9911796707
TMI Blog2007 (3) TMI 300X X X X Extracts X X X X X X X X Extracts X X X X ..... an income of Rs. 1,05,53,211 (sic) after making various additions/disallowances to the returned income, which have been partly deleted by the CIT(A), against which the assessee is presently in appeal before us. 3. The first issue is with regard to the disallowance of Rs. 3,21,02,870 made by the AO on the ground that the expenditure in question is capital in nature. Briefly stated, the facts are that the appellant incurred an expenditure of Rs. 3,21,02,870 on "promotional and trade marketing expenses" in relation to the existing products Rs. 1,57,81,862 and on "product development expenses for new products" Rs. 1,63,21,008 which was claimed as revenue expenditure under s. 37(1) of the Act. On being asked to justify the aforesaid claim the assessee submitted as follows. That the "promotional and trade marketing expenses" of Rs. 1,57,81,862 were incurred on existing products and included, inter alia, costs of presentation items given to customers on sale of the products, expenditure on advertisement material etc. The assessee claimed that the expense was wholly and exclusively for the purposes of business and did not result in acquisition of any capital asset. Secondly with respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the appellant but in this case the expenditure has increased the efficiency of the business by enabling the organization to be flexible and responsive to changing consumer preferences and does not add to the profit-earning apparatus available to the appellant. In addition the learned counsel also argued that the lower authorities erred in assuming that the development of new product implies a new line of business. The appellant has continued its existing line of business and has only introduced newer varieties or brands of existing products like soft drinks, chocolates and energy drinks. Thus the inference of the AO that the expenditure relating to such newer varieties of existing products constitutes capital expenditure is patently erroneous. In the course of the submission the learned counsel has relied on various decisions, viz.: (i) Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC); (ii) Alembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC); (iii) Bombay Steam Navigation Co. (1953) (P) Ltd. vs. CIT (1965) 56 ITR 52 (SC); (iv) CIT vs. Berger Paints (India) Ltd. (2002) 174 CTR (Cal) 269 : (2002) 254 ITR 503 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bar trials 1,12,216 Lotus Nutribar expenses 12,97,430 Nutribar research expenses 29,23,870 Development exp. for Ribena soft drink 1,58,938 Development exp. for Ribena 42,25,539 Horlicks 3-in-l packaging expenses for free samples 7,00,620 Market research & consumer analysis for new produces viz. 15,67,281 Development exp. existing products (Horlicks relaunch) 28,50,497 1,63,21,008 Total : Rs. 3,21,02,870 8. A bare perusal of the aforesaid details of expenditure incurred by the assessee shows a fact position that the expenditure is in relation to the business of the assessee. This aspect has also not been disputed by the Revenue, as is evident from the orders of the lower authorities. Now the issue whether a particular expenditure is capital or revenue has been a subject-matter of numerous judicial pronouncements. It is also a well accepted proposition that there is no single definite criterion which by itself can determine whether a particular expenditure is capital or revenue. It is a trite law that what is relevant is to evaluate the purpose of the outgoing and its intended object and effect and considered in the light of business realities. The apex Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is nature of the principle laid down in this test. What is material to consider is nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be of revenue account, even though the advantage may endure for an indefinite future." The aforesaid decision of the Hon'ble apex Court clearly shows that the test of enduring benefit is not conclusive to judge true nature of expenditure. One has to go further and ascertain as to whether particular expenditure results into an advantage of enduring nature in the capital field or revenue field. In the instant case having regard to the nature and details of expenditure it is clear that the expenditure under the head "Promotional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is aspect 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. 12. As a matter of passing we may refer to the judgment of the Hon'ble Karnataka High Court in the case of CIT vs. Bharat Earth Movers Ltd. (1985) 47 CTR (Kar) 244 : (1985) 155 ITR 321 (Kar) wherein it has been held that expenditure incurred on deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee had claimed the deduction under s. 80-I of the Act in respect of industrial undertaking established in the previous years relevant to the asst. yrs. 1991-92 and 1995-96. The AO disallowed the claim of the assessee following the assessment orders for the earlier years. The CIT(A) has upheld the action of the AO. 17. On this aspect the learned counsel for the assessee has contended that subsequent to the order of the CIT(A), the Tribunal in assessee's own case for asst. yrs. 1991-92 to 1995-96 vide orders in ITA No. 301/Chd/2001. ITA Nos. 17, 274 and 1243/Chd/1998 and ITA No. 233/Chd/1999 dt. 31st Jan., 2005 has allowed the claim of the assessee. It is also pointed out that the appeal of the Department on similar issue for the asst. yr. 1996-97 has been disposed of by the Tribunal vide ITA No. 345/Chd/2001, dt. 28th Feb., 2005 in favour of the assessee. The learned Departmental Representative has not disputed the aforesaid factual matrix brought out by the learned counsel for the appellant. 