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TMI Blog2007 (3) TMI 300X X X X Extracts X X X X X X X X Extracts X X X X ..... ure 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 revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome of Rs. 91,84,98,160, against which assessment was completed at 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent expenditure definitely had the potential to improve the profitability 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hix glow sign board 6,48,050 Outdoor publicity 98,022 GP Packaging material 1,40,000 RSO-North Trade Mktg. 26,703 RSO-West Trade MKtg. 21,059 Souvenir advertising 6,36,993 157,81,862 B. Product development expenses Development exp. for Nutribar chocolate 14,41,589 Nutribar stock written off 10,43,028 Nutribar 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 cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l outgoing. At this point it is pertinent to refer to the decision of the Hon'ble apex Court in the case of Empire Jute Co. Ltd. According to the Hon'ble apex Court what has to be seen is the nature and import of the expense in question in a commercial sense. In this case although we are of the view that the said expenditure does not result in any enduring benefit to the assessee yet even if one is to concede to this argument of the Revenue still it is not possible to deduce that the expenditure is capital in nature. This is for the reason that such enduring benefit is not in the capital field but is in the revenue field, thereby imbibing the said expenditure with character of a revenue expenditure. We may refer to the following observations of the Hon'ble Supreme Court in the case of Empire Jute Co.: There may be cases where expenditure even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may breakdown. It is not every advantage of enduring 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meet the competition in the market. It is in this background one has to examine as to whether the impugned expenditure incurred on development, introduction and launching of newer products is an advantage in the revenue field or not. 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. discussed by us in the earlier para is squarely applicable with respect to such expenditure also. 11. We may mention here the stand of Revenue that the development and introduction of new products create a new line of business for the assessee and thus expenditure related thereof is to be treated as capital expenditure. On this aspect we are unable to appreciate as to how can it be said that mere development and introduction of new varieties of products resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. On this issue we find that the Tribunal in assessee's own case for asst. yrs. 1990-91 to 1995-96 has upheld the stand of the assessee and held that for the purposes of computing deduction under s. 80HHC of the Act, the elements of sales-tax, excise duty etc. do not form part of the total turnover. Moreover the decision of the Mumbai Bench of the Tribunal in the case of Ponds India Ltd. has since been overruled by the judgment of the Bombay High Court in the case of CIT vs. Sudershan Chemicals Industries Ltd. (2000) 163 CTR (Bom) 596 : (2000) 245 ITR 769 (Bom). On this aspect there is no decision to the contrary brought to our notice. In the result we uphold the stand of the assessee and hereby set aside the order of the CIT(A) and direct the AO to recomputed the deduction under s. 80HHC of the Act after excl ding elements of sales-tax, excise duty etc. from the total turnover. In the result, on this ground assessee succeeds. 16. The third issue is with respect to the denial of deduction under s. 80-I of the Act amounting to Rs. 9,64,82,168. The assessee had claimed the deduction under s. 80-I of the Act in respect of industrial undertaking established in the previous year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TA No. 534/Chd/2004 is an appeal preferred by the assessee against the order of the CIT(A), dt. 8th March, 2004 pertaining to the asst. yr. 1999-2000. 23. The first issue in this appeal is relating to the disallowance of Rs. 30,19,000 made by the AO on the ground that the expenditure in question is capital in nature. The expenditure in question related to product development expenses. On this issue, the stand of the AO and thereafter sustained by the CIT(A) is on similar footing as was in the asst. yr. 1998-99. The issue is identical to the issue considered by us by way of ground No. 1 in the Appeal No. 379/Chd/2004 pertaining to the asst. yr. 1998-99 in the preceding paras. The rival counsel, in the course of hearing agreed that the issue herein is identical to the issue raised in the appeal of the assessee for 1998-99. In this background our decision in ground No. 1 of appeal No. ITA 379/Chd/2004 on similar issue applies mutatis mutandis herein also. In the result, on this ground the assessee succeeds. 