2011 (7) TMI 1014 - AT - Income Tax

Nature of Expenditure - Expenses as pre-production expenses - Revenue Expenditure - As per the AO, the assessee itself having shown such expenditure under the head Pre-production expenses and having capitalised it as a part of miscellaneous expenses in its balance sheet, could not claim it as revenue outgoes. In the opinion of the learned AO such expenditure could be considered for amortised allowance as specified in section 035D. He, therefore disallowed the claim. HELD THAT - We are of the opinion that the CIT (A) had rightly relied on the decision of the hon'ble jurisdictional High Court in the case of Rane (Madras) Ltd. 2007 (6) TMI 25 - HIGH COURT, MADRAS the assessee was an existing manufacturer of permanent magnets is clear from the assessment order and this is mentioned at SI. No. 9 of the facing sheet of the assessment order. Therefore, the assessee was introducing only a new product in the same line of business that it was already engaged in and hence, the amount had to be allowed as revenue expenditure. In these circumstances, we do not find any merit in the appeal filed by the Revenue.

Summary

Issues:
- Disallowance of pre-production expenses for the development of a new product.
- Classification of expenses as revenue or capital expenditure.
- Application of section 35D of the Income Tax Act.
- Interpretation of the decision of the jurisdictional High Court.

Analysis:
The appeal centered around the disallowance of Rs. 27,05,401 made by the Assessing Officer on the development of a new product, categorized as pre-production expenses by the assessee. The Revenue contended that these expenses were wrongly classified as revenue and should have been treated as capital expenditure under section 35D of the Income Tax Act. The Commissioner of Income-tax (Appeals) held in favor of the assessee, emphasizing that the new product was closely connected to the existing business, justifying the allowance of the expenses as revenue expenditure. The Commissioner relied on precedents from the jurisdictional High Court to support this decision.

The Revenue challenged the Commissioner's decision, arguing that expenses incurred during the pre-production stage for a new product should be considered capital expenditure. However, the Tribunal observed that the new product, "bonded permanent magnet," fell within the same line of business as the existing products manufactured by the assessee. The Tribunal concurred with the Commissioner's reliance on the jurisdictional High Court's judgment, which emphasized the interconnected nature of the new product with the existing business, supporting the treatment of the expenses as revenue expenditure.

The Tribunal noted the Revenue's reservations regarding the jurisdictional High Court's decision but highlighted a subsequent case where a similar view was upheld, further reinforcing the allowance of such expenses as revenue expenditure. Additionally, the Tribunal referenced the dismissal of a Special Leave Petition by the apex court against the jurisdictional High Court's decision, affirming the validity of the earlier judgment. Consequently, the Tribunal dismissed the Revenue's appeal, upholding the decision to allow the pre-production expenses as revenue expenditure.

In conclusion, the Tribunal's detailed analysis focused on the classification of expenses for the development of a new product as revenue or capital expenditure, emphasizing the interconnectedness of the new product with the existing business to support the allowance of the expenses as revenue expenditure, in line with the precedents set by the jurisdictional High Court.