2019 (4) TMI 2051 - AT - Income Tax

Nature of expenditure - amount incurred on account of research development expenses - capital expenditure or revenue expenditure - HELD THAT - Since the assessee in the instant case was already in the business of manufacturing and trading of pharmaceuticals and the expenditure was incurred in the regular course of business i.e. for the purpose of manufacturing pharmaceuticals therefore no new asset is being developed and the expenditure in our opinion has to be treated as revenue in nature. The order of the CIT(A) on this issue is accordingly set aside and the ground raised by the assessee is allowed.

Summary

Issues Involved:
1. Classification of research and development expenses as capital expenditure or revenue expenditure.

Detailed Analysis:

1. Classification of Research and Development Expenses:

Facts and Background:
The assessee, a company engaged in the business of manufacturing and trading pharmaceuticals, filed its return of income for the assessment year 2011-12. The Assessing Officer (A.O.) observed that the assessee had debited Rs. 46,93,531/- under 'Research & Development charges' and questioned why this should not be treated as capital expenditure. The assessee contended that these expenses were for ongoing research and development activities to develop a unique patentable process for manufacturing the drug Atorvastatin, which should be treated as revenue expenditure.

Assessing Officer's Decision:
The A.O. concluded that the design procured by the assessee would benefit the company for more than one year, thus classifying it as capital expenditure. Consequently, the A.O. allowed depreciation at 25% applicable to intangible assets and added Rs. 35,36,250/- to the total income of the assessee.

CIT(A) Decision:
The CIT(A) upheld the A.O.'s decision, relying on the Delhi High Court's decision in CIT vs. J.K. Synthetics Ltd. (309 ITR 371), which supports treating such R&D expenditures as capital in nature due to the 'absolute transfer of all technical knowledge' and the exclusive rights conferred on the assessee by the agreements.

Assessee's Argument:
The assessee argued that the expenditure should be considered revenue in nature as it was incurred for ongoing business operations, not for creating a new asset. The assessee cited the Delhi High Court's decision in CIT vs. Priya Village Roadshows Ltd. (332 ITR 594), which held that expenses for feasibility reports for the same business, even if for expansion, should be treated as revenue expenditure.

Tribunal's Analysis and Decision:
The Tribunal found merit in the assessee's argument, noting that the assessee was already in the business of manufacturing and trading pharmaceuticals. The Tribunal observed that similar expenditures were allowed in previous years without any addition by the A.O. The Tribunal cited the Delhi High Court's decision in Priya Village Roadshows Ltd., which distinguished between capital and revenue expenditure based on whether the expenditure was for the same ongoing business or for starting a new business.

The Tribunal concluded that since the expenditure was incurred in the regular course of the existing business and no new asset was created, it should be treated as revenue expenditure. The Tribunal set aside the CIT(A)'s order and allowed the assessee's appeal.

Conclusion:
The appeal filed by the assessee was allowed, and the research and development expenses were classified as revenue expenditure. The decision was pronounced in the open court on 16.04.2019.