Advertising Expenses incurred wholly & exclusively for business allowable

CIT Vs Miele India Pvt. Ltd. (Delhi High Court)

Mr. Chandra, did draw our attention to the AO’s view qua the issue, which was, that the advertising expenditure had been incurred to build a brand, i.e., goodwill and therefore, should not be allowed as a deduction, it does not impress us. There is nothing on record to show that the expenditure incurred by the assessee, towards advertising, was not laid out or expended, wholly and exclusively, for the purposes of business. The expenditure incurred, in our view, being a business expenditure, which was incurred wholly and exclusively for the purposes of business, and did not lead to the creation of a capital asset in the assessment year in issue, ought to have been allowed by the AO.

FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT

1. Admit.

2. The following substantial questions of law are framed for consideration by this Court:

(i) Whether the Income Tax Appellate Tribunal [in short ‘Tribunal’] erred in deleting the addition made qua pre-operative expenses by holding that the expenses incurred, in that behalf, were legitimate business expenditure?

(ii) Whether in the facts and circumstances of the case, 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?

3. With the consent of counsel for parties, the appeal is taken up for hearing and final

4. In order to adjudicate upon the questions of law framed above, it would be necessary to sketch out the broad contours of the

4.1 These questions of law concern the assessment year [in short ‘AY’] 2010-2011. The assessee had filed its return on 27.09.2010, wherein it had declared a loss of Rs.7,83,71,011/-. The return filed by the assessee was processed under Section 143(1) of the Income Tax Act, 1961 (in short ‘the Act’). Unfortunately, for the assessee, its case was picked up for scrutiny and accordingly, notice under Section 143(2) of the Act was

4.2 Consequent thereto, an assessment order was framed on 19.03.2014 under Section 143(3) of the Act. The said assessment order determined a loss of Rs.3,66,79,080/-.

4.3 Pertinently, while framing the assessment under Section 143(3) of the Act, the assessing officer made additions concerning the following:

(i) Pre-operative expenses amounting to 3,50,51,978/-.

(ii) Advertising expenses amounting to 60,39,950/-.

4.4 The assessee, being aggrieved by the order dated 19.03.2014 passed under Section 143(3) of the Act, preferred an appeal with the Commissioner of Income Tax (Appeals) [in short ‘CIT(A)]. The CIT(A) allowed the assessee’s appeal.

4.5 It is against this order of the CIT(A) that the revenue preferred an appeal before the The Tribunal vide order dated 11.04.2019 dismissed the revenue’s appeal and sustained the order of the CIT(A).

5. Mr. Shlok Chandra, who appears on behalf of the revenue, has assailed the order of the Tribunal in respect of two issues, adverted to hereinabove, i.e. deletion of the addition made by the assessing officer [in short ‘AO’] towards pre-operative expenses and advertising expenses by putting forth the following submissions.

5.1 The assessee is in the business of trading and therefore, expenses incurred prior to the commencement of business were rightly added back by the AO. In support of this plea, it was pointed out that the AO has indicated that the assessee in his written note had stated that its business commenced on 29.10.2009. It was submitted that the ‘experience centre’ was launched only on 29.10.2009 and therefore, that had to be taken as the actual date when the assessee had set-up its

5.2 The mere fact that the assessee obtained stock of the goods, that it intended to trade in, was not enough. Since the assessee is a trading entity, it needed an outlet such as an experience centre for conducting its business; which, as indicated above, was set-up only on 10.2009.

5.3 The assessee could not have sold the goods, otherwise, than via a physical outlet, as it had no online In support of these submissions, reliance was placed by Mr. Chandra on the following judgments:

(a) Commissioner of Wealth Tax v. Ramaraju Surgical Cotton Mills Ltd., (1967) 63 ITR 478 (SC).

(b) Marvel Polymers Ltd. v. Commissioner of Income Tax-II, (2007) 165 Taxman 618 (Delhi).

(c) Akzo Nobel Car Refinishes India (P.) Ltd. v. Deputy Commissioner of Income Tax, Circle 1(2), New Delhi, (2008) 25 SOT 226 (Delhi).

5.4 Insofar as the other issue is concerned, the only argument which was advanced was that the Tribunal had erred in deleting the addition made qua advertising expenses by ignoring the fact that the said expenses had been incurred to build In other words, the argument was that if the expenses were capital in nature, it could not have been treated as revenue expenses.

6. On the other hand, Mr. Piyush Kaushik, who appears on behalf of the assessee, submitted that there is a difference between the setting-up of business and commencement of business; as long as the assessee is ready to carry on business and there are facts and circumstances obtaining in a case, which point in this direction, then, it can be safely concluded that the business has been set-up and, therefore, any expenses incurred would have to be allowed as a deduction.

6.1 In support of this plea, reliance was placed on the remand report filed by the AO before the CIT(A). Based on the contents of this report, it was sought to be demonstrated that several steps have been taken by the assessee to set-up the business in the previous AYs, which included placing orders in the domestic market. The emphasis was laid on the fact that there was no prohibition in the assessee carrying on its trading activity in the domestic market and therefore, the argument advanced on behalf of the revenue that the goods in which the assessee dealt in were also obtained from its holding company albeit on or after 29.10.2009 had no relevance in the given circumstances.

6.2. In support of this plea, reliance was placed on the following judgments:

(i) Carefour WC & C India (P.) Ltd. v. Deputy Commissioner of Income Tax, (2015) 53 taxmann.com 289 (Delhi).

