By TIOL News Service

NEW DELHI, JULY 12, 2017: THE ISSUE BEFORE THE TRIBUNAL IS - Whether marketing research expenses can be amortized by invoking the provisions contained u/s 35D, without establishing that they are incurred before commencement of business or after commencement of business in connection with extension of undertaking. NO is the answer.

Facts of the case:

The AO during the subject year had noticed that the assessee company had claimed a sum of Rs.52,05,586/- in the profit & loss account under the head 'market research'. Assessee was accordingly called upon to explain as to why these expenses shall not be capitalized as the assessee was deriving long term benefit. Assessee claimed that since no new assets have been created nor there is an expenditure of enduring nature, the same could not be capitalized. However, AO being dis-satisfied proceeded to conclude that it being expense of enduring nature was being amortized by invoking the provisions contained u/s 35D(2)(a)(iii), but allowed the claim of assessee to tune of 1/5th of the expenses for the five years and assessed the total income at Rs.53,72,391/-.

On appeal, the ITAT held that,

++ perusal of the provisions contained u/s 35D invoked by the AO to amortize expenses incurred on market research goes to prove that the expenses must be incurred before commencement of the business or after commencement of the business but where there is an extension of undertaking or setting up of a new unit. In the instant case, AO has not made out any case if the assessee has incurred the expenses after the commencement of business in connection with the extension of his undertaking or in connection with its setting up a new unit. Moreover, marketing survey are conducted by the company on ad hoc basis / on day-to-day basis to achieve the target/to enhance sale and no enduring benefit in any manner used to be there;

++ the CIT(A) has categorically thrashed the issue of the impugned order, "that nature of the services to be provided by the consultants engaged by the assessee company have been brought on record by way of a sample agreement with one of such consultants at United Kingdom but the assessee had also demonstrated the increase in the revenue during the year under assessment which can be attributed to the enhanced marketing efforts of such consultants." Moreover, to invoke the provisions contained u/s 35D, such expenses are required to be incurred before the commencement of the business or after the commencement of the business in connection with extension of undertaking or in connection with its setting up of a new unit, both these conditions are not fulfilled. So, we are of the considered view that the expenses to the tune of Rs.52,05,586/- cannot be amortized by invoking the provisions contained u/s 35D and CIT (A) has rightly deleted the addition.

(See 2017-TIOL-1018-ITAT-DEL)