|CORAM:||Challa Nagendra Prasad (JM), Rajendra (AM)|
|CATCH WORDS:||capital vs. revenue expenditure|
|COUNSEL:||Harsh Shah, Paras Savla|
|DATE:||May 25, 2016 (Date of pronouncement)|
|DATE:||May 30, 2016 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 37(1): (i) Product Trial expenses of a new product is revenue in nature as it does not provide the assessee with any enduring benefit, (ii) Compensation paid to supplier to ensure goodwill and continued relationship is revenue expenditure|
Product Trial expenses of a new product is revenue in nature, does not provide Assessee any enduring benefit
Facts: The assessee had incurred expenses to test as to whether any of its existing products could be used for certain other crops. This exercise was taken before selling the goods in the market. The products were sold in the past for a specific crop, that if those products were to be used for other crops same were to be tested for/on product quality, bioefficacy and toxicology and assessee’s product line was such that required concurrence of such expenditure.
Held : In the test to decide the nature of the expenditure i.e. capital or revenue expenditure, the basic thing to be seen is as to whether the expenditure is for running the business of the Assessee smoothly. If the expenditure is incurred for day-to-day business activities of the Assessee and not for acquiring some asset it has to be allowed as revenue expenditure. In the case before us, it is a fact that no new asset came into existence. Secondly, the expenditure incurred was basically for carrying out the business. Therefore, these expenses have to be allowed.
Compensation to paid to supplier to ensure goodwill and continued relationship is revenue expenditure
Facts: Assessee had entered into an agreement with a supplier to manufacture certain amount of raw material. However, due to adverse market conditions Assessee could not lift the goods from its supplier. Assessee appointed a valuer to determine the compensation to be paid to the supplier for the losses suffered by the supplier. The AO and DRP treated this expenditure as capital expenditure.
Held: The Tribunal held that for allowing / disallowing any expenditure under Section 37 of the Act, the basic thing to be seen as to whether the expenditure was incurred for furtherance of business interest of the Assessee or not. It is a fact that in this case because of the expenditure incurred no new assets came into existence. The expenditure was incurred considering the old relation with the supplier and to avoid future business complications. If an assessee makes payment which is compensatory nature, it has to be allowed. In this case, the payment was made in pursuance of an agreement and that was of compensatory nature i.e.it was not penal, hence it was to be allowed