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 assessee's entitlement could not be negated merely because it was treated differently in the books; the Revenue's contrary view was found unreasonable and perverse, resulting in allowance of the claim. On deduction under s. 32AB, the HC construed the words "shall not be admissible" in s. 32AB(5) as directory as to the timing of furnishing the accountant's report, while maintaining the substantive statutory requirement that such report must be produced before assessment; consequently, deduction could not be denied solely for non-filing of the report with the return. All questions were answered 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.

---