Income Tax Appellate Tribunal - Amritsar
Deputy Commissioner Of Income Tax vs Max India Ltd. on 9 June, 2006
Equivalent citations: (2006)105TTJ(ASR)1002
ORDER
Joginder Pall, A.M.
1. By this order, we shall dispose of this appeal of the Revenue filed against the order of the CIT(A), Ludhiana, dt. 16th Feb., 2000 for the asst. yrs. 1991-92.
2. The Revenue has taken the following ground in this appeal:
That the learned CIT(A) has erred both in law and on facts of the case in deleting the disallowance of Rs. 2,56,55,355 made on account of product development expenses by holding that these expenses were incurred for developing new product and related to business and were allowable under Section 37(1) of the IT Act.
While deleting the disallowance, the learned CIT(A) has disregarded the fact that development of new productBOPP Film was linked with extension of the Assessee's existing business and this fact had been admitted by the assessee-company during the assessment proceedings and accordingly these expenses had been correctly capitalized by the AO under Section 35D(2)(a)of the IT Act.
3. The facts of the case are that the assessee was engaged in the business of manufacture of BOPP films and the unit of the assessee commenced commercial production in the last year. The assessee filed the return declaring therein loss of Rs. 7.10 crores. The AO observed that the assessee had claimed product development expenses of Rs. 2,56,55,355 as revenue expenditure. This claim of the assessee was allowed by the AO at the time of completing the assessment. However, subsequently, the CIT (Central) Ludhiana, in exercise of powers under Section 263 set aside the assessment and directed the AO to reframe the same after examining the claim of the assessee for deduction of the aforesaid expenditure. Accordingly, the AO took up the set aside assessment and called upon the assessee to explain as to how the expenditure incurred was allowable as Revenue expenses. The assessee submitted that the expenditure incurred did not relate to either extension of industrial undertaking or for setting up of new industrial undertaking. It was also submitted that the assessee's business had already commenced on 6th March, 1990 i.e. in the asst. yr. 1990-91 and the expenditure incurred was wholly and exclusively for the purpose of business. The assessee had further explained that there was no increase in the installed capacity of the unit as the same remained only at 3150 tonnes per annum. The assessee stated that in order to establish itself in the market, the assessee thought to improve and to develop new varieties of films with a view to minimise wastage and to improve quality. Thus, the expenditure incurred was claimed to be revenue in nature and hence allowable. These submissions were considered by the AO, who observed that expenses incurred fell in the purview of provisions of Section 35D(2)(a) of the IT Act, 1961 (In short "the Act"). He also observed that deduction under Section 35D had already been allowed to the assessee to its maximum and no further deduction under this section was allowable to the assessee; even the expenditure incurred fell within the purview of Section 35D of the Act. He further referred to the notes and schedules to the financial statement and observed that the assessee itself had capitalized and amortised the expenses incurred by the assessee. He, therefore, rejected assessee's contention that the expenditure incurred was revenue in nature and accordingly disallowed the claim.
4. Being aggrieved, the assessee impugned the disallowance in appeal before the CIT(A). It was submitted before the CIT(A) that the assessee was engaged in the business of manufacture of BOPP films and the installed capacity of the plant was 3150 tonnes which commenced commercial production on 6th March, 1990 relevant to the asst. yr. 1990-91. It was submitted that there was no change in licenced and installed capacity during the financial year 1990-91 relevant to the asst. yr. 1991-92. It was also stated that the commercial production had started with simple version of BOPP films which had a limited market and the assessee considered it necessary to develop new varieties of films and to develop technique and to improve the quality and minimise the wastage. Keeping this objective in view, the assessee incurred expenses of Rs. 3.91 crores (Rs. 135 crores as depreciation + Rs. 2.56 crores as other expenses). As a result 27 new varieties of films were developed in this programme. It was also submitted that the expenditure incurred included on power and fuel, Insurance, Repair and maintenance, employees' cost, travel and conveyance, rent, communication cost, interest expenses, other expenses and depreciation which were purely revenue in nature. It was also submitted that action of the AO to. disallow the claim under Section 35D was contrary to the provisions of the Act because Section 35D covered only expenses of capital in nature, Thus, it was contended that the expenditure was revenue in nature and hence allowable under Section 37(1) of the Act. The learned CIT(A) considered these submissions and held that the impugned expenditure was allowable as revenue expenditure. The relevant findings recorded by the CIT(A) in paras 3 and 4 are as under:
3. I have considered the arguments of the learned Counsel as well as material placed on record. An expenditure is covered within the provisions of Section 35D only when the assessee makes expenditure either before the commencement of its business or in connection with extension of industrial undertaking or in connection with setting up a new industrial unit after the commencement of business by the assessee. In the instant case, there is no dispute that the business had already commenced and the commercial production had also started during the asst. yr. 1990-91. Nothing has been pointed out by the AO to show that the unit which was installed during the asst. yr. 1990-91 was being extended by the assessee or a new industrial unit was being set up by the assessee. On the other hand, the learned Counsel pointed out that the installed capacity of the unit in asst. yr. 1990-91 was 3150 tonnes per annum and no extension of this capacity has been carried out till date. Copy of the Annual report for the year 1990-91 was furnished in this regard. The copy of letter dt. 9th Dec, 1998 from Ministry of Industry, Department of Industrial Development was also filed in this regard. In these circumstances, the expenses incurred by the assessee do not fall within the purview of Section 35D of the IT Act.
