2025 (1) TMI 565 - AT - Income Tax

Disallowance of marketing expenses by treating it as capital expenditure - assessee is a resident in corporate entity engaged in the business of manufacturer and sale of pharmaceuticals, medicinal chemicals and botanical products - HELD THAT - On perusal of the confirmation of NHPL and other corroborative evidences, it is evident that the expenses incurred primarily involve expenditure related to sale of products, such as, staff recruitment charges, salary and expenses of territory sales executives, salary and expenses of sales personnel manager, salary and expenses of sales manager, salary of MIS executives, salary and expenses of project Director and fix management service payments. It is an undisputed fact on record that the personnel engaged in sale of products of the assessee belong to NHPL. Therefore, it cannot be denied that market development expenses are towards sale of product, hence, are of revenue nature. Based on the reasoning, on which, market development expenses were disallowed in A.Ys 2021-22 and 2022- 23, the Assessing Officer proposed to reopen the assessments for A.Ys 2019- 20 and 2020-21 to disallow the market development expenses, being payment made to NHPL. This is evident from the orders passed u/s. 148A(d) of the Act on 28.03.2023. After considering the objections and submissions of the assessee, the Assessing Officer himself was convinced and passed assessment orders u/s. 147 of the Act on 26.03.2024 for A.Ys 2019-20 and 2020-21, accepting assessee s claim of market development expenses. Therefore, principle of consistency would have been maintained by following the position taken in the reassessment proceedings for A.Ys 2019-20 and 2020-21 rather than following the non-existent orders of the First Appellate Authority in A.Ys 2017-18 and 2018-19. Thus, market development expenses incurred by the assessee on account of payment made to NHPL, being in the nature of revenue expenses, are allowable. Accordingly, we direct the AO to delete the disallowances. Decided in favour of assessee.

1. ISSUES PRESENTED and CONSIDERED

The core legal question addressed in this judgment is whether the marketing expenses incurred by the assessee, specifically payments made to Nijji Healthcare Pvt. Ltd. (NHPL), should be classified as capital expenditure or revenue expenditure for the assessment years 2021-22 and 2022-23.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents:

The central legal framework involves the classification of expenses as either capital or revenue in nature. The distinction is crucial as it affects whether the expenses can be immediately deducted from taxable income or capitalized and amortized over time. The precedent from the assessee's own case in previous years (2017-18 and 2018-19) was considered, where similar expenses were disallowed as capital in nature by the First Appellate Authority.

Court's interpretation and reasoning:

The Tribunal scrutinized the nature of the expenses and the role of NHPL. It questioned the reliance on NHPL's online profile by the Assessing Officer (AO) and the First Appellate Authority to classify the expenses as capital. The Tribunal emphasized the need for substantive evidence rather than assumptions based on web profiles.

Key evidence and findings:

The assessee provided confirmations from NHPL and corroborative evidence to demonstrate that the expenses were related to the sale of products and market expansion. The Tribunal noted the inadequacy of the AO's reliance on NHPL's web profile and the lack of direct inquiry into NHPL's actual activities.

Application of law to facts:

The Tribunal applied the principle that expenses related to the sale of products and market expansion are typically revenue in nature. It found that the evidence provided by the assessee substantiated the claim that the expenses were for revenue purposes, not capital.

Treatment of competing arguments:

The Tribunal addressed the Department's argument, which relied on previous disallowances and NHPL's web profile. It countered that the previous Tribunal decision had already set aside such disallowances for lack of evidence and directed further inquiry, which was not adequately followed by the AO in the current years.

Conclusions:

The Tribunal concluded that the marketing expenses incurred by the assessee were of a revenue nature and should be allowed as deductions. It directed the AO to delete the disallowances.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

"The Tribunal did not appreciate the action of the Assessing Officer in disallowing the expenses simply relying upon the work profile of NHPL taken from the website."

"The market development expenses incurred by the assessee on account of payment made to NHPL, being in the nature of revenue expenses, are allowable."

Core principles established:

The judgment establishes that reliance on superficial evidence, such as web profiles, is insufficient for classifying expenses. Substantive inquiry and evidence are essential to determine the nature of expenses accurately.

Final determinations on each issue:

The Tribunal allowed the appeals, determining that the marketing expenses should be classified as revenue expenditure, thus permitting their deduction in the assessment years under consideration.

The judgment underscores the importance of a thorough and evidence-based approach in tax assessments, particularly when distinguishing between capital and revenue expenditures.

← Previous Next →