2016 (7) TMI 59 - AT - Income Tax

Product Development Expenses(PDE) - revenue or capital expenditure - Held that - We find that while deciding the appeal for AY. 2007-08 2015 (5) TMI 643 - ITAT MUMBAI the Tribunal had decided the issue in favour of the assessee held that the expenditure regularly incurred for sustaining the market and to push up the sales was not in the capital field but was essential and incurred in the ordinary course of business for promoting existing brands - Decided in favour of assessee Calculation of profit of Silvassa unit eligible for deduction u/s. 80 IB - allocation of various expenses debited to the advertisement and sales promotion - Held that - The method adopted by the assessee for allocating the expenditure was more justifiable than the method adopted by the AO and confirmed by the FAA. So, we hold that there was no justification to recalculate the advertisement expenditure with regard sale of NABB products namely Frooty and Appy. Thus allocation in respect of Head Office corporate expenses and advertisement expenses made by the assessee are required to be accepted. - Decided in favour of assessee Treatment to the reusable artwork expenses - revenue or capital - Held that - The Tribunal, while deciding the appeals for the AY. s. 1998-99, 2007-08 and 2008-09 had decided the issue in favour of the assessee held that as considering the average life span of such artwork, which was only less than six months, it could not be inferred that any capital apparatus had come into existence which could be the source of income generation for the assessee. The artworks was not capital expenditure - Decided in favour of assessee Disallowance of foreign travel expenditure - Held that - Departmental authorities have not doubted genuineness of the incurring of expenditure. They have not brought anything to prove that the expenditure had element of personal use. It is the prerogative of an assessee to incur or not to incur an expenditure and to decide its business needs. Therefore, reversing the order of the FAA and following order of the Tribunal for the earlier AY. , we decide the third ground of appeal in favour of the assessee.

Summary

Issues Involved:
1. Deleting the disallowance of Product Development Expenses (PDE).
2. Allocation of advertisement and sales promotion expenses for calculating profit of Silvassa unit eligible for deduction u/s. 80 IB.
3. Treatment of reusable artwork expenses as capital expenditure.
4. Disallowance of foreign travel expenditure.

Detailed Analysis:

1. Deleting the Disallowance of Product Development Expenses (PDE):
The AO disallowed ?25.41 lakhs of PDE, treating it as capital expenditure and allowing depreciation at 25%. The assessee argued that PDE was incurred for studying product ingredients and improving existing products, which was necessary for its business in the FMCG sector. The First Appellate Authority (FAA) agreed with the assessee, stating that PDE was a routine expense without enduring benefit and should be treated as revenue expenditure under section 37(1) of the Act. The Tribunal upheld the FAA's decision, referencing a similar case from AY 2007-08 where market research expenses were allowed as revenue expenditure.

2. Allocation of Advertisement and Sales Promotion Expenses:
The AO allocated 32% of advertisement expenses to the Silvassa unit, reducing its profit eligible for deduction u/s. 80 IB by ?2.46 Crores. The assessee contended that only expenses directly related to NABB products should be allocated. The FAA upheld the AO's allocation, arguing that advertisement expenses benefit the company as a whole. The Tribunal, however, supported the assessee's method of allocation, noting that different products require different advertisement strategies. It referenced the Blue Star Ltd. case, where the Tribunal accepted the assessee's allocation method, and ruled in favor of the assessee.

3. Treatment of Reusable Artwork Expenses:
The AO treated reusable artwork expenses as capital expenditure, but the FAA and Tribunal disagreed. The Tribunal cited a previous decision for AY 1998-99, where it was held that artwork with a short lifespan does not create a capital apparatus and should be treated as revenue expenditure. The Tribunal followed this precedent and ruled in favor of the assessee.

4. Disallowance of Foreign Travel Expenditure:
The AO disallowed ?14.21 lakhs of foreign travel expenses due to lack of specific details and justification. The FAA upheld this disallowance. The Tribunal, however, referenced a decision from AY 2008-09, where it was held that business expenditure should be viewed from the businessman's perspective, and without evidence of personal use, disallowance on flimsy grounds is unjustified. The Tribunal found no evidence of personal use in this case and ruled in favor of the assessee.

Conclusion:
The appeal filed by the AO was dismissed, and the appeal of the assessee was allowed. The Tribunal ruled in favor of the assessee on all issues, emphasizing the necessity of routine business expenses and proper allocation methods.