2013 (1) TMI 649 - HC - Income Tax

Research & Development expenses - capital or revenue expenditure - product already being marketed - Held that - Development of new project through Research is a continuous process because technology is changing very fast . Thus, even if assessee has developed 14 Pin Double Decker Relay Socket and 48x96 panel meter but still the prototype may require further improvement. Mere selling of units will not show that the assessee already has the technology of the same product Even if a specific product has been sold at one stage, but still the developments in the product can be carried out. It is finding of fact recorded by the Tribunal that the assessee has incurred expenditure for research and development activities, thus no substantial question of law arises for consideration.

Summary

Issues:
- Appeal under Section 260A of the Income Tax Act, 1961 against the order passed by the Income Tax Appellate Tribunal
- Allowability of Research & Development expenses claimed as capital expenditure
- Interpretation of Section 35(1)(iv) of the Act regarding Research and Development expenditure
- Disallowance of claimed expenditure by the Assessing Officer
- Decision of the Commissioner of Income Tax and the Tribunal on the matter
- Argument regarding already marketed product and reasoning for disallowance

Analysis:

The High Court heard an appeal under Section 260A of the Income Tax Act, 1961, concerning the allowability of Research & Development expenses claimed as capital expenditure by the assessee for the assessment year 2000-01. The Revenue challenged the order of the Income Tax Appellate Tribunal, which allowed the claimed expenditure. The substantial question of law framed was whether the Tribunal was correct in allowing the expenses for items that were already developed and sold by the assessee.

The Assessing Officer disallowed the claimed expenditure, stating that the articles for which Research & Development had been claimed were already being sold by the assessee. However, the Commissioner of Income Tax set aside this order, a decision later affirmed by the Tribunal. The Tribunal emphasized that Research and Development is a continuous process due to fast-changing technology. Even if the products were being sold, further improvements might be necessary, indicating ongoing development efforts.

The High Court found no merit in the Revenue's appeal. It acknowledged that Research and Development activities were carried out by the assessee and that the claimed expenditure was part of a continuous process. The Court agreed with the Tribunal's finding that the expenditure was incurred for Research and Development activities, dismissing the appeal as no substantial question of law arose for consideration.

In conclusion, the High Court upheld the Tribunal's decision, emphasizing the continuous nature of Research and Development activities and the possibility of product improvements despite initial sales. The Court found no grounds to question the allowability of the claimed expenditure under Section 35(1)(iv) of the Income Tax Act, dismissing the appeal accordingly.