2013 (9) TMI 643 - AT - Income Tax

Product Development expenditure - Development of new product - AO observed that said expenditure had resulted in growth in the turnover of the assessee in the subsequent years was sufficient to show that the same was of enduring benefit to the assessee. - capital expenditure or revenue - deduction u/s 35 or section 37 or none - Held that - assessee-company is engaged in the business of manufacturing of automobile parts and casting and as par the quantitative details furnished in the notes forming parts of the account, the products so manufactured also included liners. The said expenditure thus was incurred by the assessee on development of existing products being manufactured by it although from a different material i.e. Stainless Steel and merely because the new liners being developed by the assessee in Stainless Steel had application in industries other than automobile industry, we are of the view that the manufacturing of Stainless Steel liners cannot be considered as a new line of business. It was a case of expansion of existing business of the assessee of manufacturing liners by diversifying the existing products using different materials for making the same suitable for even other applications. The expenditure incurred by the assessee on development of Stainless Steel liners thus was relating to its existing business and the same, cannot be treated as capital expenditure merely on the basis of accounting treatment given by the assessee. Moreover a perusal of the details of the development expenditure in question incurred by the assessee clearly shows that the entire expenditure incurred by the assessee was basically of revenue in nature and it cannot be said by any stretch of imagination that same resulted in any enduring benefited to the assessee and that too in the capital filed - expenditure in question incurred by the assessee on product development is revenue expenditure allowable u/s- 37(1) - Decided in favour of assessee.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Nature of product development expenditure (capital vs. revenue).

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:

The assessee filed an appeal with a delay of 112 days for the assessment year (A.Y.) 2007-08. The delay was attributed to an oversight by the Chartered Accountant's office, where the appeal papers were misplaced and later found. The Tribunal considered the application for condonation of delay, noting that the appeal fee was paid within time and the appeal papers were signed and forwarded in a timely manner. The delay was deemed to be due to a genuine oversight and supported by affidavits. The Tribunal found sufficient cause for the delay and condoned it, allowing the appeal to proceed on its merits.

2. Nature of Product Development Expenditure (Capital vs. Revenue):

a. Facts and Contentions:

The assessee, engaged in manufacturing automobile parts and castings, capitalized product development expenditure of Rs. 3,80,58,493/- in its books but claimed it as a revenue deduction for tax purposes. The expenditure was incurred on developing Stainless Steel Liners, which had applications in various industries. The assessee argued that the expenditure was for expanding existing business and should be treated as revenue expenditure. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated the expenditure as capital, allowing only depreciation and disallowing the rest.

b. Tribunal's Analysis:

The Tribunal examined the details of the expenditure, which included costs for raw materials, staff salaries, and other operational expenses. It was noted that similar expenditure in the assessee's holding company was treated as revenue by the Tribunal in a previous case. The Tribunal emphasized that the nature of the expenditure should be considered from a commercial perspective. It was highlighted that the expenditure did not result in a new line of business but was an expansion of the existing business. The Tribunal referred to the decision in the case of Renu Electronics Pvt. Ltd., where similar expenditures were treated as revenue.

c. Conclusion:

The Tribunal concluded that the expenditure incurred on developing Stainless Steel Liners was revenue in nature. It was related to the existing business and did not result in the creation of a new capital asset. The Tribunal allowed the assessee's claim for deduction under Section 37(1) of the Income Tax Act, deleting the disallowance made by the AO and confirmed by the CIT(A).

Appeal for A.Y. 2008-09:

The Tribunal noted that the issue for A.Y. 2008-09 was identical to that of A.Y. 2007-08. Following the same reasoning and conclusion, the Tribunal deleted the disallowance of research and development expenditure for A.Y. 2008-09 as well.

Final Judgment:

Both appeals of the assessee for A.Y. 2007-08 and A.Y. 2008-09 were allowed, with the Tribunal pronouncing the order in the open court on 21st June 2013.