2022 (8) TMI 1288 - AT - Income Tax

Tribunal affirms ad expenses as revenue, not capital; emphasizes business necessity and market competition.

DCIT Circle : 16 (1), New Delhi. Versus Magic Bricks Reality Services Limited

The Tribunal upheld the CIT (Appeals) decision, ruling that the advertisement and business promotion expenses were revenue in nature and not capital ... Nature of expenditure - advertisement and business promotion expenses - revenue or capital expenditure - HELD THAT:- Hon’ble Supreme Court in the case of Empire Jute Company [1980 (5) TMI 1 - SUPREME COURT] deleted the disallowance holding that the expenses incurred by the assessee towards advertisement and business promotion are not in the nature of capita We almost identical issue came up for consideration before the co-ordinate bench of the Tribunal in the case of Addl. CIT Vs. M/s. Jasper Infotech Pvt. Ltd. [2021 (12) TMI 443 - ITAT DELHI] wherein the co-ordinate bench considered whether the CIT (Appeals) is right in deleting the disallowance of 50% of expenses incurred on advertisement, publicity and business promotion incurred on brand building of e-commerce portal ‘Snapdeal’ considering the same as revenue expenditure and not capital expenditure We hold that the ld. CIT (Appeals) had rightly held that the expenditure incurred by the assessee on advertisement and business promotion are in the nature of revenue and not capital expenditure. Ground raised by the Revenue is rejected. Issues Involved:1. Whether the advertisement and business promotion expenses incurred by the assessee are capital or revenue in nature.Detailed Analysis:1. Nature of Advertisement and Business Promotion Expenses:The Revenue challenged the order of the CIT (Appeals) which deleted the disallowance made by the Assessing Officer (AO) regarding advertisement and business promotion expenses, treating them as capital in nature. The assessee, engaged in the development and maintenance of an electronic/digital portal for real estate properties, incurred expenses of Rs.20,76,47,319/- for advertisement and business promotion. The AO viewed these expenses as capital, arguing they were for brand building and provided enduring benefits, thus creating intangible assets like goodwill and reputation. Consequently, the AO treated 50% of these expenses as capital expenditure.The assessee contended that these expenses were revenue in nature, necessary for business operations, and did not create any enduring benefit. The assessee emphasized the need for continuous advertisement due to the competitive nature of the online real estate market and provided evidence of similar expenses in subsequent years, arguing that if the expenses had created enduring benefits, there would not be a need for further expenditure.2. CIT (Appeals) Decision:The CIT (Appeals) relied on the Supreme Court's decision in Empire Jute Co. Ltd. vs. CIT (124 ITR 1) and other High Court decisions, concluding that the advertisement and business promotion expenses were revenue in nature. The CIT (Appeals) noted that in a competitive environment, such expenses are necessary to facilitate business operations and expand outreach. The CIT (Appeals) also referenced decisions from the Punjab and Haryana High Court and the Bombay High Court, which supported the view that such expenses, even if providing long-term benefits, are revenue in nature.3. Tribunal's Observation:The Tribunal, after hearing both parties, upheld the CIT (Appeals) decision, emphasizing that the expenses were necessary for business operations and did not create any enduring benefit in the capital field. The Tribunal referred to similar cases, including the decision in Addl. CIT vs. M/s. Jasper Infotech Pvt. Ltd., where advertisement expenses for an e-commerce platform were treated as revenue expenditure. The Tribunal also cited the Delhi High Court's decision in CIT vs. Citi Financial Consumer Fin. Ltd. (335 ITR 29), which held that advertisement expenses are revenue in nature as they facilitate trading operations without creating fixed capital.4. Legal Precedents:The Tribunal highlighted several legal precedents supporting the treatment of advertisement expenses as revenue expenditure:- CIT vs. Discovery Communication India (56 taxmann.com 134)- CIT vs. Spice Distribution Ltd. (54 taxmann.com 325)- CIT vs. Pepsico India Holdings (P.) Ltd. (21 taxmann.com 165)- DCIT vs. Hitz FM Radio India Ltd. (82 taxmann.com 327)- DCIT vs. Vodafone Mobile Services Ltd. (83 taxmann.com 7)These cases collectively reinforced that advertisement expenses, necessary for business operations and not resulting in the creation of intangible assets, should be treated as revenue expenditure.Conclusion:The Tribunal dismissed the Revenue's appeal, affirming that the advertisement and business promotion expenses incurred by the assessee were revenue in nature and not capital expenditure. The Tribunal's decision was based on the necessity of these expenses for business operations, the competitive nature of the market, and consistent legal precedents. The appeal of the Revenue was thus rejected, and the decision of the CIT (Appeals) was upheld.