2010 (1) TMI 813 - AT - Income Tax

Capital or Revenue - Disallowance amortization of Development and License expenses - expenses incurred on account of license fees and expenses incurred for obtaining license - Held that - claim of the assessee on account of expenses for registration of the product cannot be held to be capital expenditure but the expenses on acquisition of technical know how of a new product has to be treated as capital expenditure - claim of the assessee partly allowed R & D expenses - product bio efficacy study conducted for marketing of the products - held that - these expenses are regarding product fess including payment to research fellow, cost of accessories, chemicals, brass-wares and other misc. expenses. - In the absence of any finding that any new product was developed by incurring these expenses, addition to be deleted - decided in favor of assessee. Genuine business expenditure - foreign traveling expenses - held that - After holding that part of the expenses incurred by the assessee for which proper details and supporting vouchers are not furnished has to be considered for making an estimated disallowance on account of personal expenses and non business expenses, we feel that such estimate of personal and non business expenses at 50% of expenses is excessive and we are of the considered opinion that to meet the ends of justice, the disallowance should be of 25% of such expenses for which supporting vouchers and details could not be produced by the assessee. Prior period expenses - payment of electricity charges - held that - in a letter dated 13.8.2003 written by Sharma Cooperative Group Housing Society, it is mentioned that the payment is due from 1.5.2002 to 30.6.2003. - no where it is mentioned that the demand is ascertained during the present year. - the assessee has not filed any reply to show that the demand has crystallized during this year. - Decided against the assessee.

Summary

Issues Involved:
1. Disallowance of amortization of development and license expenses.
2. Disallowance of expenses incurred on product bio-efficacy study.
3. Disallowance of foreign traveling expenses.
4. Disallowance of prior period electricity expenses.

Detailed Analysis:

1. Disallowance of Amortization of Development and License Expenses:

The core issue is whether the expenses incurred for the registration of the company's products with the Central Insecticides Board (CIB) should be treated as capital or revenue expenditure. The assessee argued that these expenses are revenue in nature since they are related to the registration and licensing of products necessary for business operations. The Assessing Officer (AO) disallowed these expenses, categorizing them as capital expenditure based on the tax audit report. The CIT(A) upheld this view.

Upon review, the Tribunal noted that the expenses included payments for know-how and technology transfer, which should be treated as capital expenditure. However, the expenses related to the registration of the product should be considered revenue expenditure. Consequently, the Tribunal allowed Rs.2,18,857/- as revenue expenditure out of the claimed Rs.2,68,857/-, partially allowing the assessee's appeal.

2. Disallowance of Expenses Incurred on Product Bio-Efficacy Study:

The second issue involves the disallowance of Rs.1,99,939/- claimed under research and development (R&D) expenses for product bio-efficacy studies. The AO treated these expenses as capital expenditure, but the assessee contended they were for quality control and marketing purposes, thus qualifying as revenue expenditure.

The Tribunal found no evidence that these expenses resulted in a new product development. The expenses were related to maintaining product quality and conducting field trials, typical business activities. Therefore, the Tribunal concluded that these expenses should be allowed as revenue expenditure and deleted the addition, allowing the assessee's appeal on this ground.

3. Disallowance of Foreign Traveling Expenses:

The third issue concerns the disallowance of Rs.6,32,628/- out of the total foreign traveling expenses claimed by the directors. The AO disallowed 50% of the expenses for which no supporting vouchers were provided, suspecting them to be personal in nature. The CIT(A) directed the AO to verify the correct amount and make the disallowance accordingly.

The Tribunal acknowledged the practical difficulty in maintaining detailed vouchers for all routine expenses during foreign tours. However, it also noted that some personal expenses might be included. The Tribunal deemed a 50% disallowance excessive and reduced it to 25% of the unsupported expenses. Thus, the Tribunal partially allowed the assessee's appeal by directing the AO to restrict the disallowance to 25%.

4. Disallowance of Prior Period Electricity Expenses:

The final issue involves the disallowance of Rs.4,000/- out of the total prior period expenses claimed for electricity charges. The AO noted these expenses pertained to previous assessment years. The CIT(A) confirmed the disallowance for Rs.4,000/- but allowed the rest.

The assessee argued that the demand for these expenses was made during the current year. However, the Tribunal found no evidence that the demand crystallized during the current year. The CIT(A)'s observation that the demand was due from previous periods was upheld, and the Tribunal found no reason to interfere with this finding. Thus, the Tribunal rejected the assessee's appeal on this ground.

Conclusion:

The appeal was partly allowed, with the Tribunal providing relief on some grounds while upholding the disallowance on others. The Tribunal's decision balanced the need for substantiating expenses with practical business considerations, ensuring that only legitimate business expenses were allowed.