2015 (8) TMI 467 - HC - Income Tax

Disallowance of deferred revenue expenditure in the aggregate incurred towards the product development - Held that - On a plain reading of section 35 of the Act, we are unable to accept the plea of the learned counsel for the assessee that deferred revenue expenditure could be allowed by way of carry forward. There is no provision under the Income-tax Act which provides for such a method of claiming deferred research and development expenditure. Moreover, the Assessing Officer has allowed the expenses relatable to the year under consideration and disallowed only the expenditure not relatable to the relevant assessment year. It is also not the case of the assessee that the expenditure is relatable to the year under consideration. Therefore, in our firm view, the authorities below were justified in disallowing such a claim made by the assessee. Accordingly, the first question of law is answered against the assessee and in favour of the Revenue. Main plank of the argument of assessee is based on the decision of the Supreme Court in Madras Industrial Investment Corporation Ltd. v. CIT 1997 (4) TMI 5 - SUPREME Court . However, we find that the said decision relates to the issue of discount on debentures and the said decision does not apply to the facts of the present case. - Decided against assessee.

Summary

Issues:
1. Allowability of deferred revenue expenditure for product development.
2. Applicability of Explanation to section 35 of the Income-tax Act.
3. Entitlement to deduction of prior year's expenditure forming part of deferred revenue expenditure.

Analysis:
1. The appellant, a private limited company engaged in telecommunication products, filed an appeal challenging the Income-tax Appellate Tribunal's order regarding deferred revenue expenditure for product development. The Assessing Officer disallowed a significant portion of the claimed expenditure, stating it should have been claimed in the year incurred. The Commissioner of Income-tax (Appeals) upheld this decision, emphasizing that such expenditure falls under section 35 of the Act and should be allowed only in the year incurred. The Tribunal affirmed these findings, noting the lack of evidence linking the claimed expenditure to the relevant assessment year.
2. The Tribunal observed that since the appellant's business had already commenced, the Explanation to section 35 of the Act was not applicable. The appellant's appeal questioned the Tribunal's decision on this issue. However, the appellant's counsel conceded that the business had commenced before the relevant assessment year, thus not pursuing this question further. Consequently, the court did not address this issue in the appeal.
3. The appellant relied on a Supreme Court decision concerning debenture discounts to argue for the deduction of prior year's expenditure forming part of deferred revenue expenditure. However, the court found this argument inapplicable to the present case, leading to the dismissal of this question. Ultimately, the court dismissed the appeal, upholding the decisions of the authorities below and ruling against the appellant on all issues raised.