2015 (11) TMI 1374 - AT - Income Tax

Expenditure incurred towards product and development expenditure - revenue v/s capital expenditure - CIT(A) treated as revenue - Held that - Admittedly, the assessee is engaged in the business of manufacture and sale of highway axles and components for tractors, earth moving equipment etc. Since the market is very competitive one, the assessee has to come out with new features in the products to remain in the field. Therefore, it is a necessity for the assessee for constant upgradation of the original product already manufactured and sold by it. The Hon ble Gujarat High Court in the case of Gujarat Small scale Industries Corporation (1981 (7) TMI 8 - GUJARAT High Court) has held that expenses incurred after the manufacture of a product but before marketing it in order to test its quality and suitability for marketing is revenue expenditure in nature . Further, the amount incurred by the assessee on account of product development expenses in the facts and circumstances of the case is very negligible for which it cannot be considered as capital in nature. In view of the above and in view of the detailed reasoning given by the Ld.CIT(A), we find no infirmity in the order of the CIT(A) on this issue - Decided against revenue Expenditure incurred towards shifting of its manufacturing operations - revenue v/s capital expenditure - CIT(A) treated as revenue - Held that - Shifting expenditure incurred by the assessee is for carrying on its business operation and the same is incurred wholly and exclusively for the purpose of business and has to be treated as revenue expenditure. In this view of the matter we uphold the order of the CIT(A) on this issue and the ground raised by the revenue is dismissed.- Decided against revenue Disallowance made on the issue of provision for warranty - CIT(A) allowed the claim - Held that - No infirmity in the order of the CIT(A) deleting such addition. Admittedly, the AO following his order for earlier years in assessee s own case, disallowed warranty provision made during the year. We find the Tribunal in assessee s own case for A.Y. 2006-07 has deleted such disallowance. Since the issue has already been decided by the Tribunal in favour of the assessee, therefore, in absence of any contrary material brought to our notice against the order of the Tribunal in assessee s own case, on this issue, we find no infirmity in the order of the CIT(A) deleting such addition - Decided against revenue

Summary

Issues Involved:
1. Nature of product development expenditure.
2. Nature of shifting expenditure.
3. Provision for warranty.

Issue-wise Detailed Analysis:

1. Nature of Product Development Expenditure:
The primary issue was whether the expenditure incurred towards product development should be classified as revenue or capital in nature. The Assessing Officer (AO) treated the expenditure as capital, citing that it provided enduring benefits to the business. However, the CIT(A) disagreed, noting that the expenses were incurred regularly in the ordinary course of business and did not result in the creation or acquisition of any asset. The CIT(A) relied on the decision of the Hon'ble Gujarat High Court, which held that such expenses are revenue in nature if they are related to testing and processing tools owned by customers. The Tribunal upheld the CIT(A)'s decision, stating that the expenses were necessary for the constant upgradation of products due to market competition and did not create any enduring benefit.

2. Nature of Shifting Expenditure:
The second issue pertained to whether the expenditure incurred for shifting manufacturing operations should be treated as revenue or capital. The AO classified these expenses as capital, referencing the Supreme Court's decision in the case of Sitalpur Sugar Works Ltd. However, the CIT(A) held that the expenses were revenue in nature, incurred wholly and exclusively for business purposes due to the necessity of vacating rented premises. The Tribunal supported the CIT(A)'s view, noting that the shifting did not provide any enduring benefit but was necessary for the continuation of business operations.

3. Provision for Warranty:
The third issue involved the disallowance of the provision for warranty. The AO disallowed the provision on the grounds that it was not made on a scientific basis. However, the CIT(A) deleted the disallowance, referencing the Tribunal's decision in the assessee's own case for A.Y. 2006-07, which justified the provision based on past experience and statistical information. The Tribunal upheld the CIT(A)'s decision, noting that the provision was reversed and credited in the subsequent year, thereby reducing expenses and offering the amount to tax.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on all issues. The product development expenditure and shifting expenses were deemed revenue in nature, and the provision for warranty was justified based on past experience and statistical analysis. The Tribunal's decision was pronounced in the open court on 09-10-2015.