Pre-Operative Expenses and Advertising Expenses are eligible for Tax Deduction: Delhi High Court [Read Judgment]

The Delhi High Court ruled that the tribunal rightly deleted additions towards Pre-operative expenses, Advertising expenses.

The assessee, Miele India is in the business of trading and therefore, expenses incurred prior to the commencement of business were rightly added back by the AO. In support of this plea, it was pointed out that the AO has indicated that the assessee in his written note had stated that its business commenced on October 29, 2009. It was submitted that the ‘experience centre’ was launched only on October 29, 2009 and therefore, that had to be taken as the actual date when the assessee had set-up its business.

The mere fact that the assessee obtained stock of the goods, that it intended to trade in, was not enough. Since the assessee is a trading entity, it needed an outlet such as an experience centre for conducting its business; which, as indicated above, was set-up only on October 29, 2009.

Mr. Shlok Chandra, counsel behalf of the revenue, has assailed the order of the Tribunal in respect of two issues namely deletion of the addition made by the assessing officer towards pre-operative expenses and advertising expenses.

Mr. Chandra urged that the Tribunal had erred in deleting the addition made qua advertising expenses by ignoring the fact that the said expenses had been incurred to build goodwill.

In other words, the argument was that if the expenses were capital in nature, it could not have been treated as revenue expenses.

On the other hand, Mr. Piyush Kaushik, who appears on behalf of the assessee, submitted that there is a difference between the setting-up of business and commencement of business; as long as the assessee is ready to carry on business and there are facts and circumstances obtaining in a case, which point in this direction, then, it can be safely concluded that the business has been set-up and, therefore, any expenses incurred would have to be allowed as a deduction.

The division bench of Justice Rajiv Shakdher and Justice Talwant Singh said that the expenditure incurred being a business expenditure, which was incurred wholly and exclusively for the purposes of business, and did not lead to the creation of a capital asset in the assessment year in issue, ought to have been allowed by the AO.

“The rationale adopted by the A.O. for disallowing the expenditure was completely flawed. Goodwill, which is built, based on the reputation acquired by the business over the years, is an intangible asset, which is monetized, ordinarily, when the business is sold. Therefore, for the A.O. to disallow advertising expenditure on this basis was completely erroneous,” the court observed. Therefore, the court while dismissing the revenue’s appeal held that the expenditure was incurred for the subject AY and, therefore, the addition made by the AO was rightly deleted by the CIT(A), a decision which was sustained by the Tribunal.