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2007 (3) TMI 300 - AT - Income TaxDisallowance u/s 37(1) - Capital Or Revenue Expenditure - expenditure incurred on promotional and trade marketing expenses in relation to the existing products and on product development expenses for new products - manufacture and sale of food and health care - HELD THAT - The assessee is engaged in the business of manufacturing of fast moving consumer goods. The business of the assessee is subjected to volatility in consumer preferences, tastes and wants. The assessee is therefore required to perennially study the market and launch new varieties in its products line and meet the competition in the market. In our humble opinion the expenditure in question has merely enabled the assessee to remain competitive in the market and retain the customer preferences and/loyalty towards its brand of products. The said advantage certainly is not limited to the period under consideration but spills over to the future also. So however this is not conclusive to hold that the expenditure in question is a capital expenditure. The parity of reasoning laid down by the apex Court in the case of Empire Jute Co. Ltd. 1980 (5) TMI 1 - SUPREME COURT is squarely applicable with respect to such expenditure also. We are unable to appreciate as to how can it be said that mere development and introduction of new varieties of products result in creation at a new line of business. Factually speaking, prior to the development and introduction of the impugned new products the assessee was in the business of manufacturing and sale of food and health care products. Even post development and introduction of new products, the business of the assessee remains that of manufacturing and sale of food and health care products. Therefore it is erroneous to conclude that the assessee acquired a new line of business by merely developing and introducing new products in the existing line of business. The new products clearly relate to the same line of business that the assessee has been hitherto carrying on. Therefore, on above consideration also the plea of the assessee that the expenditure in question is a revenue expenditure deserves to be upheld. In conclusion, we hold that having regard to the aforesaid discussion the claim of the assessee for allowability of impugned expenditure as revenue expenditure is justified. We, therefore set aside the order of the CIT(A) and direct the AO to delete the addition. Disallowance on interest u/s 36(1)(iii) - capital borrowed for setting up a new plant - HELD THAT - It is evident that the deduction in respect of interest paid on borrowed money utilized for investment in capital assets acquired in connection with the expansion of existing business is an allowable deduction. Therefore on the basis of the aforesaid, we do not find any infirmity in the claim of the assessee that the impugned expenditure was an allowable deduction in terms of s. 36(1)(iii) of the Act. Similar proposition has also been upheld by the Tribunal in the assessee's own case for the asst. yr. 1992-93. Therefore, we conclude by holding that since the impugned interest on borrowed capital is in respect of monies utilized for the purposes of assessee's business inasmuch as it was in connection with the expansion of the existing business, the said expenditure is allowable as a deduction u/s 36(1)(iii) of the Act. Therefore, we set aside the order of the CIT(A) and direct the AO to allow the impugned deduction. Thus on this ground the assessee succeeds. Expenditure incurred on implementation of a new ERP package for recording of manufacturing and recording transactions - nature of the expenditure - HELD THAT - The details of the expenditure reveal that the majority of heads of expenses are relating to salaries, employees' travelling cost, other routine business expenditure like postage, stationery, employees' training seminars, consultancy expenses etc. The first aspect is that the expenditures in question by itself do not result in acquisition of any asset in the hands of the assessee. The impugned expenditure also is not related to the actual acquisition of the ERP package and on this count, even the AO does not dispute the factual situation. The stand of the AO for treating the expenditure, as capital is that the said expenditure has brought enduring benefits to the assessee. It is also pertinent to mention that even prior to the implementation of the new ERP package, the assessee has been carrying on the impugned activities. The only change is that with the implementation of the new ERP package, the assessee seeks to carryon such activities more smoothly, efficiently and meaningfully so as to enable the assessee to take business decisions. The expenditure in question is merely incurred on implementation of the new package. Therefore, our inference that the impugned expenditure has only enabled the assessee to carryon its business efficiently and smoothly. Therefore, while in principle, we uphold the stand of the assessee that the expenditures of the nature which have been incurred in the implementation of the new ERP package, are revenue expenditures, insofar as it relates to the aforesaid two expenditures, we deem it fit and proper to direct the AO to ascertain their nature and thereafter decide the issue. For this limited purpose, we hereby set aside the order of the CIT(A) and restore the matter to the AO to carry out the aforesaid exercise. The assessee shall provide the necessary details to the AO and also justify that the same was of revenue nature in consonance with our discussion in the aforesaid paras. In view of the discussion, on this ground the assessee succeeds to the above extent. Nature Of expenses - expenditure incurred towards the renovation/improvement of leased building - Terms of Expln. 1 appended to s. 32(1) - HELD THAT - A mere perusal of the details of expenditure listed on the paper book reveals that the heads of expenditure listed out are numerous and inter alia include travel expenses, statutory expenses, shifting/installation expenses etc. which purportedly are of revenue nature. However there are other expenditure heads which would need verification of facts since the requisite details are not on record. Therefore, for this purpose we deem it fit and proper to set aside the order of the CIT(A) and direct the AO to carry out the necessary exercise in this regard. The AO shall carry out the verification exercise to ascertain which expenditures are falling within the purview of Expln. 1 to s. 32(1) out of the expenditure in question. The AO shall bear in mind that only such expenditures which are of capital nature alone are includible within the purview of Expln. 1 to s. 32(1). The assessee shall provide the necessary details in this regard and also have liberty to make such further submissions in support of the return of income on this issue. The AO shall also take into consideration the case laws adverted to by the assessee before us in determining the nature of the expenditure in question. Thus on this, aspect we conclude by holding that the assessee succeeds for statistical purposes. In conclusion, all the appeals of the assessee are partly allowed.