4. The details of expenditure of Rs. 2.56 crores which is under dispute shows that the expenditure was on items which are considered as normal revenue expenditure. The explanation given by the appellant shows that the expenditure incurred for developing new product which was wholly related to the business and was not capital expenditure and was therefore, allowable under Section 37(1) of the IT Act. Accordingly, the disallowance of Rs. 2,56,55,355 made by the AO cannot be upheld and the AO is directed to allow the same as revenue expenses related to the business of the assessee.
The Revenue is aggrieved by the order of the CIT(A). Hence, this appeal before us.
5. The learned senior Departmental Representative, Sh. Jayant Kumar, heavily relied on the order of the AO. He submitted that the assessee was engaged in the business of manufacture of BOPP films and had started production in the period relating to immediately preceding assessment year. He drew our attention to paras 4.4 and 4.5 of the assessment order, where the AO had mentioned that the assessee had itself capitalised and amortised the expenses for a period of 8 years and this fact is duly mentioned in the notes to the financial statements. Thus, he submitted that that apart from the fact that the AO disallowed the expenses under Section 35D, the AO also held that the expenditure was capital in nature. He referred to p. 158 of the paper book filed for the asst. yr. 1998-99 which is a copy of Tribunal's order dt. 27th Feb., 2004 in assessee's own case for the asst. yrs. 1989-90, 1992-93 and 1993-94 in ITA Nos. 689 to 691/Asr/1997. He particularly referred to p. 151 of paper book which is a copy of the said order for the asst. yr. 1992-93, where the Tribunal has dealt with similar expenditure incurred of that assessment year. He submitted that out of the total disallowance of Rs. 87,93,323, the Tribunal had allowed deduction of interest of Rs. 69.90 lacs under Section 36(1)(iii) of the Act and had sustained the disallowance of remaining expenses of Rs. 18 lacs. He further referred to p. 31 of the paper book which is a copy of audited accounts containing details of product development expenditure. He submitted that out of the details given therein, amount of Rs. 1,56,55,568 related to interest and the remaining expenses were on items like power and fuel, insurance, repair and maintenance, employees' cost, travelling and conveyance, rent, communication cost and other expenses. He submitted that even if interest was to be allowed, the remaining expenses could be considered for disallowance. He further referred to p. 18 of the paper book, which is a copy of explanatory statement to the accounts and as per item No. 7, it was mentioned that the assessee was sanctioned loans by the Industrial Finance Corporation of India and other banks for financing of the project of the company. He further referred to p. 19 of the paper book which is a copy of director's report, where it was mentioned that the assessee incurred expenses of Rs. 391.83 lakhs on product development programmes. Thus, he submitted that looking to the fact that the assessee itself had treated such expenses as capital and amortised and it related to the project, the same were capital in nature. In this regard, he also referred to p. 28 of the paper book, where it was mentioned that the development of a variety of film products was undertaken by the company during the period. He submitted that even if the CIT(A) was to allow deduction of interest, he should have at least upheld part of the disallowance. Thus, the learned senior Departmental Representative submitted that the learned CIT(A) was not justified in allowing the deduction of the entire expenses under Section 37(1) of the IT Act.
