Amar Raja Batteries Ltd. v. Assistant Commissioner of Income-tax

Per J. Sudhakar Reddy, Accountant Member. - 1-5 [These paras are not reproduced here as they involve minor issues]

6. The last issue involved in this appeal is the claim of the assessee on account of advertisement expenditure. The assessee had launched a new product and incurred inaugural advertisement expenditure of over Rs. 1 crore. In the books of account, he has treated the same as deferred revenue expenditure and written off only 1/5th of the same during the year. However, while filing the return of income, he had claimed the entire amount of advertisement expenditure. The Assessing Officer relied on the entries in the books of account and disallowed 4/5th of the total advertisement expenditure claimed as deduction, and allowed only the expenditure debited to the profit and loss account in this year. On appeal, the CIT(A) confirmed the said disallowance. Hence, the assessee preferred second appeal on this aspect.

7. There is no dispute about the fact that this is an advertisement expenditure incurred for launching a new product and that this is revenue in nature and that the expenditure is laid out wholly and exclusively for the purpose of business. The CIT(A) at page 9 of his order stated that the expenditure has not brought into existence any tangible asset, which can be considered to be of an enduring nature. He goes on to add that such huge expenditure has been incurred by the assessee only to publicise the brand name and the product throughout the length and breadth of the country, so that it will remain in the minds of the customers and public. He considered that the advantage of the same for the assessee will last for a period of four/five years and that the disallowance of 4/5th is of the expenditure by the Assessing Officer is justified.

8. Assessee’s case is that there is no concept of deferred revenue expenditure under the Income-tax Act, and that the income has to be computed as per sections 28 to 43 of the Act, and that there is no dispute of the fact that this is a revenue expenditure and that the entries made in the books of account are not determinative of the allowability of otherwise of an expenditure.

9. The Revenue’s case is that the assessee himself considered the expenditure as giving him an advantage that would last for about five years, and he had accordingly given treatment in the books of account, and his claim is contrary to the method of accounting followed and the ratio of the decision of the Mumbai Bench of the Tribunal in ITO v. Shreyas Shipping Ltd. [2003] 86 ITD 556 and the judgment of the Supreme Court in Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802¹ are in its favour.

10. We have carefully considered the rival submissions. The undisputed fact is that the expenditure is in the revenue field. The only issue to be considered is whether the assessee can claim the entire expenditure in this year itself, even though it had written off this expenditure in the books over a period of five years. The Hon’ble Supreme Court in the case of Madras High Court in Madras Industrial Investment Corpn. (supra) held as follows-

"...Section 37(1) further requires that the expenditure should not be of a capital nature. The question whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on, or conduct of the business, that it may be regarded as an integral part of the profit-making process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. Any liability incurred for the business of obtaining a loan would be revenue expenditure.

Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purposes of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debenture, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of debentures."

From this judgment, it is very clear that though the assessee has written off the expenditure in its books of account over a period of five years, it must be allowed in its entirety in the year in which it was incurred, if it is revenue expenditure, and if it is wholly and exclusively incurred for the purposes of business. The Hon’ble Supreme Court observed that in certain cases, the facts may justify the assessee to spread over and claim the expenditure over a period of ensuing years.

11. In this case, the assessee had launched a new product and incurred heavy advertisement expenditure. The period for which the assessee can be said to have secured benefit by incurring this expenditure cannot be reasonably estimated. The undisputed fact is that the new product launched may fail to take off in the year of launch itself may have a long life as a product. There is no way in which it can definitely be estimated that the benefit of the expenditure would last for a particular period of time, and on this count, we agree with the arguments of the learned counsel for the assessee. Reliance placed by the Revenue in the case of Shreyas Shipping Ltd. (supra) does not come to its resuce, for in that case, dry dock and special survey expenses were incurred by the assessee and these expenses have to be incurred statutorily twice over a period of five years. That dry docking in the case of ships is mandatory. The benefit of the expenditure can be reasonably estimated over a period of 2½ years. Moreover, there was a trade practice in that case and the assessee followed that trade practice and wrote off that expenditure over a period of 2½ years. It is not the case here, as it is not a mandatory expenditure, nor can the period for which the benefit of the expenditure can be derived be estimated with a least reasonable accuracy. The Bombay Bench of the Tribunal distinguished the judgment of its jurisdictional High Court in the case of CIT v. Chowgule & Co. (P.) Ltd. [1995] 214 ITR 523¹ (Bom.) holding that in that case it was not a case of current repairs and was also not a case which did not bring into existence or obtain a new or different advantage. Therefore, this decision of the Mumbai Bench of the Tribunal in the case of Shreyas Shipping Ltd. (supra) is distinguishable on facts. Coming to the Supreme Court decision in the case of Madras Industrial Investment Corpn. Ltd. (supra), it was a case where the assessee had paid upfront discount for the debentures issued. The lump sum payment of discount which is an upfront, one time payment, secured benefit to that assessee over a number of years. In fact the upfront payment is calculated by discounting the future instalments of interest payable and it is like prepaid interest. The period for which the assessee secured benefit is specified. That assessee by making one time payment had avoided paying interest on debentures in each of the next five years. The annual compulsorily incurable expenditure on interest has been discounted and paid upfront as a one time payment. In fact the entire expenditure of upfront payment in that case does not pertain to one year. Interest is a yearly commitment. Thus on facts the Hon’ble Supreme Court held that interest of that particular year only is to be allowed. Thus, this decision is also distinguishable from the facts of the present case. Thus, both in the case of Shreyas Shipping Ltd. (supra) before the Tribunal and in the case of Madras Industrial Investment Corpn. Ltd. (supra) before the Hon’ble Supreme Court, the period for which the assessee secured the benefit has been categorically specified either by way of contractual obligations or by way of statutory requirement. There is no such circumstance in this case. The matching concept, which is heavily relied upon in both the above cases, fails in this case. The number of years for which the benefit can be said to have been derived cannot be estimated in this case. Deferment is based on the "Matching Concept", that is Matching costs with revenue. The assessee is required to claim expenses year-wise to the extent of income, which can be said to have arisen from such expenses. The income relatable to that expenditure should arise for a number of years and when a nexus can be definitely found between both income and expenditure, the matching concept comes into play. The ratio of the order of the Mumbai Bench cannot be universally applied and as held by the Hon’ble Supreme Court, has to be restricted to the particular facts of that case. The decisions relied by Revenue have limited application and can be invoked when expenditure is incurred in lump sum, essentially to get rid of future annual expenditure which is necessarily to be incurred to carry on the business. This is not a case where annual future mandatory expenditure is done away with by a lump sum upfront expenditure.

12. As far as the entries in the books of account are concerned, it is well settled that they do not clinch the issue either way, and they do not determine the allowability or otherwise of the expenditure. The decisions of the Hon’ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 and in the case of CIT v. Indian Discounts Co. Ltd. [1970] 75 ITR 191 (SC) are clear on the issue. If the argument of the learned Departmental Representative that the entries in the books of account are sacroscent and have to be accepted is to be valid, then in the case of depreciation also, the claim of the assessee is to be disallowed, as the depreciation depicted in the books of account is something different from what is claimed and allowed, while computing the income under the Income-tax Act. In the circumstances, this argument of the learned Departmental Representative has necessarily to be rejected. We agree with the submissions of the assessee and hold that the entire advertisement expenditure for product launching is to be allowed in this year.

13. In the light of the above discussion, we delete the disallowance ofRs. 1,03,63,401 made by the Assessing Officer on account of advertisement expenditure, and decide this issue in favour of the assessee.

14. In the result, appeal of the assessee is partly allowed.

198/87