2008 (4) TMI 467 - HC - Income Tax

Business Expenditure- . The assessee had incurred some expenditure towards product development. It appears that the assessee was not financially sound and was a loss making concern and therefore, instead of claiming the entire deduction for product development expenses as a revenue expenditure in one year, it claimed the deduction on a deferred revenue basis. The Assessing Officer passed an assessment order under section 143(3) of the Income Tax Act, 1961 and allowed 10 percent. of the expenses in the assessment year 1996-97. In the subsequent years, the Assessing Officer treated the assessee s claim under section 35D of the Act and disallowed the expenditure claimed by the assessee as having been incurred in earlier years. The Commissioner (Appeals) confirmed the order of the Assessing Officer. The Tribunal held that the claim of the assessee was to be allowed as the expenditure was genuine and also that the claim under section 35D was for preliminary expenses and not for product development expenses. Held that-the expenditure having been found to be genuine, the expenditure not having been claimed under section 35D of the Act and the expenditure having been accepted earlier by the Assessing Office, the product development expenses were allowable.

Summary

Issues:
1. Treatment of product development expenses for a financially unsound, loss-making concern.
2. Disallowance of expenses claimed under section 35D of the Income-tax Act, 1961.
3. Consistency in allowing deductions and application of mind by the Assessing Officer.
4. Applicability of previous court decisions on similar cases.
5. Determination of substantial question of law in the case.

Analysis:
1. The appellant, a financially unsound, loss-making concern, incurred approximately Rs.6.9 crores towards product development expenses. Instead of claiming the entire deduction in one year, the appellant opted for a deferred revenue basis due to its financial situation.

2. The Assessing Officer disallowed the expenses claimed by the appellant in subsequent years under section 35D of the Income-tax Act, 1961, treating them as incurred in earlier years. This decision was upheld by the Commissioner of Income-tax (Appeals).

3. The Income-tax Appellate Tribunal, however, ruled in favor of the appellant, stating that the expenditure was genuine and not under section 35D as claimed by the authorities. The Tribunal emphasized the need for consistency in allowing deductions, citing previous court decisions like Radhasoami Satsang v. CIT and CIT v. A. R. J. Security Printers.

4. The Tribunal rejected the Revenue's argument that the Assessing Officer did not apply his mind while passing the assessment order for the initial year, pointing out that the order was made under section 143(3) of the Income-tax Act. The Tribunal also referenced court decisions like CIT v. Kelvinator of India Ltd. and CIT v. Eicher Ltd. to support its stance.

5. Ultimately, the court found no substantial question of law to consider, given the genuineness of the expenditure, the incorrect application of section 35D, and the previous acceptance of the expenses by the Assessing Officer. The appeal was disposed of with costs imposed on the Revenue for compliance.