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TMI Blog2021 (2) TMI 324X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... efense electronics and provision of services to defense establishments. It is submitted that the line of business of the assessee requires huge expense in research and development (R&D) activity to stay relevant in the market and to exhibit to the customer that they have the capability to adopt and modify the products and services as per their demands and needs. As per the accounting policy, these expenditure are accounted as Intangible Assets/Intangible assets under development in the books of accounts, since the R&D activity enhances the know-how, technical knowledge, skill etc., of the assessee and its technical manpower. The major expenditure incurred for R&D are Remuneration to the employees, Rent of the R&D centre, Professional Charges and Purchase of materials. The expenditure incurred on research and development is claimed as expenditure in the return of income due to the following counts:-- (i) The expenditure on R&D has not created new product or it has not resulted in new line of business. (ii) The expenditure incurred are revenue in nature. (iii) The expenditure has not resulted in acquisition/construction of a Capital Asset. (iv) The expenditure is incurred for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... garding the nature of expenditure and assumed that the claim of the assessee as to its nature i.e., staff remuneration, travel expenditure, professional charges, etc. has not been disputed by the lower authorities and further the Tribunal has assumed that in the remand report, the AO has also not doubted the genuineness of expenditure. However, as per 4 of the remand report which is extracted at page 8 of the impugned order, the CIT(A) was of the view that the AO has given a categorical finding that all these expenses have been incurred for specific projects as inputs and accordingly has given a finding that the entire expenditure on the product development by the assessee is capital in nature. Therefore the AO in the original order as well as in the remand report, had consistently held that the said expenditure incurred for development of the projects is capital in nature. In the remand report, the AO had not conceded as to the bifurcation of the expenses viz., staff remuneration, travel expenditure and professional charge. The AO simply has not questioned the genuineness of the individual input components. The CIT(A) was therefore of the opinion that the ITAT for AYs 2007-08 & 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red for developing the project proto types by the appellant relating to development of intangible asset cannot be weighed or assessed based on the input costs. It has to be treated as one item only. The expenditure incurred by the assessee on such projects is liable to be treated as capital expenditure as the same has resulted in giving rise to enduring benefit to the assessee by bringing into existence a totally new product upon which the appellant has recognized the intellectual property. The position of the settled law that "the expenditure resulting in advantage of enduring nature is a capital expenditure", is not disturbed or reversed by any judicial fora." 11. The CIT(A) upheld the disallowance by terming the same as "Capital Outgo" and citing the reason that the said amount was treated as "intangible asset" under the head "Development" in the books of account of the assessee. 12. Against this, the assessee is in appeal before us. The Ld. AR submitted that the assessee had enclosed the following documents for the six assessment years: a. Financial Statement for the six assessment years. b. Statement of Computation of Income f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al know-how and this technical know-how (repository) helps the assessee to stay relevant in the market and to exhibit to the customer that they have the capability to adopt and modify the products and services as per their demands and needs. 17. The Ld. AR submitted that the assessee had incurred expenditure in the form of remuneration to employees of technical capability, travelling expenses and providing training to them in different spheres of technology used by Defence establishments and the expenditure incurred for these activities primarily includes remuneration to staff, purchase of material, professional charges paid to consultants and travelling expenses. Thus, it was submitted that the nature of this expense is of revenue. 18. Further, the Ld. AR submitted that the R&D expenditure incurred by the assessee is allowable under section 37, since the said expenditures meet all the conditions contained in section 37, viz. the expenditure are incurred for the purpose of business; they are for personal purpose and is not a capital expenditure. 19. The Ld. AR submitted that the CIT(A) treated the R&D expenditure as capital expenditure for the reason that the said expenditure ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a capital expenses. ......... 22. The principle was considered by the Supreme Court in Empire Jute Co. Ltd. vs. CIT (1980) 124 ITR 11. In the said case, the Court observed that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit may none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consist merely in facilitating the assessee's trading operations or in enabling the management in conduct of the assessee's business 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of the CIT(A), the Tribunal allowed revenue expenditure as such and allow depreciation on the items of capital items present in the R&D expense. The Ld. AR relied on the decision of the Tribunal in the following cases where the Tribunal had ruled R&D expenses as revenue in nature when the same does not result in new product or new line of business: i) Opus Software Solutions Pvt. Ltd. vs. ACIT (ITA 584/PN/2011) ii) DCIT vs. Autoline Industries Ltd. (ITA 1711/PN/2012) (Pune) iii) Dr. Reddy's Laboratories Ltd. vs. Addl. CIT (ITA 2229/Hyd/2011 & 85/Hyd/2013) (Hyderabad). 