As exp. nt resulted in capital asset, so to be recorded as exp. in capital field

Facts in Brief:

1.  During relevant year, the assessee incurred certain expenditure on brand building which was claimed as deduction under section 37(1).

2.  The Assessing Officer held that expenditure resulted in enduring benefit. Thus, he disallowed the claim of the assessee by treating it as capital expenditure.

3.  The Commissioner (Appeals) found that the expenditure was in the nature of sales promotion, staff welfare, discount allowed, telephone charges, travelling expenses, salary, product launching, meeting expenses and, advertisement expenses in the relevant field. 

4.  CIT (Appeals) held that said expenses were routine operational expenses inevitable for launching of any product and had nothing to do with brand building.

5.  CIT (Appeals), thus, concluded that expenditure incurred by assessee was to be allowed in its entirety in assessment year in question.

  On appeal, ITAT held as under:

6.  As the expenditure has not resulted in capital asset, so has to be recorded as expenditure in capital field. It should be noted that the assessee had to incur this kind of expenditure year after year so as to keep the product in market otherwise when the advertisement was not followed up subsequently even the advantage secured from earlier advertising would get dissipated. 

7.  Just because an expenditure is debited in books towards brand building, which it purportedly is, and statutory recognition has since been accorded to such an intangible asset, as a 'brand' would not by itself imply that an advantage in the capital field, or of enduring value to the business has, arisen to the assessee upon incurring the expenditure.

8.  Rather, the business being competitive and prudence and conservatism being fundamental accounting assumptions, capitalization of such expenses or ascribing lasting abiding value to such expenses, could only be done on sound footing and cogent basis. Thus, the expenditure cannot be attributed to capital expenditure on brand building. Accordingly, the order of the Commissioner (Appeals) is upheld. 

9.  In the result, the revenue's appeal is dismissed. 

  RELEVANT PARAS OF THE JUDGMENTS ARE AS UNDER:

10.  It was found from records that though the expenditure incurred by the assessee got the benefit to the assessee for more than one year that expenditure itself cannot be called/treated as capital expenditure on the simple reason that it does not bring into existence any new asset in the field of capital or in other words no new brand was developed by incurring that expenditure and the accounting treatment given by the assessee cannot be conclusive to treat expenditure as capital.

11.  In this case most of the expenditure in the field of advertisement presumably was to create public awareness and consciousness of the product so as to increase the sales of the assessee. It appears that from the incurring of the expenditure for promotion, consultancy and legal expenditure the firm has hired consultancy for the purpose of product launching. 

12.  It is for this reason that sustained and concerted advertising campaigns are generally undertaken. The other expenditure incurred are sales promotion, printing of catalogues, designs, stationery, vehicle hire charges, product display, travelling, staff welfare charges etc. which are essentially ancillary and toward sub serving the brand building exercise through advertisement campaigns.

13.  This expenditure stands incurred for the purpose of running the business. It is not per se capital in nature. By incurring this expenditure it cannot be said that any capital asset stands acquired by the assessee and it was incurred for the purpose of running the business and such nature of expenditure cannot be said that resulted in enduring benefit.

14.  The assessee having admittedly incurred the expenditure on brand building, it cannot be retracted from the same; its books of account reflecting its understanding represents its current state of affairs. However, it is to be noted that the assessee has not considered the expenditure in the field of capital account. The assessee has treated it as revenue expenditure only. As such, there is no force in the argument of the revenue that the brand building expenditure shall be always treated as capital expenditure.