Friday, 17 July 2015

Whether when assessee is in business of marketing bulk drugs and one of its ventures runs into losses, it can be deemed to be new enterprise and same is to be treated as capital expenditure - NO: HC

THE bone of contention is - Whether when assessee is in business of marketing bulk drugs and one of its ventures runs into losses, it can be deemed to be a new enterprise and the same is to be treated as capital expenditure. NO is the verdict.
Facts of the case
The assessee is in petrochemical industries. For the AY 1998-99, the assessee filed its return of income claiming a sum of Rs.75,91,000/- as revenue expenditure under the head 'market research'. The said expenditure was disallowed by AO, which resulted in the filing of the appeal by the assessee before the CIT(A). The CIT (A) accepting the contention of the assessee allowed the appeal holding that since the assessee had already in the business of supply of LPG Cylinders, the marketing research expenses for extending into new territories could be treated as revenue expenditure. Aggrieved by the same, the Revenue preferred an appeal before the Tribunal and the Tribunal dismissed the same, thereby confirmed the order of the CIT(A).
Held that,
++ there was no material to hold that it amounted to a new or fresh venture. What was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of day-to-day business of the appellant's established enterprise. The financial outlay under the agreement for the better conduct and improvement of the existing business was revenue in nature and was allowable deduction in computing the business profits of the appellant. In coming to this conclusion, the court also noticed the principles which should govern while deciding such issues by the courts. The most important aspects relevant for the present purpose which can be culled out from the above discussion is that where expenses are incurred in areas which supplement the existing business and is not a fresh or new venture and agreement of acquiring technical know-how pertain to product already in the line of the established business which was intended to improve 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. On the other hand, if the technical know-how is acquired for the purpose of establishing altogether a new or fresh venture, launching of a new enterprise, the same expenditure may be treated as capital and not revenue. In such cases the test of enduring benefit might break down. That is to say, the argument that the knowledge having become once part of the knowledge bank of the acquirer, cannot be taken back in a sense and will always remain with the assessee and is enduring. But looking to the business realities, namely, the purpose for which knowledge has been acquired becomes determining the true character of the expenditure;
++ from the decision as extracted above, it is clear 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 above, 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 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. For all the reasons stated above and in the light of the parameters enunciated above for treating a particular expenditure as capital or revenue, this Court is of the considered opinion that the order passed by the Tribunal requires no interference. Accordingly, the substantial question of law is answered in favour of the assessee and against the Revenue. Following the above-said decision of this Court dated 24.2.2015 in T.C.(A)No.959 of 2007, this Tax Case (Appeal) stands dismissed

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