5.1 The learned Counsel for the assessee, Sh. Ajay Vohra, on the other hand, heavily relied on the order of the CIT(A) and reiterated the submissions made before the authorities below. He submitted that the assessee was already in the business of manufacture of BOPP films and its unit had started functioning in the period relating to asst. yr. 1990-91. The Revenue has not disputed this fact. Drawing our attention to p. 19 of the paper book, the learned Authorised Representative submitted that the installed capacity of the unit was 3150 tonnes and the same had remained so in the accounting year under reference. He further submitted that the expenditure incurred was on the development of varied range of BOPP films with a view to bring improvement in the product and other varieties of the same item already being manufactured by the assessee. Thus, the expenditure incurred related to the same unit which was already under production and did not relate to expansion of the existing business. He drew our attention to p. 31 of the paper book which contains details of the product development expenditure. He submitted that these also included interest expenses of Rs. 1,56,55,568 which were otherwise allowable under Section 36(1)(iii) even if the amount borrowed was utilised for acquisition of capital assets. The remaining expenses on power and fuel, insurance, repair and maintenance, employees' cost, travel and conveyance, rent, communication cost, etc. were in the nature of revenue. He submitted that the very fact that assessee had capitalized and amortised the said expenditure in its books does not mean that the expenditure was capital in nature. He submitted that the accounting entries made by the assessee are not the determinant factor, whether the expenditure was capital or revenue in nature. He relied on the judgment of Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT . As regards the decision of the Tribunal for the asst. yr. 1992-93 relied upon by the learned Departmental Representative, the learned Counsel submitted that the same is not applicable to the facts of the present case. He submitted that in that case, the expenditure incurred related to setting up a new unit. But in the present case, the expenditure incurred is neither for setting up a new unit nor for the expansion of the existing unit. He further submitted that the expenditure could not be disallowed under Section 35D because Section 35D was applicable only if the expenditure was capital in nature. He drew our attention to CBDT's Circular No. 56, dt. 19th March, 1971 (copy placed at pp. 10 to 13 of the paper book), where it is provided that Section 35D would be applicable only if the expenditure related to capital field. The same would not apply to a case where the expenditure was otherwise allowable under Section 37(1) of the Act. He further stated that on identical facts, Tribunal, Delhi Bench, in the case of Asstt. CIT v. Medicamen Biotech Ltd. (2006) 99 TTJ (Del) 873 : (2005) 1 SOT 347 (Del) has allowed deduction of similar expenditure. Thus, he submitted that the order of the CIT(A) does not merit any interference.
6. We have heard both the parties and carefully considered the rival contentions, examined the facts, evidence and material placed on record and referred to the relevant pages of the paper book to which our attention has been drawn. From the facts discussed above, it is clear that the assessee was already in the business of manufacture of BOPP films and its unit had started commercial production on 6th March, 1990 relating to asst. yr. 1990-91. This fact is admitted by the AO on p. 1 of the assessment order. Page 19 of the paper book which is a copy of director's report and p. 17 of the paper book being explanatory notes to the financial statements clearly mentioned that the expenditure incurred by the assessee related to improvement in product specification of BOPP films and also to develop new varieties of the BOPP films. Page 19 of the paper book further mentions that the installed capacity of the unit remained at 3150 tonnes. Thus, the expenditure incurred did not result in enhancing the installed capacity of the unit. The details of the expenditure incurred are at p. 31 of the paper book. The same include expenses on power and fuel at Rs. 30,82,587, insurance Rs. 7,50,142, repair and maintenance Rs. 7,62,671, employees costs about Rs. 31 lacs, travel and conveyance Rs. 10,65,763, rent Rs. 4,95,832, communication costs Rs. 1,91,079, interest at Rs. 1,56,55,568, other expenses at Rs. 4,77,433 and depreciation at Rs. 1,35,27,513. After excluding the depreciation from the total expenses, the expenses remained at Rs. 2,56,55,355. The assessee has not acquired any new plant and machinery and the expenditure fallsin the category of revenue. Since the expenditure incurred related to improving and developing the new varieties of BOPP films already manufactured by the assessee, it cannot be said that the expenses related to setting up of a new unit or for expansion of the existing unit. No disallowance under Section 35D could be made for the reason that Section 35D deals with the amortisation of certain preliminary expenses before the commencement of the business, or after the commencement of the business, in connection with the extension of industrial undertaking or in connection with the setting up a new industrial unit. As mentioned earlier, the expenses did not relate to the period prior to commencement of business because the unit had already been set up and had started production in the year relevant to the asst. yr. 1990-91. Since the assessee was already manufacturing BOPP films and expenditure incurred on product development also related to the development of new varieties and improvement of the same items and there was no increase in the installed capacity of the unit, it could not be considered to relate to expansion of the industrial undertaking or for setting up of a new industrial unit. Besides, as per Board's Circular No. 56, dt. 19th March, 1971 (a copy placed at pp. 13 to 17 of the paper book) Section 35D is applicable only to expenditure which is capital in nature. In case the expenditure was otherwise allowable as revenue expenditure under Section 37(1), provisions of Section 35D would not be applicable. In the present case, the expenditure incurred could not be considered to fall in the capital field. Therefore, no disallowance under Section 35D in respect of the expenditure incurred by the assessee could be made.
