2015 (9) TMI 4 - AT - Income Tax

Tribunal rules brand building expenses as revenue, upholding distinction between capital and revenue expenditure.

Dy. Commissioner of Income-tax Circle-2 (2), Mumbai Versus Polygel Industries Pvt. Ltd.

Dy. Commissioner of Income-tax Circle-2 (2), Mumbai Versus Polygel Industries Pvt. Ltd. - TMI Issues Involved:Allowability of expenditure incurred on 'brand building' for assessment year 2007-08.Analysis:Issue 1: Nature of Expenditure - Capital or RevenueThe primary issue in this case revolves around determining whether the expenditure incurred by the assessee on 'brand building' should be treated as capital or revenue expenditure. The Assessing Officer (AO) initially treated the expenditure as capital, resulting in an addition to the assessee's income. However, the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, stating that the expenditure was routine operational expenses necessary for product launching and should be allowed in its entirety. The Revenue challenged this decision.Issue 2: Enduring Benefit and Capital ExpenditureThe Departmental Representative (DR) argued that the significant amount spent on brand building for launching a new product resulted in enduring benefits, making it capital expenditure. The DR relied on various judgments to support this argument. Conversely, the assessee contended that the expenditure did not result in acquiring any tangible or intangible asset of enduring benefit, thus qualifying as revenue expenditure. The Tribunal analyzed the nature of the expenditure based on established principles.Issue 3: Determining Capital vs. Revenue ExpenditureThe Tribunal examined the expenditure in detail, noting that it included various expenses related to sales promotion, staff welfare, advertisement, and other operational costs. The Tribunal emphasized that the purpose of the expenditure should be considered to determine its nature. It highlighted key factors such as the intention to acquire an enduring asset, the benefit derived for the business, and the distinction between capital and revenue expenditure based on the nature of the asset or advantage acquired.Final DecisionAfter thorough analysis, the Tribunal concluded that the expenditure on brand building did not result in the creation of any new capital asset or enduring benefit to the business. The Tribunal noted that the accounting treatment and statutory recognition of the expenditure as 'brand' did not automatically classify it as capital expenditure. Emphasizing the competitive business environment and accounting principles, the Tribunal upheld the CIT(A)'s decision to treat the expenditure as revenue expenditure. Consequently, the Revenue's appeal was dismissed.Overall, the judgment clarifies the distinction between capital and revenue expenditure based on the purpose, benefit, and nature of the expenditure, providing a comprehensive analysis of the case and relevant legal principles.