Capital or revenue expenditure- Market research expenses and Severance cost of employees vis-à-vis closure of business
The assessee was in the business of manufacturing of powdered soft drink in the name and style of TANG. During the year under appeal it closed down its manufacturing business and paid the sum of `93.92 lacs by way of severance pay to its employees. Its claim to allow such payment as business expenditure was disallowed by the AO on the following grounds:
(1) As per its Form 3CD the Board of Directors decided to discontinue the business of production of powdered soft drink due to non-viability of operations and accordingly, the assessee had ceased its business operations;
(2) As per its Notes on Accounts, the assessee had decided to sell its business and hence, its accounts were not prepared on going-concern basis;
(3) Severance cost was incurred for closure of the business;
(4) U/s.37 only those expenditure which are incurred for the running of business was allowable.
Another issue before the Tribunal was about the allowability of expenditure of `24.52 lacs incurred on market research. According to the AO the assessee had incurred the expenses for developing and designing a new product. Therefore, he disallowed the said expenditure by treating the same as capital in nature as according to him, the expenditure had resulted in providing benefit of enduring nature to the assessee.
On appeal the CIT(A) upheld the order of the AO. Before the Tribunal the Revenue supported the orders of the lower authorities and pointed out that even the directors in their Board meeting had specifically observed that the business of manufacturing was closed.
Capital or revenue expenditure – Severance cost of employees vis-à-vis closure of business
Assessee having suspended only its manufacturing activity and not closed down its trading activity, it is not a case of closure of business and, therefore, expenses incurred by it towards severance cost of employees is allowable as revenue expenditure.
Capital or revenue expenditure – Market research expenses
Assessee, a manufacturer of a soft drink having conducted a market research by using the services of a professional agency to determine its brand performance with price, gauge the consumer demand at the current price or a lower price and to know whether its brand can adopt a different pricing between the base flavours and the new flavours, the expenses were incurred for exploring the circumstances as to how assessee can carry on its business more potentially and not exploring the market of a new product and, therefore, same is allowable as revenue expenditure.
Source:- KJS India (P) Ltd. v. DCIT (2010) 46 DTR (Del)(Trib) 369