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TMI Blog2015 (3) TMI 569X X X X Extracts X X X X X X X X Extracts X X X X ..... o have been incurred on setting up of new branches. (c) Whether the Ld CIT(A) was justified in deleting the disallowance made u/s 40A(3) of the Act. 4. The first issue in both the parties' appeal arise out of common issue. The assessee company is engaged in the business of providing skin care and weight management services. It also sells skin care products. It has established branches all over the country by name "Kaya Skin Clinics" and "Kaya Life Centres". The assessee claimed expenditure under the head "Advertising & Sales Promotion" to the tune of Rs. 17.10 crores. The AO took the view that the assessee has incurred this expenditure only to build its own brand, which will give enduring benefit to the assessee. Accordingly the AO took the view that the expenditure incurred by the assessee should be treated as "deferred revenue expenditure". Accordingly, the AO allowed 20% of the expenditure and, however, disallowed the balance amount i.e., Rs. 13.68 crores as Capital expenditure incurred towards intangible assets "Kaya skin clinic" (i.e.,brand building). 5. The Ld CIT(A) also took the view that the expenses incurred by the assessee are not purely towards advertising its produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Corporation Ltd Vs. CIT reported in 225 ITR 802(SC). He further submitted that the tax authorities are not correct in presuming that the advertisement expenses incurred by the assessee has resulted in brand building, since the result of advertisement could not be measured in a scientific manner. He further submitted that there is uncertainty over the period for which the said advertisement programme shall have effect. The Ld A.R also furnished following contentions in the written submissions given to us:- "(a) The Assessee submits that the expenditure on advertisement and sales promotion incurred by it is revenue in nature and has been incurred in the ordinary course of its business. The expenditure has been incurred towards advertisements of the services offered by it in TV, Radio, print media and art work charges etc. A bare perusal of the sample advertisements placed at pages 135 to 137 of the Paper Book and sample invoices at pages 123 to 134 shows that the advertisements are focused towards promotion of the services relating to skin treatment and weight management provided by the Assessee. Further, no enduring benefit is derived from such advertisements as such expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and not depreciated as a capital asset. Once, it is accepted that the expenditure is revenue in nature it is well settled, in as far as income-tax is concerned, that there is no concept of deferred revenue expenditure (see CIT v. Casio India Ltd. 335 ITR 196 (Del.), CIT v. Citi Financial Consumer Finance Ltd. 335 ITR 29 (Del.), Hindustan Commercial Bank Ltd., In re 21 ITR 353 (All.) and DCIT v. Core Healthcare Ltd. 308 ITR 263 (Guj.). In any event, such expenditure cannot be deferred as the period for which the benefit may flow is not ascertainable. It is also possible that the advertisement may fail to have the desired result. (d) Assuming without admitting that the expenditure on advertisement and sales promotion is for the purposes of creation of brand name the Assessee submits that in view of the following decisions such expenditure even on creation of brand name has to be allowed as a revenue deduction. Asian Paints Ltd. vs. Addl. CIT [(Mumbai ITAT) ITA 7801/MUM/2010] Fine Jewellery (I) Ltd. vs. ACIT [(Mumbai ITAT) 19 ITR 746] ACIT vs. Warner Lambert India Ltd. [(Mumbai ITAT) ITA 954 & 3063/Mum/2006] ITO vs. Spice Communications Ltd. [(Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn self-generated brand "Spice" since 1997. The assessee's business of providing cellular mobile services is undoubtedly a highly competitive business, and assessee has to provide services in a competitive environment. This is also not in dispute that the assessee has incurred expenditure towards advertisement and sales promotion in course of carrying on its business activities. The AO has allowed 90 per cent of the expenses as revenue expenditure and allocated 10 per cent towards capital by observing that 10 per cent of expenses have been incurred towards brand building. The AO has not been able to justify as to how the 10 per cent of the total advertisement and sales promotion expenses can be allocated towards capital expenditure when the assessee has not acquired any brand from any outside party. The expenditure on advertisement and sales promotion constituted expenditure incurred on press advertisement, hoardings, neon signs, brochures, etc. The press advertisements could not be considered as capital asset acquired by the assessee. Similarly, putting hoardings and neon signs could not also be considered on capital field. These expenditures do not lead to create any capital asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of