By TIOL News Service

NEW DELHI, AUG 18, 2017: THE ISSUE BEFORE THE TRIBUNAL IS - Whether advertisement & sales promotion expenses incurred for purposes of making customers aware of existence of products/services in the market, which may or may not result in sales, are not capital expenditure. YES is the answer.

Facts of the case:

The Assessee filed its return declaring a loss of Rs. 3,73,30,202/- and its case was selected for scrutiny. The AO observed that assessee had derived revenue from sale of publication and advertisement published therein. During assessment proceedings, the AO noted that year under consideration was 3rd year of operation of assessee and expenses on advertisement and sales promotion were incurred to propagate the brand name of assessee in market. The AO, thus, held expenses to be capital in nature and disallowed the same holding it to be enduring in nature. On appeal, the CIT(A) deleted the addition.

On appeal, the ITAT held that,

++ the AO has already recorded that year under consideration is 3rd year of since its commencement. This means that business has been carried on since past two assessment years. It is seen that the Supreme Court in case of Empire Jute Co. Ltd vs. CIT - 2002-TIOL-238-SC-IT-LB has held that: "....(i) It is not a universally true proposition that what may be a capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer. The fact that a certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer. (ii) There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of assessee's business to be carried on more efficiently or more profitability while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case...." Therefore, respectfully following same, we are of considered opinion that expenditure incurred by assessee towards advertisement and sales promotion are for the purposes of making customers aware of assessee's existence and its products/services, including improvement, if any, in the market which may or may not result in sales. We are, therefore, inclined to uphold findings of CIT(A).

(See 2017-TIOL-1166-ITAT-DEL)