Case Law Details

Case Name : Bioplus Life Sciences Pvt. Ltd. Vs DCIT (Karnataka High Court)
Appeal Number : ITA No. 49 of 2012
Date of Judgement/Order : 24/08/2020
Related Assessment Year : 2006-07 & 2007-08
Courts : All High Courts (5989) Karnataka High Court (302)

Bioplus Life Sciences Pvt. Ltd. Vs DCIT (Karnataka High Court)

The issue under consideration is whether the expenditure incurred towards upgraded and development of a product was to be considered as capital expenditure or revenue expenditure?

High Court states that when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of trade, there is very good reason for treating such an expenditure as properly attributable not to revenue but to capital. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. In the backdrop of aforesaid well settled legal principles, the facts of the case in hand may be examined. It is pertinent to note that assessee had started a new Unit at Hosur by taking over machineries and properties of M/s V.B.Medicare Pvt. Ltd., Hyderabad on lease. The work of development of ‘SUCRALOSE’ viz., a new product was started in Hosur Unit. The product was developed. Thus, the assessee had produced a new product from which enduring benefit was derived. Therefore, the same has to be treated as capital expenditure. An asset was brought into existence for enduring benefit of the business and therefore, the same has to be treated as capital expenditure. The expenditure has not been made for bringing into existence an asset for running of the business or working with it with a view to produce profits. Therefore, the same cannot be treated as revenue expenditure. It is pertinent to mention here that the assessee himself in the Books of account had shown it as capital expenditure. Therefore, the Assessing Officer, the Commissioner of Income Tax (Appeals) and the Tribunal have rightly treated the expenditure incurred by the assessee for development of a new asset as capital expenditure. In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the assessee and in favour of the revenue.

FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT

This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the assessee. The subject matter of the appeal pertains to the Assessment years 2006-07 and 2007-08. The appeal was admitted by a bench of this Court vide order dated 29.05.2012 on the following substantial questions of law:

(i) Whether the Tribunal was justified in holding that manufacturing and administrative expenses incurred by the appellant for development of a product in the course of its manufacturing activity which was already carried on, was capital expenditure?

(ii) Whether the appellant was entitled to claim deduction of the expenditure incurred towards upgrading and development of a product as revenue expenditure under Section 37(1) of the Act and whether the Tribunal was justified in holding that the expenditure incurred towards upgraded and development of a product was to be considered as capital expenditure?

(iii) Whether the Tribunal was justified in holding that sucralose is entirely new product different from the products, which were manufactured currently and exported by the appellant company?

2. The factual backdrop, in which the aforesaid substantial questions of law arise for consideration for this court need mention: The assessee is engaged in the business of manufacture and export of pharmaceuticals and neutralceutical products. The assessee is carrying on the business in two units viz., Hoodi Unit and Hosur Unit. During the Assessment years 2006-07 and 2007-08, the assessee developed a product named as ‘SUCRALOSE’ in its unit at Hosur. The assessee filed its return of income for the Assessment years 2006-07 and 2007-08 declaring total income of Rs.1,14,137/- and Rs.25,38,923/- respectively. The assessee claimed deduction under Section 10B of the Act in respect of Hoodi Unit and deduction of expenditure under Section 37(1) of the Act in respect of the product developed in Hosur Unit. The returns filed by the assessee were processed under Section 143(1) of the Act and were selected for scrutiny and notices under Section 143(2) of the Act were issued.

3. The Assessing Officer by orders dated 22.12.2008 and 24.12.2009 in respect of Assessment years 2006-07 and 2007-08 inter alia held that from profit and loss account of the Hosur Unit of the assessee it was noticed that revenues were earned by the aforesaid Unit from a product called ‘GLUCOSAMINE CHLORIDE’, whereas, project development expenses relate to development of product ‘SUCRALOSE’. It was further held that the assessee itself in the books of account had capitalized the expenses. However, for income tax purposes it was claimed as revenue expenditure. It was further held that in pharmaceutical company, the formula which is developed would be an asset and using the formula different formulations like tablets, capsules etc are produced commercially. It was
also held that the expenses incurred for developing the formula, which gives enduring benefits has to be considered as capital in nature. Being aggrieved, the assessee filed appeals. The Commissioner of Income Tax (Appeals) vide order dated 04.10.2010 affirmed the order passed by the Assessing Officer and dismissed the appeals. The assessee thereupon approached the Income Tax Appellate Tribunal (hereinafter referred to as ‘the Tribunal’, for short). The Tribunal by an order dated 04.11.2011 inter alia held that assessee by
manufacturing the new product viz., ‘SUCRALOSE’ has obtained an enduring benefit and the assessee itself had capitalized the expenditure in the Books of accounts.

The appeals preferred by the assessee were partly allowed. Being aggrieved, the assessee is in appeal before us.

