1987 (3) TMI 132 - AT - Income Tax

Actual Cost, Industrial Undertaking, Profits And Gains, Revenue Expenditure, Written Down Value

Summary

Issues Involved:
1. Whether the foreign tour expenses of Rs. 98,946 should be allowed as revenue expenditure.
2. Whether the book value of Research and Development (R&D) capital assets should be included in the capital employed for the purpose of section 80J.

Detailed Analysis:

Issue 1: Foreign Tour Expenses as Revenue Expenditure

Facts and Arguments:
- The ITO disallowed foreign tour expenses totaling Rs. 1,25,625, allowing only Rs. 26,679, thus disallowing Rs. 98,946. The ITO categorized these expenses as capital expenditure, arguing that the tours were for assessing the suitability of a plant for manufacturing ammonia/methanol, which was considered a new product and plant installation.
- The assessee argued that the expenses were for assessing the suitability of an existing plant in Australia to be purchased for manufacturing ammonia/methanol, essential feed materials for their products. The expenditure was claimed to be for preserving the business, as their supply agreement with another company was ending soon. Additionally, the Managing Director's visit was for export promotion, which should be considered revenue expenditure.
- The Commissioner (Appeals) deleted the addition of Rs. 98,946, referencing ITAT Ahmedabad Benches decisions that had accepted similar expenses as revenue expenditure in previous years.

Tribunal's Decision:
- The Tribunal held that the expenditure was incurred wholly and exclusively for the purpose of business, emphasizing the acute need for an alternative supply of liquid ammonia, a basic raw material for the assessee's business.
- The Tribunal noted that the expenditure was not directly related to the acquisition of a capital asset, as the trip was exploratory and not at the negotiation stage for purchase. The project was eventually abandoned, further supporting the view that the expenditure was not for acquiring a capital asset.
- The Tribunal cited various judicial pronouncements, including Supreme Court decisions, to support that the expenditure was related to the profit-earning process and not for acquiring an asset of enduring benefit.
- The Tribunal concluded that the foreign tour expenses were allowable as revenue expenditure and not capital expenditure.

Issue 2: Inclusion of R&D Capital Assets in Capital Employed for Section 80J

Facts and Arguments:
- The ITO excluded the book value of R&D capital assets from the capital employed, arguing that since 100% of the cost was allowed under section 35(1)(iv), the actual cost to the assessee should be nil.
- The assessee contended that the R&D assets were existing on the first day of the accounting year and should be included in the capital employed. The cost of these assets was included in the balance sheet, and the deduction under section 35 was an incentive, not depreciation.

Tribunal's Decision:
- The Tribunal referred to section 80J(1A) and section 43(1) and (6) to determine the value of assets for computing capital employed. It noted that the assets were not entitled to depreciation, thus the actual cost should be considered.
- The Tribunal emphasized that the Explanation to section 43(1) did not apply because the assets were still used for scientific research and had not ceased to be used for this purpose.
- The Tribunal agreed with the assessee that the statute did not prohibit including the values of R&D assets in the capital employed, supporting the view that the incentive deduction under section 35 did not reduce the actual cost for section 80J purposes.
- The Tribunal upheld the Commissioner (Appeals) decision to include the values of R&D assets in the capital base for computing relief under section 80J.

Conclusion:
The Tribunal dismissed the appeal, deciding both issues in favor of the assessee. The foreign tour expenses were allowed as revenue expenditure, and the book value of R&D capital assets was included in the capital employed for the purpose of section 80J.