Issues Involved:
1. Disallowance of promotional and product development expenses. 2. Calculation of deduction under Section 80HHC. 3. Denial of deduction under Section 80-I. 4. Inclusion of managerial labor and factory staff salaries in closing stock valuation. 5. Disallowance of product development expenses for subsequent years. 6. Inclusion of sales tax, excise duty, and freight in total turnover for deduction calculation. 7. Disallowance of interest on capital borrowed for setting up a new plant. 8. Expenditure on ERP package implementation. 9. Expenditure on renovation/interior decoration of leased office premises. 10. Adjustment for excise duty under Section 43B. Detailed Analysis: 1. Disallowance of Promotional and Product Development Expenses: The appellant incurred Rs. 3,21,02,870 on promotional and product development expenses, which the AO treated as capital expenditure. The CIT(A) upheld this view, considering the expenses as enabling the introduction of new products and thus venturing into a new line of business. The Tribunal, however, held that the expenses were necessary for running a fast-moving consumer goods business and did not lead to the creation of any fixed asset. The Tribunal allowed the expenses as revenue expenditure, emphasizing that the expenditure facilitated business operations without creating a new line of business. 2. Calculation of Deduction under Section 80HHC: The AO included sales tax, excise duty, and freight as part of the total turnover while computing the deduction under Section 80HHC. The CIT(A) upheld this. However, the Tribunal referred to its own decisions in earlier years and the Bombay High Court's judgment in CIT vs. Sudershan Chemicals Industries Ltd., directing the AO to exclude these elements from the total turnover for deduction calculation. 3. Denial of Deduction under Section 80-I: The AO disallowed the deduction under Section 80-I for industrial undertakings established in previous years, following earlier assessment orders. The Tribunal noted that the deduction had been allowed in earlier years by the Tribunal and directed the AO to allow the deduction, emphasizing consistency in the application of the law. 4. Inclusion of Managerial Labor and Factory Staff Salaries in Closing Stock Valuation: The authorities included these expenses in the closing stock valuation. The Tribunal noted that this issue had been consistently decided against the assessee in earlier years and upheld the lower authorities' decision. 5. Disallowance of Product Development Expenses for Subsequent Years: For subsequent years, the AO disallowed similar product development expenses as capital in nature. The Tribunal applied its reasoning from the earlier year, treating the expenses as revenue in nature and allowing the deduction. 6. Inclusion of Sales Tax, Excise Duty, and Freight in Total Turnover for Deduction Calculation: The Tribunal consistently directed the exclusion of these elements from the total turnover for calculating deductions under Section 80HHC, following its earlier decisions and the judgment of the Bombay High Court. 7. Disallowance of Interest on Capital Borrowed for Setting Up a New Plant: The AO disallowed the interest on borrowed capital for a new plant, treating it as capital expenditure. The Tribunal, however, held that the interest was for the expansion of existing business and allowable under Section 36(1)(iii). The Tribunal also noted that the amendment to Section 36(1)(iii) by the Finance Act, 2003, was prospective and not applicable retrospectively. 8. Expenditure on ERP Package Implementation: The AO treated the expenditure on ERP package implementation as capital in nature. The Tribunal, however, held that the expenditure was for facilitating and streamlining business operations and was revenue in nature. The Tribunal directed the AO to verify specific expenses related to voice and data telecom circuits. 9. Expenditure on Renovation/Interior Decoration of Leased Office Premises: The AO treated the expenditure as capital in nature under Explanation 1 to Section 32(1). The Tribunal directed the AO to verify the nature of expenses, emphasizing that only capital expenditures fall within the purview of Explanation 1. 10. Adjustment for Excise Duty under Section 43B: The Tribunal directed the AO to re-evaluate the claim of the assessee regarding the adjustment for excise duty under Section 43B, following the decisions in Lakhanpal National Ltd. vs. ITO and other similar cases. Conclusion: All the appeals of the assessee were partly allowed, with the Tribunal providing detailed directions on each issue, emphasizing consistency with earlier decisions and the correct application of the law.
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