2022 (5) TMI 1222 - AT - Income Tax

Nature of expenditure - Disallowing revenue expenditure on product testing prototyping and verification expenses - HELD THAT - The true nature of the expenditure had not been doubted by the AO. Undisputedly, the appellant is in the business of manufacturing of automotive components since 1999. As result of this expenditure, no new asset has been created nor new product did actually materialize. The expenditure was only incurred for the purpose of facilitating the existing business of manufacturing of automotive components and enabling the management to conduct the business operations more efficiently and productively. The Hon'ble Supreme Court in the case of (i) Empire Jute Co. Ltd. 1980 (5) TMI 1 - SUPREME COURT and (ii) Alembic Chemical Works Co. Ltd. 1980 (5) TMI 1 - SUPREME COURT held that expenditure incurred on the existing business incurred in connection with the existing business. Updating existing products should be allowed as revenue expenditure. Expenditure was incurred only up-gradation of existing products, we are of the considered opinion that the expenditure is not in the nature of capital but revenue expenditure. Accordingly, we direct the Assessing Officer to allow the expenditure as revenue nature. Accordingly, this ground of appeal filed by the assessee stands allowed.

Summary

Issues:
Allowability of expenditure claimed as product development expenses as revenue expenditure.

Analysis:
The appeal was against the order of the Commissioner of Income Tax (Appeals) for the assessment year 2011-12. In the first round of litigation, the Tribunal had partly allowed the appeal but inadvertently did not adjudicate on the second issue raised in ground of appeal no. 8. The appellant moved a Miscellaneous Petition for recall of the appeal, which was granted, leading to the present appeal.

The issue revolved around the allowability of expenditure claimed as product development expenses of Rs. 1,42,39,571/- as revenue expenditure. The appellant explained that the expenditure was incurred for various reasons related to continuous product improvement, customer specifications, cost optimization, and quality issues. The Assessing Officer considered the expenditure as capital in nature as it was for product development resulting in patents. The Commissioner upheld this decision stating that the expenditure was on a new product line and should be capitalized.

The appellant argued that the expenditure did not result in new assets but was aimed at improving existing products. Previous decisions in favor of the appellant by the Tribunal were highlighted. The Revenue contended that the expenditure was on new products and should be treated as capital expenditure.

After considering the submissions and legal precedents, the Tribunal held that the expenditure on testing and validation for existing products was revenue expenditure. It was noted that no new asset was created, and the expenditure facilitated existing business operations. Citing relevant case laws, the Tribunal concluded that the expenditure was revenue in nature and directed the Assessing Officer to allow it as such. Consequently, ground of appeal no. 8 was allowed, and the appeal by the assessee was also allowed.

In conclusion, the Tribunal found the expenditure on testing and validation of existing products to be revenue in nature, not capital. The decision was based on the fact that the expenditure aimed at upgrading existing products and facilitating business operations efficiently. The legal position and precedents supported treating such expenditure as revenue, leading to the allowance of the appeal.