Expenditure incurred for product development that provides benefits in subsequent years is treated as capital expenditure, even if such expenses are recurring, whereas general promotional and trade marketing expenses are revenue expenditure.

JAGMOHAN BANSAL, J. (ORAL)

1. The appellant through instant appeal under Section 260A of the Income Tax Act, 1961 (for short ‘1961 Act’) is seeking setting aside of order dated 21.03.2007 passed by Income Tax Appellate Tribunal, Chandigarh (for short ‘ITAT’).

2. The appellant has raised following questions for adjudication by this Court:-

(i) Whether on facts and in the circumstances of the case, the ITAT is right in law in treating the expenditure incurred on promotional and trade marketing as revenue expenditure, when the purpose of the expenditure & its intended reality is to obtain benefit of enduring nature?

(ii) Whether on the facts and in the circumstances of the case, the ITAT was right in holding that Excise Duty and Sales Tax will not form part of "total turnover" while computing deduction u/s 80HHC?

(iii) Whether on the facts and in the circumstances of the case the ITAT was right in law in allowing the deduction u/s 80-I of the I.T. Act, 1961, in as much as the machinery had been installed in the same existing factory premises, which is an expansion of the existing factory?

3. Learned counsel for the parties are ad idem that questions No.2 and 3 stand answered against Revenue by this Court or Hon’ble Supreme Court, thus, may be answered against Revenue. Ordered accordingly.

Question No.1:- Whether on facts and in the circumstances of the case, the ITAT is right in law in treating the expenditure incurred on promotional and trade marketing as revenue expenditure, when the purpose of the expenditure & its intended reality is to obtain benefit of enduring nature?

4.1 The respondent is engaged in the manufacture and sale of multiple consumer products. It is incurring expenses on promotion of its product. It besides other expenses incurred a sum of Rs.1.57 crore on promotional and trade marketing expenses and Rs.1.63 crore on product development expenses. The Assessing Officer formed an opinion that aforesaid expenses should be treated as capital expenses. The assessee preferred an appeal which came to be dismissed by CIT(Appeals). The assessee preferred second appeal which was allowed by ITAT. The Tribunal has held that promotional and trade marketing expenses as well as product development expenses should be treated as revenue expenses. From the perusal of nature of expenses incurred on promotional and trade marketing, it can be easily inferred that these expenses are recurring as well as revenue in nature. These expenses cannot be called capital expenses, however, matter needs to be examined with respect to product development expenses.

The detail of expenses incurred on product development is as below:-

“B. Product Development Expenses

Development Ex. For Nutribar chocolate 1441589

Nutribar Stock written off 1043028

Nutribar Trials 112216

Lotus Nuteribar Expenses 1297430

Nutribar research expenses 2923870

Development exp. for Ribena Softdrink 158938

Development exp. for Ribena 4225539

Horlicks 3-in-1 packaging expenses for 700620

free samples

Market research & Consumer analysis for 1567281

new produces-viz

Development exp. Existing products 2850497

(Horlicks relaunch) 16321008

Total Rs.321,02,870/-”

4.2 The Tribunal has held that in view of nature of the product and activities carried out by the assessee, these expenses should be treated as revenue expenses. The findings recorded by Tribunal read as:-

“10. Now we may examine the expenditure under the head "Product Development Expenses". The details of the expenditure show that the same has been incurred for introducing and developing new products. The assessee is engaged in the business of manufacture and sale of food and health care products under a well known brand. The expenses include development expenses for new products namely nutribar chocol