18. We find from the perusal of the precedent cited above that the issue with regard to the deduction under s. 80-I has been adjudicated by the Tribunal in favour of the appellant in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction under s. 80HHC of the Act. While computing deduction under s. 80HHC the AO included sales-tax, excise duty, freight etc. as part of the total turnover. Similar issue has been dealt with by us while dealing with the appeal for asst. yr. 1998-99 in the earlier paras. Therein we have directed the AO to recompute the deduction under s. 80HHC of the Act after excluding sales-tax, excise duty etc. from the total turnover following the decision of the Bombay High Court in the case of Sudershan Chemicals Industries Ltd. Following the same on this ground, we uphold the stand of the assessee. Accordingly, assessee succeeds on this ground. 25. The third issue is with respect to the denial of deduction under s. 80-I of the Act amounting to Rs. 9,46,29,393. This issue is identical to ground No. 3 considered by us in the appeal of the assessee for the asst. yr. 1998-99 in the preceding paras. The issue and the circumstances leading upto the present dispute are identical to those in the asst. yr. 1998-99. Therefore, our decision in the asst. yr. 1998-99 applies mutatis mutandis herein also. Thus, on this issue the assessee succeeds. 26. In ground No. 4, the issue is with regard to the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure. The details of the expenditure have been, placed in the paper book at pp. 58-59. We have perused the details of the expenses. It was a common ground between the parties that the dispute relating to allowability of similar expenditure was subject-matter of appeal for the asst. yr. 1998-99 (ITA No. 379/Chd/2004) considered by us in the earlier paras. After having perused the details of the expenses, the respective orders of the lower authorities arid the rival contentions we find that the basis of disallowance of the impugned expenditure remains on the similar reasoning as taken by the AO in the asst. yr. 1998-99. The rival contentions are also on similar lines. A perusa1 of the details of expenditure clearly shows that the expenditure in question is related to the business of the assessee and is on revenue account. The reasoning brought out by us in the asst. yr. 1998-99 is applicable with respect to the fact position in this year too. The background and fact situation being identical to our decision on similar issue in the asst. yr. 1998-99, the same applies mutatis mutandis herein also. Oh this ground the assessee succeeds. 32. The fourth issue is with, regard to the action ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d counsel specifically relied upon the phraseology of s. 36(1)(iii) which provided that the amount of interest paid in respect of capital borrowed for the purpose of the business shall be allowed as deduction in computing the income. The learned counsel also argued that the reliance placed by AO on the newly inserted proviso to s. 36(1)(iii) was untenable since the said amendment was prospective in nature and cannot be read retrospectively. In this regard reliance was placed on the judgment of the Tribunal in assessee's own case for the asst. yr. 1992-93 in ITA No. 1316/Chd/1998 dt. 31st Jan., 2005 wherein it is held that the amendment to s. 36(1)(iii) is prospective in nature. Reliance was also placed on the decision of the Tribunal in the case of Swaraj Engines Ltd. vs. Jt. CIT (2005) 98 TTJ (Chd) 346 : (2005) 97 ITD 45 (Chd) besides reliance was also placed on the decision of the Rajasthan High Court in the case of CIT vs. Hindustan Zinc Ltd. (2003) 185 CTR (Raj) 177 : (2004) 269 ITR 369 (Raj). Apart from the aforesaid reliance was also placed on a number of decisions: (i) Setabganj Sugar Mills Ltd. vs. CIT (1961) 41 ITR 272 (SC); (ii) Produce Exchange Corp. Ltd. vs. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture incurred on capital borrowed for such purpose is allowable expenditure or not. The claim of the assessee is to be examined with reference to the provisions of s. 36(1)(iii) of the Act. Sec. 36(1)(iii) provides that while computing the income referred to in s. 28 of the Act, the amount of interest paid in respect of capital borrowed for the purposes of business is an allowable deduction. The assessee has incurred expenditure on interest in respect of capital borrowed and utilized for expansion of its existing line of production. In this background, following the decisions of the Supreme Court in the cases of India Cement Ltd. vs. CIT (1966) 60 ITR 52 (SC), Challapalli Sugars Ltd. vs. CIT 1974 CTR (SC) 309 : (1975) 98 ITR 167 (SC), CIT vs. Associated Fibre & Rubber Industries (P) Ltd. (1999) 152 CTR (SC) 21 : (1999) 236 ITR 471 (SC) and Gujarat High Court in the case of CIT vs. Alembic