Product Development Expenses shall be treated as Revenue Expenditure, eligible for Deduction: ITAT [Read Order]

Top Stories Product Development Expenses shall be treated as Revenue Expenditure, eligible for Deduction: ITAT [Read Order] Product development expenses would be eligible for deduction as revenue expenditure By Aiswarya Krishnadas – On March 13, 2024 6:32 pm – 2 mins read In a significant decision, the Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) ruled that product development expenses should be classified as revenue expenditure and are eligible for deduction. The company is  involved in manufacturing, supplying, erecting, and commissioning pollution control equipment, particularly bag filters and electrostatic precipitators, for various industrial sectors such as iron and steel, power, and cement. For the assessment year 2016-17, the company filed its return of income on November 30, 2016, declaring a total income of Rs. 1,14,63,420/- under normal provisions of the Income Tax Act and a book profit of Rs. 1,58,97,377/- under section 115JB of the Income Tax Act, 1961. During this period, the company claimed expenses of Rs. 69,90,965/- under the category of product development expenses. When asked to justify these expenses, the company provided ledger copies of the product development expenses. The Assessing Officer ( AO ) noted that no supporting documents were furnished by the company.

The company clarified that it had incurred expenses of Rs. 69,90,965/- in developing various products during the year. A portion of this amount was shown as a return in the profit and loss account, while the remainder was classified as a non-current asset in the balance sheet. The company explained that it used its own materials purchased for manufacturing, along with its employees and workers, for activities such as design and development of these products. Therefore, the costs of materials, employee wages, and other expenses such as travel were allocated under the respective heads and claimed as deductions under product development expenses.

The tribunal determined that none of the expenditure incurred provided any enduring benefit to the company, and all expenses were genuine regular revenue expenditures. The company consistently used its own employees and materials purchased for manufacturing to develop new products. The two-member bench of Yogesh Kumar U.S ( Judicial member ) and M. Balaganesh ( Accountant member ) agreed with the AO that there was no concept of deferred revenue expenditure under the Income Tax Act, as explicitly stated in sections 35AB and 35ABB of the Income Tax Act. Considering the nature of the expenses incurred by the company for product development, the tribunal concluded that the entire expenditure was revenue in nature and thus eligible for deduction as revenue expenditure in the year of incurrence. As a result, the ITAT allowed similar expenditure incurred by the company for the assessment year 2018-19.

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