Business expenditure

The assessee-company, engaged in the business of cosmetics, claimed a deduction on account of “testers” and “merchant display” including materials like spatula, lacquer and lipgloss applicators, disposable sponges, etc, which were supplied free of cost to the retailers in order to promote product sales. The AO held that the assessee had incurred these expenses to earn goodwill that would benefit the business in the long run and bring benefit of an enduring nature and both these items of expenses were disallowed as capital expenses. The AO also disallowed the promotional expenses claimed by the assessee under s 40(a)(ia) holding that the assessee-company had filed details of TDS only on expenses under the head “salary”, legal and professional expenses and complete details of TDS and expenses under the head, “promotional expenses” were not furnished. The assessee had also claimed a deduction on legal expenses. The AO observed that these expenses were for consultation for increase of capital and other capital related matters. The AO further observed that the assessee-company was not an industrial undertaking and made a disallowance under s 35D. In an appeal, the CIT(A) deleted the disallowance holding that the nature of the expenditure incurred by the assessee on account of testers and merchant display was absolutely essential for the day to day conduct of the business of the assessee and these expenses were allowable as revenue expenditure. Regarding promotional expenses too, the CIT(A) deleted the disallowance made by the AO. Regarding legal expenses, the CIT(A) deleted the disallowance, holding that s 35D was not applicable in the present case. Being aggrieved, the revenue has filed the present appeal.

The issue is whether the promotional expenses incurred by a company engaged in business of cosmetics on “Testers”, and “merchant display” which were supplied free of cost to the retailers are capital in nature merely because it also promotes goodwill of the company.

The nature of expenditure incurred in the assessee’s line of business is absolutely essential for the day to day conduct of the business of the assessee-company and the same is allowable as revenue expenditure.

As regard the promotional expenses, the assessee company has given a break up of the promotional expenses through the paper book on which the remand report was called from the AO. The assessee-company had categorised these expenses under three categories, one on which TDS was deducted and paid. The second category included those items and invoices on which tax was not required to be deducted by the assessee, and given a break up which was noted by the CIT(A). For the third category of expenses, tax was not deducted as the amount paid to each person did not exceed Rs 20,000. Thus, the disallowance made by AO was rightly deleted by the CIT(A).

As regards the deletion of disallowance on legal expenses, the CIT(A) had proceeded on the basis that the provisions of s 35D were not applicable in the present case. However, he has not given any finding regarding the allegation of the AO that these expenses are incurred for the consultation for the increase of capital and other capital related matters. From the invoice, it was not clear whether the whole or part of these legal expenses were in connection with the increase in capital or other capital related matters as has been alleged by the AO. Thus, the order of the CIT(A) is set aside and the matter is restored to the file of the AO for a fresh decision.

Capital or revenue expenditure — Promotional expenses incurred by cosmetic company on “Testers”, and “merchant display” which were supplied free of cost to the retailers are revenue in nature as held by DelTrib in ITO v Elka Cosmetic Pvt Ltd. — In favour of: The Assessee (Partly) ; ITA No. 4704/Del/2010 : Assessment Year: 2006–2007

Decided on: 13 April 2011