9911796707
TMI Blog2014 (10) TMI 364X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of developing and selling leading edge optical networking products for worldwide customers - It has developed software differentiated, next generation products that enable telecommunication carriers to build converged networks - The life span of this product is hardly a year - Because of competition in the market, the assessee has to come out with new features every year if they want to be in the field - Therefore, there is a constant upgradation of the original product - It is in that context substantial amount is spent towards employees cost and the upgradation also includes use of components purchased every year - those components are used for manufacturing Printed Circuit Boards - Every year these Circuit Boards undergo modifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the finding recorded by the Tribunal that the expenditure on prototype development is to be treated as revenue expenditure and not as a capital expenditure. 2. The assessee develops and sells leading edge optical networking products for worldwide customers. It has developed software differentiated, next generation products that enable telecommunication carriers to build converged networks that support traditional voice based services as well as new data dominated services. Their product line is marketed under the brand name TJ100. 3. In the return of income filed for the year 2003-04, the assessee has claimed a sum of ₹ 6,00,68,512/- as product development expenses. The break up of this figure is: Engineering charges: Rs.27,66,645 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure. The expenditure is not merely to facilitate the assessee's business but expenses is used for development which earned him substantial revenues in the later years. Therefore, treating it as a capital expenditure, the said expenditure was added back to the income of the assessee, of course he held that the assessee can claim depreciation. 4. Aggrieved by the same, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals). The Appellate Authority proceeded on the basis that as per its own admission, the assessee has derived an enduring benefit from the prototypes so developed as the same have not been scrapped and are still used and, therefore, it upheld the assessing authority's action of treating the expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alternative as allowable under Section 35 (1) (iv) of the Act without any discussion. Aggrieved by the said order, the revenue has filed these appeals. 6. ITA No.813/2007 and ITA No.72/2011 was admitted to consider the following substantial questions of law:- 1. Whether the Tribunal was right in holding that a sum of ₹ 6,00,68,512/- incurred for developing a product TJ-100 having a utility value for a period of 5 years cannot be considered as a capital expenditure and depreciation allowed by the Assessing Officer confirmed by the Appellate Commissioner treating as a revenue expenditure? 2. Whether the Tribunal was right in alternatively holding that the assessee's claim regarding expenditure is allowable under Section 36 (i) (iv) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of product development expenses and, therefore, it cannot be treated as a revenue expenditure. The Tribunal was right in treating it as a revenue expenditure. 11. In the light of the aforesaid facts and the rival contentions, it is clear that the assessee is in the business of developing and selling leading edge optical networking products for worldwide customers. It has developed software differentiated, next generation products that enable telecommunication carriers to build converged networks. The life span of this product is hardly a year. Because of competition in the market, the assessee has to come out with new features every year if they want to be in the field. Therefore, there is a constant upgradation of the original product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. 13. In fact, the Apex Court in the case of ALEMBIC CHEMICAL WORKS CO. LTD., vs COMMISSIONER OF INCOME TAX, GUJARAT [1989 VOL. 177 PAGE 377] held that, it would be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical knowhow at any p ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
