2019 (6) TMI 288 - AT - Income Tax

Addition on account of pre-operative expenses - allowable business expenses - CIT-A deleted the addition - HELD THAT - If the stated chronology of events is considered in the light of the remand report of the Assessing Officer there remains no doubt that the assessee has commenced its business in earlier assessment year. Therefore expenses considered as pre-operative expenses by the Assessing Officer have to be treated as legitimate business expenditure for the year under consideration. The findings of the ld. CIT(A) cannot be faulted with. Ground No. 1 according dismissed. Nature of advertisement expenditure - alleged that assessee is building a brand image of the parent company - revenue or capital in nature - - CIT-A deleted the addition - HELD THAT - During the course of assessment proceedings the case was referred to the TPO and the TPO framed order u/s 92CA(3) of the Act on 09.01.2014 and no adverse inference was drawn in respect of I.T. notification by the assessee during the year under consideration. This shows that the TPO was satisfied with the AMP expenses incurred by the assessee and did not make any adverse comment in so far as the issue of brand building is concerned. Thus public memory is very short and therefore the companies have to incur advertisement expenditure year after year to keep products fresh in the minds of the public. In our considered opinion such expenditure cannot partake the character of giving any enduring benefit. In our considered opinion the Assessing Officer has grossly erred in treating such expenditure as intangible asset and on facts of the case the findings of the ld. CIT(A) needs no interference. Ground No. 2 stands dismissed.

Summary

Issues:
1. Deletion of addition of pre-operative expenses
2. Deletion of addition of expenditure on advertisement

Analysis:

Issue 1: Deletion of addition of pre-operative expenses
The case involved the Revenue appealing against the deletion of the addition of pre-operative expenses by the Assessing Officer. The Assessing Officer disallowed expenses for the first 7 months as pre-operative expenses, which the assessee contested by providing evidence of business setup in earlier years. The ld. CIT(A) called for a remand report, which confirmed the commencement of business in the previous year. The ld. CIT(A) deleted the addition of pre-operative expenses after considering the facts and submissions. The chronological events from the date of incorporation supported the conclusion that the assessee had commenced business in the earlier assessment year, justifying the deletion of the addition. The Tribunal upheld the ld. CIT(A)'s decision, dismissing Ground No. 1.

Issue 2: Deletion of addition of expenditure on advertisement
The Assessing Officer treated the expenditure on advertisement as capital in nature, considering it as brand-building for the principal company. However, the TPO did not draw adverse inferences on the AMP expenses during the year. The Tribunal opined that advertisement expenses do not provide enduring benefits and are necessary for keeping products fresh in public memory. Therefore, such expenses cannot be classified as intangible assets. The Tribunal upheld the ld. CIT(A)'s decision to delete the addition of advertisement expenses, dismissing Ground No. 2.

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the deletion of both pre-operative expenses and advertisement expenses. The judgment provided a detailed analysis of the facts, submissions, and legal principles governing the treatment of these expenses, ensuring a fair and thorough consideration of the issues at hand.