Glass Industries Ltd., 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 infi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ea of the Revenue based on the decision of the Hon'ble Punjab & Haryana High Court in the case of Vardhman Polytex Ltd. wherein it has been recommended that the issue be referred to a larger Bench. In this regard, we have carefully perused the said decision. In the said decision, the Hon'ble Bench has not overruled its earlier decision in case of Punjab Alkalies & Chemicals Ltd. (2006) 30 ITR 247 (P&H) and neither the decision of the Tribunal in the case of Swaraj Engines Ltd. and in the assessee's own case for 1992-93 have been interfered with. Therefore, presently, there is no prevailing decision of the Hon'ble jurisdictional High Court contrary to the aforesaid decision. Therefore, our decision to uphold the plea of the assessee. 38. Another aspect on the basis of which the claim of the assessee has been disallowed is that the assessee has capitalised the interest in the books of account in the immediately preceding year as well as in the year under consideration, whereas only in this year the expenditure has been claimed as deduction under s. 36(1)(iii) in the return of income. On both these aspects, we do not find any justifiable reasons which would disentitle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obsolescence very fast and therefore it requires continuous upgrading. Due to the rapid changing systems and technology the impugned expenses are purely revenue in nature. Reliance has been placed on various decisions viz., Empire Jute Company Ltd., CIT vs. Associated Cement Companies Ltd. (1988) 70 CTR (SC) 28 : (1988) 172 ITR 257 (SC), Alembic Chemical Works Co. Ltd., CIT vs. K & Company (2003) 181 CTR (Del) 378, ITC Classic Finance Ltd. vs. Dy. CIT (2000) 112 Taxman 11 (Cal)(Mag) , Media Video Company (2002) 122 Taxman 28 (Del)(Mag), Sumitimo Corporation India (P) Ltd. vs. Addl. CIT (2005) 1 SOT 91 (Del), Ajit Kumar S. Kamdar vs. Dy. CIT (2005) 1 SOT 183 (Mumbai), Naveen Projects Ltd. vs. Dy. CIT (2005) 1 SOT 232 (Del). The learned counsel further submitted that similar expenditure incurred in the immediately preceding assessment year has been allowed as a revenue expenditure by the assessing authority. 42. On the other hand, the learned Departmental Representative while defending the orders of the lower authorities has argued that the expenditure was capital in nature as it rendered enduring benefits to the assessee. For this our attention has been drawn to the discussion mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditures 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. 44. We have considered the nature of the expenditure incurred and the resultant benefits to the assessee. Evidently the business of the assessee is to carryon manufacture and sale of food and healthcare products. The activity pertaining to accounting, finance, recording of transactions relating to sales/purchases, inventories etc. are all secondary and assist in the furtherance of the main business objective of the assessee i.e. manufacturing. These secondary activities are necessary as 'aids' or 'tools' of management so as to enable the assessee to accurately and correctly ascertain the true state of affairs. An efficient and reliable recording of activities of accounting, finance, inventory management, processing of purchases, sales etc. would enable the assessee to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, 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. 46. Before parting we may also make a mention that the AO himself has accepted similar expenditure in the immediately preceding assessment year as revenue in nature. The plea of the assessee on this aspect was before the AO as well as before the CIT(A). We do not find any rebuttal in the orders of lower authorities on this issue. Even before us, no arguments or any material whatsoever has been attempted to be brought on record by the Revenue to controvert the said factual position. Therefore, even on the principles of consistency w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of repairs allowable under s. 30 of the Act. The AO, however did not accept the plea of the assessee and has held that in terms of Expln. 1 appended to s. 32(1) of the Act, any expenditure incurred towards the renovation/improvement of leased building is to be held as capital in nature. Accordingly the AO has disallowed the impugned expenditure and treated the same as capital expenditure. We find that the CIT(A) has also upheld the same reasoning to decide the issue in favour of the AO. 51. Before us the learned counsel appearing for the assessee has vehemently argued that the impugned expenditure was of revenue in nature. The learned counsel reiterated the submissions which were made before the lower authorities in support of the claim of the assessee. Adverting to the invoking of Expln. 