2017 (7) TMI 421 - AT - Income Tax

Expenses incurred on market research - revenue expenses - whether expenses not to be amortized u/s 35D(2)(a)(iii) as held by AO? - expenses incurred in connection with extension of its undertaking - Held that - Bare perusal of the provisions contained u/s 35D invoked by the AO to amortize expenses incurred on market research goes to prove that the expenses must be incurred before commencement of the business or after commencement of the business but where there is an extension of undertaking or setting up of a new unit. In the instant case, AO has not made out any case if the assessee has incurred the expenses after the commencement of business in connection with the extension of his undertaking or in connection with its setting up a new unit. Moreover, marketing survey are conducted by the company on ad hoc basis / on day-to-day basis to achieve the target/to enhance sale and no enduring benefit in any manner used to be there. Moreover, to invoke the provisions contained u/s 35D, such expenses are required to be incurred before the commencement of the business or after the commencement of the business in connection with extension of undertaking or in connection with its setting up of a new unit, both these conditions are not fulfilled. So, the expenses cannot be amortized by invoking the provisions contained u/s 35D and ld. CIT (A) has rightly deleted the addition - Decided in favour of assessee.

Summary

Issues involved: Determination of whether expenses incurred on market research are revenue expenses and to be amortized under section 35D(2)(a)(iii) of the Income-tax Act, 1961.

Analysis:
1. The Revenue appealed against the Commissioner of Income-tax (Appeals)'s order regarding the treatment of expenses incurred on market research for the assessment year 2010-11 under section 143(3) of the Act.
2. During scrutiny, the Assessing Officer noted the expenses claimed by the assessee under 'market research' and questioned whether these should be capitalized due to long-term benefit. The assessee argued that since no new assets were created, the expenses should not be capitalized. However, the AO considered the expenses of enduring nature and amortized them under section 35D(2)(a)(iii) but allowed only 1/5th of the expenses over five years.
3. The assessee appealed to the CIT (A), who ruled in favor of the assessee. Subsequently, the Revenue appealed to the Tribunal.
4. After hearing both parties and reviewing the documents, the Tribunal focused on the main issue of whether the market research expenses should be considered revenue expenses or amortized under section 35D(2)(a)(iii) of the Act.
5. The Tribunal examined the provisions of section 35D(2)(a)(iii) which allow for the amortization of certain expenses incurred before or after the commencement of business in connection with the extension of undertaking or setting up a new unit.
6. It was observed that the AO failed to establish that the expenses were incurred in connection with the extension of the business or setting up a new unit after the commencement of business. Market surveys were deemed essential for day-to-day operations without providing enduring benefits.
7. The CIT (A) highlighted that the consultants engaged by the assessee contributed to increased revenue, indicating the immediate impact of marketing efforts rather than long-term benefits.
8. Since the conditions for invoking section 35D were not met, the Tribunal concluded that the expenses on market research cannot be amortized under section 35D(2)(a)(iii). The CIT (A)'s decision to delete the addition was upheld, and the Revenue's appeal was dismissed.

In conclusion, the Tribunal found no errors in the CIT (A)'s decision and ruled against the Revenue, emphasizing that the market research expenses did not qualify for amortization under section 35D(2)(a)(iii) of the Income-tax Act, 1961.