ITO, NEW DELHI vs. M/S. BEEHIVE SYSTEMS (P) LTD., NEW DELHI

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 30.06.2014, passed by the Commissioner of Income-tax (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 ld. CIT (A) erred in holding that the expenses incurred on market research were revenue expenses and not to be amortized u/s 35D(2)(a)(iii) as held by AO, though the same were incurred in connection with extension of its undertaking as per the details submitted by the assessee during the assessment proceeding.”

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, AO 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/-.

Assessee carried the matter before the ld. CIT (A) 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.

We have heard the ld. 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.

The sole question arises for determination in this case is :-

To proceed further, we would like to reproduce the provisions contained u/s 35D(2)(a)(iii) of the Act for ready perusal:-

Bare perusal of the provisions contained u/s 35D invoked by the AO 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, AO 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.

Ld. CIT (A) 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.”

Moreover, to invoke the provisions contained u/s 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 u/s 35D and ld. CIT (A) has rightly deleted the addition and the question framed for determination is answered against the Revenue.