The Mumbai Bench of the Income Tax Appellate Tribunal ( ITAT ) bench recently ruled that marketing expenses can be considered revenue per Section 37 of the Income Tax Act.
The assessee, ARI Healthcare Pvt. Ltd, which manufactures and sells pharmaceutical products, claimed ₹2.16 Crores in sales and marketing expenses for the Assessment Year (AY) 2021-22. The company made this expenditure by paying Nijji Healthcare Pvt Ltd for market development and product distribution services.
The Assessing Officer (AO) disallowed the assessee’s claim, treating the marketing expenses as capital expenditures instead of revenue. The AO asserted that, according to its website, Nijji Healthcare’s work profile showed signs of market expansion and brand-building activities instead of direct sales.
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Aggrieved by this order, the assessee moved with an appeal to the Commissioner of Income Tax (Appeals) [CIT(A)], where the CIT[A] also upheld the disallowance made by the AO. The CIT(A) further stated that he made a similar decision in the preceding assessment years.
Aggrieved by the CIT[A] order, the assessee appealed to the ITAT, where the tribunal observed that the AO’s approach was erroneous, as he had relied on Nijji Healthcare’s website information rather than analysing the actual services provided. It further noted that the ITAT had already remanded the issue in AYs 2017-18 and 2018-19, directing the AO to conduct a deeper inquiry, which was not done in the present case.
The Tribunal also observed that for AYs 2019-20 and 2020-21, the AO had reopened assessments to disallow the same marketing expenses but allowed them in the final reassessment order. This contradiction raised questions about consistency in evaluation. The ITAT held that marketing expenses incurred for sales and business expansion qualify as revenue expenditure under Section 37 of the Income Tax Act.
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The Tribunal, consisting of Renu Jauhri (Accountant Member) and Saktijit Dey (Vice President), set aside the disallowance and directed its deletion. The Tribunal held that when an issue has been remanded for detailed verification in earlier years, reopening the disallowance without proper verification is unjustified. As a result, the appeal was allowed.
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