2018 (3) TMI 951 - AT - Income Tax

Allowability of Production Registration Expenses (PRE) - nature of expenditure - revenue or capital - Held that - To solve the knotty issue of capital/revenue expenditure the aim and object of the expenditure is to be considered not the quantum. As far as entries in the books of accounts and claiming depreciation in the earlier years is concerned, it is suffice to say that entries made in the books of accounts do not decide the true nature of expenditure. The issue of capital versus revenue expenditure has to be seen from the angle of an assessee rather than an AO. We find that in the cases of Panacea Biotech Ltd. (2012 (2) TMI 15 - DELHI HIGH COURT )and Cadila Healthcare Ltd (2013 (3) TMI 539 - GUJARAT HIGH COURT) has clearly held that PRE had to be allowed as revenue expenditure. - Decided in favour of assessee

Summary

Issues Involved:
1. Classification of Production Registration Expenses (PRE) as capital or revenue expenditure.
2. Grant of interest under section 244A of the Income-tax Act, 1961 in respect of the refund arising out of self-assessment tax.

Issue-wise Detailed Analysis:

1. Classification of Production Registration Expenses (PRE) as capital or revenue expenditure:

The primary issue in both assessment years (AY 2011-12 and AY 2012-13) was whether the Production Registration Expenses (PRE) incurred by the assessee should be classified as capital or revenue expenditure. The Assessing Officer (AO) initially capitalized the PRE and allowed depreciation at the rate of 25%. The assessee, however, claimed these expenses as revenue expenditure in the revised return, which the AO rejected on the grounds that the revised return was not filed within the permissible time under section 139(5) and that the PRE provided an enduring benefit to the assessee.

The AO argued that the registration process was a long-term endeavor involving significant costs and efforts, granting the assessee a right to sell its products in various countries, which was an enduring benefit. The AO also referred to agreements and data access rights, concluding that these expenses should be capitalized as they added to the capital structure of the assessee.

The First Appellate Authority (FAA) allowed the assessee's appeal, holding that the claim for revenue expenditure on PRE could be considered in appellate proceedings, citing the case of Pruthvi Brokers and Shareholders (349 ITR 336). The FAA observed that the expenses were business expenses necessary for obtaining permissions to sell products in various countries and were of a recurring nature, thus qualifying as revenue expenditure.

The Tribunal upheld the FAA's decision, noting that the assessee was a trader and not a manufacturer, and the expenses were related to selling and marketing activities rather than manufacturing. The Tribunal emphasized that the PRE did not bring any enduring benefit but were necessary for day-to-day business operations. The Tribunal cited various judgments, including Panacea Biotech Ltd., Cadila Healthcare Ltd., and Empire Jute Mills, to support the view that the nature of the advantage in a commercial sense is crucial, and not every enduring benefit is capital in nature.

2. Grant of interest under section 244A of the Income-tax Act, 1961:

In the Cross Objection (CO) for AY 2011-12, the issue was the grant of interest under section 244A in respect of the refund arising out of self-assessment tax. The FAA preferred to follow the judgment of Engineers India Ltd. rather than Stock Holding Corporation of India Ltd.

During the hearing, it was noted that the judgment of Stock Holding Corporation of India Ltd. was delivered by the Hon'ble Bombay High Court, whereas the other judgment was of the Delhi High Court. The Tribunal opined that the FAA should have followed the judgment of the Hon'ble Bombay High Court. However, the Tribunal allowed the assessee the liberty to raise the issue as and when it arises.

Conclusion:

The appeals filed by the AO for both assessment years were dismissed, and the CO of the assessee was allowed for statistical purposes. The Tribunal concluded that the PRE should be treated as revenue expenditure and that the FAA's order did not suffer from any legal or factual infirmity. Additionally, the FAA was directed to follow the judgment of the Hon'ble Bombay High Court regarding the grant of interest under section 244A.