Section 35D-Amortization of market research expense as preliminary expenses

Bare perusal of the provisions contained under section 35D invoked by the assessing officer to amortize expenses incurred on market research goes to prove that the expenses must be incurred before commencement of the business or after commencement of the business but where there is an extension of undertaking or setting up of a new unit. In the instant case, assessing officer has not made out any case if the assessee has incurred the expenses after the commencement of business in connection with the extension of his undertaking or in connection with its setting up a new unit. Moreover, marketing survey are conducted by the company on ad hoc basis / on day-to-day basis to achieve the target/to enhance sale and no enduring benefit in any manner used to be there.

To invoke the provisions contained under section 35D, such expenses are required to be incurred before the commencement of the business or after the commencement of the business in connection with extension of undertaking or in connection with its setting up of a new unit, both these conditions are not fulfilled. So, we are of the considered view that the expenses to the tune of Rs. 52,05,586 cannot be amortized by invoking the provisions contained under section 35D

Full Text of the ITAT Order is as follows:-

The appellant, Income Tax Officer, Ward 2(4), New Delhi (hereinafter referred to as ‘the Revenue’) by filing the present appeal sought to set aside the impugned order dated 30-6-2014, passed by the Commissioner (Appeals)-V, New Delhi under section 143(3) of the Income Tax Act, 1961 (for short ‘the Act’) qua the assessment year 2010-11 on the ground that :–

“On the facts and in the circumstances of the case, the learned Commissioner (Appeals) erred in holding that the expenses incurred on market research were revenue expenses and not to be amortized under section 35D(2)(a)(iii) as held by assessing officer, though the same were incurred in connection with extension of its undertaking as per the details submitted by the assessee during the assessment proceeding.”

2. Briefly stated facts of this case are : during the scrutiny proceedings, assessing officer noticed that the assessee company has claimed a sum of Rs. 52,05,586 in the profit & loss account under the head ‘market research’. Assessee called upon to explain as to why these expenses shall not be capitalized as the assessee was deriving long-term benefit. Assessee claimed that since no new assets have been created nor there is an expenditure of enduring nature, the same cannot be capitalized. However, assessing officer being dis-satisfied proceeded to conclude that it being expense of enduring nature is being amortized by invoking the provisions contained under section 35D(2)(a)(iii) of Act but allowed the claim of the assessee to tune of 1/5th of the expenses for the five years and assessed the total income at Rs. 53,72,391.

3. Assessee carried the matter before the learned Commissioner (Appeals) by way of filing the appeal who has allowed the appeal. Feeling aggrieved, the Revenue has come up before the Tribunal by way of filing the present appeal.

4. We have heard the learned Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.

5. The sole question arises for determination in this case is :–

“as to whether expenses to the tune of Rs. 52,05,586 incurred by the assessee on market research are revenue expenses and to be amortized under section 35D(2)(a)(iii) of the Act as contended by the Revenue?”

6. To proceed further, we would like to reproduce the provisions contained under section 35D(2)(a)(iii) of the Act for ready perusal :–

“35D. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31-3-1970, any expenditure specified in sub-section (2),–

(i) before the commencement of his business, or

(ii) after the commencement of his business, in connection with the extension of his undertaking or in connection with his setting up a new unit,

the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the undertaking is completed or the new unit commences production or operation :

Provided that where an assessee incurs after the 31-3-1998, any expenditure specified in sub-section (2), the provisions of this sub-section shall have effect as if for the words “an amount equal to one-tenth of such expenditure for each of the ten successive previous years”, the words “an amount equal to one-fifth of such expenditure for each of the five successive previous years” had been substituted.

(2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of the following clauses, namely :–

(a) expenditure in connection with–

(i) preparation of feasibility report;

(ii) preparation of project report;

(iii) conducting market survey or any other survey necessary for the business of the assessee;

(iv) engineering services relating to the business of the assessee :

Provided that the work in connection with the preparation of the feasibility report or the project report or the conducting of market survey or of any other survey or the engineering services referred to in this clause is carried out by the assessee himself or by a concern which is for the time being approved in this behalf by the Board”

7. Bare perusal of the provisions contained under section 35D invoked by the assessing officer to amortize expenses incurred on market research goes to prove that the expenses must be incurred before commencement of the business or after commencement of the business but where there is an extension of undertaking or setting up of a new unit. In the instant case, assessing officer has not made out any case if the assessee has incurred the expenses after the commencement of business in connection with the extension of his undertaking or in connection with its setting up a new unit. Moreover, marketing survey are conducted by the company on ad hoc basis / on day-to-day basis to achieve the target/to enhance sale and no enduring benefit in any manner used to be there.

8. Learned Commissioner (Appeals) has categorically thrashed the issue at page 24 of the impugned order, “that nature of the services to be provided by the consultants engaged by the assessee company have been brought on record by way of a sample agreement with one of such consultants at United Kingdom but the assessee had also demonstrated the increase in the revenue during the year under assessment which can be attributed to the enhanced marketing efforts of such consultants.”

9. Moreover, to invoke the provisions contained under section 35D, such expenses are required to be incurred before the commencement of the business or after the commencement of the business in connection with extension of undertaking or in connection with its setting up of a new unit, both these conditions are not fulfilled. So, we are of the considered view that the expenses to the tune of Rs. 52,05,586 cannot be amortized by invoking the provisions contained under section 35D and learned Commissioner (Appeals) has rightly deleted the addition and the question framed for determination is answered against the Revenue.

9. In view of what has been discussed above, finding no illegality or perversity in the findings returned by learned Commissioner (Appeals), the Revenue’s appeal is hereby dismissed.