2022 (9) TMI 1396 - AT - Income Tax

Expenditure under the head project expenses Biotechnology - allowable business expenditure - commencement of business - earning of income requirement before an expenditure - AO held that assessee did not have any income relatable to Bio-technology R D and the unit was in fledgling stage and no business was carried out - HELD THAT - It is undisputed fact that the assessee carries on an existing business and its business has already commenced. In this year, the assessee has sought to pursue a new product line and it is not a case that the assessee has not commenced the business. The assessee was registered long back in the year 1996 and its business had already commenced and it is not the case that the business had not commenced. The prescribed authority as defined in Rule 6(1) mean Director General (Income-tax Exemptions) in concurrence with Secretary, Department of Scientific and Industrial Research, Government of India. We have already held in para-9 that the assessee s business had already commenced long back and it was in the process of new product line only. There may be several permutations and combinations that may arise for determining whether the expenditure is revenue or capital and each case must, of course, be dealt with on the broad principles that have been accepted by the Courts. Finally, Hon ble Court in Jay Engineering Works Ltd. 2007 (10) TMI 286 - DELHI HIGH COURT held that since the control over the two units is in the hands of the same management and administration and there was unity of control leading to an inter-connection, inter-dependence and inter-lacing of the two ventures such that it can be said that the fuel injection equipment project is only an extension of the existing business of the assessee and, therefore, the expenditure incurred by the assessee on this Project is a revenue expenditure. Considering this decision, the matching concept as invoked by Ld. AO would have no application. Further, the earning of income is not a requirement before an expenditure could be claimed by the assessee. Thus disallowance as made by Ld. AO and as confirmed by CIT(A) is not sustainable in law and the same is liable to be deleted. We order so. The Ld. AO is directed to re-compute the income of the assessee.

Summary

Issues: Disallowance of expenditure on Biotechnology Research & Development before commencement of business for Assessment Year 2013-14.

Assessment Proceedings:
The appeal by the assessee arose from the disallowance of expenditure on Biotechnology Research & Development amounting to Rs.169.60 Lacs for the year. The Assessing Officer held that since the business had not commenced, the expenses were precommencement expenses and not allowable as revenue expenditure. The AO emphasized the need for income generation before allowing expenses as revenue deductions. The AO disallowed the claimed depreciation as well.

Appellate Proceedings:
During the appellate proceedings, the assessee argued that the expenses were revenue in nature, directly related to its business, and included salaries, depreciation, and other costs. The assessee presented a letter from the Ministry of Science and Technology recognizing it for customs and excise duty exemption. However, the CIT(A) upheld the disallowance, citing that the expenses were incurred before the commencement of the business, thus not admissible under Sec. 35(1)(i) without certification from the prescribed authority.

Findings and Adjudication:
The ITAT found that the assessee had an existing business in repairs and maintenance and intended to diversify into biotechnology products. The ITAT noted that the assessee had obtained recognition for in-house R&D activities. The approval by the Department of Scientific and Industrial Research (DSIR) was crucial, indicating the readiness of the assessee to undertake research for new products. The ITAT highlighted that the business had already commenced, and the expenses were predominantly revenue in nature, aligning with Sec. 37(1) for allowable deductions.

The ITAT referred to the Hon'ble Delhi High Court's decision in Jay Engineering Works Ltd. v. CIT, emphasizing the unity of control and interconnection between existing and new ventures for expenditure to be considered revenue. The ITAT distinguished the Hyderabad Tribunal's decision in DCIT v. Bharat Biotech International Ltd, noting its subsequent amendment and lack of relevance to the present case. Ultimately, the ITAT held that the disallowance was not sustainable in law, ordering the AO to re-compute the income of the assessee and allowing the appeal.

In conclusion, the ITAT ruled in favor of the assessee, emphasizing the admissibility of the expenses incurred on Biotechnology Research & Development, given the existing business operations and the readiness to expand into new product lines.