TMI Blog2006 (6) TMI 422X X X X Extracts X X X X X X X X Extracts X X X X ..... ture 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. In the present case, the expenditure incurred could not be considered to fall in the capital field. Therefore, no disallowance u/s 35D in respect of the expenditure incurred by the assessee could be made. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of industrial undertaking or for setting up of new industrial undertaking. It was also submitted that the assessee s business had already commenced on 6-3-1990 i.e., in the assessment year 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 Assessing Officer, who observed that expenses incurred fell in the purview of provisions of section 35D(2)( a ) of the Income-tax 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 inclined fell within the purview of section 35D of the Act. He further ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking 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 assessment year 1990-91. Nothing has been pointed out by the Assessing Officer to show that the unit which was installed during the assessment year 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 assessment year 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 dated 9-12-1998 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 Income-tax 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it. 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, dated 19-3-1971 (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. [2005] 1 SOT 347 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 alr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, dated 19-3-1971 (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 Assessing Officer 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 Kedarnatn Jute Mfg. Co. Ltd. case ( supra ). The same is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose 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 effort ..... X X X X Extracts X X X X X X X X Extracts X X X X
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