing activity of the industrial undertaking hence entitled to special deduction u/s 80HH & 80I further loans/borrowings from specified financial institutions are includible in computing capital for the purpose of section 35D

Summary

Issues Involved:
1. Allowability of advertisement expenses as revenue expenditure.
2. Deduction under Section 35D regarding short-term loan.
3. Deduction under Sections 80HH and 80-I on the miscellaneous income from the sale of empty containers.

Detailed Analysis:

1. Allowability of Advertisement Expenses as Revenue Expenditure:
The primary issue concerns whether advertisement expenses incurred by the assessee to create a brand image with enduring benefits are allowable as revenue expenditure. Initially, the Assessing Officer and Commissioner (Appeals) treated the expenditure as capital in nature, disallowing Rs.70,22,742/- on the grounds that it was a special campaign for creating a corporate image, thus leading to an enduring benefit. The Tribunal, however, reversed this decision, emphasizing that the nature of the expenditure should be assessed under Section 37(1) of the Income Tax Act, 1961. The Tribunal held that the expenditure did not result in a tangible asset and that enduring benefit alone does not classify it as capital expenditure. The Tribunal relied on Supreme Court decisions in Empire Jute Co. Ltd. v. Commissioner of Income-Tax and Alembic Chemical Works Co. Ltd. v. Commissioner of Income-tax, Gujarat, which state that the nature of advantage should be considered commercially and that the test of enduring benefit is not conclusive. The High Court agreed, noting that the expenditure was incurred during the running of the business and did not result in any enduring benefit justifying it as capital expenditure. Thus, the advertisement expenses were allowable as revenue expenditure.

2. Deduction under Section 35D Regarding Short-Term Loan:
The second issue pertains to whether the Tribunal erred in granting deduction under Section 35D for short-term loans. The Assessing Officer disallowed the deduction, arguing that the expenditure was in the capital field and not part of "capital employed" as per Section 35D. The Commissioner (Appeals) and Tribunal disagreed, interpreting that the definition of "capital employed" in the Explanation to Section 35D(3) does not differentiate between short-term and long-term borrowings. The High Court affirmed this interpretation, noting that the borrowing from specified financial institutions qualifies as "long-term borrowings" under the Explanation, even without a specified period. Hence, the Tribunal's decision to include the short-term loan for calculating the deduction under Section 35D was upheld.

3. Deduction under Sections 80HH and 80-I on Miscellaneous Income from Sale of Empty Containers:
The third issue involves whether the miscellaneous income from the sale of empty containers qualifies for deduction under Sections 80HH and 80-I. The Assessing Officer excluded Rs.26,64,113/- from the deduction, arguing it was not derived from the industrial undertaking. The Commissioner (Appeals) and Tribunal held that the income from the sale of containers, which were part of raw material purchases, was directly related to the manufacturing activity. They cited the Supreme Court's decision in Cambay Electric Supply Industrial Co. Ltd. v. C.I.T., which supports treating such income as derived from the industrial undertaking. The High Court agreed, noting that the sale of empty containers either reduces the purchase cost or directly adds to profits, thus qualifying for deductions under Sections 80HH and 80-I.

Conclusion:
The High Court concluded that advertisement expenses are allowable as revenue expenditure, upheld the deduction under Section 35D for short-term loans, and affirmed the deduction under Sections 80HH and 80-I for income from the sale of empty containers. Consequently, the appeals were disposed of with no order as to costs, and Civil Application Nos. 53 and 54 of 2001 were accordingly disposed of.