Income Tax Appellate Tribunal - Bangalore
Bangalore Tool Works (P.) Ltd. vs Income-Tax Officer on 19 July, 1993
Equivalent citations: [1993]47ITD604(BANG)
ORDER
S. Bandyopadhyay, Accountant Member
1. The only point for assessment years 1983-84 and 1984-85 and the main point for assessment year 1982-83, as agitated by the assessee in these three appeals, relate to disallowance of the claims of deferred revenue expenditure in proportional manner. The assessee had incurred deferred revenue expenditure by way of designing and development expenses in respect of various equipments in past. The assessee claimed the following amounts out of the said deferred revenue expenses as expenses for the three years under consideration:
Assessment year 1982-83 :
Development expenditure on Cooker Extruder Rs. 22,135
Assessment year 1983-84:
Development expenses relating to :
(i) Cooker Extruder Rs. 22,135
(ii) Panel Patching Communication Equipment Rs. 40,989
(iii) Prototype Panel Patching Communication Equipment Rs. 25,536
Assessment year 1984-85:
(i) Cooker Extruder Rs. 22,135
(ii) Panel Patching Communication Equipment Rs. 110,355
(iii) Prototype Panel Patching Communication Equipment Rs. 68,752
The Income-tax Officer discussed the claim of the assessee in this regard in detail in the assessment order for assessment year 1983-84. She stated that although the assessee had written off parts of the developments expenses in each of the three years and claimed the same as expenses, nothing had however been stated regarding the allowability or non-allowability of the expenditure. The ITO was of the opinion that it was the business of the assessee to develop and design equipment and, therefore, the expenditure incurred for development and designing a particular equipment, whether it be in the nature of revenue expenditure or a capital expenditure, should have been claimed and allowed in the years to which such expenditure related. If the expenditure was capital in nature the assessee could have capitalised them and claimed depreciation on the same. On the other hand, a revenue expenditure should have been claimed in its entirety in the year to which it related. In that view the ITO disallowed the claim of the assessee for all the three years on the ground that the expenses did not relate to these years.
In appeals, the CIT(A) examined the facts of the case in detail and came to the conclusion that since the assessee was engaged in the business of developing and designing equipments, "development expenses" under consideration were of revenue nature and should have therefore been claimed and allowed in the years in which the expenses had been incurred. He discussed the facts of the following two decisions relied upon by the assessee and distinguished those from the facts of the present case :
(i) Hindustan Aluminium Corpn. Ltd. v. CAT [1983] 144 ITR 474 (Cal.)
(ii) CIT v. Hind Construction and Engg. Co. Ltd. [1984] 147 ITR 513 (Cal.).
The CIT(A) himself relied upon the decision in the case of Hindustan Commercial Bank Ltd. (21 ITR 353) in which the High Court had held that there was no legal jurisdiction for spreading out the revenue expenditure and that the whole amount was deductible in the year in which it had actually been incurred, if it was not in the nature of capital expenditure. In that view, the CIT(A) dismissed the contentions of the assessee and upheld the disallowances as made by the ITO.
2. Before us, the representative of the assessee has claimed that the development expenses were essential to the functioning of the business of the assessee and hence they should be allowed as revenue expenditure. He stated that so far as the Cooker Extruder was concerned, the expenses had been incurred in earlier years and they were spread over a period of 10 years in each of which 1/10th of the total expenditure incurred was claimed as deduction. Assessment year 1983-84 was the fifth year in that regard and the claim of the assessee for all earlier years (upto assessment year 1981-82) had been allowed by the department.
So far as the Communication Equipment is concerned, the representative of the assessee stated that production of the said equipments commenced in assessment year 1983-84 only and the claim for deduction of the development expenses in a spread- out manner was made for the first time in that year only. It is stated that the claim in this regard was made in proportion of the sale made during the year to the total amount of sale-order. He furthermore claimed that the expenses were claimed as relatable to the benefit accruable in each year. Besides relying on the decision of the Calcutta High Court in the case of Hindustan Aluminium Corpn. Ltd. (supra), he also placed reliance on the decision of the Rajasthan High Court in the case of Addl. CTT v. Farasol Ltd. [1987] 163 ITR 364. The departmental representative, on the other hand, admitted that since the normal business of the assessee was to design and develop prototypes, the expenses under consideration had got to be admitted as revenue expenses. He, however, argued that there is no statutory provision about allowing revenue expenses in a deferred or spread-out manner. He also emphasised that there was no agreement for claiming the expenses in a phased manner and in the face of these facts, the entire expenses should have been claimed and allowed in the year/years in which such expenses had actually been incurred.
