Expenditure incurred as a measure of value addition is to be treated as revenue expenditure

IN THE INCOME TAX APPELLATE TRIBUNAL

‘D’ BENCH, CHENNAI

BEFORE Dr. O.K.NARAYANAN, VICE-PRESIDENT

AND SHRI GEORGE MATHAN, JUDICIAL MEMBER

I.T.A. No.1600/Mds/2011

Assessment Year : 2008-09

Assistant Commissioner of of

Income Tax, Company Circle-

I(2), Coimbatore.

(Appellant)

Vs.

M/s. Kannappan Iron and Steel

Co. Pvt. Ltd.,

9/110, Kalidas Road,

Ramnagar,

Coimbatore-641 009.

PAN:AABCK2974P

 (Respondent)

Appellant by: Mr. K.E.B.Rengarajan, Jr. Standing Counsel

Respondent by: Mr. Saroj Kumar Parida, Advocate

Date of Hearing: 12th December, 2011

Date of Pronouncement: 12th December, 2011

O R D E R

PER Dr.O.K.NARAYANAN, VICE-PRESIDENT:

This appeal filed by the Revenue relates to the assessment year 2008-09. The appeal is directed against the order of the Commissioner of Income Tax(Appeals)-I at Coimbatore dated 13.07.2011 and arises out of the assessment completed under section 143(3) of the Income Tax Act, 1961.

2. The assessee is converting scrap iron into MS steel. In the previous year relevant to the impugned assessment year, the assessee proceeded further to improve the value addition by converting MS steel again into TMT steel. In that process, the assessee had incurred an expenditure of ` 88,75,000/-. This amount was claimed as a deduction under the head ‘product development expenditure’. The assessing authority had disallowed this claim on the ground that this amount of expenditure was capital in nature. In first appeal, the Commissioner of Income Tax(Appeals) accepted the contention of the assessee and directed the assessing authority to treat the expenditure as revenue and allowed the same as deduction. The Revenue is aggrieved and therefore the second appeal is before us.

3. The very same issue was considered in assessee’s own hands for immediately preceding assessment year 2007-08.  After considering the issue in a reasonably detailed manner the Tribunal held that the expenditure was revenue in nature and therefore, the Commissioner of Income Tax(Appeals) was  justified in deleting the addition made by the assessing authority.

4. When this order of the Tribunal dated 2nd November, 2010 passed in ITA No.1569/Mds/2010 was placed before us in the course of hearing, Shri K.E.B.Rengarajan, learned Standing Counsel appearing for the Revenue, contended that the issue has to be examined afresh in the light of the recent judgement of the Hon’ble Delhi High Court in the case of Commissioner of Income Tax Vs. Harig Crank Shafts Ltd., 325 ITR 304. Dutifully this decision was considered. In that case the assessee had incurred certain expenditure for product development which was treated as deferred revenue expenditure. Accordingly a deduction of 10% of the expenditure was allowed by assessing authority. In an assessment of subsequent assessment year, the assessing authority attempted to give deduction under section 35D treating the expenditure as preliminary expenses. The Tribunal held that the expenditure was not in the nature of preliminary expenses and therefore the same cannot be considered as a deduction under section 35D and the expenses were incurred and the claim was genuine, the deduction should have been allowed by the assessing authority. The above decision of the Tribunal has been confirmed by the Hon’ble High Court in the above judgement. We have to see that the Hon’ble High Court has not laid down any proposition of law in the above decision. They have held that the expenditure claimed by the assessee was product development expenditure and the same cannot be treated as preliminary expenses and therefore the same cannot be considered for piecemeal deduction available under section 35D. The Court also has not made any observation that the expenditure was capital in nature. In those circumstances, the Hon’ble High Court agreed with the finding of the Tribunal that the expenditure should be allowed as an item governed by section 37. The above stated judgement in no way disapproves the order of the Tribunal passed in assessee’s own case for the immediately preceding assessment year 2007-08 on which the assessee has placed reliance.

5. In its earlier decision, the Tribunal has examined the various components of the expenditure and found that all those items individually are revenue in nature. The Tribunal found that the expenditures were not incurred for setting up of any business or initiating an expansion programme. The expenditures were incurred as a measure of value addition and for competing in the market. There was no basic improvement in the fundamental character of product already manufactured and processed by the assessee. It was in the light of those findings, the Tribunal has held that the disputed expenditures were in fact revenue in nature.

6. We find that the decision of the Tribunal for the earlier assessment year 2007-08 is applicable to the present case as well and accordingly the present appeal filed by the Revenue is liable to be dismissed.

Order pronounced in the open court at the time of hearing on Monday, the 12th December, 201 at Chennai.

                                                Sd/-                                        Sd/-

                                      (George Mathan)              (Dr. O.K.Narayanan)

                                       Judicial Member                   Vice-President

Chennai,

Dated the 12th December, 2011.

somu

Copy to:

(1) Appellant     (4) CIT(A)

(2) Respondent  (5) D.R.

(3) CIT               (6) G.F.