2002 (2) TMI 97 - HC - Income Tax

Advertising spend treated as revenue expense, and s. 32AB deduction allowed despite late accountant's report filing

Advertisement expenditure, being recurrent and yielding no enduring benefit, was held to be revenue expenditure allowable in computing profits, and the ... Claim u/s 32AB and u/s 80HHC - incurred advertisement expenditure for the accounting year - Unreasonable and perverse - HELD THAT:- It is now settled law that if according to the revenue laws the assessee is entitled to treat a sum as a revenue expenditure, then that legal right of the assessee is not self-estopped by the treatment given by the assessee to it in its own books of account. Advertisement expenses are normally to be treated as revenue expenditure since the memory of the purchasing market is short and advertisement is needed from year to year and cannot be made once for all in any single particular year. We are of the opinion that the words 'shall not be admissible' occurring in sub-section (5) of section 32AB are also directory and not mandatory in nature. No doubt, if the auditor's report is not available at all, a claim for deduction cannot be made by the assessee but for achievement of this, it is not necessary to interpret the above phrase as mandatory with regard to the part of the existence of the auditor's report and only directory with regard to the part containing the time of furnishing of the report. Thus, the interpretation of the said phrase occurring in sub-section (5), as a directory one does not do away with the compulsory requirement of producing the auditor's report for assessment and deduction. We find, therefore, that even in the case of the return itself, the documents and papers which should accompany it, do not cause its utter and complete failure from the very inception, even if those are not annexed with the return. A chance is always given to the assessee to put the matter right before the assessment. In our opinion, we should not interpret sub-section (5) of section 32AB in a manner even more stringent than the requirement of the filing of the return itself. We do not see any particular reason to take a different view in regard to this sub-section than the view we have already taken in regard to sub-section (5) of section 32AB. We note that the compulsory requirement of producing the accountant's report at all, as per rule 18BBA and Form No. 10CCAC of the Income-tax Rules and Forms appended thereto is sufficiently preserved by the Explanation below sub-section (2) of section 288. This report of the accountant has to come, as per the said section and the said Explanation. Our interpretation merely permits the assessee to produce the said report even after the date of the filing of the retum as passed; it does not wholly do away with the requirement of filing the report altogether. As such all the questions are answered in the affirmative and in favour of the assessee. Issues Involved: Tax reference for assessment year 1988-89 involving questions on revenue expenditure, claim under sections 32AB and 80HHC, and addition to closing stock value.Revenue Expenditure (Question 1): The Tribunal found that the advertisement expenditure incurred by the assessee for new brand products was Rs.8,29,723. Despite inconsistent treatment in the accounts, the assessee argued it was revenue expenditure. Citing relevant Supreme Court cases, it was established that the assessee's legal right to treat it as revenue expenditure is not estopped by its accounting treatment. Advertisement expenses are generally treated as revenue expenditure due to their recurring nature.Claim under Sections 32AB and 80HHC (Question 2): The first part involves section 32AB where the assessee claimed Rs.36.77 lakhs, but the Revenue contested due to late submission of the auditor's report. The court held that the requirement to furnish the report along with the return is directory, not mandatory, as long as it is available during assessment. The second part pertains to section 80HHC, where a similar provision exists for furnishing the accountant's report along with the return. The court applied a similar interpretation as in section 32AB, ruling in favor of the assessee for complying with the necessary reports.Addition to Closing Stock Value (Question 3): The Revenue argued for adding Rs.35.11 lakhs to the closing stock value based on section 145A, but the Tribunal disagreed. Referring to a Supreme Court decision, it was established that the Modvat excise credit need not be added to the valuation of the input stock. The court upheld the Tribunal's decision, ruling in favor of the assessee on this question.Conclusion: All three questions were answered in the affirmative and in favor of the assessee, emphasizing the legal rights of the assessee in determining revenue expenditure, complying with necessary reports for deductions, and valuing closing stock appropriately.