2012 (10) TMI 238 - AT - Income Tax

Tribunal allows appeal, deems sales promotion expenses as revenue, not capital, citing business benefit.

Brightest Circle Jewellery (P.) Ltd. Versus Assistant Commissioner of Income-tax-8(3) (OSD), Mumbai

Brightest Circle Jewellery (P.) Ltd. Versus Assistant Commissioner of Income-tax-8(3) (OSD), Mumbai - TMI Issues Involved:1. Enhancement and disallowance of sales promotion expenses.2. Classification of expenses as capital or revenue in nature.Issue-wise Detailed Analysis:1. Enhancement and Disallowance of Sales Promotion Expenses:The primary grievance of the assessee was against the enhancement and disallowance of Rs. 3,89,62,423/- made by the CIT(A) on account of sales promotion expenses, which were treated as capital expenditure. The Assessing Officer had initially disallowed 20% of these expenses, amounting to Rs. 58,44,364/-, considering them as capital expenditure.2. Classification of Expenses as Capital or Revenue in Nature:- Factual Background:The assessee-company, engaged in the business of licensing, manufacturing, distribution, and selling of diamonds under the brand 'Nakshatra,' incurred sales promotion expenses to the tune of Rs. 3,89,62,423/-, paid to 'Diamond Trading Company Limited' (DTC) for promoting the mark 'Nakshatra.' The Assessing Officer partially accepted the expenses as revenue in nature but treated 20% of the expenditure as capital expenditure, allowing depreciation on it.- Assessee's Argument:The assessee contended before the CIT(A) that the expenses were incurred to create awareness about branded jewellery in India and were wholly and exclusively for business purposes. The expenses did not bring any asset of enduring nature into existence and were legitimate business expenditures. The assessee relied on several judgments to support their contention.- CIT(A)'s Findings:Upon reviewing the agreement dated 8-11-2005 between the assessee, DTC, and DBC AG, the CIT(A) concluded that the expenditure was for creating the mark 'Nakshatra' and the goodwill associated with it, which belonged to DTC and DBC AG. The CIT(A) held that the entire expenditure was capital in nature and enhanced the disallowance to Rs. 3,89,62,423/-. The CIT(A) noted that the assessee did not own the brand or the mark and thus was not entitled to capitalize the expenditure as an intangible asset or claim depreciation.- Assessee's Appeal:The assessee argued that the agreement with DTC and DBC AG was to create awareness for branded and quality diamond jewellery in India. The mark 'Nakshatra' was licensed to the assessee for use without any ownership rights, and the expenditure was purely for sales promotion. The assessee emphasized that the expenditure facilitated business operations and increased sales, thus qualifying as revenue expenditure. The assessee cited several case laws to support their position.- Tribunal's Analysis:The Tribunal examined the agreement and noted that the mark 'Nakshatra' and the associated goodwill belonged to DBC AG and DTC. The assessee had no rights over the mark or the goodwill and was only authorized to sell products under the brand. The Tribunal concluded that the expenditure did not create any enduring benefit or asset for the assessee but facilitated business operations and profitability. The Tribunal referenced the Supreme Court's observations in Empire Jute Co. Ltd. to support the view that not every enduring advantage is capital in nature.- Conclusion:The Tribunal held that the entire expenditure of Rs. 3,89,62,423/- was on revenue account and allowable as an expenditure incurred wholly and exclusively for business purposes. The Tribunal reversed the findings of the CIT(A) and the Assessing Officer, allowing the assessee's appeal.Judgment:The appeal filed by the assessee was allowed, with the Tribunal concluding that the sales promotion expenses were of revenue nature and allowable as business expenditure.