Expenditure incurred for developing new product
when abandoned it is a deductible expenditure
CA V.K. Subramani
Every business needs to adopt to various market situations,
be it changing choice of customers or technology upgradation or compulsion
necessitated by competitors' activity. To skim the market, product innovation
is a must. Human beings have taken challenges and today both technology and
market demand work in tandem to bring the best out of innovators.
In the context of income-tax, a company may incur
expenditure to develop a new product. It may range from pin to plane.
Introduction of new product may be research on medicines and/or could also be
software. In Pr. CIT v. Trigent Software Ltd. 2022 TaxPub(DT) 7832 (Bom-HC)
: (2023) 457 ITR 765 (Bom) the assessee incurred Rs.7.09 crore towards
development of a new product. The assessee was subjected to reassessment
proceedings. The assessee submitted that it was an expenditure incurred for
development of a new product which was ultimately abandoned. The entire amount
which was claimed as expenditure was added to the total income of the assessee
In the first appeal the claim was allowed favouring the
assessee by reasoning that it was incurred in respect of same line of business
in which the assessee was already engaged. Reliance was placed on Indo Rama
Synthetics India Ltd v. CIT 2011 TaxPub(DT) 0093 (Del-HC) : (2011) 333 ITR 18
(Del) and tribunal decision in the case of IL & FS Education and
Technology Services (P) Ltd (I.T.A. No. 765/Mumbai/2009, dated 10-4-2013).
The tribunal too, decided in favour of the assessee and
hence, Revenue preferred an appeal before the High Court. Reference was made to
the decision of Empire Jute Co Ltd. v. CIT (1980) 124 ITR 1 (SC) where
it was held that there is no all-embracing formula which can provide solution
to the problem. No touch stone is devised and that every case has to be decided
on its own facts keeping in mind the broad picture of the whole operation in
respect of which the expenditure was incurred.
The High Court made reference to the apex court decision in
Empire Jute case (Supra) wherein it was held that enduring benefit test is
not a certain or conclusive test and cannot be applied mechanically without
regard to the particular facts and circumstances of a given case and that what
was material to consider was the nature of advantage and that, it is only where
the advantage was in capital field that the expenditure would be disallowable
on an application of this test. If the advantage consisted merely in
facilitating the assessee's trading operations or enabling the management and
conduct of the assessee's business to be carried on more efficiently or more
profitably, while leaving fixed capital untouched, the expenditure would be on
revenue account even though the advantage may endure for an indefinite future.
The High Court held that in Indo Rama Synthetics
(supra) where expenditure was incurred for starting a new business which was
not carried out earlier, then such expenditure would be capital expenditure
whether or not the project really materialized or not. However, if the
expenditure was incurred in respect of the same business, which was already
carried on by the assessee, even if it is for expansion of the business i.e. to
start a new unit and there was unity of control and a common fund, then such
expenditure would be revenue in nature, thus eligible for deduction. It also
took notice of decision in the case of CIT v. Tata Robins Ltd. 2012
TaxPub(DT) 3014 (Jhar-HC) : 211 Taxman 257 (Jharkhand).
The decision finally was in favour of the assessee. Thus,
the key take away is that expenditure for development of new product related to
the same business, when abandoned it is deductible as revenue expenditure.