Hoarding expenses allowed as revenue in nature and not capital. Hoardings are subjected to vagaries of rain, storm, damages etc. and part normal activities of advertisements and publicity business.
ABCAUS Case Law Citation:
ABCAUS 2986 (2019) (06) ITAT
Important Case Laws Cited/relied upon by the parties:
M/s Empress Advertising
The assessee was aggrieved by the order of the CIT(A) in disallowing hoarding construction charges as capital expenditure instead of revenue expenditure.
The assessee was an individual carrying on business of advertisement. During the assessment proceedings, the assessing officer noted that in the profit and loss account, a sum had been debited under the head ‘hoarding construction charge’.
The assessee was requested to explain that since such huge expenses were made for construction of hoarding, the same should be giving usefulness / utility to the assessee for more than one financial year and hence why the said expenses should not be treated as capital in nature.
The assessee submitted that ‘hoarding Construction charges’ had been paid to a marketing company with respect of various sites. These sites had an estimated life of barely one year so instead of considering it as capital expenditure, such amount had been debited in the profit & loss account as revenue expenditure.
Assessing Officer noted that the assessee had incurred hoarding construction cost @ Rs. 200/- per sq. ft. which was too high and contradicted the claim of the assessee that the hoardings have a life of barely one year. According to the AO, the claim that for a construction having barely one year’s longevity, the assessee would spend Rs. 200/-, as cost of construction per sq. ft. was not acceptable.
Thus, AO concluded that at this rate of construction, the assessee would get a structure which is fairly durable and capable of giving benefits / use value to the assessee far beyond the relevant financial year.
The AO observed that having regard to the huge cost of construction, the only logical conclusion which emerged was that the hoardings had a life of more than one year, quite contrary to the claim of the assessee.
Accordingly, the AO treated them as capital expenditure and disallowed as deduction claimed in the accounts by the assessee. However, having regard to the nature of business of the assessee, those hoardings were treated by AO as plant & machinery for the assessee and depreciation @ 15% was allowed thereon.
Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the CIT(A) who confirmed the addition made by assessing officer. Aggrieved by the order of the CIT(A) the assessee was in appeal before the Tribunal.
The Tribunal observed that AO had made the disallowance because according to him, at the given rate of construction, the assessee would get a structure which is fairly durable and capable of giving benefits / use value far beyond the relevant financial year.
The Tribunal noted that the hoardings are subjected to vagaries of rain, storm, vandalism, weather, theft, miscreants, damages etc., thus, the activities indulged by the assessee were part of its normal activities of advertisements and publicity.
The Tribunal further observed that the assessee had incurred the hoarding charges for facilitating the business operations and not with the object of acquiring any capital asset. The assessee was in the business of advertising and these expenses with regard to the hoarding structures was a part of the normal and day to day business of the assessee.
It was also noted that the hoardings were temporary structures and were made with angles of steel and iron rods to affix them to the ground since these are vulnerable to rain, storm, theft and other damages. As such, affixation of the same using steel angles and iron rods was a necessity else the assessee would have not received any advertising orders.
To receive advertising orders, these hoardings were required to be maintained by the assessee in a good quality condition. Further, in order to avoid corrosion of the structure and other adverse weathering effects, replacement of parts and other incidental expenses is regularly required to be done. It was also relevant to note that such expenditure is a recurring expenditure which is required to be incurred by the assessee regularly and the same therefore cannot be said to have given any enduring benefit to the assessee in capital field
The Tribunal also noted that the Inspector’s report relied upon by the AO was given after almost three years. The Inspector had based his findings in the impugned report by watching a hoarding after a time gap of three years. The said hoardings had underwent changes in this long time span of three years. Repair works and replacement of parts had taken place in the last few years as per the demand of the advertising business. As such, the structure existing on the date the Inspector visited the site can in no circumstances be compared with the structure which existing in the relevant AY.
The Tribunal also noted that the assessee had been following this practice of claiming the hoarding expenses as revenue expenses in all the earlier years also and the same was not disturbed by the AO in any of the preceding years. There was no change in the accounting policies of the assessee in the current year vis a vis the earlier years, hence consistency should be maintained by the assessing officer.
The Tribunal relying upon the decision of the Coordinate Bench held that the hoarding expenses incurred by the assessee were revenue in nature and not capital in nature and the assesse was entitled to deduction on account of hoarding expenditure being in the nature of revenue expenditure.