1 to s. 32(1) by the AO, the learned counsel contended that it was applicable only to the expenditures incurred on undertaking structural changes to the leased premises and not on account of repairs/renovations of the nature carried out by the assessee. The learned counsel specifically relied upon the decision of the Delhi High Court in the case of Escorts Finance Ltd. (2006) 205 CTR (Del) 574 : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned counsel for the assessee contended that the case laws relied upon by the learned Departmental Representative are not applicable as the same did not pertain to leased premises. Moreover the learned counsel sought to place reliance on the decision of the Hon'ble Punjab & Haryana High Court in the case of Regal Theatre vs. CIT (1966) 59 ITR 449 (P&H) in support of his case. Apart from the aforesaid, reliance was placed on the decisions in the cases of CIT vs. Chowgule & Co. (P) Ltd. (1995) 125 CTR (Bom) 442 : (1995) 214 ITR 523 (Bom), CIT vs. Madras Auto Service (P) Ltd. (1998) 148 CTR (SC) 398 : (1998) 233 ITR 468 (SC) in support of the stand. 54. We have carefully considered the rival submissions. The entire case of the Revenue is built on the provisions of Expln. 1 to s. 32(1) of the Act. We therefore, deem it expedient to reproduce the same which is as under: "Where the business, or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have also perused the orders of the lower authorities and find that the AO as well as the CIT(A) had proceeded on the assumption, evidently without making any verification, that the expenses are of capital nature merely because they are incurred on a leased premises. The aspect as to whether or not the expenditure is of revenue or capital in nature is dependent on its factual contours which has not been subjected to any verification by the lower authorities. A mere perusal of the details of expenditure listed out at pp. 64 and 65 of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nged the method of valuation of closing stock to exclude excise duty paid from such valuation on direct cost basis. The change was not accepted by the Tribunal." "In asst. yr. 1985-86, the assessee raised further plea that if excise duty paid had to be included in the valuation of closing stock, the same needed to be reduced in order to give full effect to the provisions of s. 43B of the IT Act, 1961 ("the Act"). The Tribunal in that year remanded the matter back to the AO to decide the same in light of the decision of the Special Bench of the Tribunal constituted in the case of Indian Communication Network (P) Ltd. vs. IAC (1994) 48 TTJ (Del)(SB)604 : (1994) 206 ITR 86 (Del)(SB)(AT) as and when available." "By the time, the appeal for asst. yr. 1986-87 came to be heard by the Tribunal, the Special Bench of the Tribunal in the case of ITO vs. Food Specialities Ltd. (1994) 48 TTJ (Del) 621 : (1994) 206 ITR 119 (Del)(AT) held that excise duty paid did not have to be included in the valuation of closing' stock on direct cost basis." "Another Special Bench of the Tribunal, in the case of Inman Communication Network (P) Ltd. vs. IAC (1994) 48 TTJ (Del)(SB)604 : (1994) 206 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) Rs.6,47,89,028 Excise duty element included in closing stock and claimed as deduction under s. 43B for asst. yr. 2000-01. Rs.6,02,41,800 Difference Rs. 45,47,228 "(*On the assumption that exclusion of the same upheld by the CIT(A) in the appeal for asst. yr. 1999-2000 would be confirmed by the Tribunal by dismissing the Departmental appeal)." "The AO did not add the amount of Rs. 45,47,228 offered for tax by the assessee since the AO is contesting the finding of CIT(A) allowing relief to the assessee in the earlier years." The plea of the assessee is that if the excise duty paid is included in the valuation of the closing stock, then the same needs to be allowed the requisite deduction permissible in terms of s. 43B of the Act. We find that the said stand is sustainable in view of the following decisions: 1. Lakhanpal National Ltd. vs. ITO; 2. CIT vs. Bharat Petroleum Corpn. Ltd.; 3. Chemicals & Plastics India Ltd. vs. CIT. Following the same, we direct the AO to re-evaluate the claim of the assessee and recompute the income of the assessee by making the necessary adjustments on this count. On this ground the assessee succeeds for statistical purposes. 59. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le herein also. In the result, on this ground the assessee succeeds. 64. In ground No. 4 the issue is with regard to the disallowance of interest amounting to Rs. 10,32,90,873 incurred by the assessee on capital borrowed for setting up of a new plant at Sonepat. The Revenue disallowed the expenditure on the plea that the same was capital in nature. Similarly, expenditure pertaining to assessment year 2000-01 (ITA No. 309/Chd/2005) has been dealt with by us in the earlier paras. In terms thereof the impugned ground of the assessee is liable to be decided against the Revenue. In the result assessee succeeds on this ground. 65. In ground No. 5 the dispute is with regard to the expenses incurred on implementation and customisation of ERP package amounting to Rs. 8,57,899 disallowed by the AO on the ground that the same was capital in nature. Similar issue has been considered and dealt with by us by way of ground No. 5 in the assessee's appeal for asst. yr. 2000-01 (ITA No. 309/Chd/2005) in the earlier paras. Our decision therein applies mutatis mutandis herein also. In the result, on this ground the assessee succeeds. 66. Similarly in ground No. 6 the dispute is in relation to t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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