2004 (4) TMI 280 - AT - Income Tax

Advertisement expenditure - launching a new product - treatment of the expenditure in the books of account - HELD THAT - In this case, the assessee had launched a new product and incurred heavy advertisement expenditure. The period for which the assessee can be said to have secured benefit by incurring this expenditure cannot be reasonably estimated. The undisputed fact is that the new product launched may fail to take off in the year of launch itself may have a long life as a product. There is no way in which it can definitely be estimated that the benefit of the expenditure would last for a particular period of time, and on this count, we agree with the arguments of the learned counsel for the assessee. Reliance placed by the Revenue in the case of Shreyas Shipping Ltd. 2002 (5) TMI 203 - ITAT BOMBAY-H does not come to its resuce, for in that case, dry dock and special survey expenses were incurred by the assessee and these expenses have to be incurred statutorily twice over a period of five years. That dry docking in the case of ships is mandatory. The benefit of the expenditure can be reasonably estimated over a period of 21/2 years. Moreover, there was a trade practice in that case and the assessee followed that trade practice and wrote off that expenditure over a period of 21/2 years. It is not the case here, as it is not a mandatory expenditure, nor can the period for which the benefit of the expenditure can be derived be estimated with a least reasonable accuracy. Thus, we delete the disallowance made by the Assessing Officer on account of advertisement expenditure, and decide this issue in favour of the assessee. In the result, appeal of the assessee is partly allowed.

Summary

Issues Involved:
The judgment involves the issue of advertisement expenditure claimed by the assessee for launching a new product, specifically focusing on the treatment of the expenditure in the books of account and its allowability as a deduction.

Issue 1: Claim of Advertisement Expenditure
The assessee incurred inaugural advertisement expenditure of over Rs. 1 crore for a new product launch, treating it as deferred revenue expenditure in the books of account and writing off only 1/5th during the year. The Assessing Officer disallowed 4/5th of the total expenditure claimed, allowing only the amount debited to the profit and loss account. The CIT(A) upheld the disallowance, leading to the assessee's second appeal.

Issue 2: Allowability of Expenditure
The dispute revolves around whether the entire advertisement expenditure can be claimed in the year of filing the return, despite being written off over five years in the books. The Revenue argued that the treatment in the books of account and the method of accounting followed do not support the assessee's claim, citing relevant legal precedents.

Judgment Summary:
The Tribunal considered the nature of the expenditure, emphasizing that it must be revenue in nature and incurred wholly and exclusively for business purposes. Referring to legal principles, including the Madras Industrial Investment Corpn. case, the Tribunal highlighted that revenue expenditure should generally be allowed entirely in the year incurred, even if written off over subsequent years. The Tribunal noted that the benefit period of the advertisement expenditure could not be reasonably estimated, unlike cases with specified benefit periods. It distinguished precedents cited by the Revenue, emphasizing the unique circumstances of the current case. The Tribunal rejected the argument that entries in the books of account determine expenditure allowability, citing relevant Supreme Court decisions. Ultimately, the Tribunal ruled in favor of the assessee, deleting the disallowance of the advertisement expenditure and partially allowing the appeal.