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2021 (2) TMI 324 - AT - Income TaxNature of expenditure - expenses towards R D - revenue or capital expenditure - AR submitted that the R D expenses incurred for modification/adaption of existing products was claimed as revenue expenditure even though the same was accounted as intangible asset under development in the books of accounts - HELD THAT - The assessee has treated the R D expenditure as capital expenditure by showing it as intangible assets in its balance sheet. However, it is not known whether the intangible assets shown by the assessee in its balance sheet includes revenue expenditure or not? In earlier assessment years, the CIT(Appeals) had made analysis of expenditure which are revenue or capital and the revenue expenditure was allowed as deduction. Being so, the Tribunal decided the issue in favour of the assessee in AYs 2007-08 2008-09 in assessee's own case. For assessment year under consideration, the R D expenditure which was treated as revenue expenditure in its Profit Loss account is not separately brought on record by the assessee before us. Hence, it is appropriate to remit the issue to the file of the CIT(Appeals) for proper classification of R D expenditure which is in the nature of revenue expenditure or capital expenditure. Thereafter the portion of revenue expenditure on R D to be allowed as business expenditure in these assessment years. On the other hand, the R D expenditure which is in the nature of capital expenditure has to be disallowed and depreciation to be granted. With these observations, we remit the issue in dispute in all these assessment years to the file of the CIT(Appeals) for fresh consideration. Appeal allowed for statistical purposes.
Issues Involved:
1. Disallowance of revenue expenditure claimed under section 37 of the Income Tax Act. 2. Classification of Research & Development (R&D) expenditure as capital or revenue expenditure. 3. Treatment of R&D expenditure in the books of accounts versus its treatment for tax purposes. 4. Reliance on previous Tribunal decisions and other judicial precedents. Detailed Analysis: 1. Disallowance of Revenue Expenditure Claimed Under Section 37 of the Income Tax Act: The appellant contested the disallowance of substantial amounts of revenue expenditure for various assessment years. The appellant argued that these expenses were incurred for the purpose of business activities and should be allowed as revenue expenditure under section 37 of the Income Tax Act. The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] disallowed these claims, treating the expenses as capital in nature. 2. Classification of Research & Development (R&D) Expenditure as Capital or Revenue Expenditure: The appellant claimed that the R&D expenses did not result in the creation of new products or a new line of business and were thus revenue in nature. The CIT(A), however, upheld the AO's decision, stating that the expenditures were for the development of new products and thus capital in nature. The appellant referenced previous Tribunal decisions in its favor for earlier assessment years (2007-08 and 2008-09) where similar R&D expenditures were allowed as revenue expenses. 3. Treatment of R&D Expenditure in the Books of Accounts Versus Its Treatment for Tax Purposes: The appellant treated R&D expenditures as intangible assets in its financial statements but claimed them as revenue expenditures in its tax returns. The CIT(A) and AO disallowed this claim, arguing that the expenditures were capital in nature because they were shown as intangible assets in the balance sheet. The Tribunal noted that the treatment in the books of accounts should not determine the nature of the expenditure for tax purposes, citing the Supreme Court's ruling in Taparia Tools Ltd. vs. JCIT. 4. Reliance on Previous Tribunal Decisions and Other Judicial Precedents: The appellant relied on previous Tribunal decisions in its own case and other cases (e.g., Dr. Reddy's Laboratories Ltd., Opus Software Solutions Pvt. Ltd., and Autoline Industries Ltd.) to argue that R&D expenses should be treated as revenue expenditures when they do not result in new products or a new line of business. The Tribunal acknowledged these precedents but noted that the CIT(A) had not properly classified the expenditures into revenue and capital components for the assessment years under consideration. Conclusion: The Tribunal concluded that the issue needed to be remitted back to the CIT(A) for a proper classification of the R&D expenditures into revenue and capital components. The CIT(A) was directed to allow the portion of the R&D expenditure that is revenue in nature as a business expenditure and to disallow the capital expenditure while granting appropriate depreciation. The appeals were partly allowed for statistical purposes, and the matter was sent back to the CIT(A) for fresh consideration. Pronouncement: The judgment was pronounced in the open court on January 27, 2021.
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