2009 (2) TMI 13 - HC - Income Tax

Expenses incurred on film production by way of advertisement for marketing of products manufactured by them - if the expenditure is in respect of business which is yet to commence then the same cannot be treated as revenue expenditure but if the expenditure is in respect of an ongoing business and there is no enduring benefit it can be treated as revenue expenditure - Since expenditure was in respect of promoting ongoing products of the assessee, they are held as by way of revenue expenditure

Summary

Issues:
1. Whether the Tribunal was correct in deleting the disallowance made by the Assessing Officer for expenses incurred by the assessee for promotion films, slides, advertisement films and treating them as capital expenditure?

Analysis:
The judgment of the High Court of Bombay pertained to assessment years 2001-2002 and 1996-97, addressing the common question of law regarding the treatment of expenses incurred by the assessee for promotion films, slides, and advertisement films. The Revenue contended that the Tribunal erred in deleting the disallowance, citing the judgment in Commissioner of Income Tax vs. Patel International Films Ltd., 102 ITR 219. The assessee argued that the expenses were of a revenue nature and did not provide any enduring benefit to the company, merely aiding in making customers aware of its products. The Assessing Officer initially disallowed the expenditure, deeming it capital in nature. However, the CIT (A) held in favor of the assessee, stating that the expenses were revenue in nature as they were related to ongoing product promotion and did not create any enduring benefit. The Tribunal, referring to its own judgment in Deputy Commissioner of Income Tax vs. Metro Shoes P. Ltd., 268 ITR 106 (AT), concurred that the expenditure on advertisement films was revenue in nature as it aimed at continuously advertising products to maintain consumer interest.

The Revenue's main contention was that the Tribunal overlooked the precedent set in Patel International Films Ltd. In that case, the court held that the expenditure on a film processor for advertisement purposes was capital in nature as it was for future business activities, unlike the ongoing business promotion in the present case. The High Court emphasized a similar decision by the High Court of Punjab & Haryana in Commissioner of Income Tax vs. Liberty Group Marketing Division, where expenditure on glow signboards and TV films was deemed revenue in nature. The court established the test that if the expenditure is for an ongoing business without any enduring benefit, it qualifies as revenue expenditure. Conversely, if the expenditure is for a business yet to commence, it cannot be treated as revenue expenditure since it pertains to a product yet to be marketed. Therefore, in the current case, the court upheld the CIT (A) and Tribunal's decision, concluding that the expenditure was revenue in nature as it was for promoting ongoing products.

In conclusion, the High Court found no merit in the Revenue's appeals and dismissed them based on the distinction between the ongoing business promotion in the present case and the future business activities in the Patel International Films Ltd. case. The court affirmed that the expenditure incurred by the assessee for promotion films was rightly treated as revenue expenditure, aligning with the ongoing business operations and lacking any enduring benefit.