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 ... Revenue expenditure versus capital expenditure - Advertisement expenditure to be treated as revenue expense - Auditor's/accountant's report requirement directory and not mandatory as to time of furnishing - Furnishing report 'along with' return is directory - Valuation of closing stock excluding excise/Modvat credit - Section 145A not declaratory of prior lawRevenue expenditure versus capital expenditure - Advertisement expenditure to be treated as revenue expense - The Tribunal was justified in allowing Rs.8,29,723 as revenue expenditure in respect of advertisement for two new brands. - HELD THAT: - The Tribunal found that the expenditure related to advertisement of two new brand products and, applying settled principles, the expenditure falls within revenue account. Reliance was placed on earlier Supreme Court decisions (Kedarnath Jute Mfg. Co. Ltd. and India Discount Co. Ltd. ) which establish that an assessee's right to treat an outlay as revenue expenditure is not self estopped by the treatment in the assessee's books and that advertising outlays of this nature are ordinarily revenue in character because the market's memory is short and advertising is recurrent rather than a single enduring capital outlay. The Court accordingly upheld the Tribunal's factual and legal conclusion that the amount is allowable as revenue expenditure.Allowed in favour of the assessee; the advertising expenditure is revenue in nature and deductible.Auditor's/accountant's report requirement directory and not mandatory as to time of furnishing - Furnishing report 'along with' return is directory - The Tribunal was justified in allowing the claims under section 32AB and section 80HHC despite the auditor's/accountant's report being filed after the date of the return. - HELD THAT: - Sub section (5) of section 32AB and sub section (4) of section 80HHC require production of an auditor's/accountant's report 'along with' the return, and on their face use mandatory language. The court held that the requirement as to timing is directory, not mandatory. The legislative purpose-verification of the accounting position-is satisfied if the report is available at assessment; absence of the report at the exact time of filing should not automatically defeat a genuine claim. The mandatory element that the report must exist and be produced is preserved; the Court's interpretation permits filing the report after the return filing date but before assessment, without nullifying the statutory obligation to supply the report altogether. Authorities dealing with returns and accompanying documents were considered, and the Court rejected a narrower construction that would make the timing condition fatal.Allowed in favour of the assessee; late production of the required audit report did not forfeit entitlement to deductions under section 32AB and section 80HHC.Valuation of closing stock excluding excise/Modvat credit - Section 145A not declaratory of prior law - The Tribunal was justified in deleting the addition of Rs.35.11 lakhs to the value of closing stock representing Modvat/excise credit. - HELD THAT: - The Court rejected Revenue's submission that a later enacted section (section 145A) should be read as declaratory to compel inclusion of excise in stock valuation for the year in question. The court observed that section 145A (introduced subsequently) is not merely declaratory and that it is inappropriate to invoke a later fiscal provision to alter the law applicable to the assessment year before the provision's enactment. Relying on the Supreme Court's reasoning in Collector of Central Excise v. Dai Ichi Karkaria Ltd. , the Court accepted the principled position that input excise/Modvat credit should be excluded from the value of input stock because the businessman obtains credit for the excise component; thus the true valuation of input stock is net of the excise element. The Tribunal's deletion of the addition was therefore sustained.Allowed in favour of the assessee; closing stock valuation should exclude the Modvat/excise credit and the later section 145A cannot be treated as declaratory to alter the law for the year under consideration.Final Conclusion: All three reference questions for assessment year 1988-89 are answered in favour of the assessee: the specified advertisement outlay is deductible as revenue expenditure; the requirement to furnish the auditor's/accountant's report 'along with' the return is directory as to timing and late production before assessment did not forfeit the statutory deductions under sections 32AB and 80HHC; and the addition to closing stock on account of Modvat/excise credit was rightly deleted. 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.