2009 (7) TMI 144 - HC - Income Tax

Assessee-company is engaged in the business of manufacture of auto electrical parts for which it was importing several components. The assessee-company considered that, instead of importing the components, it would be more beneficial to have the components locally procured and indigenously manufactured, and for this purpose a separate cell was set up for developing import substitute components. Expenditure for setting up of separate cell for import substitute components is revenue in nature Merely because the benefit of the expenditure can also be available later, is not a good enough reason to treat the expenditure, as a capital expenditure

Summary

Issues:
1. Disallowance of deduction on expenditure for establishing a separate cell for developing import substitute components.
2. Determination of whether the expenditure is of capital or revenue nature.
3. Interpretation of enduring benefit from the expenditure in relation to its nature.

Analysis:
1. The appeal under section 260A of the Income-tax Act, 1961, was filed by the Revenue challenging the order of the Income-tax Appellate Tribunal (ITAT) disallowing the deduction on expenditure for developing import substitute components. The assessee-company set up a separate cell to procure components locally instead of importing them, incurring expenditure treated as deferred revenue expenditure. The Assessing Officer disallowed the deduction, considering the expenditure as of a capital nature. The Commissioner of Income-tax (Appeals) accepted the stand of the assessee, stating that the expenditure was of revenue nature, as no capital asset was acquired, and the treatment in the books of account was not determinative.

2. The Income-tax Appellate Tribunal opined that the expenditure was of revenue nature, given its purpose to substitute raw material components, providing only revenue advantage to the assessee. The appellant contended that the enduring benefit from the expenditure made it capital in nature, citing legal precedents. However, the respondent argued that the expenditure was revenue in nature, supported by various judgments. The court found that the expenditure, including salaries, wages, and traveling expenses, was revenue in nature, and the benefit's timing did not alter its character.

3. The court referenced judgments supporting the revenue nature of expenses like salaries, rejecting the appellant's argument on enduring benefit converting revenue expenditure to capital. The court upheld the concurrent findings of the authorities below, stating that no substantial question of law arose and dismissed the appeal. The judgments cited by the respondent aligned with the court's view that the expenditure in question remained revenue in nature, emphasizing the specific circumstances of the case.