DCIT vs Magic Bricks Reality Services Ltd – Disallowance of Advertisement Expenses for AY 2016-17

Case Overview: DCIT vs Magic Bricks Reality Services Ltd – AY 2016-17

This article discusses the case of the Deputy Commissioner of Income Tax (DCIT), Circle-16(1), New Delhi (the appellant) versus Magic Bricks Reality Services Ltd, New Delhi (the respondent), under case number ITA 6677/DEL/2019. The appeal relates to the assessment year (AY) 2016-17, with the final tribunal order pronounced on September 7, 2022. The core issue in this case was the disallowance of 50% of advertisement and business promotion expenses claimed by the respondent, which was later deleted by the Commissioner of Income Tax (Appeals) [CIT(A)].

Background of the Case

Magic Bricks Reality Services Ltd, the respondent, is engaged in the business of developing and maintaining an electronic/digital portal dedicated to real estate properties. For AY 2016-17, the respondent electronically filed its return of income on October 16, 2016, declaring a loss of Rs. 76,04,00,143. The case was selected for scrutiny, and the Assessing Officer (AO) subsequently framed the assessment under Section 143(3) of the Income Tax Act, 1961, determining the total income at Rs. 44,18,56,800.

The AO observed that the respondent had claimed Rs. 84,94,48,903 as advertisement expenses for brand building, maintaining customer base, and enhancing revenue. The AO was of the view that these expenses were capital in nature and disallowed 50% of the claimed expenses, amounting to Rs. 31,85,43,339. Aggrieved by the AO’s order, the respondent appealed to the CIT(A), who deleted the addition, leading the Revenue to file an appeal with the Income Tax Appellate Tribunal (ITAT).

Revenue’s Grounds of Appeal

The Revenue raised the following grounds in its appeal to the ITAT:

• Whether, on the facts and circumstances of the case, the CIT(A) was justified in deleting the addition of Rs. 31,85,43,339 made on account of disallowance of 50% of the advertisement and business promotion expenses, particularly in view of the fact that the CIT(A) accepted that the benefit arising out of the expenditure is enduring in nature.
• The appellant also reserved the right to add, amend, alter, or forgo any grounds of appeal either before or at the time of hearing of the appeal.

Proceedings Before the ITAT

The case was heard by the ITAT Delhi Bench ‘E’ on September 1, 2022, with the final order pronounced on September 7, 2022. The Revenue was represented by Ms. Rinku Singh, CIT-DR, while the respondent was represented by Shri Mukesh Gupta, C.A., and Ms. Neha Gupta, C.A.

During the hearing, the Revenue supported the AO’s decision to disallow 50% of the advertisement expenses, arguing that these expenses were capital in nature. The respondent, on the other hand, reiterated the submissions made before the AO and CIT(A), emphasizing that the expenses were incurred for business purposes and were revenue in nature. The respondent also pointed out that a similar issue had been decided in its favor for AY 2015-16, where the ITAT had dismissed the Revenue’s appeal.

ITAT’s Decision

After considering the submissions and reviewing the material on record, the ITAT noted that the issue of disallowance of 50% of advertisement expenses had already been addressed in the respondent’s favor for AY 2015-16. In that case, the Tribunal had held that the expenditure incurred on advertisement and business promotion was of a revenue nature and not capital expenditure.

The ITAT observed that the facts of the case for AY 2016-17 were identical to those of the previous year, and the Revenue had not presented any distinguishing features. As a result, the ITAT found no reason to interfere with the CIT(A)’s order and dismissed the Revenue’s appeal.

Significance of the Ruling

The ITAT’s decision in this case reaffirms the principle that advertisement and business promotion expenses, which are incurred to maintain and enhance a business’s customer base and revenue, are of a revenue nature and should not be capitalized. This ruling is significant for businesses that engage in substantial brand-building activities, as it provides clarity on the tax treatment of such expenses.

Moreover, the ruling highlights the importance of consistency in tax assessments across different assessment years, particularly when the facts of the case remain unchanged. The ITAT’s reliance on its earlier decision in the respondent’s case for AY 2015-16 underscores the need for uniformity in tax treatment and the value of precedent in tax litigation.

Conclusion

The case of DCIT, Circle-16(1), New Delhi vs Magic Bricks Reality Services Ltd, New Delhi, serves as a critical reference point for businesses and tax professionals dealing with the classification of advertisement and business promotion expenses. The ITAT’s decision to dismiss the Revenue’s appeal and uphold the deletion of the disallowance by the CIT(A) provides a clear interpretation of the nature of such expenses and their appropriate tax treatment.

This ruling also emphasizes the role of the ITAT in ensuring that tax assessments are conducted consistently and in accordance with established legal principles. By upholding the CIT(A)’s order, the ITAT has reinforced the notion that advertisement and business promotion expenses, aimed at generating revenue, are not capital expenditures and should be treated as deductible expenses for tax purposes.

DCIT vs Magic Bricks Reality Services Ltd – Disallowance of Advertisement Expenses for AY 2016-17