2020 (8) TMI 766 - HC - Income Tax

Nature of expenditure - manufacturing and administrative expenses incurred by the appellant for development of a product in the course of its manufacturing activity which was already carried on - Revenue expenditure u/s 37(1) or capital expenditure - HELD THAT - Assessee had started a new Unit at Hosur in financial year 2004-05 by taking over machineries and properties of M/s V.B.Medicare Pvt. Ltd., Hyderabad on lease. The work of development of 'SUCRALOSE' viz., a new product was started in financial year 2005-06 in Hosur Unit. The product was developed in the financial year 2006-07. Thus, the assessee had produced a new product from which enduring benefit was derived. Therefore, the same has to be treated as capital expenditure. An asset was brought into existence for enduring benefit of the business and therefore, the same has to be treated as capital expenditure. The expenditure has not been made for bringing into existence an asset for running of the business or working with it with a view to produce profits. Same cannot be treated as revenue expenditure. It is pertinent to mention here that the assessee himself in the Books of account had shown it as capital expenditure. Therefore, the Assessing Officer, the Commissioner of Income Tax (Appeals) and the Tribunal have rightly treated the expenditure incurred by the assessee for development of a new asset as capital expenditure. - Decided against assessee.

Summary

Issues:
1. Classification of manufacturing and administrative expenses as capital or revenue expenditure.
2. Entitlement to claim deduction for upgrading and development of a product under Section 37(1) of the Income Tax Act.
3. Determination of whether Sucralose is a new product different from existing products.

Analysis:
Issue 1:
The appeal raised questions on the classification of manufacturing and administrative expenses incurred by the assessee for developing a new product, Sucralose, as capital or revenue expenditure. The Assessing Officer and the Commissioner of Income Tax (Appeals) held that the expenses for developing a new product with enduring benefits should be considered capital expenditure. The Tribunal partly allowed the appeals, stating that the assessee obtained an enduring benefit from manufacturing Sucralose, thus supporting the capital expenditure classification. The court noted that the assessee had capitalized the expenses in their books, aligning with the capital expenditure treatment. The court referred to legal principles emphasizing that expenditure leading to an asset or advantage for enduring trade benefit should be treated as capital expenditure. Therefore, the court upheld the capital expenditure classification for the development expenses.

Issue 2:
Regarding the entitlement to claim deduction for upgrading and developing Sucralose under Section 37(1) of the Act, the court analyzed the purpose of the expenditure. The revenue argued that if an expenditure creates a new intangible asset with enduring effects, it should be treated as capital expenditure. The court referred to precedents emphasizing that the nature of expenditure should be determined by the purpose for which it was incurred. The court concluded that the development of Sucralose resulted in an enduring benefit, thus aligning with capital expenditure treatment. The court upheld the decisions of the Assessing Officer and the Commissioner of Income Tax (Appeals) in this regard.

Issue 3:
The court also considered whether Sucralose was an entirely new product different from the existing products manufactured and exported by the assessee company. The court reviewed the factual background, noting that the assessee developed Sucralose in a separate unit, indicating a new product line. The court emphasized that the production of Sucralose resulted in enduring benefits, leading to the classification of the expenses as capital expenditure. The court dismissed the appeal, affirming the decisions of the lower authorities and ruling in favor of the revenue.

In conclusion, the court upheld the capital expenditure classification for the development expenses incurred by the assessee for Sucralose, emphasizing the enduring benefits derived from the new product. The court's analysis aligned with legal principles dictating the treatment of expenditure based on its purpose and impact on the business, ultimately dismissing the appeal and ruling in favor of the revenue.