2015 (7) TMI 996 - HC - Income Tax

Development charges - revenue v/s capital expenditure - Held that - The Court is satisfied with the explanation offered by the Assessee that it is incurring development charges on research and testing of components and that this does not result in a benefit to it of an enduring nature so as to characterise the development charges as capital expenditure. The Court is of the view that testing of products and components is essentially a continuous process which permeates different accounting years. It is an integral part of a routine manufacturing and monitoring activity. It cannot obviously be a one-time event. The Revenue has not been able to persuade the Court that an error has been committed in any of the previous AYs where the Assessee s explanation was accepted and the expenditure on development charges was treated as revenue expenditure. In the facts and circumstances of the case, the Court is additionally persuaded to adopt the rule of consistency as explained in Radhasoami Satsang v. CIT (1991 (11) TMI 2 - SUPREME Court ) and decline the plea of the Revenue to remand the matter to the AO for a fresh determination. - Decided in favour of assessee.

Summary

Issues:
1. Whether the addition of 'development charges' claimed as revenue expenditure by the Assessee was justified as capital expenditure?
2. Whether the rule of consistency applies in this case regarding the treatment of development charges as revenue expenditure?

Analysis:

Issue 1:
The primary issue in this case was whether the addition of 'development charges' claimed by the Assessee as revenue expenditure was justified as capital expenditure. The ITAT had initially deleted the addition based on the Assessee's consistent explanation that the charges were revenue expenditure in previous assessment years. The Revenue argued that the Assessee failed to provide adequate particulars of the development charges incurred in previous years, thus not discharging the onus placed on them. However, the Court found that the Assessee's explanation of incurring development charges for research and testing of components did not result in an enduring benefit, making it revenue expenditure. The Court emphasized that testing of products is a continuous process integral to routine manufacturing activities, not a one-time event.

Issue 2:
The second issue revolved around the application of the rule of consistency in treating development charges as revenue expenditure. The Assessee demonstrated a consistent history of having the development charges treated as revenue expenditure in previous assessment years. The Court noted that the Revenue failed to show any error in the previous assessments where the Assessee's explanation was accepted. Additionally, the Court referred to the Radhasoami Satsang case to uphold the rule of consistency and declined the Revenue's plea to remand the matter for a fresh determination by the AO. Ultimately, the Court dismissed the appeals, stating that no substantial question of law arose requiring further examination.

In conclusion, the judgment highlighted the importance of consistent treatment of expenses, the nature of benefits derived from expenditures, and the Court's discretion in applying the rule of consistency in tax matters.