Legitimacy of business expenses and their allowance as a deduction under Section 37 of the Income Tax Act, 1961.

JUDGMENT

Rajiv Shakdher, J. - Admit.

2. The following substantial questions of law are framed for consideration by this Court:

(i) Whether the Income Tax Appellate Tribunal [in short 'Tribunal'] erred in deleting the addition made qua pre-operative expenses by holding that the expenses incurred, in that behalf, were legitimate business expenditure?

(ii) Whether in the facts and circumstances of the case, the Tribunal was justified in deleting the addition made qua advertising expenses by failing to consider the fact that these expenses were incurred to build goodwill, which is, a capital asset?

3. With the consent of counsel for parties, the appeal is taken up for hearing and final disposal.

4. In order to adjudicate upon the questions of law framed above, it would be necessary to sketch out the broad contours of the case.

4.1. These questions of law concern the assessment year [in short 'AY'] 2010-2011. The assessee had filed its return on 27.09.2010, wherein it had declared a loss of Rs.7,83,71,011/-. The return filed by the assessee was processed under Section 143(1) of the Income Tax Act, 1961 (in short 'the Act'). Unfortunately, for the assessee, its case was picked up for scrutiny and accordingly, notice under Section 143(2) of the Act was issued.

4.2 Consequent thereto, an assessment order was framed on 19.03.2014 under Section 143(3) of the Act. The said assessment order determined a loss of Rs.3,66,79,080/-.

4.3 Pertinently, while framing the assessment under Section 143(3) of the Act, the assessing officer made additions concerning the following:

(i) Pre-operative expenses amounting to Rs.3,50,51,978/-.

(ii) Advertising expenses amounting to Rs.60,39,950/-.

4.4. The assessee, being aggrieved by the order dated 19.03.2014 passed under Section 143(3) of the Act, preferred an appeal with the Commissioner of Income Tax (Appeals) [in short 'CIT(A)]. The CIT(A) allowed the assessee's appeal.

4.5. It is against this order of the CIT(A) that the revenue preferred an appeal before the Tribunal. The Tribunal vide order dated 11.04.2019 dismissed the revenue's appeal and sustained the order of the CIT(A).

5. Mr. Shlok Chandra, who appears on behalf of the revenue, has assailed the order of the Tribunal in respect of two issues, adverted to hereinabove, i.e. deletion of the addition made by the assessing officer [in short 'AO'] towards pre-operative expenses and advertising expenses by \putting forth the following submissions.

5.1. The assessee is in the business of trading and therefore, expenses incurred prior to the commencement of business were rightly added back by the AO. In support of this plea, it was pointed out that the AO has indicated that the assessee in his written note had stated that its business commenced on 29.10.2009. It was submitted that the 'experience centre' was launched only on 29.10.2009 and therefore, that had to be taken as the actual date when the assessee had set-up its business.

5.2. The mere fact that the assessee obtained stock of the goods, that it intended to trade in, was not enough. Since the assessee is a trading entity, it needed an outlet such as an experience centre for conducting its business; which, as indicated above, was set-up only on 29.10.2009.

5.3. The assessee could not have sold the goods, otherwise, than via a physical outlet, as it had no online presence. In support of these submissions, reliance was placed by Mr. Chandra on the following judgments:

(a) Commissioner of Wealth Tax v. Ramaraju Surgical Cotton Mills Ltd., (1967) 63 ITR 478 (SC).

(b) Marvel Polymers Pvt. Ltd. v. Commissioner of Income Tax-II,2007 165 Taxman 618 (Delhi).

(c) Akzo Nobel Car Refinishes India (P.) Ltd. v. Deputy Commissioner of Income Tax, Circle 1(2), New Delhi,2008 25 SOT 226 (Delhi).

5.4. Insofar as the other issue is concerned, the only argument which was advanced was that the Tribunal had erred in deleting the addition made qua advertising expenses by ignoring the fact that the said expenses had been incurred to b