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.
INCOME TAX APPELLATE TRIBUNAL, MUMBAI
ITA No.2420/Mum/2010
(Assessment year: 2006-07)
Scientific Precision (P) Ltd Vs ACIT
Date of Pronouncement:27/06/2012
ORDER
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:
