2011 (11) TMI 848 - AT - Income Tax

Summary

Issues Involved:
1. Reduction of deduction u/s 10B by excluding certain items of expenditure from export turnover.
2. Classification of product development expenses as capital or revenue expenditure.

Summary:

Issue 1: Reduction of Deduction u/s 10B

The assessee challenged the reduction of deduction u/s 10B by the AO, who excluded freight charges from the export turnover but not from the total turnover. The CIT(A) upheld the AO's decision. The assessee cited the judgment of the Hon'ble Mumbai High Court in CIT v Gem Plus Jewellery India Ltd. and the Special Bench decision in ITO v M/s Sak Soft Ltd., which held that if an item is excluded from export turnover, it should also be excluded from total turnover to maintain parity. The Tribunal agreed with the assessee, directing the AO to exclude the expenses from both export turnover and total turnover while calculating the deduction u/s 10B. Consequently, ground no. 3 was allowed.

Issue 2: Classification of Product Development Expenses

The assessee claimed the expenditure on developing a new product, "Sucralose," as revenue expenditure. The AO treated it as capital expenditure, a view affirmed by the CIT(A). The Tribunal noted that the assessee ventured into a new line of business with long-term benefits, and the expenditure provided an enduring benefit. The Tribunal upheld the AO's decision, classifying the expenditure as capital in nature. Therefore, ground nos. 5 and 6 were dismissed.

Conclusion:

The appeals were partly allowed, with the Tribunal directing the AO to adjust the export and total turnover for deduction u/s 10B and upholding the classification of product development expenses as capital expenditure.

Order pronounced in the open court on 4th day of November, 2011.