2010 (10) TMI 308 - AT - Income Tax

Addition of income whether the designing charges amounting to Rs. 19,08,576/- were Revenue or Capital in nature - The appellant most humbly submits that on the facts and circumstances of its case and in law the subject expenditure is revenue in nature Department contended that once a new product had come into existence by incurring the said expenditure, then the expenditure was nothing but a Capital expenditure - Considering the nature of the expenditure incurred by the assessee it can be safely decided that the upgradation or the improvement of an existing product, through which all in all a new product do not made, cannot be said to be an expenditure towards acquiring of a new asset, therefore, out of the ambits of the definition of capital expenditure Appeal is allowed

Summary

Issues Involved:
1. Whether the designing charges amounting to Rs. 19,08,576/- were "Revenue" or "Capital" in nature.

Detailed Analysis:

Issue 1: Nature of Designing Charges - Revenue or Capital Expenditure

Assessee's Argument:
The assessee argued that the expenditure on designing charges was revenue in nature. The company is engaged in manufacturing EPBX, and due to technological changes and innovations, it continuously develops and modifies products. The designing work, which includes layouts and enclosures, is done by reputed firms like Tata Elxi Ltd. The assessee contended that these expenses are routine and necessary for the business, thus qualifying as revenue expenditure.

Assessing Officer's (AO) Stand:
The AO disagreed with the assessee, classifying the designing charges as capital expenditure. The AO argued that the expenditure led to the development of new products, providing an enduring benefit to the assessee. The AO referenced the Supreme Court decision in Scientific Engineering House Pvt. Ltd. (157 ITR 86), which held that such technical know-how constitutes capital expenditure. Consequently, the AO allowed depreciation at 25% on the amount.

CIT(Appeals) Decision:
The CIT(A) upheld the AO's decision, noting that the designing charges resulted in the acquisition of assets usable over a period of time. The CIT(A) distinguished this case from the assessee's earlier case for Assessment Year 2005-06, where the claim was allowed, by emphasizing that the goods produced with the help of designing charges were not limited to a single year.

Tribunal's Analysis:
The Tribunal considered the arguments from both sides. The assessee highlighted that for the Assessment Year 2005-06, the CIT(A) had ruled in favor of treating similar expenditure as revenue, and this decision was not contested by the Revenue Department. The assessee argued that the expenditure was for improving existing products, not creating new ones, and was a recurring necessity due to technological advancements.

The Tribunal reviewed several case laws to resolve the issue:
- CIT vs. South India Exports Co. Ltd. (242 ITR 150 Mad.): Payment for technical know-how without acquiring a new asset was held as revenue expenditure.
- CIT vs. Mihir Textiles Ltd. (287 ITR 232 Guj.): Payments for technical services were considered revenue expenditure.
- Southern Roadways Ltd. (282 ITR 379 Mad.): Expenditure on upgrading existing systems was held as revenue expenditure.
- Empire Jute Co. vs. CIT (124 ITR 01 SC): Advantage of more working time without enduring benefit was treated as revenue expenditure.
- Alembic Glass Industries (103 ITR 715 Guj.): Interest on capital borrowed for interconnected units was allowable as revenue expenditure.
- HEDE Consultancy (258 ITR 380 Bom.): Expenditure on renovation and interior decoration was held as revenue expenditure.
- B.A. Plantations & Industries (251 ITR 455 Gauhati): Engineering services and repairs were considered revenue expenditure.
- Alembic Chemical Works (177 ITR 377 SC): Expenditure on process improvement was held as supplemental to existing business, not a new venture.

Revenue's Argument:
The Revenue Department argued that the expenditure led to new products, thus constituting capital expenditure. They relied on the Supreme Court decision in Scientific Engineering House Pvt. Ltd., where technical know-how for manufacturing new products was considered a capital asset.

Tribunal's Conclusion:
The Tribunal distinguished the present case from the Scientific Engineering House Pvt. Ltd. decision, noting that the assessee was not manufacturing a completely new product but was improving existing ones. The expenditure was deemed necessary for keeping up with technological advancements and did not result in acquiring a new asset.

Final Judgment:
The Tribunal concluded that the designing charges were for upgrading and improving existing products, which is a recurring necessity in the telecom equipment manufacturing business. Therefore, the expenditure was classified as revenue expenditure. The appeal of the assessee was allowed.

Result:
The appeal of the Assessee is allowed, and the designing charges are classified as revenue expenditure.