3. On a careful consideration of the facts of the present case and the legal issue involved, we are of the view that the departmental contention is acceptable in principle. Excepting certain specific provisions relating to amortisation of initial expenses in certain cases, there is no other statutory provision for allowing revenue expenses in a phased or spread-out manner. On the other hand, the expenses are required to be claimed and allowed only in the year in which the expenses are incurred or the liability towards such expenses accrued. In this connection, we feel ourselves fortified in coming to this conclusion by the following findings of the Karnataka High Court in the case of My sore Tobacco Co. Ltd. v. CIT [1978] 115 ITR 698:
An expenditure which can be claimed as a deduction in any assessment year should have been incurred in the relevant accounting year. The entire exercise in the computation and assessment of business profits is to arrive at the true profits of the year which are liable to tax. The unit of assessment is the year and the receipts and expenditure which have to be taken into account must relate to the relevant accounting year. Therefore, if the expenditure of an earlier year is taken into account in a later year, the true profits of the later year cannot be determined and the result would be lopsided and unreal.
By following the above-mentioned decision of the Karnataka High Court we a) so come to the conclusion that revenue expenditure is essentially allow able in the year to which it pertains or in which it incurred. In the instant case, so far as the Cooker Extruder is concerned, the development expenditure was certainly incurred in an earlier year and the expense has been spread by the assessee over a period of 10 years in an arbitrary manner. There is no link of the expense with the profit-earning process of the assessee for the years under consideration and no nexus of such expense with the income of the assessee for these years could be established by the assessee. In that view, therefore, we conclude that so far as the development expenses relating to cooker extruder are concerned, the assessee missed the bus in not claiming the entire expenses in the year in which such expenses were incurred. The fact that part of such expenses were allowed rather illegally in some of the earlier years does not detract from the right of the department to disallow the claim of the assessee in the years under consideration. Hence, so far as this particular item is concerned, we confirm the disallowances for all the three years.
4. The same, however, cannot be said exactly about the Communication Equipments. Although the production of such equipments started in some earlier years and the development expenses were also incurred in such earlier years, the sale of such equipments however started only with effect from the accounting year corresponding to assessment year 1983-84. The assessee has also claimed only such amounts of development expenses proportionate to the figures of sales for the two years viz., assessment years 1983-84 and 1984-85. It is a cardinal principle of Accountancy that for determining the profit arising out of sale made during a year, all the expenses incurred for production of the articles sold must be taken into consideration irrespective of the fact whether such expenses were incurred in that particular year or in some earlier year. If part of the production expenses were incurred in earlier years, the expenses would remain capitalised in such earlier year by way of consideration of the expenses as work-in-progress and the entire work-in-progress relating to the articles sold will ultimately have to be allowed in the year of actual sale. Since, on account of consideration of the development expenses in a manner proportionate to the sales for each year, such portions of the total development expenses which actually relate to the production of the equipments sold during any particular year can be considered to have been claimed in that year, it goes without saying that the development expenses which constitute nothing but a component of the total cost of production of the equipments will have to be allowed against the sale consideration for the year. Therefore, so far as the communication equipments are concerned, we are of the view that although the development expenses relating to such equipments might have been incurred in some earlier year, yet on account of the accounting principles taken recourse to by the assessee relating to treatment of such development expenses corresponding to the equipments actually sold in an year, the development expenses will have to be allowed in the proportionate manner. We, therefore, direct that so far as the Communication Equipments are concerned, the development expenses be allowed in the manner as claimed by the assessee.
5. The only other point relating to assessment year 1982-83 touches the claim of the assessee that it should be considered as an industrial company. We may refer to the discussions made by the CIT(Appeals) at para 11 of his appellate order for this year in which he has clearly come to the finding that the main source of income of the assessee in that year was from clearing and forwarding charges amounting to Rs. 92.45 lakhs as against the other income being only Rs. 1 lakh. The CIT(Appeals) treated the assessee as a non-industrial company on that ground. We feel inclined to agree with his finding and the appellate ground taken by the assessee in this regard is hence being rejected by us.
6. In the result, the appeal for assessment year 1982-83 is dismissed whereas the same for assessment years 1983-84 and 1984-85 are partially allowed to the extent of deletion of the disallowances relating to the Communication Equipments.