2015 (6) TMI 924 - AT - Income Tax

Reopening of assessment - disallowance of development charges - Held that - It is an undisputed position that expenses in question are incurred on testing the performance of local components vis- -vis similar components used outside India, to improve performance, import substitution and monitoring compliance with safety standards, and for bench marking performance of it s products. This exercise is essentially a continuous process which permeates different accounting years, and does not result in such an enduring advantage so as to render the expenses as capital expenditure in nature. Testing for products is not a one time event which leads to benefit in the capital field particularly in a situation like this where it is an integral part of routine manufacturing and monitoring activity. Viewed thus, the authorities below were clearly in error in holding the development expenses to be capital expenditure. - Decided in favour of assessee.

Summary

Issues:
Disallowance of expenditure on development charges as capital expenditure and denial of depreciation on development expenses.

Analysis:
The appeal was against the order passed by the CIT(A) regarding the assessment under section 143(3) r.w.s. 147 of the Income Tax Act, 1961 for the assessment year 2004-05. The assessee contested the disallowance of expenditure on development charges amounting to Rs. 18,731,381, arguing that it was a routine expense for research and testing purposes, not capital in nature. The Assessing Officer, however, considered the expenditure as capital and disallowed it, citing that it should have been capitalized with depreciation allowable at 25%. The CIT(A) upheld the disallowance, relying on principles from various legal cases emphasizing that expenditure for enduring benefit is capital in nature. The CIT(A) concluded that the development expenses resulted in enduring benefit, hence capital in nature, and dismissed the appeal.

In response to the appeal, the ITAT Delhi analyzed the case, noting that a similar disallowance for the assessment year 2007-08 had been deleted by a co-ordinate bench of the Tribunal. The ITAT observed that the expenses incurred on testing and development activities did not lead to an enduring benefit qualifying as capital expenditure. The continuous nature of the testing process, aimed at improving performance and ensuring compliance, did not result in enduring capital advantage. Therefore, the ITAT held that the development expenses were revenue in nature and directed the Assessing Officer to delete the disallowance of Rs. 18,731,381. The appeal was allowed in favor of the assessee.

In conclusion, the ITAT Delhi overturned the CIT(A)'s decision and allowed the appeal, directing the deletion of the disallowance of development charges as capital expenditure. The ITAT emphasized that the testing and development activities did not lead to an enduring capital advantage, making the expenses revenue in nature. The ITAT's decision was based on the continuous and routine nature of the testing process, which did not result in lasting capital benefits.