The Ahmedabad bench of the Income Tax Appellate Tribunal ( ITAT ) has held that the advertisement expenses incurred at the time of installation of additional machinery will result in an enduring benefit and are allowable as Revenue Expenditure.
M/s. Rosebys Interiors India Ltd, the assessee filed its original return of income for the assessment year 2009-10 declaring a total loss of 5,21,64,446/- on 30-09-2009 and revised its return of income on 28-09-2010 by claiming advertising expenses to the tune of 21,28,55,537/-. During the course of the assessment, the Assessing Officer observed that the said advertisement expenses were not debited to the profit and loss account by the assessee.
As per the balance sheet, the said advertising expenses have been accounted as “capital work in progress (brand building expenditure)”. The assessee stated that they had capitalised the above expenditure in the books of account, but since the expenditure was purely in the nature of revenue, the assessee claimed these expenses in the (revised) return of income as revenue expenditure.
The AO disallowed the above advertisement expenses claimed by the assessee by way of filing a revised return of income. On appeal, the CIT(A) allowed the assessee’s appeal.
It was evident that the AO has not challenged the genuineness of expenses incurred by the assessee. The assessee placed copies of invoices/newspaper advertisements/other documentary evidence in support of the genuineness of advertisement expenditure incurred by the assessee and the genuineness of the expenses has not been doubted.
The primary reason for the disallowance of advertisement expenses by the AO is that firstly, the assessee cannot be permitted to change its stand, wherein the original return, the assessee had treated the aforesaid expenses as capital work in progress and secondly, since the advertisement expenses were almost 4 times the turnover of the assessee in the first year of operations, the same are capital in nature.
A Coram consisting of Shri P.M. Jagtap, Vice President And Shri Siddhartha Nautiyal, Judicial Member observed that there is no concept of deferment of revenue expenditure in the Income Tax Act.
The Tribunal held that there was a direct nexus between the advertising expenditure and the business of the assessee and that the assessee had to incur such expenditure to meet the competition in the Indian market for selling its products in India. While dismissing the appeal of the department, the Tribunal held that advertisement expenditure which enduring benefits are revenue expenditure.
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