Advertisement Spend Is Revenue, Not Capital: Gujarat HC Dismisses Revenue’s Appeal

Rinki Petrochemicals & Industries Ltd. incurred advertisement expenditure of Rs. 5.01 crore and, as a matter of accounting policy, treated it as deferred revenue expenditure in its books, debiting only a portion to the profit and loss account. However, while computing taxable income, the assessee claimed the entire amount as revenue expenditure under Section 37(1) of the Income-tax Act, 1961.

The Assessing Officer disallowed the claim, holding that the expenditure was capital in nature due to its treatment as deferred revenue in the accounts. The Commissioner (Appeals) and the Income Tax Appellate Tribunal deleted the disallowance, holding that advertisement expenses are revenue in nature. Aggrieved, the Revenue filed the present tax appeal before the Gujarat High Court.

Issue Before HC: Whether advertisement expenses can be treated as capital expenditure merely because the assessee classified them as deferred revenue expenditure in its books of account.

HC’s Ruling: The Gujarat High Court dismissed the Revenue’s appeal and answered the substantial question of law in favour of the assessee. The Court held that there is no concept of “deferred revenue expenditure” under the Income-tax Act and that entries in books of account are not determinative of the true nature of expenditure.

Relying on the Supreme Court’s decision in Taparia Tools Ltd., the Court reiterated that revenue expenditure incurred wholly and exclusively for business is allowable in full in the year it is incurred, even if the assessee chooses to spread it over multiple years in its accounts. Advertisement expenses do not become capital merely because they may yield benefits over a longer period.

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