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TMI Blog2006 (6) TMI 422X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment proceedings and accordingly these expenses had been correctly capitalized by the Assessing Officer under section 35D(2)(a) of the Income-tax 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 Assessing Officer 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 Assessing Officer 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 Assessing Officer to reframe the same after examining the claim of the assessee for deduction of the aforesaid expenditure. Accordingly, the Assessing Officer 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 under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Assessing Officer 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 connecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed the expenses under section 35D, the Assessing Officer also held that the expenditure was capital in nature. He referred to p. 158 of the paper book filed for the assessment year 1998-99 which is a copy of Tribunal's order dated 27-2-2004 in assessee's own case for the assessment years 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 assessment year 1992-93, wher7e the Tribunal has deal 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls 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 capita] 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 [1971] 82 ITR 363. As regards the decision of the Tribunal for the assessment year 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 falls in 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 assessment year 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 CIT v. Sakthi Soyas Ltd. 2006] 283 ITR 194. In this case, the assessee had incurred expenditure of Rs 20,36,157 towards crop development for the assessment year 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 Assessing Officer 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-t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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