2023 (3) TMI 87 - AT - Income Tax

Nature of expenses - advertising expenses - Revenue or capital expenditure - whether the above expenses were revenue in nature in view of the fact that these expenses would essentially lead to establishment and promotion of Livpure brand in India? - HELD THAT - There is no denial to the fact that these expenses have been incurred to increase the awareness and popularity of the Livpure brand and to enhance the profit and revenue for the Assessee in long run. Thus these expenses have given enduring benefit to the Assessee and cannot be said to have incurred on revenue account wholly and exclusively for the purposes of Assessee s business. We observe that there are so many heads of expenses which the Assessee has claimed to have been incurred. AO though gone into the legality/status of the expenditures but without bifurcating different heads of the expenditures treated all the expenditures as capital in nature and therefore in our view determination qua nature of different head of expenditures has not been done properly and in real sense. Assessee also did not file proper details/heads of the expenditures incurred and in lump sum claimed the said expenditure as revenue in nature . Hence we are inclined to remand the instant case to the file of the Assessing Officer for decision afresh suffice to say by affording reasonable opportunity of being heard to the Assessee. Assessee is also directed to produce the bifurcated details and documents in relation to the expenses incurred on account of advertising and publicity expenses as claimed. Further the primary onus would be upon the Assessee to establish the nature of the expenses before the Assessing Officer. Appeal filed by the Assessee stands allowed for statistical purposes.

Summary

Issues Involved:
1. Determination of whether advertising, marketing, and business promotion expenses are capital or revenue in nature.
2. Consideration of depreciation on the disallowed capital expenditure.

Issue-wise Detailed Analysis:

1. Determination of whether advertising, marketing, and business promotion expenses are capital or revenue in nature:

The Assessee declared a total loss of Rs. 31,76,93,622/- for the assessment year 2014-15 and claimed advertising expenses of Rs. 26,85,34,669/- as revenue expenditure. The Assessing Officer (AO) questioned whether these expenses, which were aimed at establishing and promoting the "Livpure" brand, should be treated as capital expenditure. The Assessee argued that the expenses were of a revenue nature, facilitating trading operations and enabling the business to be carried on more efficiently or profitably without creating any tangible or intangible asset of enduring nature. The Assessee cited various cases, including the decision of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT, to support its claim that the nature of the advantage in a commercial sense should be considered, and not every enduring benefit should be treated as capital expenditure.

The AO, however, found that these expenses provided an enduring benefit to the Assessee, enhancing the brand's image and leading to better sales and turnover in the long run. The AO concluded that the expenses were not incurred wholly and exclusively for the business of the Assessee but were aimed at establishing and promoting the brand "Livpure," thus creating an intangible asset with enduring benefits. Consequently, the AO disallowed the expenditure by treating it as capital in nature.

The Assessee appealed to the Commissioner of Income-tax (Appeals) (CIT(A)), who affirmed the AO's decision, agreeing that the expenses were aimed at building a brand of enduring nature and could not be treated as revenue expenses. The CIT(A) found the reasons given by the AO convincing and upheld the addition of Rs. 26,85,34,669/- as capital expenditure.

2. Consideration of depreciation on the disallowed capital expenditure:

The Assessee made an alternative plea for depreciation on the disallowed capital expenditure. The CIT(A) accepted this plea and directed the AO to work out the depreciation on the capital expenditure, thereby allowing the Assessee's appeal on this ground in part.

Conclusion:

The Income Tax Appellate Tribunal (ITAT) heard the appeal and observed that while the AO treated all the advertising and publicity expenses as capital in nature, there was no proper bifurcation of different heads of expenses. The ITAT noted that the Assessee did not provide detailed bifurcated expenses and claimed the entire amount as revenue expenditure. The ITAT decided to remand the case back to the AO for a fresh decision, directing the Assessee to produce bifurcated details and documents related to the expenses incurred. The primary onus would be on the Assessee to establish the nature of the expenses before the AO. The appeal filed by the Assessee was allowed for statistical purposes.

Order:

The appeal filed by the Assessee is allowed for statistical purposes, and the case is remanded back to the AO for a fresh decision after affording a reasonable opportunity of being heard to the Assessee. The Assessee is directed to produce bifurcated details and documents related to the advertising and publicity expenses claimed. The order was pronounced in the open court on 15/02/2023.