2014 (3) TMI 953 - AT - Income Tax

Deduction towards market research expenses under section 37(1) - Capital expenditure or Revenue expenditure - Held that - Admittedly, the assessee is not a manufacturer but a trader only. The activity of the assessee, being the purchase and further sale of equipment and earning of commission upon such sales cannot be said in any way to be manufacturing activity but a trading activity only. The market research was done by the assessee for the betterment and expansion of its trading business. The expenditure incurred on the market research by a trader cannot be said to have brought into existence anything of enduring benefit in the sense of a capital asset. In view of the settled position of law on this issue as laid down by the hon'ble High Courts of Bombay and Calcutta in the cases of CIT v. Glenmark Pharmaceutical Ltd. 2013 (1) TMI 488 - BOMBAY HIGH COURT and CIT v. Ananda Bazar Patrika (P) Ltd 1989 (2) TMI 19 - CALCUTTA High Court - Decided in favour of assessee.

Summary

Issues:
1. Confirmation of addition for market research expenses under section 37(1) of the Income-tax Act, 1961.
2. Deduction of 20% for net 5 years or depreciation on capital expenditure.

Analysis:

Issue 1:
The appellant challenged the addition made by the Assessing Officer for the claim of deduction towards market research expenses under section 37(1) of Rs. 14,03,000, treating revenue expenditure as capital expenditure. The Assessing Officer considered the expenses as capital in nature, providing an enduring benefit to the assessee for years to come. In appeal, the Commissioner of Income-tax (Appeals) upheld the addition, stating that the market research undertaken by the assessee had enduring benefits, even though it was related to day-to-day business. The appellant relied on various court decisions to support their claim that expenses for market survey or research should be treated as revenue expenditure. The Tribunal observed that the assessee, being a trader, conducted market research for the betterment and expansion of its trading business, which did not create any enduring benefit as a capital asset. Citing precedents from the High Courts of Bombay and Calcutta, the Tribunal allowed the ground of the assessee, overturning the addition.

Issue 2:
The appellant raised an alternative ground for deduction of 20% for net 5 years or depreciation on the capital expenditure. Since the first ground was allowed by the Tribunal, the second ground became irrelevant and infructuous. Consequently, the appeal of the assessee was allowed, and the order was pronounced in favor of the appellant on March 21, 2014.