Product-development costs remain revenue expenditure absent proof of an intangible asset; unsupported income and expense additions require verification.

Product-development expenditure incurred for new parts, improvements and prototypes was treated as revenue expenditure because no material supported the assumption that it created a patent, know-how or other intangible asset; the related disallowance was deleted. The Form 26AS-based income addition was restored for merits-based examination because the furnished reconciliation and reasons for differences had not been addressed. Ad hoc disallowances of housekeeping and other expenses were also restored for fresh verification, as they were based only on ledger narrations and increased expenditure without identifying defects, rejecting the books, or examining supporting records.

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Issues: (i) Whether product-development expenditure incurred for new parts, improvements and prototypes was capital or revenue expenditure; (ii) Whether the addition based on unreconciled income reflected in Form 26AS could be sustained without examining the reconciliation furnished; (iii) Whether ad hoc disallowances of housekeeping and other expenses were sustainable.

Issue (i): Whether product-development expenditure incurred for new parts, improvements and prototypes was capital or revenue expenditure.

Analysis: The expenditure was incurred in the ordinary course of meeting customer requirements. The assumption that it created a patent, know-how or other intangible asset was unsupported by material. The same issue in the assessee's earlier year had been decided on the basis that such expenditure did not result in creation of an intangible asset.

Conclusion: The product-development expenditure was revenue expenditure and the disallowance was deleted, in favour of the assessee.

Issue (ii): Whether the addition based on unreconciled income reflected in Form 26AS could be sustained without examining the reconciliation furnished.

Analysis: A reconciliation of income and tax credit as per the books and Form 26AS, including reasons for the differences, had been furnished. The authorities had rejected it without addressing the reconciliation or the stated reasons. A detailed verification on merits was required.

Conclusion: The addition was remanded to the Assessing Officer for examination of the reconciliation after granting reasonable opportunity to the assessee.

Issue (iii): Whether ad hoc disallowances of housekeeping and other expenses were sustainable.

Analysis: The disallowances were made at 50% merely from ledger narrations and an increase in expenditure, without examination of the supporting records, rejection of the books, or identification of defects in vouchers or documents. The expenditure and supporting material required fresh verification.

Conclusion: The disallowances were remanded to the Assessing Officer for fresh examination after granting reasonable opportunity to the assessee.

Final Conclusion: The capital treatment of product-development expenditure was rejected, while the remaining substantive additions were restored for merits-based verification.

Ratio Decidendi: An expenditure cannot be treated as capital merely on an unsupported assumption of creation of an intangible asset, and ad hoc disallowances require identified defects and proper examination of supporting material.

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