2021 (7) TMI 771 - AT - Income Tax

Nature of expenditure - Lease hold improvement expenditure - expenses incurred on design and technical consultancy towards improving the exisiting product in the same line of business - Revenue or capital expenditure - CIT(A) held that the expenditure of design and technical services incurred towards improving the existing product which has the effect of long-term or enduring benefit to the appellant and therefore, it needs to be capitalized as 'capital expenditure' - HELD THAT - The assessee has been incurring this expenditure for improving existing products as well as developing of new products, thereby existing business from the existing customers has been increased as well as new additional customers added. It has also resulted in reduction in rejection on account of quality issues. As such, it cannot be held as expenditure incurred in the ordinary course of carrying day to day business of assessee. On the other hand, it is for deriving enduring benefit in the long run business plan. The other contention of the ld. AR is that to meet the matching principle, the company has capitalized 70% of R D expenditure under the head intangible assets and balance 30% has been claimed as revenue expenses by charging it to P L account. However, we observe that 70% shares of assessee company is acquired by M/s. Filtrauto, SA of France, as such the assessee charges only 30% of this expenditure to P L account and 70% of R D expenditure was considered as intangible assets by showing it in the balance sheet and it is not because of matching principle the expenditure was bifurcated as above. Being so, we hold that the expenditure is in the capital field and to be considered as not allowable. On other hand, the assessee is entitled only for depreciation at applicable rate. This ground of assessee is partly allowed for all the assessment years i.e., AYs 2013-14 to 2016-17.

Summary

Issues Involved:
1. Whether the expenses incurred on design and technical consultancy towards improving the existing product should be treated as 'revenue expenditure' or 'capital expenditure.'
2. Whether the principle of consistency should be applied to allow the expenditure in the assessment years 2013-14 to 2016-17, as it was allowed in the assessment years 2010-11 and 2011-12.

Issue-wise Detailed Analysis:

1. Treatment of Expenses on Design and Technical Consultancy:
The primary issue was whether the expenses incurred on design and technical consultancy towards improving the existing product should be treated as 'revenue expenditure' or 'capital expenditure.' The assessee argued that these expenses were for the day-to-day running of the business and should be treated as revenue expenditure. They cited several judgments, including Empire Jute Co. Ltd. v. CIT and CIT v. M/s. Escorts Auto Components Ltd., to support their claim that the expenditure facilitated the company's trading operations without altering its fixed assets.

However, the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated these expenses as capital expenditure, arguing that they provided an enduring benefit to the company. The Tribunal upheld this view, noting that the expenses were not incurred in the conduct of day-to-day affairs but for securing enduring benefits for the long term. The Tribunal emphasized that the nature of the expenditure, as reflected in the company's accounting policies, indicated that it was for developing new products and improving existing ones, thus providing a commercial advantage.

2. Principle of Consistency:
The assessee contended that the principle of consistency should apply, as the AO had allowed similar expenses as revenue expenditure in the assessment years 2010-11 and 2011-12. They cited the Supreme Court judgment in Radhasoami Satsang v. CIT to support their argument.

The Tribunal, however, rejected this contention, stating that the decision in Radhasoami Satsang was confined to its specific facts and could not be treated as a general authority. The Tribunal noted that the earlier AO had not thoroughly examined the nature of the expenses and had allowed them in a routine manner. In contrast, the AO in the current assessment years had conducted a detailed examination and found the expenses to be of a capital nature. The Tribunal concluded that the principle of consistency did not bind the AO or the Tribunal when new facts and materials were presented.

Conclusion:
The Tribunal dismissed the appeals, holding that the expenses incurred on design and technical consultancy towards improving the existing product should be treated as capital expenditure. It also ruled that the principle of consistency did not apply in this case, as the earlier AO's decision was not based on a thorough examination of the facts. The Tribunal allowed the assessee to claim depreciation on the capitalized expenditure but denied the treatment of these expenses as revenue expenditure.