THE COMMISSIONER OF INCOME TAX-I vs. ARVIND PRODUCTS LTD.

This appeal is filed by the Revenue challenging the   judgment   of   the   Income   Tax   Appellate   Tribunal dated 09.03.2007. At the time of admission of the appeal, following substantial questions of law were framed. “A. Whether the Appellate Tribunal is right in law and on facts in accepting the claim of   the   assessee   for   deduction   of Rs.2,70,05,729/­

Brief facts are as under.

We are concerned with the assessment year 2001­

The respondent assessee is a company registered under   the   Companies   Act   and   is   engaged   in   the business of manufacturing of textiles.  For the said assessment year, the assessee had filed the return of income on 30.10.2001 declaring loss.   The assessee had expended a sum of Rs.2.70 crores (rounded off) for   project   development   and   claimed   it   as   revenue expenditure.   The Assessing Officer doubted whether the   expenditure   could   be   treated   as   a   revenue expenditure.     He   called   for   the   response   from   the assessee.     The   assessee   contended   that   the   said amount   was   paid   to   Arvind   Mills   Limited   on   actual cost   basis   for   product   development.     This   product development   was   in   the   nature   of   improvement   of different types of fabrics produced by the assessee. The expenditure was in relation to improvement of the existing   products   of   the   assessee   and   not   for development   of   new   product.     The   expenditure   was

The   Assessing   Officer   did   not   accept   such contentions.  He was of the opinion that the benefit of   newly   developed   or   improved   product   would   be available to the assessee for long duration.   Such expenditure   therefore   would   be   resulting   into enduring   benefits.     He   therefore   disallowed   such expenditure   and   instead   treated   it   as   capital expenditure.

The assessee carried the matter in appeal before the   Commissioner   of   Income   Tax   (Appeals)   and reiterated   the   contentions   raised   before   the Assessing   Officer.     It   was   pointed   out   that   the expenditure was incurred in respect of improvement of different   variety   of   clothes   produced   by   the assessee.     The   whole   purpose   was   to   improve   its quality.     Since   the   expenditure   was   incurred   in relation   to   assessee's   existing   business   of   cloth [1980] 124 ITR 1  contended that the enduring nature test in a given case may break down if it is found that the advantage is in the commercial sense and not in the capital field.   Assessee also relied on the judgment   of   the   Supreme   Court   in   case   of  Alembic Chemical   Works  Co.  Ltd.  v.  CTT  reported  in  [1989] 177 ITR 377 (SC).   The Commissioner of Income Tax (Appeals) however, was not convinced.  He was of the opinion that the expense incurred was with respect to development of product and it cannot be denied that such   expenditure   would   not   result   into   enduring benefit.     He   therefore   confirmed   the   view   of   the Assessing Officer.

The assessee carried the matter in appeal before the Tribunal.  Tribunal noted the relevant facts and held   that   the   expenditure   was   revenue   expenditure. Whether the expenditure would result into advantage to the company may depend on various factors such as how well the products are marketed, how the market receives it and presence of similar products in the market.   If there are superior products already in the   market,   the   advantage   of   the   assessee   may   be neutralized.     The   Tribunal   was   essentially   of   the opinion that whether any advantage would accrue to the assessee or not out of such product development being   highly   uncertain,   the   expenditure   cannot   be treated as capital in nature.

Having heard learned counsel for the parties and having perused documents on record, what emerges is that the assessee who was engaged in manufacturing textile products, had expended the amount in question for   product   development   undertaken   by   a   sister concern of the assessee on its behalf.  The research work did not involve development of a new product or even   a   new   technique   or   technology   to   manufacture existing product more efficiently.   He is aimed at improving the quality of the existing products of the assessee.  Essentially thus, the expenditure was for the   assessee's   existing   business   and   was   for   the purpose   of   improving   the   quality   of   the   existing products.

As rightly pointed out by the counsel for the assessee, in somewhat similar situations, three High Courts   have   held   that   the   expenditure   should   be treated as revenue expenditure.

In case of Commissioner of Income­tax, Faridabad v. Escorts Auto Components Ltd.  reported in  [2011] 197 TAXMAN 42 (Punj & Har.), Division Bench of Punjab and Haryana High Court considered the expenditure by the   assessee   for   modification   of   existing products/development of new products under the same management with the same workforce and expertise. The Court   held   that   the   expenditure   incurred,   by   no stretch of imagination, can be regarded as capital expenditure.

In case of Commissioner of Income­tax, Bangalore v. Tejas Networks India (P.) Ltd. reported in [2014] 52   taxmann.com   513   (Karnataka),   Division   Bench   of Karnataka   High   Court   considered   a   case   where   the assessee was engaged in the business of dealing and selling   optical   networking   products.     The   assessee had incurred expenses towards the development of a certain product and claimed his revenue expenditure. The   department   opposed   his   claim.     The   High   Court held that lifespan of such products was very short due to severe competition, constant up­gradation of original   products   was   required   and   the   expenditure was therefore treated as revenue expenditure.

Division Bench of Delhi High Court in case of Commissioner   of   Income­tax­I   v.   ACL   Wireless   Ltd. reported   in  [2014]   361   ITR   210   (Delhi),   held   and observed   that   an   expenditure   which   enables   profit making structure to work more efficiently leaving the source of profit making structure untouched, would be revenue in nature.

Under the circumstances, both the questions are answered   against   the   Revenue.     Before   closing, however, we may observe that we should not be seen to have   approved   the   entire   decision   making   process adopted by the Tribunal though we confirm the final conclusions contained in the impugned judgment.   We say so because without full material on record, the Tribunal has expanded on the nature of uncertainty of the benefits of the product development.   Since the assessee had not led any evidence in this respect, the Tribunal's conclusions could not have been based on such uncertainty.

Subject   to   above   observations,   Tax   Appeal   is dismissed. (AKIL KURESHI, J) (B.N. KARIA, J) ANKIT SHAH