(ii) Commissioner of Income Tax L.G. Electronics (India) Ltd., (2005) 149 Taxman 166 (Delhi).

6.3 It was further contended that since the findings of fact have been returned in this behalf, both, by the CIT(A) and the Tribunal, this Court while adjudicating upon the instant appeal ought not to disturb those findings.

6.4 Insofar as the other issue is concerned, which is, the deletion of addition made on account of advertising expenses, it was submitted that the view taken by the CIT(A) and the Tribunal should be The advertising expenses were incurred wholly and exclusively for the business of the assessee and therefore, ought to be allowed as a deductible expense under Section 37 of the Act. In support of this submission, reliance was placed on the judgment rendered in Commissioner of Income Tax v. Citi Financial Consumer Fin. Ltd., (2012) 20 taxmann.com 452 (Delhi).

6.5 In effect, the submission was that the substantial questions of law framed should be decided in favour of the

7. We have heard the learned counsel for the parties and perused the Insofar as the issue concerning pre-operative expenses is concerned, it would be important to advert to the factual information set out in paragraph 10 of the order of the CIT(A); none of which, is disputed, before us.

7.1 A perusal of the information set out hereinabove would show that the assessee had obtained the Importer Exporter Code [in short ‘IEC’] on 11.2008; the assessee had executed a lease deed with Regus Business Centre on 16.06.2008; a lease deed qua a commercial plot located at Jasola, Delhi was executed by the assessee on 16.12.2008; the assessee had entered into an agreement for outsourced employees (which included drivers, advisors positioned at the dealer’s site and chef) on 22.09.2008; the assessee had hired six senior employees between the financial year [in short ‘FY’] 2008-2009; the first local purchase was made on 27.11.2008; local sales were made by the assessee on 04.12.2008 and 26.03.2009; orders were received from Dawar International Electronics Pvt. Ltd. on 02.01.2009 and 22.01.2009; and purchase orders were raised on the assessee’s holding company on 18.03.2009.

7.2 We have, consciously, only adverted to the steps taken by the assessee in the previous AY i.e. 2009-2010. We also note that there is a reference to certain steps which the assessee had taken in AY 2008-2009 such as getting itself incorporated and having a PAN number and TAN number allotted to it.

7.3 This apart, there are certain steps that the assessee took in the subject AY, e., AY 2010-2011, which included raising purchase orders on its holding company, the details of which are given in the tabular chart, extracted hereinabove.

7.4 The reason that we have only emphasised on the steps taken by the assessee in the previous AY, i.e., AY 2009-2010 is to show that, both, CIT(A) and the Tribunal were correct in concluding, in our view, that the assessee had set-up its business and was ready to carry on the same in the previous AY, e., AY 2009-2010.

7.5 Therefore, Mr. Chandra’s submission that the business of the assessee was set-up only on 10.2009, in our opinion, is not correct. This submission of Mr. Chandra is predicated on one singular fact, which is, that the assessee had launched its experience centre i.e. physical outlet on 29.10.2009.

7.6 It is correctly argued by Kaushik that there is a difference between setting-up of business and commencement of business. The fact that the assessee had executed lease deeds for its premises, engaged senior employees, carried out local purchase, and sales could not have been possible had it not set-up its business.

7.7 Therefore, on facts, in our view, the judgments cited by Mr. Chandra are distinguishable. The fact that the assessee had set-up an experience centre in the FY 2009-2010, which was another mode or platform for selling its goods, cannot have us hold that the assessee had not set-up its business in the previous AY. Therefore, the stated absence of the assessee on an online platform, in our view, is non-sequitur in the fact situation obtaining in the instant case.

8. Insofar as the second issue is concerned, which relates to the advertising expenditure, the submissions made on behalf of the revenue by Chandra, lacked conviction. Although, Mr. Chandra, did draw our attention to the AO’s view qua the issue, which was, that the advertising expenditure had been incurred to build a brand, i.e., goodwill and therefore, should not be allowed as a deduction, it does not impress us. There is nothing on record to show that the expenditure incurred by the assessee, towards advertising, was not laid out or expended, wholly and exclusively, for the purposes of business. The expenditure incurred, in our view, being a business expenditure, which was incurred wholly and exclusively for the purposes of business, and did not lead to the creation of a capital asset in the assessment year in issue, ought to have been allowed by the AO.

8.1 The rationale adopted by the A.O. for disallowing the expenditure was completely flawed. Goodwill, which is built, based on the reputation acquired by the business over the years, is an intangible asset, which is monetized, ordinarily, when the business is sold. Therefore, for the A.O. to disallow advertising expenditure on this basis was completely erroneous.

8.2. Thus, the deletion of the addition made by the A.O. qua expenditure incurred on advertising both by the CIT(A) and the Tribunal, to our minds, was in order. The extent of expenditure on advertising does not, in our view, decide as to whether the expenditure incurred is of a revenue nature or of a capital nature. There is nothing on record, as indicated above, to show that a capital asset was created. In sum, it fulfilled the criteria for allowability of such expenditure, as provided, in Section 37 of the Act¹. The expenditure was incurred for the subject AY and, therefore, the addition made by the A.O. was rightly deleted by the CIT(A); a decision which was sustained by the Tribunal.

9. Thus, for the foregoing reasons, we are of the view that both the questions of law have to be answered in favour of the assessee and against the It is ordered accordingly.

10. The appeal is disposed of in the aforesaid terms. Consequently, the pending applications shall also stand