2016 (2) TMI 518 - HC - Income Tax

Expenditure incurred on procurement of research reports - revenue v/s capital expenditure - Held that - The expenditure incurred in respect of same business is allowable as revenue expenditure, even if it is for expansion of the business. In the instant case here too admittedly the expenditure even as per the revenue is for expansion of business and therefore such expenditure on research reports obtained in the course is revenue expenditure.

Summary

Issues:
1. Whether expenditure on procurement of research reports is revenue or capital in nature.
2. Whether research reports provide enduring benefits to the business.
3. Whether expenditure for expansion of business through research reports is revenue or capital expenditure.

Issue 1:
The dispute revolves around determining whether the expenditure incurred by the assessee for obtaining research reports should be classified as revenue or capital in nature. The Assessing Officer treated the expenditure as capital, leading to the allowance of depreciation. The CIT(A) upheld this view, considering the expenditure for business expansion as capital in nature. However, the Tribunal, citing the decision in CIT vs. Priya Road Show Limited, held that the expenditure for research reports was revenue expenditure, crucial for business expansion. The Tribunal emphasized that the nature of the expenditure did not change, even if part of it was used for marketing purposes. The Tribunal's decision was based on the premise that the expenditure was for the expansion of the existing business, making it revenue in nature.

Issue 2:
The Assessing Officer and CIT(A) contended that the research reports would provide enduring benefits to the business, justifying the classification of the expenditure as capital. However, the Tribunal, following the decision in Priya Road Show Limited, emphasized that even if the project for which the expenditure was incurred did not materialize, the expenditure could still be considered revenue in nature. The Tribunal's analysis focused on the essential purpose of the expenditure, stating that if it was for the same business and aimed at expansion, it should be treated as revenue expenditure. The Tribunal's decision highlighted that the creation of a new asset with enduring benefits would classify the expenditure as capital, which was not the case here.

Issue 3:
The core issue was whether the expenditure for the expansion of the business through research reports should be considered revenue or capital expenditure. The Tribunal's decision, based on the Delhi High Court ruling in Priya Road Show Limited, clarified that expenditure for the same business, even for expansion, should be treated as revenue expenditure. The Tribunal's findings emphasized that the nature of the business remained the same, and the unity of control and common fund were crucial factors in determining the nature of the expenditure. As the expenditure was for business expansion and not the creation of a new asset with enduring benefits, it was rightly classified as revenue expenditure. The Tribunal's decision was deemed plausible, considering the factual position and relevant case law, leading to the dismissal of the appeal by the High Court.

This comprehensive analysis of the judgment highlights the key issues addressed, the arguments presented by the parties, and the reasoning behind the Tribunal's decision, ultimately leading to the dismissal of the appeal by the High Court.