2016 (5) TMI 33 - HC - Income Tax

Provision for breakage in transit - whether amounts to provisioning for contingent liability? - Held that - It is not in dispute that it stands covered in favour of the Revenue by the decision of this Court in Seagram Distilleries Pvt. Ltd. v. CIT (2015 (10) TMI 491 - DELHI HIGH COURT). Consequently, the appeals are admitted as far as this question is concerned and the question is answered in the negative i.e. in favour of the Revenue and against the Assessee. The impugned order of the ITAT to that extent is set aside. Expenditure incurred on brand creation - Held that - Spread of the brand expenses over a period of five years was actually in the nature of deferred revenue expenditure and the question of treating it as capital expenditure did not arise.

Summary

Issues:
1. Whether making a provision for breakage in transit amounts to provisioning for contingent liability?
2. Whether the expenditure incurred on brand creation is in the nature of capital expenditure or revenue expense?

Analysis:
1. The High Court addressed the first issue concerning the provision for breakage in transit. The Court referred to a previous decision in Seagram Distilleries Pvt. Ltd. v. CIT, where it was held in favor of the Revenue. Consequently, the Court admitted the appeals on this question, answering it in the negative, favoring the Revenue and against the Assessee. The ITAT's order on this issue was set aside.

2. Moving on to the second issue, the Court examined the expenditure on brand creation. The Assessing Officer treated the brand expenses as capital in nature, disallowing them as they were seen to enhance the brand's image. However, the ITAT disagreed, stating that the expenditure did not result in creating an enduring asset. The ITAT relied on a previous decision in CIT v. Monto Motors, which was affirmed by the Supreme Court. The Court agreed with the ITAT's reasoning, considering the spread of brand expenses over five years as deferred revenue expenditure, not capital expenditure. Therefore, the Court declined to frame a question on this issue.

In conclusion, the appeals by the Revenue were disposed of, with the first issue decided in their favor based on precedent, and the second issue resolved in favor of the Assessee, considering the nature of the brand expenses as deferred revenue expenditure.