Commissioner of Income Tax vs Denso India Limited

A.K. Sikri, J.—This appeal u/s 260A of the Income Tax Act, 1961, has been filed by the Revenue challenging the order dated March 24, 2006, passed by the Income Tax Appellate Tribunal (ITAT) whereby the Income Tax Appellate Tribunal has dismissed the appeal of the Revenue and confirmed the order of the Commissioner of Income Tax (Appeals) and held that the Assessing Officer was not justified in disallowing the deduction on account of expenditure incurred by the assessee for establishing a separate cell for developing import substitute components.

The facts of the case are that the assessee-company is engaged in the business of manufacture of auto electrical parts for which it was importing several components. The assessee-company considered that, instead of importing the components, it would be more beneficial to have the components locally procured and indigenously manufactured, and for this purpose a separate cell was set up for developing import substitute components. The object of this special cell was to identify local manufacturers for the import components substitutes, prepare drawings for the components so required by the assessee-company, seek manufacture of the components by the local manufacturers under the supervision and direction for quality control of components. Towards this cell, expenditure was incurred by the assessee-company in its books of account, under the head "Deferred revenue expenditure". The Assessing Officer treated this expenditure as of a capital nature and disallowed the deduction claimed by the assessee mainly for the following reasons:

(i) No additional information or evidence was produced to prove that the expenses were not capital nature.

(ii) The assessee-company had themselves capitalised the expenditure but claimed the same amount as deduction in the computation of income.

(iii) Once the assessee has treated the amount as capital expenditure in the books of account, the burden lies on the assessee to prove that the expenditure was of revenue nature.

Before the Commissioner of Income Tax (Appeals) (CIT(A)), the assessee-company contended that despite the treatment given in the books of account by the assessee-company as deferred revenue expenditure, the fact remains that the said expenditure was of revenue nature. The Commissioner of Income Tax (Appeals) accepted the stand of the assessee-company, inter alia, for the following reasons:

(i) Prima facie, the expenditure was of revenue nature.

(ii) No capital asset was acquired or brought into existence by incurring the expenditure.

(iii) Expenditure incurred for the purpose of running a business efficiently cannot for that reason be labelled as capital expenditure.

(iv) The treatment of the expenditure in the books account/financial statements is not relevant for determining whether or not the expenditure is of capital or revenue nature.

(v) Heavy revenue expenditure incurred in one year cannot have the effect of converting it into capital expenditure. For example, expenditure incurred on advertisement.

(vi) The Assessing Officer did not dispute the fact that the expenditure was incurred or question the quantum. His main problem was that the company had, in its financial statement, chosen to treat the expenditure as deferred revenue expenditure.

(vii) The Income Tax Act, 1961, does not cater for deferred revenue expenditure no matter what the principles of accountancy prescribe,.

(viii) Even, according to the appellant, the expenditure was treated as deferred revenue expenditure. In other words, irrespective of how the appellant chose to write off the expenditure, it still remained revenue expenditure.

In appeal, the Income Tax Appellate Tribunal had opined that though the treatment given by the assessee-company considering the long-term benefits of the said expenditure as deferred revenue expenditure, such treatment alone was not sufficient to conclude that the said expenditure was of capital nature. The Income Tax Appellate Tribunal accordingly held that the said expenditure was clearly of a revenue nature having regard to its very nature as well as purpose for the same was being incurred, viz., being to substitute the components of raw material and as such, the advantage accrued to the assessee is only in the revenue field and not in the capital field.

Before us it is not disputed by the appellant that the expenditure incurred towards salaries, wages, travelling expenses, etc., are revenue in nature, however, the counsel for the appellant has contended that since there was enduring benefit from the expenditure, the said expenditure is capital in nature. Reliance was placed upon Assam Bengal Cement Co. Ltd. Vs. The Commissioner of Income Tax, West Bengal, on the meaning of capital expenditure and on Taparia Tools Ltd. Vs. Joint Commissioner of Income Tax, and The Commissioner of Income Tax Vs. The Kanyakumari Dist. Co-op. Spinning Mills Ltd., for the same purpose.

The counsel for the respondent-assessee has however placed reliance upon M/s. Madras Industrial Investment Corporation Ltd. Vs. The Commissioner of Income Tax, Tamil Nadu-I, Madras, ), COMMISSIONER OF INCOME TAX Vs. PRINTPAK MACHINERY LTD., Empire Jute Co. Ltd. Vs. Commissioner of Income Tax, Commissioner of Income Tax Vs. J.K. Synthetics Limited, and Commissioner of Income Tax Vs. Usha Iron and Ferro Metal Corporation Ltd., to contend that the expenditure is of revenue nature only. The counsel for the respondent has further contended that the concurrent findings of facts of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal should not be disturbed by the court as no substantial question of law arises.

A reference to the judgments cited by the respondents show that expenses such as salaries, etc., incurred by the assessee in this case is clearly revenue in nature. The judgments cited by the counsel do not apply as none of them dealt with facts as found in the present case, i.e., of expenditure for salaries, wages, travelling expenses, etc. Merely because the benefit of the type of expenditure involved in this case is such the benefit can also be available later, is not a good enough reason to treat the expenditure, which is otherwise of revenue nature, as a capital expenditure. There are concurrent findings of both the authorities below with which we agree and which are not perverse. No substantial question of law arises. Dismissed.