6.1 The AO has laid undue emphasis on the treatment given by the assessee for capitalizing and amortising the impugned expenditure in the books of account. It is settled position under the law that accounting entries are not the determinant factor in deciding whether expenditure incurred was capital or revenue in nature. Reliance in this regard is placed on the judgment of Supreme Court in the case of Kedamath Jute Mfg. Co. Ltd. v. CIT (supra). The same is to be determined by looking to the nature of expenditure whether the same relates to capital or revenue field. In the case of Asstt. CIT v. Medicamen Biotech Ltd. (supra), the Tribunal, Delhi Bench has held that test of enduring benefit alone was not conclusive for treating any expenditure as capital and it is relevant to find out or ascertain as to whether such expenditure results into an advantage of enduring nature to assessee in capital field or revenue field so as to decide exact nature of such expenditure and allowability under the Act. In that case also, the assessee had clamed deduction of entire expenditure incurred on marketing of newly launched products amounting to Rs. 47,71,118 though in the P&L a/c, it had debited only 1/10th of expenses by treating the same as deferred revenue expenditure. The Tribunal held that the nature of expenses incurred was such that they did not result in enduring benefit to assessee and treatment in the books of account of the assessee could not be said to be conclusive. Thus, the total expenditure incurred by the assessee amounting to Rs. 47,71,110 was held to be revenue in nature.
6.2 As discussed above, the treatment given by the assessee in its books of account by treating the same as deferred revenue expenditure is not a conclusive or decisive factor in treating the expenditure as capital or revenue in nature. Reliance is also placed on the recent judgment of Madras High Court in the case of CIT v. Sakthi Soyas Ltd. (2006) 283 ITR 194 (Mad). In this case, the assessee had incurred expenditure of Rs. 20,36,157 towards crop development for the asst. yr. 1992-93 and in the return of income, the assessee claimed deduction of the same as revenue expenditure. Besides, the assessee had also incurred expenditure of Rs. 16,41,125 towards advertisement in respect of launching of soya products and sales promotion expenses. The assessee capitalized the expenditure in its books of account. The AO disallowed the claim of the assessee and treated the expenditure capital in nature on the ground that the assessee itself had treated the same as capital expenditure in the books of account. However, the Hon'ble Madras High Court held that name given to an expenditure or a nomenclature given to an expenditure in the books of account of the assessee is not the litmus test to decide the exact nature of the expenditure for the purpose of income-tax. The assessee may treat amount as capital expenditure in its regular books of account under the provisions of the Companies Act, in disclosing a fair view of the financial status of the company, as required by law. Capitalisation of those items of expenditure in the books of account alone was not the decisive factor in deciding whether the said expenditure was capital or revenue expenditure. The Hon'ble High Court observed that the assessee had incurred crop development expenses of Rs. 20,36,157 for propagating a new crop among the local farmers and further incurred expenses of Rs. 16,41,125 for advertisement through visual and print media and also for designing and printing leaflets, brochures, etc. All these expenses were held to be in the nature of business expenditure entitled for deduction in computing the assessee's income.
6.3 Now whether the expenditure incurred has resulted in enduring benefit or not has to be seen in the context of today's world where changes in the technological field are taking place at rapid pace. The present time is a time of multinationals. In order to survive in the business, the industry is required to make continuous efforts on research and development in order to keep pace with the technological changes that are taking place every day and to strive for improvement in the existing product and also to bring new product attractive in design and better in quality. Therefore, what could be termed as an enduring benefit in the olden days may not be so in the present times. The very fact that the assessee has capitalized or amortised the expenses in the books of account for 8 years would not mean that the assessee has acquired enduring benefit for all the 8 years. Therefore, no disallowance could be made on the ground that expenditure is capital in nature when the nature of expenditure incurred show the same is revenue in nature and was incurred wholly and exclusively for the purpose of business.
6.4 The learned Departmental Representative has relied on the decision of Tribunal, Amritsar Bench for the asst. yr. 1992-93. The same is distinguishable on facts as in that case expenditure incurred related to expansion of existing unit. This is not a case here as the assessee has neither set up a new unit nor expanded the existing unit. Therefore; ratio of this decision is not applicable to the facts of the present case.
6.5 In the light of these facts and circumstances of the case and the legal position discussed above, we are of the considered opinion that the learned GIT(A) was justified in allowing deduction of the impugned expenditure. We confirm his order and reject the grounds of appeal of the Revenue
7. In the result, the appeal filed by the Revenue is dismissed.