Facts of the Case

  • The assessee, Hike Private Limited, filed its return declaring substantial losses.
  • The Assessing Officer (AO), during scrutiny under Section 143(3), disallowed expenses of ₹43.01 crore and treated them as capital expenditure.
  • The primary reason given by AO:
    • No business revenue was generated.
    • Expenses were allegedly incurred for brand building, creating an intangible asset.
  • CIT(A) upheld the AO’s disallowance.
  • However, the ITAT reversed the findings and allowed the expenses as revenue in nature.
  • The Revenue filed an appeal before the Delhi High Court 

Issues Involved

  1. Whether expenses incurred by the assessee can be treated as capital expenditure merely because no business income was generated.
  2. Whether absence of income under Section 28 disentitles the assessee from claiming deductions under Sections 30–37.
  3. Whether expenditure incurred for brand-building qualifies as creation of an intangible capital asset.

Petitioner’s (Revenue) Arguments

  • The assessee had not commenced or set up its business.
  • Expenses were incurred prior to earning revenue; hence they should be capitalized.
  • Expenditure was directed towards brand creation, resulting in an intangible asset (as per Accounting Standard-26).
  • Therefore, such expenses cannot be allowed as revenue expenditure.

Respondent’s (Assessee) Arguments

  • The AO’s reasoning regarding “non-commencement of business” was not part of the original assessment reasoning.
  • The disallowance was wrongly made on the assumption of brand-building.
  • In earlier assessment years (AY 2012-13), similar expenses were accepted as revenue expenditure.
  • The ITAT correctly appreciated facts and allowed the deduction.

Court’s Findings / Order

  • The High Court upheld the ITAT’s decision and dismissed the Revenue’s appeal.
  • Key observations:
    • The AO adopted an incorrect legal approach.
    • The proposition that no income under Section 28 = no allowable expenditure under Sections 30–37 is unsustainable in law.
    • The AO’s concern was misplaced—focus was wrongly on absence of income rather than nature of expenditure.
    • The argument that business was not set up was not supported by the record.
    • Consistency principle applied, as similar treatment was accepted in earlier years.
  • Held: No substantial question of law arises.

Important Clarifications

  • No income does not mean no expense deduction:
    Even if no business income is earned, legitimate business expenditure can still be allowed.
  • Wrong test applied by AO:
    The correct test is the nature of expenditure, not whether income was earned.
  • Brand-building ≠ automatic capital expenditure:
    Not every expenditure resulting in future benefit becomes capital in nature.
  • Consistency principle:
    Treatment accepted in earlier years carries persuasive value unless facts materially change.

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/RAS04092023ITA4992023_150818.pdf 

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