After establishment and before commencement expenditure under sec 35 can claim as revenue expenditure

IN THE INCOME TAX APPELLATE TRIBUNAL

"F" Bench, Mumbai

Before Shri B. Ramakotaiah, Accountant Member and

Shri Vivek Varma, Judicial Member

ITA No.2420/Mum/2010

(Assessment year: 2006-07)

Scientific Precision (P) Ltd

411, Shah & Nahar Industrial

(Appellant)

Vs

ACIT 2(3), Room No. 555

5th Floor,

Estate, Dr. E. Moses Road

Worli Naka

Mumbai 400 018

Aayakar Bhavan

MK Road

Mumbai 400 020

PAN – AAACS 8343 P

 (Respondent)

Assessee by: Mrs. Arati Vissanji

Department by: Shri A.K. Modi, Sr.DR

Date of Hearing: 18/06/2012

Date of Pronouncement: 27/06/2012

O R D E R

Per B. Ramakotaiah, A.M.

This appeal by assessee is against the order of CIT (A)-6 Mumbai dated 08.01.2010. Assessee raised the following ground:

“Ground No.1.The learned Commissioner of Income-tax (Appeals) erred in confirming the disallowance of `.38,33,701/- as research expenditure and holdng the expenditure could nto be stated to be revenue in nature. Your appellants submit that the said expenditure is revenue in nature and ought to have been allowed as claimed”.

2. Briefly stated assessee is in the business of manufacturing of Tocopherol Vitamin-E and mixed Tocopherol. AO completed the assessment under section 143(3) disallowing the expenditure claim at `.62,62,182/- and depreciation of `.16,11,204/- on the reason that assessee has not started the business and as there is no commercial production, expenditure pertains to work in progress or cost of inventory cannot be allowed. In the appeal before the CIT (A) it was submitted that assessee has commenced the business and disallowance of expenditure was not correct. After considering the submissions of assessee including the examination of registration with various authorities, the CIT (A) held that assessee has commenced its business activity. However, he proportionately allowed the expenditure being administrative, personnel and other expenses including depreciation while, however, confirming the disallowance of expenditure relating to the research amounting to `.38,33,701/- on the reason that research activity was long drawn process which would result in creation of an asset of enduring benefit in the nature of final result of such research activity. He held the expenditure as capital in nature.

3. It is assessee’s contention that primarily the expenditure is on revenue account and the expenditure even though of research expenses is alternatively allowable under section 35 (1)(i). The learned Counsel brought to our notice Schedule-12 of the balance sheet and Profit & Loss A/c wherein the details of expenditure are shown as under:

“Schedule-12 Research Expenses:

It was submitted that total consumption of raw material was to the tune of `.73,77,528/- and including freight and other expenses totals to RS.89,37,907/-. Assessee has shown closing work in progress at `.46,79,555/- and realization to the tune of `.4,24,651/. Net amount of `.38,33,701/- was only claimed. It was the submission that there was no capital expenditure involved and entire  expenditure claim was revenue in nature. The learned Counsel relied upon the judgment of the Supreme Court in the case of Empire Jute Co. Ltd vs. CIT, 124 ITR 1 for the proposition that even though there may be an enduring advantage, it cannot be presumed to be capital in nature and findings of the CIT was erroneous. Alternatively the learned Counsel also relied on the provisions of section 35 to claim that even capital expenditure was allowable as a deduction once it is established that the expenditure is meant for research. It was the submission that on both counts the amount is allowable.

4. The learned DR however, relied on the orders of the CIT (A) to submit that the research is an enduring benefit and accordingly the amount cannot be allowed as revenue expenditure.

5. We have considered the issue. At the outset it was brought to our notice that the Revenue has raised the issue of commencement of business in its appeal ITA No.2685/Mum/2010 and the appeal was dismissed ex-parte assessee and the CIT (A) finding that assessee has commenced business was upheld. Therefore, to that extent there is no dispute with the fact that assessee has commenced business activity during the year. As seen from the nature of the expenditure claim by assessee under the head research expenses, the entire expenditure pertains to use of raw material, freight and other expenditure which are in revenue field and there is no capital expenditure involved nor any capital asset was purchased as part of these expenses. Just because the benefits of research may have some enduring benefit, the expenditure cannot be considered as capital in nature. Following the principles laid down by the Supreme Court in the case of Empire Jute Co. Ltd, vs. CIT (supra), we hold that this expenditure is revenue in nature. Even otherwise once it is established that the expenditure is for the purpose of research, provisions of section 35 with reference to expenditure on scientific research are also equally applicable and alternately expenditure is allowable as such. For these reasons, we direct AO to allow the expenditure as claimed. Assessee ground is allowed.

6. In the result, appeal filed by the assessee is allowed.

Order pronounced in the open court on 27th June, 2012.

                                                     Sd/-                    Sd/-

                                            (Vivek Varma)   (B. Ramakotaiah)

                                         Judicial Member   Accountant Member

Mumbai, dated 27th June, 2012.

Vnodan/sps

Copy to:

1. The Appellant

2. The Respondent

3. The concerned CIT(A)

4. The concerned CIT

5. The DR, “F“ Bench, ITAT, Mumbai

By Order

Assistant Registrar

Income Tax Appellate Tribunal,

Mumbai Benches, MUMBAI