1977 (4) TMI 63 - AT - Income Tax

Development costs for prototypes deemed revenue expenses, allowable under Income Tax Act, integral to profit-making process.

INCOME TAX OFFICER. Versus PHOTO ELECTRIC INSTRUMENTS.

The Tribunal dismissed the Department's appeal and allowed the assessee's cross-objection, determining that the expenses related to the development cost ... - Issues:1. Nature of expenses - capital or revenue.2. Allowability of expenses under section 37 of the Income Tax Act.3. Allowability of expenses under section 35(1)(ii) of the Income Tax Act.Nature of Expenses - Capital or Revenue:The case involved an appeal by the Department and a cross-objection by the assessee regarding expenses related to the development cost of prototypes of precision instruments. The Income-tax Officer contended that the expenses were capital in nature as they brought a new line of business into existence. The Appellate Assistant Commissioner disagreed, stating that the expenses were of revenue nature as they did not provide an enduring benefit. The Tribunal upheld the Appellate Assistant Commissioner's decision, emphasizing that the expenses were integral to the profit-making process and did not result in an enduring advantage.Allowability of Expenses under Section 37:The Appellate Assistant Commissioner held that the expenses were allowable under section 37 of the Income Tax Act as they were revenue in nature. The Tribunal agreed, noting that the expenses were incurred for running the business more economically and conveniently, rather than acquiring an enduring benefit. Therefore, the expenses were deemed allowable under section 37.Allowability of Expenses under Section 35(1)(ii):The assessee contended that the expenses should be allowed under section 35(1)(ii) of the Act, which pertains to deductions for scientific research. The Tribunal analyzed the definition of 'scientific research' and concluded that the work done by the Council of Scientific and Industrial Research (C.S.I.R.) in developing new instrument designs constituted scientific research. As the C.S.I.R. was a prescribed authority and the research conducted was within the scope of section 35(1)(ii), the expenses incurred were deemed allowable under this section.In conclusion, the Tribunal dismissed the appeal by the Department and allowed the cross-objection by the assessee, affirming that the expenses in question were revenue in nature and thus allowable under section 37 of the Income Tax Act. Additionally, the expenses were held to be allowable under section 35(1)(ii) due to their association with scientific research conducted by the C.S.I.R.