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2013 (11) TMI 466 - AT - Income TaxExpenditure to be revenue or capital in nature - Research and Development expenditure i.e. G.E.Linear Development Expenditure, Eaton Project Development - In the books of accounts the assessee has treated them as research and development expenditure. In the computation depreciation @100% has been claimed thereon. Initially, it was the claim of the assessee that these expenditure having been incurred are allowable under section 35(1)(i) and 35(1)(iv) of the Act and alternatively it was claimed that the same is allowable as revenue expenditure under section 37 of the Act Held that - Expenditure are incurred on raw material, Sub-contracting charges, power and fuel, salary and wages, bonus, P.F, ESI, LWF, leave encashment, canteen, telephone expenses, printing and stationary, foreign travel expenses and interest. None of these expenditure can be said to have formed a new asset and A.O has admitted that these expenditure are relatable to the business of the assessee then simply for the reasons that these have given some enduring benefit to the assessee cannot be regarded as capital expenditure In the computation these expenditure were claimed under section 37/ 35(1)(iv) of the Act and going into the nature of expenditure it was held that the expenditure did not reflect that any new capital asset had came into existence. The expenditure were held to be allowable under section 37(1) of the Act In the present case, expenditure claimed by the assessee are revenue expenditure and are allowable in the year under consideration under section 37(1) of the Act Decided in favor of Assessee.
Issues Involved:
1. Disallowance of Research and Development (R&D) Expenditure of Rs. 2,23,02,662. 2. Allowability of expenditure under sections 35 and 37 of the Income Tax Act. 3. Classification of expenditure as capital or revenue. 4. Consistency in accounting treatment and its impact on tax claims. 5. Assessment of whether the expenditure incurred provided an enduring benefit. Detailed Analysis: 1. Disallowance of Research and Development (R&D) Expenditure: The assessee claimed Rs. 2,23,02,662 as R&D expenditure, which was disallowed by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO treated the expenditure as capital in nature, allowing only 25% depreciation, while the assessee contended it should be treated as revenue expenditure. 2. Allowability of Expenditure under Sections 35 and 37: The CIT(A) held that the expenditure was not allowable under sections 35 or 37 of the Income Tax Act. The assessee argued that the expenditure was for the development of new products within the existing line of business and should be allowed under section 37(1) as revenue expenditure. The AO and CIT(A) rejected this, stating the expenditure was for setting up the GE Linear Project, which commenced operations during the year, thus treating it as capital expenditure. 3. Classification of Expenditure as Capital or Revenue: The AO classified the expenditure as capital, arguing it provided an enduring benefit to the assessee. The assessee contended that the expenditure was for R&D in the existing line of business and did not result in the creation of a new capital asset, thus should be treated as revenue expenditure. The Tribunal examined the nature of the expenditure, which included raw materials, subcontracting charges, salaries, and other operational costs, concluding that these did not result in the creation of a new asset and were therefore revenue in nature. 4. Consistency in Accounting Treatment: The CIT(A) and AO noted that in previous years, similar expenditures were capitalized, and the assessee claimed depreciation. The CIT(A) applied the rule of consistency, referencing the Radhasoami Satsang vs. CIT case, to argue that the assessee should not change its accounting treatment. The Tribunal, however, referenced the Supreme Court decision in Kedarnath Jute Mfg. Co. Ltd. vs. CIT, stating that accounting treatment in books is not conclusive for determining the nature of expenditure for tax purposes. 5. Enduring Benefit and Commercial Perspective: The AO and CIT(A) argued that the expenditure provided an enduring benefit, thus classifying it as capital. The Tribunal referred to the Supreme Court decision in Empire Jute Co. Ltd. vs. CIT, emphasizing that not all enduring benefits result in capital expenditure. The Tribunal concluded that the expenditure facilitated the assessee's trading operations without creating a new capital asset, thus qualifying as revenue expenditure. Conclusion: The Tribunal allowed the appeal, holding that the expenditure of Rs. 2,23,02,662 was revenue in nature and allowable under section 37(1) of the Income Tax Act. The Tribunal did not find it necessary to address the alternative contention under section 35(1)(iv) as the primary issue was resolved in favor of the assessee. Order: The appeal filed by the assessee is allowed in the manner stated above. The order was pronounced in the open court on 16.4.2013.
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