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2014 (10) TMI 364 - HC - Income TaxExpenses on prototype development expenses u/s 36(1)(iv) - Revenue or Capital expenses - Whether the Tribunal was right in holding that a sum 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 AO confirmed by the Appellate Commissioner treating as a revenue expenditure - Held 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 - 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 modification, changes - the expenses incurred in this regard is in the nature of revenue expenditure. Relying upon EMPIRE JUTE COMPANY LIMITED vs COMMISSIONER OF INCOME TAX [1980 (5) TMI 1 - SUPREME Court] - There is no all-embracing formula which can provide a ready solution to the problem; no touchstone has been devised - Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. Further they held that, there may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down - The test of enduring benefit is not a certain or conclusive test and it cannot be applied blindly and mechanically – the statement of law equally holds good in the area of telecommunication, may be with more force - the expenditure that is claimed is for upgrading the existing product - the product so upgraded goes on changing as time progresses, keeping in mind the requirement and the competition in the market - The Tribunal rightly held that the expenditure is not in the nature of capital expenditure but is revenue expenditure –Decided against revenue.
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