Polygel Industries P. Ltd, Mumbai vs Department Of Income Tax

आयकर अपीलीय अिधकरण, अिधकरण मुंबई IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES 'C' MUMBAI सव ौी आय.पी. बंसल, याियक सदःय एवं ौी चं पुजारी, लेखा सदःय के सम । BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER

ITA NO.3655/MUM/2011 (A.Y.2007-08)

Dy. Commissioner of Income-tax Polygel Industries Pvt. Ltd. Circle-2(2), Aayakar Bhavan L-1, 205, "D" Great Eastern Room No.545, 5th Floor Vs. Galleries, Plot No.20, Sector-4 M.K. Road Nerul Mumbai-400 020. Navi Mumbai-400 706. GIR No./PAN : AAACK 4105 F (Respondent) (Appellant )

Appellant by : Shri N. Padmanaban-DR Respondent by : Shri Vijay Kothari

Date of hearing : 16/02/2015 Date of pronouncement : 25/02/2015

ORDER

PER CHANDRA POOJARI, A.M:

This appeal filed by the Revenue is directed against the order passed by ld. CIT(A) dated 16/02/2011 for the assessment year 2007-08. The only issue for our consideration is with regard to allowability of expenditure incurred by the assessee on "brand building" to the tune of Rs.1,67,05,772/-.

2. The facts of the issue are that the assessee has incurred an amount of Rs.2,22,74,363/- under the head "brand building expenses". The AO questioned the nature of expenditure whether capital or Revenue. The assessee replied vide letter dated 11/12/2009 stating that the expenditure incurred represents the expenditure incurred towards new product launching and it has not resulted in creating any new asset whether tangible or intangible. The AO disagreed with the contention of the 2 ITA No.3655/M/11

assessee and treated the above expenditure as capital expenditure and granted depreciation on it @ 25% worked out at Rs.55,68,591/- thereby making addition of Rs.1,67,05,772/- to the returned income of the assessee . Again,the assessee carried the matter before the CIT(A). The CIT(A) was of the opinion that the expenditure was in the nature of sales promotion, staff welfare, discount allowed, telephone charges, travelling expenses, salary, product launching, meeting expenses, advertisement and other expenses in the relevant field. This according to CIT(A) are routine operational expenses inevitable for launching of any product and have nothing to do with brand building, though the assessee used the word "expenditure on brand building". Further he observed that the expenditure on launching of a new product in an existing business is fully deductible even the assessee has treated it as deferred Revenue expenditure. Accordingly he observed that the expenditure is to be allowed in its entirety and allowed the claim of the assessee. Against this, the Revenue is in appeal before us.

3. The ld. DR submitted that the assessee itself claimed expense as "brand building expenses" for launching a new product and the amount in question is incurred by assessee is a huge amount for launching a new product and by incurring this expenditure at one time, the assessee derives enduring benefit by which the assessee's sales get boosted for a long period. Therefore, the expenses which resulted in enduring benefit shall be treated as capital expenditure and he also derived support from section 55(2)(a) of the income tax Act, wherein brand name is also treated as capital asset so as to compute capital gain on transfer. He relied on the following judgments :-

1) Assam Bengal Cement Co. Ltd. vs. CIT (27 ITR 23)(SC);

2) Empire Jute Co. Ltd. vs. CIT (124 ITR 1)(SC) and

3) Arvind Mills Ltd. Vs. CIT (197 ITR 432) (SC)

3.1 Thus, he submitted that the expenditure incurred by the assessee which is in relation to brand building and is having impact on assessee's business in the long run and should be treated as capital expenditure and depreciation should be granted as done by the AO. On the other hand the ld. AR relied on the order of CIT(A).

3 ITA No.3655/M/11 4. We have heard both parties and perused the material available on record. In this case the assessee incurred an amount of Rs.2,22,74,363/- under the head "brand building expenses" . The same has been claimed by the assessee as revenue expenditure in its return of income. The expenditure is mostly in the nature of sales promotion, staff welfare, discount allowed to the distributor, product launch, towards consultancy and legal expenses, advertisement, vehicle head charges, telephone, postal charges, carpenter and customer meeting expenses, travelling expenses, free sample expenses, salary and conveyance and material expenses etc. The AO was of the opinion that expenditure resulted in enduring benefit. Thus, he disallowed the claim of the assessee by treating it as capital expenditure and depreciation was granted on it.

According to ld. AR the expenditure incurred has not resulted in acquiring any tangible or intangible property or acquiring any asset of enduring benefit so as to treat it as capital expenditure. Basically, the expenditure would be capital in nature if it is made with a view to bring into a profit making asset or business advantage which resulted in bringing enduring benefit. The purpose of incurring the expenditure is to be seen if the expenditure is incurred with a view to bring into existence an asset or advantage for enduring benefit of the business it would, unless the circumstances show otherwise, be in the nature of a capital expenditure. The quantum of the expenditure cannot be reason to decide nature of expenditure. The amount spent no matter, the nature of the expenditure depend upon the acquisition of assets in permanent nature and if the aim and object of expenditure is to bring new asset into existence or on the other hand if it is incurred for running a business or working it with a view to produce profit it would be revenue expenditure. Usually, while deciding the nature of expenditure one has to see the following points:-

i) If the expenditure is with the intention or for acquiring or bringing into existence an asset or advantage of an enduring benefit to the business i.e. being carried on, or for existence of the business i.e. going on, or for a substantial replacement of an existing business asset it would be capital expenditure.