24. The second issue is with regard to the manner of computing deduction under s. 80HHC of the Act. While computing deduction under s. 80HHC the AO included sales-tax, excise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,72,30,053. The dispute in the present ground is similar to the dispute considered by us by way of ground No. 3 in the appeal of the assessee for asst. yr. 1998-99 (ITA No. 379/Chd/2004). In, asst. yr. 1998-99 it has been held that the assessee is entitled to deduction under s. 80-I of the Act with respect to the industrial undertaking in question. It was a common ground between the parties that the issue and the rival stands on this issue in this year are on identical footing to those considered by the Tribunal in the asst. yr. 1998-99. Following the aforesaid, our decision in assessment year 1998-99 in directing the AO to allow deduction under s. 80-I to the assessee applies mutatis mutandis in this year too. The assessee, accordingly succeeds on this ground. 31. The third issue is with regard to disallowance of Rs. 56,94,220 under the head 'Product development expenses and Rs. 1,68,32,340 under the head 'Consumer market research expenses'. The aforesaid expenses claimed by the assessee have been disallowed on the ground that the expenditure in question is capital in nature. The details of the expenditure have been, placed in the paper book at pp. 58-59. We have p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s held that the said amendment being clarificatory in nature, was to be applied retrospectively. Fourthly, the AO noted that similar expenditure on account of interest on borrowed capital pertaining to the, immediately preceding assessment year of 1999-2000 has not been claimed as revenue expenditure by the assessee itself. Therefore the claim of the assessee, to the contrary in this year was disallowable. The AO held that the amount in question of Rs. 4,06,51,312 was to be capitalised and accordingly disallowed the claim of the assessee for deduction under s. 36(1)(iii) of the Act. The CIT(A) has sustained the stand of the AO. 33. Before us the learned counsel for the assessee has vehemently argued that the capital borrowed was utilized for setting up a new manufacturing unit at Sonepat for production of an existing product and therefore it was an expenditure incurred on the expansion of existing business. It was submitted that the new line of production was completely dependent on the existing line of business there being a unity of control, common funds and common management. The learned counsel specifically relied upon the phraseology of s. 36(1)(iii) which provided that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resentative also made submission that similar issue has been considered by the Hon'ble Punjab Haryana High Court in the case of CIT vs. Vardhman Polytex Ltd. in ITA No. 1 of 2003 and vide its decision dt. 17th Aug., 2006 [reported at (2006) 205 CTR (P H) 457-Ed.], the issue has been directed to be referred for the consideration of the Hon'ble Chief Justice for constituting a larger Bench. Therefore, according to him, the matter may be restored back to the AO with directions to follow the order of the larger Bench of the Hon'ble Punjab Haryana High Court. 35. We have considered the rival submissions carefully. The fact position in the instant case is not in dispute. Admittedly the assessee has utilized borrowed capital for setting up of a new manufacturing unit at Sonepat for undertaking manufacture of an existing product, namely, Horlicks. The said unit has not commenced production in the year under consideration. Evidently the impugned activity of manufacture of Horlicks at Sonepat is only expansion of the existing business of the assessee, The moot question is as to whether the expenditure incurred on capital borrowed for such purpose is allowable expenditure o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) is applicable prospectively whereas the decision of the Calcutta High Court in the case of JCT Ltd. vs. Dy. CIT (2005) 194 CTR (Cal) 509 : (2005) 144 Taxman 435 (Cal) is to the contrary. Noticing the divergence of views the Tribunal relying upon the principle of law laid down by the Hon'ble Supreme Court in the case of CIT vs. Vegetable Products Ltd. 1973 CTR (SC) 177 : (1973) 88 ITR 192 (SC) held that the view which is favourable to the assessee, be applied. Accordingly the Tribunal held that the proviso to s. 36(1)(iii) is applicable prospectively and not retrospectively. Respectfully concurring with the aforesaid decision of our co-ordinate Bench, we hold that the amendment to s. 36(1)(iii) is applicable prospectively. Therefore, it follows that the position of law prevailing prior to the amendment is to be applied to test efficacy of the stand of the assessee for deduction under s. 36(1)(iii) of the Act. This aspect has been considered by us in the earlier paras and it is held that the claim of the assessee for deduction under s. 36(1)(iii) of the Act is in order. 37. Now, with respect to the plea of the Revenue based on the decision of the Hon'ble Punjab Harya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground the assessee succeeds. 