JIVA AYURVEDIC PHARMACY LTD,NEW DELHI vs. ACIT RANGE-13, NEW DELHI

The sole issue in this appeal raised by the assessee is that the Ld. CIT(A) is not justified in restricting the disallowance to the tune of 5% of total expenditure treating the same as capital in nature and the same is wholly arbitrary, misconceived and bad in law and thus deserves to be deleted.

At the very outset, the learned counsel of the assessee by submitting copy of the order of ITAT ‘C’ Bench in ITA 954/Del/2019 for A.Y. 2015-16 in assessee’s own appeal order dated 13.04.2023 submitted that the identical issue for immediately subsequent year has been decided in favour of the assessee and thus under identical facts and circumstances the issue is covered in favour of the assessee therefore sole grievance of the assessee may kindly be allowed.

Replying to the above the Senior DR strongly supported the orders of the authorities below. However he did not controvert that in the Tribunal order dated 13.04.2023 (supra) for A.Y. 2015-16, the identical issue under identical facts and circumstances has been decided in favour of the assessee.

On careful consideration of above submissions, first of all we note that the issues raised in this appeal are admittedly covered by the decision of coordinate bench dated 13th April 2023, in assessee own case for the assessment year 2015-16. We however see no reasons to take any view of the matter then the view taken by the coordinate bench in the aforesaid decision wherein the coordinate bench has inter alia observed as follows:- 2. The assessee is engaged in the business of manufacturing of ayurvedic drugs and pharmaceuticals with the brand name 'JIVA' and running various ayurvedic clinics all over the country. Return declaring income of Rs. 2,72,58,140/- under normal provisions and at book profit of Rs. 1,92,33,678/- was filed, which was taken up for scrutiny assessment. The dispute involved is in regard to the claim of Rs. 10,65,017/- out of advertisement expenses amounting to Rs. 56,80,090/- being disallowed by the learned A on the finding that the expenditure is giving enduring benefit to the assessee, therefore, creating an intangible asset and such an expenditure is not revenue but capital expenditure. Accordingly 25% of the advertisement expenses were capitalized and depreciation @ 25% was allowed treating the same as intangible asset. 3. Learned CIT(Appeals) has confirmed the same by reducing it to 5% of the total expenditure. 4. Accordingly, the assessee is in appeal and following ground is raised: "That the Respondent has erred in holding that 5% of the total expenditure claimed is towards the creation of brand value of the appellant company which is capital in nature and accordingly, the disallowance is restricted to 5% of the total expenses as capital in nature.

Learned DR however supported the findings of learned tax authorities below.

Appreciating the matter and the submissions it comes up that there is no dispute with regard to the genuineness of the expenditure or that the expenditure were under the head advertisement expenses' which is part of selling and distribution expenses. The Bench is of the considered opinion that creation of goodwill is not a primary end of all such expenditures rather goodwill is a by-product of the primary business activity. Mere by advertisement expenses a brand value may be created for a short term but the enduring benefit of which learned A.O. talks is outcome of the business activity to the satisfaction of customers. It is not justified to disallow the expenditure on account of assertion that distribution expenses that create a brand value is a capital expenditure.

Even otherwise there is force in the contention of learned AR on the basis of judicial pronouncements that when the expenses are not doubted to be incurred wholly and exclusively for purpose of business, then for creation of goodwill disallowance of expenditure is erroneous as that asset in the form of goodwill once created is monetized when the business is sold. Learned CIT (Appeals) has fallen in error in not appreciating the aforesaid proposition of law and arbitrarily concluding that 5% of expenditure is towards creation of brand value, is capital in nature, the grounds raised