ITAT Mumbai Upholds Assessee’s 70:30 Expense Allocation Between Revenue and Capital Work-in-Progress
Tribunal Recognises Consistency in Sales Promotion and Financial Expense Treatment
Tax Department Cannot Disallow Accepted Accounting Practices Without Justification
By Our Legal Reporter
New Delhi: December 09, 2025:
In a significant ruling, the Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has upheld an assessee’s consistent practice of allocating sales promotion and financial expenses between revenue expenditure and capital work-in-progress (WIP). The Tribunal observed that the assessee had followed a 70:30 allocation ratio for several years, and the tax department had accepted this method in earlier scrutiny assessments.
This judgment reinforces the principle that consistency in accounting treatment is critical, and once a method has been accepted by the tax authorities, it cannot be arbitrarily challenged in subsequent years.
Background of the Case
- Assessee’s Practice: The assessee consistently allocated 70% of sales promotion and financial expenses to revenue and 30% to capital WIP.
- Department’s Objection: In the relevant year, the tax department disallowed part of the expenses, arguing that they should be fully capitalised.
- Assessee’s Argument: The assessee contended that the allocation method had been consistently followed and accepted in earlier years, and there was no change in facts or circumstances.
- ITAT’s Decision: The Tribunal restored the assessee’s allocation method, ruling that consistency must be maintained unless there is a material change.
Tribunal’s Observations
The ITAT made several important observations:
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- Consistency Principle: Once a method of accounting has been accepted by the department, it cannot be rejected without valid reasons.
- No Change in Facts: Since the assessee’s business operations and expense nature remained the same, the allocation method continued to be valid.
- Revenue vs. Capital: Sales promotion expenses are generally revenue in nature, but a portion can be capitalised if linked to capital projects.
- Fair Allocation: The 70:30 split was considered a fair and reasonable method of allocation.
Legal Context
The ruling draws upon established principles in tax law:
- Supreme Court Precedents: Courts have consistently held that accounting methods accepted in earlier years should not be disturbed unless there is a change in facts.
- Revenue Expenditure: Expenses incurred for day-to-day operations, like sales promotion, are deductible as revenue expenditure.
- Capital Expenditure: Expenses linked to creation of assets or long-term benefits may be capitalised.
- Hybrid Treatment: In some cases, expenses may be partly revenue and partly capital, requiring fair allocation.
Implications of the Ruling
The ITAT’s decision has wide implications for businesses:
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- Certainty in Tax Treatment: Companies can rely on consistent accounting practices without fear of sudden disallowances.
- Reduced Litigation: The ruling discourages arbitrary challenges by tax authorities.
- Encouragement for Transparency: Businesses are encouraged to adopt clear and consistent expense allocation methods.
- Impact on Real Estate and Infrastructure: Sectors with large capital projects often face disputes over expense allocation; this ruling provides clarity.
Expert Views
Tax experts and chartered accountants have welcomed the ruling:
- Tax Consultants: Say the judgment reinforces the importance of consistency in tax compliance.
- Auditors: Note that hybrid expense allocation is common in industries with capital-intensive projects.
- Legal Analysts: Stress that the ruling will reduce unnecessary disputes and align with global accounting practices.
Broader Industry Context
Similar rulings have been delivered in other cases:
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- Mahindra & Mahindra Ltd vs DCIT (ITAT Mumbai): Advertisement and sales promotion expenses were held to be revenue in nature, not capital.
- Other ITAT Rulings: Expenses incurred for business promotion and tours by partners have also been allowed as revenue expenditure.
These cases collectively establish that sales promotion and related expenses are generally revenue in nature, and only a portion may be capitalised if directly linked to asset creation.
Conclusion
The ITAT Mumbai’s ruling upholding the assessee’s 70:30 allocation of sales promotion and financial expenses between revenue and capital WIP is a landmark decision. It underscores the importance of consistency in accounting practices and provides clarity for businesses facing similar disputes.
For taxpayers, the message is clear: if a method has been consistently followed and accepted, the tax department cannot arbitrarily disallow it. This ruling strengthens taxpayer confidence and promotes fairness in tax administration.
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