Cost of ad campaign is a revenue expenditure

Taxing Matters

Can expenditure on an advertisement campaign to improve the company's image and apprise its existing and would be customers about the quality of its products be claimed as a revenue expenditure?

Yes. The expenditure incurred by assessee does not bring into existence any tangible assets and even though expenditure incurred may bring to assessee some benefit of an enduring nature, this alone will not be sufficient to treat the expenditure as capital expenditure in view of the Supreme Court decision in the Empire Jute Co Ltd vs Commissioner of Income-Tax case.

We took a building on lease for opening a showroom in the assessment year 2001-02. It required repairs and renovations. The renovations continued for one year. It is being used as a showroom from April 1, 2003. The assessment officer is not allowing deduction for rent on the ground that in the assessment year 2001-02 the building was not "used" for business. Is his approach correct?

Even on a liberal interpretation of word "used" as passive use, assessee cannot be said to have satisfied the condition required for deduction of rent under Section 30 of the Income-Tax Act. Hence, the assesment officer's view on allowance under Section 30 is correct.

It now needs to be seen whether the claim can be allowed under Section 37(1) of the Income-Tax Act. On deduction of rent for the premises under Section 37(1) of the Income-Tax Act, the judicial opinion is divided. Whether the said Section can be applied to any expenditure of the nature described in Sections 30 to 36 of the Act, if it is found not to fulfil the conditions laid down in these sections, is the question.

As far as allowance for rent of business premises is concerned, there is no specific prohibition. Section 30 operates in a limited field where the premises are used for business or profession and in that case deduction for rent, local rates or municipal taxes can be granted.

It will not cover a case, where the premises are not used for business but are incidental to the carrying on of the business. In that situation, the expenditure on that count will not be of the nature described in Section 30.

Hence, Section 37(1) will be applicable. It will be satisfying Section 37(1) and its residuary nature if a construction is put on it to mean that, whenever an allowance falls under Sections 30 to 36, that by itself would exclude entertainment of the claim under Section 37(1).

The purpose and scope of Section 10(2) (ii) of the 1922 Act, which in part corresponds to Section 30(a) (I) of the Income-Tax Act, 1961, and Section 10(2) (xv), corresponding to Section 37(1) of the 1961 Act were considered in the Commissioner of Income-Tax vs Rama Krishna Steel Rolling Mills case, (1974) 95 ITR 97 (Delhi).

It was held that if an expenditure could not be allowed under any of the specific clauses of sub-Section (2) of Section 10 of the Act, on the ground that the conditions prescribed in these specific provisions had not been satisfied, still the expenditure could be allowed under the general clause (xv).

Thus, in your case, even though deduction for rent in respect of premises is not allowable under Section 30 of the Income-Tax Act, 1961, for the assessment year 2001-02, the claim is to be granted under Section 37(1) of the Income-Tax Act. (See S S Jainsons vs Assistant Commissioner of Income-Tax case, (2001) 76 ITD 51 (Delhi tribunal)/2001 21 DTC 293 (Delhi tribunal).

Can processing and administrative charges incurred for obtaining a bank loan be claimed as deduction in the computation of taxable income?

Yes. In view of the Supreme Court decision in the Indian Cements Ltd Vs Commissioner of Income-Tax case, (1966) ITR 52 (SC).

I am a sole trader and not required statutorily to get my accounts audited. But for accuracy and proper maintenance of accounts, I have got it audited on a payment of Rs 5,000. The assessment officer is not allowing this expenditure on the grounds that it has been voluntarily incurred and after the close of the accounting year. I am not convinced. Please suggest.

The expenditure for getting accounts audited is an expenditure, which is incurred for business, is allowable. The assessment officer's argument that the audit was done after the end of the accounting year is of no avail to the revenue department because the audit is always conducted after the end of the accounting year.

Hence the amount claimed is allowable as a business deduction under Section 37(1) of the Income-Tax Act, 1961. (See Aatur Holdings (P) Ltd and ORS vs Assistant Commissioner of Income-Tax case and the ORS/Assistant Commissioner of Income-Tax vs Aatur Holdings (P) Ltd case, (2001) 20 DTC 502/530 (Mumbai tribunal).

I am an automobile manufacturer. I have incurred some expenditure on design and development of tools for my business. Can I claim it as a revenue expenditure?

Yes. Expenditure incurred on design and development of tools to improve component already manufactured by assessee-automobile manufacturer is a revenue expenditure because the benefit acquired by assessee is not of enduring nature to put impugned expenditure in the category of capital expenditure.