2021 (4) TMI 277 - HC - Income Tax

Court upholds deduction of pre-operative & advertising expenses in tax appeal case.

The Pr. Commissioner of Income Tax-6 Versus Miele India Pvt. Ltd.

The Pr. Commissioner of Income Tax-6 Versus Miele India Pvt. Ltd. - [2021] 433 ITR 286 (Del) Issues Involved:1. Whether the Income Tax Appellate Tribunal erred in deleting the addition made qua pre-operative expenses by holding that the expenses incurred were legitimate business expenditure.2. Whether the Tribunal was justified in deleting the addition made qua advertising expenses by failing to consider the fact that these expenses were incurred to build goodwill, which is a capital asset.Issue-Wise Detailed Analysis:1. Pre-operative Expenses:The primary issue addressed was whether the Tribunal erred in deleting the addition made by the AO concerning pre-operative expenses. The assessee had filed its return for AY 2010-2011, declaring a loss. The AO, during scrutiny, added back pre-operative expenses amounting to Rs. 3,50,51,978/-, arguing that these expenses were incurred before the commencement of business.The assessee contended that there is a difference between setting-up of business and commencement of business. The CIT(A) and the Tribunal concluded that the business was set-up in the previous AY (2009-2010), based on various steps taken by the assessee, including obtaining an IEC, executing lease deeds, hiring employees, making local purchases, and sales. The Tribunal sustained the CIT(A)’s order, allowing the deduction of pre-operative expenses.The Court agreed with the Tribunal and CIT(A), noting that the assessee had undertaken several business activities in the previous AY, indicating that the business was set-up. The Court rejected the revenue’s argument that the business commenced only when the experience centre was launched on 29.10.2009. The Court emphasized the distinction between setting-up and commencement of business and held that the expenses incurred prior to 29.10.2009 were legitimate business expenditures.2. Advertising Expenses:The second issue was whether the Tribunal was justified in deleting the addition made by the AO concerning advertising expenses amounting to Rs. 60,39,950/-. The AO had disallowed these expenses, arguing that they were incurred to build goodwill, a capital asset.The assessee argued that the advertising expenses were incurred wholly and exclusively for business purposes and should be allowed as a deduction under Section 37 of the Act. The CIT(A) and the Tribunal accepted this argument and allowed the deduction.The Court upheld the Tribunal’s decision, stating that there was no evidence to suggest that the advertising expenses were not incurred wholly and exclusively for business purposes. The Court noted that goodwill is an intangible asset built over time and does not arise from one-time advertising expenditure. The Court concluded that the AO’s rationale for disallowing the expenditure was flawed and that the expenses met the criteria for allowability under Section 37 of the Act.Conclusion:The Court answered both substantial questions of law in favor of the assessee and against the revenue. The appeal was disposed of accordingly, and all pending applications were closed.