CIT v Citi Financial Consumer Finance Ltd. (Delhi High Court)

The expenditure is to be fully allowed in the year in which the same is incurred provided it fulfills the test laid down under s 37, and only in exceptional cases can the expenditure be allowed to be spread over, that too, when the assessee chooses to do so as held by Delhi High Court in CIT v Citi Financial Consumer Finance Ltd — In favor of : The Assessee ; ITA Nos. 1820, 1974/2010 and  5/2011.

CIT Vs Citi Financial Consumer Finance Ltd

High Court of Delhi

ITA Nos. 1820, 1974/2010 and 1, 5 /2011

A K Sikri and M L Mehta, JJ

Decided on: 30 March 2011

Counsel appeared:

Mr Prem Lata Bansal, Sr. Adv. & Mr Deepak Anand, Jr. Standing Counsel for the appellant Mr C S Aggarwal, Sr. Adv. & Mr Prakash Kumar, Adv. for the respondent

Judgment

Per: A K Sikri, J:

1. These four appeals are directed against the common order passed by the Income Tax Appellate Tribunal in respect of same assessee and pertain to the assessment years 2001-02 and 2002-03. The ITA 1974/2010 and ITA 5/2011 relate to the assessment year 2001-02 in which the following two questions of law are proposed:-

“(a) Whether ITAT was correct in law in allowing entire expenditure incurred by the assessee on advertisement u/s 37(1) of the Act?

(b) Whether ITAT was correct in law in allowing entire expenditure incurred by the assessee on commission, stamping fee and directing selling expenses to the assessee.”

2. In ITA 1820/20 10 and 01/2011 one question relating to expenditure incurred on advertisement is common. Additional question of law which is raised is in the following terms:

“Whether ITAT was correct in law in allowing a sum of Rs. 1,52,24,029/- claimed by the assessee as lease hold improvements treating the same as revenue in nature.”

3. Final arguments were heard on these three aforesaid questions at the admission stage itself. We proceed to decide these questions now.

Re: Expenditure on Advertisement and Publicity; nature of:

4. In the assessment year 2001-02, the assessee company claimed an expenditure of Rs. 3.93 crores on account of advertisement and publicity expenditure as revenue expenditure and the same had been debited to the profit and loss account. The AO was of the view that this expenditure cannot be termed as expenditure relevant exclusively for the period of 12 months under consideration during the said assessment year. Such advertisement and publicity expenses had bearing on the period which spreads over a period of five years and, therefore, the assessee could not claim the benefit in the year in which the expenditure was incurred. Thus, opining that the benefit was of enduring nature, he was of the view that it is to be spread over a period of five years and thus allowed 1/5th of the aforesaid amount in the year in question. In the next year, the total expenditure incurred on publicity and advertisement was Rs. 6.35 crores and giving identical reason, the Assessing Officer allowed 1/5th thereof in that year. Before the CIT (A), the assessee argued that the calculation made by the AO was based on his surmises and conjectures and without asking the assessee to respond with the factual information. According to the assessee, this infringed its right of natural justice. The assessee also submitted that expenditure incurred on advertisement, publicity and sales promotion was revenue expenditure and whole of it was to be allowed in the year in which it was incurred. Some judgments in supports of this contention were cited by the assessee. Argument of the assessee did not convince the CIT (A) who reiterated the view taken by the AO namely the expenditure incurred needed to be amortized under section 35D(2) of the Act. The CIT(A) referred to and relied upon the judgment of the Madras High Court in Madras Fertilizers Ltd. v Commissioner of Income Tax, 209 ITR 174 and dismissed this ground taken by the assessee in its appeal.

5. In further appeal to the Tribunal, the assessee has succeeded. The Tribunal has held that section 35 D of the Act was wrongly invoked as it had no applicability. Reason was simple, viz., the nature of expenditure does not fall under the ambit of preliminary expenditure as envisaged under section 35 D of the Act. The Tribunal further opined that the advertisement expenditure had actually been incurred during the year and there is a nexus between the expenditure of the assessee business and, therefore, this expenditure was allowable under section 37 of the Act having regard to the principle laid down by this Court in the case of CIT v Salora International Ltd. 308 ITR 199. The Tribunal further took the view that judgment of the Madras High Court in Madras Fertilizers Ltd. (supra) had no application to the facts of this case.

6. Before us, Mrs. Bansal, learned Senior Counsel appearing for the Revenue did not make any attempt to justify the amortization of the aforesaid expenditure predicated on the provisions of section 35D of the Act. Her arguments rested on the premise that the expenditure on publicity and advertisement was of enduring nature and benefit accrued from the same could not be confined to the year in question when the expenditure was incurred. She relied upon the judgment of Madras Industrial Investment Corporation Ltd. v Commissioner of Income Tax, 225 ITR 802) wherein it was held as under:-