2015 (7) TMI 483 - HC - Income Tax

Market research expenses treated as revenue expenditure for assessment year 1998-99.

The Tribunal upheld the Commissioner's decision to treat market research expenses as revenue expenditure for the assessment year 1998-99. The court ... Expenses incurred under the head 'market research' - revenue v/s capital expenditure - Tribunal held it as revenue - Held that:- The main parameters that are necessary for the expense to be treated as revenue expenditure is where expenses are incurred in areas which supplement the existing business and is not a fresh or new venture and agreement relates to revenue and the said activity is for the purposes of improving the operations of the existing business, its efficiency and profitability from the area of day-to-day business of the appellant's established enterprise's, expenses be treated as revenue and not capital. In the case on hand, a careful reading of the order of the Tribunal and the facts as narrated it is clear that there is absolutely no justification for the Department to hold that there was a new line of business on which there occurred a loss. The parameters enunciated in the decision in Suhrid Geigy Ltd. Case (1995 (12) TMI 25 - GUJARAT High Court ) is squarely attracted to the facts of the present case, justifying the loss of the assessee as a business loss, as admittedly, the assessee is in the business of marketing bulk drugs, formulations, etc., and one of its ventures has ended in a loss and that loss is attributable to business and it cannot be deemed to be a new enterprise and a capital expenditure. Thus the order passed by the Tribunal requires no interference.- Decided in favour of the assessee. Issues:1. Treatment of market research expenses as revenue or capital expenditure.2. Application of legal principles to determine the nature of expenditure incurred.Issue 1: Treatment of market research expenses as revenue or capital expenditureAnalysis: The case involved a dispute regarding the treatment of market research expenses claimed by the assessee as revenue expenditure for the assessment year 1998-99. The Assessing Officer disallowed the expenditure, leading to an appeal by the assessee before the Commissioner of Income Tax (Appeals). The Commissioner allowed the appeal, considering the expenses as revenue expenditure since they were related to extending the business into new territories. The Revenue, dissatisfied with this decision, appealed to the Tribunal, which upheld the Commissioner's order. The key contention was whether the market research expenses could be treated as revenue expenditure, especially when there was no detailed submission by the assessee and the research aimed at entering new territories with potential enduring benefits.Issue 2: Application of legal principles to determine the nature of expenditure incurredAnalysis: The judgment referred to a previous decision of the Madras High Court dated 24.2.2015 in a similar case, highlighting the principles established by the Gujarat High Court. The Gujarat High Court's decision emphasized that expenses supplementing an existing business and aimed at improving its operations, efficiency, and profitability should be treated as revenue expenditure. On the other hand, expenses related to establishing a new venture or enterprise might be considered capital expenditure. The court stressed the importance of analyzing the purpose for which knowledge or technical know-how was acquired to determine the true character of the expenditure. In the present case, the court found that the market research expenses were in line with the established business of the assessee and aimed at improving its operations, making them eligible to be treated as revenue expenditure. The judgment concluded that the Tribunal's decision did not warrant interference, and the substantial question of law was answered in favor of the assessee, leading to the dismissal of the appeal by the Revenue.This detailed analysis of the judgment provides a comprehensive understanding of the issues involved and the legal principles applied by the court to determine the nature of the expenditure incurred by the assessee.