1998 (7) TMI 16 - HC - Income Tax

Court rules prototype development expenditure as revenue, allows depreciation on business assets

The court ruled in favor of the assessee, affirming that the expenditure of Rs. 3,09,500 for developing a prototype compressor was revenue in nature and ... Capital Or Revenue Expenditure, Depreciation, Owner Issues Involved:1. Depreciation on properties purchased by the assessee.2. Entitlement for depreciation u/s 34 of the Income-tax Act, 1961.3. Allowability of Rs. 3,09,500 as revenue expenditure for developing a prototype compressor.Summary:Issue 1: Depreciation on Properties PurchasedThe court addressed whether the Appellate Tribunal was correct in upholding the Commissioner of Income-tax (Appeals) order granting depreciation on properties purchased by the assessee on May 7, 1979, for the assessment year 1979-80. The Tribunal's decision was based on the fact that the assessee had been in possession and enjoyment of the property, using it for business purposes, thus meeting the requirements for claiming depreciation.Issue 2: Entitlement for Depreciation u/s 34The court examined if the Tribunal's conclusion that the assessee was entitled to depreciation for the assessment year 1979-80 on properties purchased by the document dated May 7, 1979, was supported by valid materials and sustainable in law. The Tribunal found that the assessee had paid the consideration, was put in possession in 1977, and used the land for business purposes, thus entitling it to depreciation.Issue 3: Allowability of Rs. 3,09,500 as Revenue ExpenditureThe court evaluated whether the sum of Rs. 3,09,500 paid by the assessee to Consolidated Pneumatic Tool Co. (India) Ltd. for developing a new prototype compressor was allowable as revenue expenditure. The Tribunal concluded that the expenditure did not confer an enduring benefit to the assessee. The court noted that the assessee was not the manufacturer of compressors but required them for its rigs. The expenditure was for developing a prototype to meet specific requirements, and the cost was shared with the manufacturer. The court held that this expenditure was of a revenue character, not capital, as it did not result in an enduring benefit and was part of an ongoing business activity.Conclusion:The court ruled in favor of the assessee on all issues, affirming that the expenditure of Rs. 3,09,500 was revenue in nature and that the assessee was entitled to depreciation on the properties in question. The assessee was awarded costs of Rs. 1,000.