2014 (6) TMI 844 - AT - Income Tax

Tribunal rules in favor of jewelry manufacturer: Brand building expenses are revenue, not capital.

The Tribunal held that the expenditure on brand building by the jewelry manufacturer and exporter was revenue expenditure for assessment years 2009-10 and ... Expenses on advertisement - creation of brand value - capital or revenue in nature - Allowability of expenses u/s 37(1) of the Act - Whether the assessee's case can be said to be covered in its favour by the tribunal's order deciding the assessee's appeal against the revision order u/s. 263 for AY 2006-07 – Held that:- What is to be seen is whether any capital asset stands acquired by the assessee through its concerted advertisement campaign - No evidence in this regard has been brought on record. Though ordinarily, the onus to prove its return, and the claims preferred thereby, is only on the assessee Relying upon CIT v. Calcutta Agency Ltd. [1950 (12) TMI 4 - SUPREME Court] - the assessee to have discharged the initial onus on it; the genuineness of the expenditure, or of it having been incurred for the purpose/s of business, as afore-stated, being not in dispute - no holistic view in its respect has been taken or sought to be adopted by it, enquiring into the details of the exercise undertaken by the assessee, but by viewing only one year at a time, even as the same would, as it appears to us, is in the nature or assumes the nature of a project. Apart from the coming into existence of a brand value, there are issues with regard to its valuation and cost - as a relationship between the expenditure and the asset, assuming its existence, has to be direct for it to be considered as forming part of its cost, and which cannot be said to be so in the instant case - Just because an expenditure is debited in books as toward brand building, which it purportedly is, and a statutory recognition has since been accorded to such intangible assets, 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 - there was no basis to hold that the expenditure incurred in the regular course of its business by the assessee, has translated or manifested in, or resulted in the acquisition of, a capital asset or a in a profit making apparatus by the assessee, or of it being in the nature of capital expenditure, i.e., per se - it has been rightly treated by it as revenue expenditure, admissible u/s.37(1) of the Act. We decide accordingly – Decided against Revenue. Issues:Allowability of expenditure on brand building for assessment years 2009-10 and 2010-11.Analysis:The Appeals arose from the Orders by the Commissioner of Income Tax (Appeals) for the assessment years 2009-10 and 2010-11. The issue concerned the allowability of expenditure on brand building by the assessee, a manufacturer and exporter of jewelry. The Tribunal's order for the assessment year 2006-07 was cited by the assessee's counsel to support the claim that the expenditure should be treated as revenue expenditure. However, the Departmental Representative argued against this view, stating that the tribunal had not expressed a final view on the matter for the years under consideration.The Tribunal examined the expenditure profile for the relevant years, primarily consisting of advertisement expenses aimed at brand building. The expenditure also included legal and professional fees, product display costs, and staff recruitment expenses. The Tribunal noted that the expenditure was incurred for business purposes and classified it as revenue expenditure based on the purpose for which it was incurred. The Revenue claimed that the expenditure created a capital asset, but the Tribunal found no evidence to support this claim.The Tribunal emphasized that the onus to prove the acquisition of a capital asset through the expenditure rested on the Revenue. It noted that the expenditure was not treated as capital in the assessee's accounts but was spread over multiple years for operational purposes. The Tribunal highlighted the lack of empirical data or objective facts to show that the brand building expenditure resulted in an enduring advantage for the business.Ultimately, the Tribunal concluded that the impugned expenditure did not result in the acquisition of a capital asset or a profit-making apparatus for the assessee. Therefore, the expenditure was rightly treated as revenue expenditure under section 37(1) of the Income Tax Act. The Tribunal allowed the assessee's appeal for the assessment year 2009-10 and dismissed the Revenue's appeal for the assessment year 2010-11.In summary, the Tribunal's decision focused on the nature of the expenditure, the purpose for which it was incurred, and the lack of evidence to support the Revenue's claim that it led to the acquisition of a capital asset. The Tribunal's analysis highlighted the distinction between revenue and capital expenditure and emphasized the importance of factual evidence in determining the tax treatment of expenses related to brand building.