40. The fifth issue is with respect to expenditure incurred by the assessee on implementation of a new ERP package amounting to Rs. 3,77,65,412. The assessee had incurred expenses on implementation of a new ERP package for recording of manufacturing and recording transactions. The AO has rejected the claim of the assessee by holding that the said expenditure was capital in nature. The conclusion of the AO is based on the reasoning that the expenditure incurred would provide assessee with enduring benefits. The CIT(A) has also upheld the stand of the assessee. 41. Before us the learned counsel submitted that the expenditures in question were of revenue nature and that it did not result in any enduring benefit or creation of asset in the capital field and, therefore, it was to be allowed as a revenue expenditure. It was contended that the expenditure was incurred to facilitate and streamline the assessee's day-to-day management and trading operations. It was also submitted that with the rapid advancement in computer software, the technology acquired in a particular year falls into obsolescence very fast and therefore it requires continuous upgr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred in relation to the implementation and customisation of ERP package. 43.1 We have considered the rival submissions carefully. Insofar as the factual aspect of the matter is concerned, details of the expenditure in question amounting to Rs. 3,77,65,412 have been placed in the paper book at pp. 60 to 62. The assessee has implemented a new ERP package for recording of manufacturing and accounting transactions, i.e. in the field of financial and commercial activities. At p. 62 of the paper book and also as noted by the lower authorities, the new package is with regard to the recording of transactions in the field of accounting and finance, commercial transactions (i.e. sale and purchase order management, inventory management etc.). In order to implement, the new ERP system, the assessee claims to have incurred the impugned expenditure. 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 acquisitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hly. At this point 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. 45. With this background we may now look at the break up of the expenditure as per the details placed at pp. 60 to 61 of the paper book. We have perused the same and find that as per the details on record, the entire expenditure fits the bill except in relation to the expenditure voice telecom circuit Rs. 19,86,581 and data/telecom circuit usage Rs. 69,16,888. With respect to the aforesaid two expenses there is no specific discussion either in the orders of the lower authorities or even before us; to gauge its nature. Therefore, while in principle, we uphold the stand of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uisition of an ERP package but is claimed to be merely for implementation of the ERP package. 48. In view of the aforesaid discussion, on this ground the assessee succeeds to the above extent. 49. The sixth issue is with regard to the expenditure of Rs. 4,77,59,930 on renovation/interior decoration at the leased office premises, incurred by the assessee. The AO held that the said expenditure was a capital expenditure instead of the same being claimed as revenue expenditure by the assessee. The CIT(A) has also sustained the stand of the AO and hence the present ground of the assessee. 50. Briefly, the facts are that the assessee incurred the said expenditure on renovation of leased office premises and claimed the same as revenue expenditure. On being asked to justify the claim, the assessee submitted that the premises in question were being used by it for its own business purposes. That the expenditure incurred was in the nature of revenue expenditure and did not result in either creation of a new asset or benefit of enduring nature in the capital field. The assessee, therefore justified its claim that the same was in the nature of repairs allowable under s. 30 of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned Departmental Representative submitted that the expenditure in question could not be classified as current repairs and in fact the expenditure provided a benefit of enduring nature in the hands of the assessee. The learned Departmental Representative referred to and relied upon the deci3ion of the Hon'ble Punjab Haryana High Court in the case of Uttar Bharat Exchange Ltd. vs. CIT (1965) 55 ITR 550 (P H) and Silver Screen Enterprises vs. CIT (1972) 85 ITR 578 (P H). The reliance was also placed on the decision of the Mumbai Bench of the Tribunal in the case of Asstt. CIT vs. Nirmal Warehousing Agency (2001) 72 TTJ (Mumbai) 793 : (2001) 77 ITD 1 (Mumbai). The learned Departmental Representative further submitted that the plea of the assessee that the claim of the assessee be allowed under s. 37(1) of the Act was not texable since the claim has to be dealt with in accordance with the specific provisions, namely, s. 30 of the Act. For this proposition, reliance was placed on the decision of the jurisdictional High Court in the case of CIT vs. Khem Chand Bahadur Chand (1981) 23 CTR (P H) 319 : (1981) 131 ITR 336 (P H). 