2017 (5) TMI 910 - AT - Income Tax

Capitalization of license fee and royalty expenditure - Held that - Identical issue having similar facts was involved in the assessment year 2007-08 2015 (9) TMI 898 - ITAT DELHI which has been decided against the revenue wherein held that what is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee s trading operations or enabling the management and conduct of the assessee s business to be carried on more effectively or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The license fee and the royalty fee to the Government of India is on a year to year basis and this fact was never disputed by the Revenue at any point of time and thus the same has to be held as revenue in nature - Decided in favour of assessee. Addition on capitalization of brand development expenditure - Held that - Similar facts was a subject matter of the departmental appeal for the preceding year i.e. assessment year 2009-10 2015 (9) TMI 898 - ITAT DELHI wherein held it is not possible to agree with the appellant-Revenue that the advertisement expenses incurred by the respondent-assessee at the time of installation of additional machinery in the existing line of business resulted in any enduring benefit, so as to be treated as capital in nature. Advertisement expenses incurred by the assessee to create brand image is allowable as revenue expenditure - Decided in favour of assessee.

Summary

Issues:
1. Deletion of addition of ?51,69,792 on capitalization of license fee and royalty expenditure.
2. Deletion of addition of ?1,39,720 on capitalization of brand development expenditure.

Analysis:

Issue 1:
The first issue pertains to the deletion of the addition of ?51,69,792 made by the Assessing Officer (AO) on the capitalization of license fee and royalty expenditure. The appellant argued that a similar issue was decided in the assessee's favor in a previous case. The Tribunal referred to the previous decision and highlighted the nature of the advantage in a commercial sense, emphasizing that if the advantage facilitates trading operations without affecting fixed capital, the expenditure is revenue in nature. Based on the precedent and legal principles, the Tribunal found no merit in the department's appeal and ruled against the addition.

Issue 2:
The second issue concerns the deletion of the addition of ?1,39,720 on the capitalization of brand development expenditure. The appellant contended that a comparable issue was previously decided against the department in another case. The Tribunal examined the nature of the expenses, including hoardings, pamphlets, and promotional events, and referred to relevant judgments stating that expenses on publicity and advertisement are treated as revenue in nature and fully allowable in the year incurred. Citing legal precedents, the Tribunal concluded that the brand development expenses were akin to normal advertisement expenses and allowed them as revenue expenditure. Consequently, the Tribunal dismissed the department's appeal in this regard.

In conclusion, the Appellate Tribunal ITAT DELHI, in the cited judgment, upheld the deletions of both the addition of ?51,69,792 on capitalization of license fee and royalty expenditure and the addition of ?1,39,720 on capitalization of brand development expenditure, based on legal principles and precedents established in previous cases.