2021 (1) TMI 1030 - AT - Income Tax

Nature of expenditure - expenditure incurred for development of a new product including knowhow - assessee manufacturing auto electrical parts incurred expenditure for setting up separate cell for developing import substitute parts - revenue or capital expenditure - HELD THAT - In this case, the facts are identical to the facts considered in the case of CIT Vs Denso India Ltd 2009 (7) TMI 144 - DELHI HIGH COURT where the assessee is engaged in the business of manufacturing LED lights, was purchasing certain raw materials till assessment year 2010-11, but from the assessment year 2013-14, it started manufacturing substitute of purchases for which certain expenditure have been incurred for development of the product which are purely revenue in nature. Although, the assessee has considered said expenditure as deferred revenue expenditure, pending amortization in the financial statement, but because of nature of expenditure the same has been claimed as deduction u/s.37(1) in the statement of total income. Thus expenditure incurred by the assessee being technical consultancy charges, purchase of raw materials, advertisement charges and electricity charges are in the nature of revenue expenditure, which does not give any enduring benefit to the assessee and hence, same cannot be treated as capital expenditure. Hence we, direct the Assessing Officer to allow deduction towards expenditure as claimed by the assessee in the statement of total income. - Decided in favour of assessee.

Issues Involved:

1. Disallowance of expenses treated as capital expenditure.
2. Treatment of deferred revenue expenditure in the books of accounts.
3. Nature of expenses incurred (capital vs. revenue).
4. Compliance with principles of natural justice.

Issue-wise Detailed Analysis:

1. Disallowance of expenses treated as capital expenditure:

The primary issue revolves around the disallowance of expenses by the Assessing Officer (AO), who treated them as capital expenditure. The assessee, engaged in manufacturing LED lights, claimed deductions for expenses such as consultancy charges, raw material purchases, and salaries, treating them as deferred revenue expenditure in their financial statements but as revenue expenditure for income tax purposes. The AO contended that these expenses were capital in nature, providing enduring benefits, and thus added them back to the total income as capital work-in-progress.

2. Treatment of deferred revenue expenditure in the books of accounts:

The AO and the Commissioner of Income Tax (Appeals) [CIT(A)] based their disallowance on the treatment of these expenses in the books of accounts. The CIT(A) upheld the AO's decision, stating that the nature of the expenses indicated they were capital in nature, as the manufacturing of LED drives/solar lights was not completed in the relevant assessment year. The CIT(A) emphasized that the accounting treatment as deferred revenue expenditure suggested enduring benefits, justifying the disallowance under Section 37(1) of the Income Tax Act.

3. Nature of expenses incurred (capital vs. revenue):

The assessee argued that the expenses were revenue in nature, incurred for the existing business, and should be allowed as deductions irrespective of their accounting treatment. The assessee cited the case of CIT Vs. Denso India Ltd. (2009) 318 ITR 140, where similar expenses were deemed revenue in nature. The Tribunal agreed, stating that the nature of the expenses, not their accounting treatment, determines their deductibility. The Tribunal noted that the expenses did not result in the acquisition of a capital asset or provide enduring benefits, aligning with the principles established in the Denso India Ltd. case.

4. Compliance with principles of natural justice:

The assessee also contended that there was a lack of proper opportunity to present their case, violating principles of natural justice. However, the Tribunal's decision focused on the substantive issue of the nature of the expenses, ultimately ruling in favor of the assessee based on the merits of the case.

Conclusion:

The Tribunal concluded that the expenses incurred by the assessee were revenue in nature and did not provide enduring benefits or result in the acquisition of a capital asset. The Tribunal directed the AO to allow the deductions as claimed by the assessee in the statement of total income, following the precedent set by the Delhi High Court in the Denso India Ltd. case. Consequently, both appeals filed by the assessee for the assessment years 2013-14 and 2014-15 were allowed. The Tribunal emphasized that the nature of the expenses, rather than their accounting treatment, determines their deductibility for tax purposes.

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