4 ITA No.3655/M/11 ii) If on the other hand, the expenditure, although for the purpose of acquiring an asset or advantage is for running of the business or for working out that asset with a view to produce profit, it would be revenue expenditure.

iii) If the outgoing is so related to the carrying on or the conduct of the business that may be regarded as an integral part of the profit earning process or operations and not for acquisition of asset of a permanent nature the condition of which is the precedent for the running of the business then it would be expenditure of a revenue nature.

iv) Special knowledge or technical knowledge, or patent or a trade mark, is an asset if it is acquired for payment for use and exploitation for a limited period and what is acquired is not an asset or advantage of an enduring nature and at the end of the agreed period that advantage or asset reverts back to the giver of that special knowledge or owner or patent or trade mark it would be expenditure of revenue nature.

v) If it is intrinsically a capital asset, it is immaterial whether the price for it is paid once and for all or periodical or whether it is paid out of capital or income or linked up with the net sales. The out going in such a case would be of the nature of capital expenditure.

vi) If the amount is incurred for acquisition of an asset of an enduring nature is in the capital field though payment has been made in small amounts or periodical instalments.

vii) A lumpsum amount incurred would not cease to be revenue expenditure or get into or converted into capital expenditure merely because it is payment made in lumpsum. It is the intention and object with which expenditure incurred and not the method or the manner in which the payment is made or the sources of such payment.

viii) If the expenditure is recurring and incurred during the course of business or manufacturing it would be revenue expenditure.

ix) An asset or advantage of an enduring nature does not mean that it may last for ever. If the capital asset, in its nature, a short lived one, the expenditure incurred over it does not, for that reason, cease to be a capital expenditure.

5 ITA No.3655/M/11 x) It is not the law that if an enduring advantage is obtained the expenditure for securing it must be treated as capital expenditure if advantage acquired is to carry on the business then it would be revenue expenditure.

4.1 On the above proposition, we find that though the expenditure incurred by the assessee got the benefit to the assessee for more than one year that expenditure itself cannot be called/treated as capital expenditure on the simple reason that it does not bring into existence any new asset in the field of capital or in other words no new brand was developed by incurring that expenditure and the accounting treatment given by the assessee cannot be conclusive to treat expenditure as capital. In this case most of the expenditure in the field of advertisement presumably was to create public awareness and consciousness of the assessee product so as to increase the sales of the assessee. It appears that from the incurring of the expenditure for promotion, consultancy and legal expenditure the firm has hired consultancy for the purpose of product launching. It is for this reason that sustained and concerted advertising campaigns are generally undertaken. The other expenditure incurred are sales promotion, printing of catalogues, designs, stationery, vehicle hire charges, product display, travelling, staff welfare charges etc. which are essentially ancillary and toward sub-serving the brand building exercise through advertisement campaigns. This expenditure stands incurred for the purpose of running the business. It is not per se capital in nature. By incurring this expenditure it cannot be said that any capital asset stands acquired by the assessee and it was incurred for the purpose of running the business and such nature of expenditure cannot be said that resulted in enduring benefit. The ld. DR argued that the assessee having admittedly incurred the expenditure on brand building, it cannot be retracted from the same; its books of accounts reflecting its understanding represents its current state of affairs. However, it is to be noted that the assessee has not considered the expenditure in the field of capital account. The assessee has treated it as Revenue expenditure only. As such, there is no force in the argument of the ld. DR that the brand building expenditure shall be always treated as capital expenditure. As the expenditure has not resulted in capital asset, 6 ITA No.3655/M/11

so has to be recorded as expenditure in capital field. It should be noted that the assessee had to incur this kind of expenditure year after year so as to keep the product in market otherwise when the advertisement was not followed up subsequently even the advantage secured from earlier advertising would get dissipated . Just because an expenditure is debited in books towards brand building, which it purportedly is, and statutory recognition has since been accorded to such an intangible asset, as a "brand" would not by itself imply that an advantage in the capital field, or of enduring value to the business has, arisen to the assessee upon incurring the expenditure. Rather, the business being competitive and prudence and conservatism being fundamental accounting assumptions, capitalization of such expenses or ascribing lasting abiding value to such expenses, could only be done on sound footing and cogent basis.( Alembic Chemical Works vs. CIT (177 ITR

377)(SC)). In our opinion the expenditure cannot be attributed to capital expenditure on brand building. Accordingly, we are inclined to uphold the order of the CIT(A) and dismiss the grounds taken by revenue .

5. In the result, the revenue appeal in ITA No.3655/11 is dismissed.

Order pronounced in the open court on 25/02/2015 आदे श क घोषणा खुले यायालय म# $दनांकः 25/02/2015 को क गई ।

Sd/- Sd/- (आय.पी. बंसल / I.P. BANSAL) (चं पुजारी /CHANDRA POOJARI ) याियक सदःय / JUDICIAL MEMBER लेखा सदःय / ACCOUNTANT MEMBER

मुंबई Mumbai; $दनांक Dated 25/02/ 2015 व.िन.स./Jv, Sr. PS

आदे श क ूितिल+प अमे+षत/Copy षत of the Order forwarded to : 1. अपीलाथ. / The Appellant 2. ू/यथ. / The Respondent. 3. आयकर आयु0(अपील) / The CIT(A)- 7 ITA No.3655/M/11

4. आयकर आयु0 / CIT 5. +वभागीय ूितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR, ITAT, Mumbai 6. गाड फाईल / Guard file.

आदे शानुसार/ ार BY ORDER, स/या+पत ूित //True Copy//

उप/सहायक उप सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपीलीय अिधकरण, अिधकरण मुंबई / ITAT, Mumbai