CIT Vs. Liberty group marketing division (315 ITR 125) and the ratio of the said decision was followed by the jurisdictional High Court in the case of Geoffrey Manner & Co. Ltd (supra). For the sake of convenience, the head notes given by the ITR in the case of Liberty group marketing division are extracted below:- "Business expenditure-Capital or revenue expenditure- Advertisement expenditure on glow sign boards-Expenditure incurred by the assessee on glow sign boards does not bring into existence an asset or advantage for the enduring benefit of the business-Glow sign board is not an asset of permanent nature but requires frequent replacement-Expenditure on glow sign boards is made by assessee with an object to facilitate the business operation-Hence, expenditure is allowable revenue expenditure Held : The expenditure incurred by the assessee on glow sign boards does not bring into existence an asset or advantage for the enduring benefit of the business, which is attributable to the capital. The glow sign board is not an asset of permanent nature. It has a short life. The materials used in the glow sign boards decay with the effect of weather. Therefore, it req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counted service income of Rs. 18.81 crores. The AO noticed that the assessee has been consuming its own products (captive consumption) while providing services to its clients. Hence, the AO ascertained the ratio of captive consumption with the service charges income generated by it. In the immediately preceding year, the service income shown by the assessee was 3100 times of the value of captive consumption, whereas during the year under consideration it was only 2614 times. Hence, the AO computed the service charges income of the instant year at 3100 times of the captive consumption at Rs. 119.86 crores. The assessee had declared the service charges income at Rs. 101.05 crores. Hence the AO treated the difference amount of Rs. 18.81 crores as unaccounted income of the assessee. The Ld CIT(A) also confirmed the said addition. 16. The Ld A.R submitted that the assessee is providing 562 different types of services using different types of its products. He further submitted that the assessee is manufacturing 48 types of products and the cost of items range from Rs. 5/-per unit to Rs. 930/- per unit. The service charges collected would depend upon types of services rendered and the al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose vouchers were self serving invoices. It appears that the assessee has claimed that it is having quantitative details for captive consumption. However, the Ld CIT(A) has observed as under in this regard:- "Further I find no force in the argument that there is quantitative details of captive consumption because there is no details on record which can be one to one correlated. When there is complete failure on the part of the assessee to correlate the consumption with receipts, there is no propriety to claim that there is opening balance, production, purchase, sale and closing stock." During the course of appellate proceedings before Ld CIT(A), it appears that the assessee has furnished details of 17 types of services (claimed to be major services). However, the Ld CIT(A) has taken the view that the furnishing of details of 17 services out of 562 services cannot explain the difference in receipts. 19. However, we are of the view that there appears to be some merit in the contentions of the assessee. Normally the service receipts are determined on the basis of Fixed costs, variable costs and profit element. The material cost would fall in the category of variable costs. Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative expenses then same are to be amortized or it has to be capitalized in respective assets. AO has not proved beyond doubt as to how such expenses are not related to acquisition of such assets. There is no proper reasoning in para 7.4 of the assessment order hence same can not be upheld. On the contrary, Ld. AR has rightly argued that such expenses are attributable to the cost of bringing the assets to its working condition for its use. The reliance placed in the cases of Challapalli Sugars Ltd. v. CIT 98 ITR 167(SC). Gujarat High Court in Arvind Mills Ltd. v. CIT 112 ITR 64(Guj) Bombay High Court in CIT v. Polychem ltd. 98 ITR 574 (Bom), CIT V/s Nirlon Synthetic Fibres & Chemicals Ltd 137 ITR 1 (Bom) and CIT V/s J.M.A. Industries Ltd 129 ITR 373( Delhi) supports the contention of the appellant. If such expenditure is not to be capitalized then it would be allowed as revenue expenditure. AO has not clarified as to how these are not genuine expenditure, therefore the finding of the AO is without any leg. Thus, considering the facts of the case AO is directed to allow the depreciation on various expenses after capitalizing the same to be appropriate account of assets. In view of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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