4. Learned counsel for the assessee submitted that the authorities ought to have appreciated that assessee had not ventured into a new line of business but had developed a new product and by incurring expenses towards development of the product, the line of business was not changed and therefore, the expenses incurred by the assessee in developing a new product ought to have treated as revenue expenditure instead of capital expenditure. It is also submitted that development of a new product ought to have been treated as part of the existing business. In support of aforesaid submissions, reliance has been placed on decisions in ‘ALEMBIC CHEMICAL WORKS CO. LTD. VS. COMMISSIONER OF INCOME TAX’, (1989) 177 ITR 0377, ‘ COMMISSIONER OF INCOME TAX VS. DENSO INDIA LTD.’, (2009) 318 ITR 0140 and ‘COMMISSIONER OF INCOME TAX VS. HERO HONDA MOTORS LIMITED’, (2015) 372 ITR 0481 (DELHI).

5. On the other hand, learned counsel for the revenue submitted that assessee itself had capitalized the expenditure in developing new product in the Book of accounts. It is further submitted that if an amount is expended to bring into existence a new intangible asset, which has an enduring effect, then the same has to be treated as capital expenditure. It is further submitted that the nature of expenditure will not determine whether it is revenue or capital expenditure, but the nature of expenditure has to be decided with reference to the purpose, for which the expenditure was incurred. In support of aforesaid submissions, reliance has been placed on decisions in ‘ARVIND MILLS LTD. V. COMMISSIONER OF INCOME-TAX’, (1992) 63 TAXMAN 493 (SC), ‘HONDA SIEL CARS INDIA LTD. V. COMMISSIONER OF INCOME-TAX, GHAZIABAD’, (2017) 82 TAXMANN.COM 212 (SC) and ‘TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. VS. COMMISSIONER OF INCOME-TAX’, (1997) 93 TAXMAN 502 (SC).

6. We have considered the submissions made by learned counsel on both the sides and have perused the record. Before proceeding further, it is apposite to take note of well settled legal principles to determine whether expenditure of the assessee was a capital expenditure or a revenue expenditure. The Supreme Court in ‘ALEMBIC CHEMICAL WORKS CO. LTD. VS. CIT’, (1989) 177 ITR 377 has laid down the following principles, which are reproduced below:

(i) When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital (referred to British
Insulated Helsby Cables Ltd. Vs. Atherton (1926) AC 205.

(ii) If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure.

(iii) The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure.

7. The aforesaid principles were quoted with approval in HONDA SIEL CARS INDIA Ltd supra and it was held that primary test, which is to be adopted with reference to acquisition of technical information and know how, remains the same, viz., the enduring nature test. It has further been held that where the expenditure is incurred which gives enduring benefit, it will be treated as capital expenditure and technical information and know how are intangible asset and having regard to their unique characteristic the question that need to be posed for determining such a nature of expenditure are also different.

8. In the backdrop of aforesaid well settled legal principles, the facts of the case in hand may be examined. It is pertinent to note that assessee had started a new Unit at Hosur in financial year 2004-05 by taking over machineries and properties of M/s V.B.Medicare Pvt. Ltd., Hyderabad on lease. The work of development of ‘SUCRALOSE’ viz., a new product was started in financial year 2005-06 in Hosur Unit. The product was developed in the financial year 2006-07. Thus, the assessee had produced a new product from which enduring benefit was derived.

Therefore, the same has to be treated as capital expenditure. An asset was brought into existence for enduring benefit of the business and therefore, the same has to be treated as capital expenditure. The expenditure has not been made for bringing into existence an asset for running of the business or working with it with a view to produce profits. Therefore, the same cannot be treated as revenue expenditure. It is pertinent to mention here that the assessee himself in the Books of account had shown it as capital expenditure. Therefore, the Assessing Officer, the Commissioner of Income Tax (Appeals) and the Tribunal have rightly treated the expenditure incurred by the assessee for development of a new asset as capital expenditure.

9. So far as reliance on decision in ALEMBIC supra is concerned, it is pertinent to note that in the aforesaid case, Alembics had got a licence to manufacture penicillin in the year 1961 and was producing 5000 Units of Penicillin per milli meter. In 1963, it entered into an agreement with Meiji Japan, which agreed to supply the requisite technical know how so that production could be increased to 10,000 Units and once for all payment was made. It was therefore, held that new venture was brought into existence by purchase of technology and agreement was only to increase the yield of penicillin with a view to enhance profit earning process and therefore, the expenditure was held to be revenue expenditure. The aforesaid decision therefore, has no application to the obtaining factual matrix of the case. Similarly, the decision in the case of Denso India Ltd. Supra is of no assistance to the assessee, as it was not disputed before the High Court that expenses such as salaries, wages and traveling allowance etc. were revenue in nature. The Supreme Court in Hero Honda Motors Ltd. Supra was interpreting the terms and conditions of the agreement and in that context it was held that payments in question were made for right to use technical know how and information and the ownership and intellectual property rights in the know how or technical information were never transferred or became an asset of the assessee. Therefore, the aforesaid decision is also not applicable to the fact situation of the case.

In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the assessee and in favour of the revenue.

In the result, the appeal fails and the same is hereby dismissed.

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