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 reassessment.

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.