53. In reply the learned counsel for the assessee conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lanation. It is only any capital expenditure which is covered within the purview of the said Explanation. Moreover, the expenditure envisaged in the Explanation, inter alia, includes expenditure by way of renovation or expansion or of improvement to the building provided of course that the same is to be of capital nature. In other words the plea of the assessee that since the impugned expenditure is incurred on renovation and repairs and is, therefore, to be treated as revenue cannot be accepted forthwith. The correct import of the Explanation is that even the expenditure incurred on renovation and repairs of a leased building is includible in the purview of the Expln. 1 provided the said expenditure is of capital nature. If it is found that the expenditure is of revenue expenditure, then notwithstanding that it is incurred on a leased building, the same will not fall within the purview of the Expln. 1 to s. 32(1) of the Act. Now therefore, it would be of utmost importance to ascertain the nature of the expenses incurred by the assessee in this regard. The details of the expenses in question have been placed at pp. 64 to 65 of the paper book. We have also perused the orders of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the provisions of s. 43B of the Act. 57. In relation to this ground, the factual position is that in the earlier assessment years the assessee had valued its closing stocks by excluding therefrom the excise duty in respect of such goods. However in view of the insertion of s. 145A of the Act w.e.f. 1st April, 1999, the assessee changed its method of valuation of closing stock and started valuing its closing stock inclusive of duty paid. The plea of the assessee is that in terms consistent stand taken in the earlier years, an income of Rs. 45,47,228 being difference between the excise element including opening stock and closing stock (if the same being higher in opening stock than in closing stock), the same deserved to be considered. The AO, however did not allow the aforesaid adjustment made by the assessee in its return of income. 58. We have considered the rival stands on this issue. The assessee has also submitted a factual note on this issue which is as under: The assessee was upto asst. yr. 1982-83, including excise duty paid as part of valuation of closing stock. During the previous year relevant to asst. yr. 1983-84, the assessee changed the method of valuati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation Network (P) Ltd. vs. IAC (1994) 48 TTJ (Del)(SB)604 : (1994) 206 ITR 86 (Del)(SB)(AT); 2. Lakhanpal National Ltd. vs. ITO (1986) 54 CTR (Guj) 241 : (1986) 162 ITR 240 (Guj); 3. CIT vs. Bharat Petroleum Corporation Ltd. (2001) 169 CTR (Bom) 119 : (2001) 252 ITR 43 (Bom); 4. Chemicals Plastics India Ltd. vs. CIT (2003) 179 CTR (Mad) 509 : (2003) 260 ITR 193 (Mad). The assessee continued to follow the method of exclusion of excise duty paid from the valuation of closing stock on direct cost basis upto asst. yr. 1998-99. With the insertion of s. 145A w.e.f. asst. yr. 1999-2000, the assessee changed the method of valuation of closing stock to include excise duty paid thereon. The assessee, however, claimed that element of excise duty paid included in the valuation of closing stock had to be necessarily reduced in order to give full effect to the provisions of s. 43B of the Act. On that basis, the assessee added to the income for asst. yr. 2000-01, a sum of Rs. 45,47,228 arrived at on the following basis: Excise duty element included in closing stock and claimed as deduction under s. 43B for asst. yr. 1999-2000 (consequently, opening s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to be decided against the assessee in view of the judgment of the Hon'ble jurisdictional High Court in the case of Rani Paliwal vs. CIT (2003) 185 CTR (P H) 333 : (2004) 268 ITR 220 (P H). Following the same on this aspect, the assessee has to fail. Therefore, in respect of ground No. 1, the assessee partly succeeds. 62. The second issue is with regard to the denial of deduction under s. 80-I of the Act amounting to Rs. 2.35.16,765, It was a common ground between the parties that the said dispute is similar to the dispute considered by the Tribunal in the asst. yr. 1998-99 (ITA No. 379/Chd/2004) by way of ground No. 3. The facts and circumstances being identical, our decision in ground No. 3 in ITA 379/Chd/2004 is applicable mutatis mutandis herein also. Thus, on this issue the assessee succeeds. 63. In ground No. 3 the issue is with regard to the disallowance of Rs. 2,26,29,716 made by the AO on the ground that the expenditure in question is capital in nature. The expenditure in question was incurred under the head 'Consumer market research expenses'. It was a common ground between the parties that the factual matrix and the dispute in question is similar to gr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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