2016 (2) TMI 1288 - AT - Income Tax

Product development expenses - Revenue or capital expenditure - HELD THAT - We find that ld. CIT(A) while deciding the appeal for A.Y. 2002-03 and following it has given a finding that due to incurring of product development expenses the installation capacity did not increase and assessee did not set up a separate and independent unit from manufacturing and no capital asset was brought into existence. He has further held that entries in the books of account were not determinative of the allowability or otherwise of the expenditure. Before us Revenue has not brought any material on record to controvert the finding of ld. CIT(A). In view of the aforesaid facts we find no reason to interfere with the order of ld. CIT(A). - Decided against revenue.

Summary

Issues involved:
1. Allowability of product development expenses for A.Y. 2007-08.
2. Allowability of product development expenses for A.Y. 2002-03 based on tax effect.

Issue 1: Allowability of product development expenses for A.Y. 2007-08:

The appellant, engaged in manufacturing, filed its return for A.Y. 2007-08 with declared income. The Assessing Officer (A.O.) disallowed product development expenses claimed as revenue expenditure, treating them as capital in nature. The ld. CIT(A) allowed the appeal, relying on previous decisions. The Revenue appealed, arguing the expenses were capital. The A.O. and Revenue contended that the expenses benefited future years, making them capital. The ld. CIT(A) held that the expenses did not lead to asset creation or capacity increase, thus allowing them as revenue expenses. The Revenue failed to provide evidence to challenge this finding. Consequently, the ITAT upheld the ld. CIT(A)'s decision, dismissing the Revenue's appeal.

Issue 2: Allowability of product development expenses for A.Y. 2002-03 based on tax effect:

For A.Y. 2002-03, the Revenue challenged the deletion of product development expenses addition. The ld. A.R. argued for dismissal due to low tax effect as per CBDT Circular No. 21 of 2015. The tax effect was below the prescribed limit. The ITAT noted that the tax effect was less than Rs. 10 lakhs, falling under the CBDT Circular's exemption criteria. As per the Circular, appeals with a tax effect below Rs. 10 lakhs are not maintainable unless specific exemptions apply. Since the Revenue did not demonstrate any such exemptions, the appeal was dismissed solely based on the tax effect, without delving into the case's merits.

In conclusion, the ITAT dismissed both appeals by the Revenue concerning the allowability of product development expenses for A.Y. 2007-08 and A.Y. 2002-03, respectively. The judgments were based on the findings that the expenses did not result in asset creation or capacity increase and the tax effect for the latter year fell below the CBDT Circular's prescribed limit.