Most companies incur considerable expenditure on publicity and advertisement for building a brand name and enhancing its public image. This is specially done before a company decides to make an initialing public offering of its equity shares.
The tax department has been known to disallow such expenditure on the ground that it results in an enduring advantage and, therefore, is not deductible under section 37(1) of the Income-tax Act, 1961. This point has been considered by the Gujarat High Court in CIT v Core Healthcare Ltd. (308 ITR 263).
In this case, the company had undertaken a diversification plan. As a public issue was forthcoming, to make the people aware about various new products of the company, an advertisement campaign was launched. The expenditure of Rs 70,22,742 incurred thereon was disallowed by the tax department.
The claim of the assessee was rejected by the tax department by treating the expenditure in question as capital expenditure on the ground that it was a special advertisement campaign launched by the company for creating a corporate image and was not incurred for running the existing business of the company.
The tribunal held that allowability or otherwise of the expenditure had to be tested as per the requirements of the provisions of section 37(1), viz that the expenditure in question was not of a personal nature and the only test, which was then required to be applied was whether the expenditure was capital in nature. The tribunal held that making of accounting entries in the books of account was not determinative of the character and/or nature of the claim.
The expenditure in question did not bring into existence any tangible asset and merely because the expenditure may bring some benefit of an enduring nature to the assessee, that factor alone was not sufficient to treat the expenditure as capital expenditure. Before the high court, it was submitted on behalf of the assessee, that the incurring of advertisement or publicity expenses would not be capital in nature, once it is found that the expenditure in question was incurred during existence of a running business in view of the following decisions:
(a)Hindustan Commercial Bank Ltd, In re (21 ITR 353)(b) Delhi Cloth and General Mills Co Ltd v CIT (198 ITR 500); and(c) CIT v Sakthi Soyas Ltd (283 ITR 194)
The court held that it was not in dispute that the expenditure of Rs 70 lakh and odd was incurred on a special advertisement campaign. However, that by itself would not be sufficient to determine as to whether the expenditure in question is on the revenue account or capital account. The approach of the commissioner (appeals) that the expenditure in question was treated as deferred revenue expenditure and hence was capital in nature, cannot be termed to be a correct approach because in so far as the Income-tax Act is concerned, the category of deferred revenue expenditure is confined to specific cases.
Similarly, making of an entry or absence of an entry does not determine the allowability or otherwise of the item. Every expenditure incurred by a business concern, if incurred for the purposes of business, is bound to result in some benefit, direct or indirect, immediate or after some time.
Any benefit derived by a business need not be confined to the year of expenditure and this is an ordinary incident of a running business. In the case before the
Allahabad High Court in Hindustan Commercial Bank Ltd., In re (21 ITR 353), the expenditure on advertisement had been incurred at the point of time when new branches of the bank had to be opened and inaugurated. It has been held by the Allahabad High Court that there is no principle that the amount spent in a special campaign of advertisement must necessarily be capital expenditure.
The apex court?s decisions on which reliance has been placed by the tribunal, namely, Empire Jute Co. Ltd. (124 ITR 1 (SC)) and Alembic Chemical Works Co Ltd (177 ITR 377 (SC)) specifically lay down that the nature of advantage has to be considered in a commercial sense and the test of enduring benefit is not a certain or conclusive test and cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. The expression ?asset or advantage of an enduring nature? has been evolved to emphasise the element of a sufficient degree of durability appropriate to the context. The idea of ?once for all? payment and enduring benefit are not to be treated as something akin to statutory conditions.
In further elucidation of the principle, Romer LJ laid down in Anglo-Persian Oil Co Ltd v Dale (16 TC 253, 274, 1 KB 124, 146) that the advantage paid for need not be of a positive character and may consist in the getting rid of an item of fixed capital, that is, of an onerous character. The expenditure is to be attributed to capital if it be made with a view to bringing an asset or advantage into existence and it is not necessary that it should have that result (Collins v Joseph (7 ITR 92, 99)).
In CIT v Madras Auto Service (233 ITR 468), the Supreme Court allowed as revenue expenditure the cost of demolishing an old building and constructing a new one in consideration of having to pay a lower lease rent. Similarly, the payment made by a company to get rid of the shares of an insolvent subsidiary, the continued retention of which would have been harmful to its business, was held to be on revenue account (Lawson v Johnson (209 ITR 761 (HL))).
As the Supreme Court held in Alembic Chemical Works Co Ltd v CIT (117 ITR 377, 386, 391), quoted in CIT v Carburretors (221 ITR 680, 689) and CIT v BPL Systems (227 ITR 779), the concepts of payment made ?once and for all? and of ?enduring benefit? must ?respond to the changing economic realities of business?. It also observed: The ?once for all? payment test is also inconclusive. In a given case, the test of ?enduring benefit? might break down.
Bhagwati J, delivering the judgment of the Supreme Court, laid down in Assam Bengal Cement Co Ltd v CIT (27 ITR 34, 46) that the expression ?once and for all? in Viscount Cave?s test does not mean that the payment should be made in a single sum and at one time. The expression ?once and for all? is used to denote an expenditure, which is made once and for all for procuring an enduring benefit to the business as distinguished from a recurring expenditure in the nature of operational expenses.
Applying the aforesaid settled legal position to the facts of the case, the Gujarat High Court held in Core Healthcare Ltd?s case that it was not possible to agree with the tax department that the advertisement expenses incurred by the assessee at the time of installation of additional machinery in the existing line of business resulted in any enduring benefit, so as to be treated as capital in nature.
The aforesaid decisions are in consonance with well established principles of law and brand building will no longer be a taxing exercise.
The author is advocate, Supreme Court