25. In the case of Opus Solutions (supra), the Tribunal held that expenditure incurred for the development of new product in the line of business carried on by the assessee is in the revenue field since the same would improve the profitability of the assessee and the enduring benefit cannot be regarded to be in the capital field. The Tribunal held has follows: "10. In our considered opinion, the aforesaid proposition of the Revenue is absolute alien to the business realities under which the assessee is operating Quite clearly, the assessee is in the business of software development which entails ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nasmuch as the expenditure in question merely results in development of new products by the assessee in its existing line of business. Even otherwise, it is noteworthy that none of the expenditures in question are of capital nature and in fact, the expenditure which has been referred to by us in the earlier paragraph clearly are such expenditure, which are incurred in the course of carrying on of business." 26. Further, the Ld. AR submitted that the Tribunal held that the treatment in the books of accounts does not have interference in the claim of the expenditure as revenue in nature as follows:- "11. The other objection of the Revenue that the assessee had treated the impugned expenditure as a deferred revenue expenditure in the books of account and claimed it as a revenue expenditure in the computation of income, is of no consequence. The Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra) and also thereafter in the case of Tuticorin Alkali Chemicals vs. CIT 227 ITR 172 (SC) and Sutlej Cotton Mills Ltd. vs. CIT 116 ITR 1 (SC) has supported the proposition that the entries in the books of account cannot be demonstrative of the true nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction in view of the ratio laid down by Pune Bench of Tribunal in Opus Software Solutions (P) Ltd. vs. ACIT (supra). As referred by us in the paras hereinabove, the nature of expenditure is not such that it can be said to be capital expenditure and in the absence of product developed by the assessee having been patented, we find no merit in the order of Assessing Officer in this regard. Upholding the order of CIT(A), we dismiss the ground of appeal No. 1 raised by the Revenue." 28. Further, the Ld. AR submitted that in the case of Dr. Reddy's Laboratories Ltd. vs. Addl. CIT (supra), the Tribunal held that an expenditure for developing new drug in the same line of business of the assessee is to be allowed as revenue expenditure. 29. In view of the above judgments of the Tribunal, the Ld. 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. Hence, applying the ratio laid down in the aforesaid decisions, the Ld. AR submitted that the expenditure has to be allowed as revenue expenditure. 30. For the A.Y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before us is that it is a revenue expenditure to be allowed while computing the income of assessee. 34. Now the question is, whether this expenditure incurred by the assessee towards R&D should be treated as revenue or capital expenditure? It is a well-accepted legal preposition that no test of universal application can be laid down to determine the question whether an expenditure incurred by the assessee is revenue or capital. It depends on the overall facts and circumstances of each case. Such matters have to be decided from a practical view and on application of the proper principles of law. Courts are of the view that keeping in mind the ground realities of business, AO should consider the purpose of a particular expenditure. A few principles in this regard can be enumerated as under:-- (i) One of the guidelines for distinguishing revenue expenditure from capital expenditure is that if the expenditure is incurred for obtaining an advantage of enduring benefit it would be capital expenditure. But, the test of enduring benefit is not a certain or conclusive test and it is not be applied blindly and mechanically. In other words every advantage of enduring nature acquired by an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was made for the technical know-how which was for the betterment of the product in question which was already being produced; whether the improvisation made is part and parcel of the existing business or a new business was set up with the so-called technical know-how for which payments were made; whether on expiry of the period of agreement the assessee is required to give back the plans and designs which were obtained, but the assessee could manufacture the product in the factory that has been set up with the collaboration of the foreign firm; the cumulative effect on a construction of the various terms and conditions of the agreement; whether the assessee derived benefits coming to its capital for which the payment was made. If from the terms of the agreement between the parties it transpires that the purpose be the acquisition of an asset/a right of a permanent character was a pre-requisite to the commencement or continuance of the business, the expenditure would be a capital expenditure. (xi) If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would fall in the category of capital exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalised, if the cost can be reliably measured, the product or process is technically and commercially feasible and the Company has sufficient resources to complete the development and to use and sell the asset. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads that are directly attributable to preparing the asset for its intended use. Other development expenditure is recognised in the Statement of Profit and Loss as an expense as incurred. g) AMORTIZATION Intangible assets are amortised in the Statement of Profit and Loss over their estimated uses lives, from the date that they are available for use based on the expected pattern consumption of economic benefits of the asset. Accordingly, at present, these are being amortised on straight line basis. An intangible asset is derecognized on disposal or when no future economic benefits are expected from its use and disposal. Losses arising from retirement and gains or losses arising ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tement of Profit and Loss." 36. As seen from the above, 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, ITA Nos. 1384 & 1385/Bang/2013 in assessee's own case. In those assessment years, the classification of expenditure was shown as follows:- A. Y. Capital Expenditure Revenue Expenditure 2007-08 35,83,346 105,79,544 2008-09 91,68,575 269,98,8243 37. The AO in earlier assessment years treated the above entire expenditure as capital expenditure. The CIT(Appeals) allowed the revenue expenditure as a deduction, however, allowed depreciation on the capital expenditure. Against this, the department went in appeal before the Tribunal. The Tribunal in para 10 of the order held as under:- "10. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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