2014 (4) TMI 623 - AT - Income Tax

Disallowance of product development expenses Capital or revenue expenses Depreciation on product development expenses Held that - The expenses has been outsourced as assessee did not have any skill/specialized personal - As per Section 35AB, where the assessee has paid in any previous year any lump sum consideration for acquiring any know-how for use for the purposes of his business, 1/6th of amount so paid shall be deducted in computing the P&L account of the business for that year - Know-how means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil well or other sources of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto) - The Product Development Report was dated 20.03.2009 and agreement was dated 12.12.2007, whereas the assessee had claimed this expenditure in A.Y. 2009- 10 - As per the agreement, the amount is to be paid in advance but assessee had not furnished any evidence for paying this amount to the developer during the year thus, the matter is remitted back to the AO to verify whether the project Report was actually used for the business purposes in this year or not and accordingly, he had paid the money in the year under consideration Decided in favour of assessee. Allowability of 100% depreciation on particle size analyzer and dust collector Held that - The AO had already allowed the 100% depreciation on Rs. 22,09,948/- in preceding year - When the AO had accepted the assets are depreciable @ 100%, the Revenue cannot deny 100% depreciation on remaining amount for 180 days - Further, addition made during the year is also having similar nature thus, the AO is directed to re-calculate depreciation @ 100% but considering the date of purchase of machineries whether it is for 180 days or less than 180 days - The CIT(A) also allowed 100% depreciation on dust collector but it is allowable from the date of purchase not for the whole year Decided in favour of Assessee. Reduction in disallowance u/s 14A of the Act - The CIT(A) had partially allowed the appeal of the assessee by observing that dividend from the foreign company is taxable and hence, such investment cannot be considered for making disallowance u/s. 14A thus, when dividend from the foreign company is taxable then it could not be made part of disallowance u/s. 14A - CIT(A) is right in holding the disallowance of Rs. 6.31 lacs Decided against Revenue. Addition on account of capitalization of interest - Held that - IDBI s term loan was disbursed on 05.09.2008 at Rs. 219 lacs and Rs. 200 lacs on 31.03.2009 - The assessee had admitted before the CIT(A) that these funds were utilized towards capital work-in ITA progress at various location during the year under consideration - The assessee submitted before the CIT(A) that Rs. 209.21 lacs interest was paid on term loan - it had been capitalized Rs. 16.27 lacs in capital work-in-progress the working made by the appellant before the CIT(A), which has been accepted by the CIT(A) without giving any opportunity to the AO - the disallowance in work-in-progress on account of interest does not appear proportionate to the term loan and interest expenditure debited in the P&L account the issue is required further verification by the AO thus, the matter is remitted back to the AO Decided in favour of Revenue.

Issues Involved:

1. Disallowance of product development expenses as revenue expenditure.
2. Alternative claim for depreciation on product development expenses.
3. Disallowance of 100% depreciation on Particle Size Analyzer.
4. Restriction of depreciation on opening balance of block of 100% depreciable assets.
5. Reduction of disallowance under Section 14A.
6. Deletion of addition on account of capitalization of interest.

Detailed Analysis:

1. Disallowance of Product Development Expenses as Revenue Expenditure:

The Assessee claimed Rs. 55,00,000/- as revenue expenditure for product development. The AO disallowed this, classifying it as capital expenditure, as the expenditure was for acquiring know-how with enduring benefits. The CIT(A) upheld the AO's decision, citing judicial precedents that expenditures for acquiring new know-how or feasibility reports are capital in nature. The Tribunal directed the AO to verify if the project report was used for business purposes during the year and to determine the appropriate treatment of the expenditure.

2. Alternative Claim for Depreciation on Product Development Expenses:

The Assessee alternatively claimed depreciation if the product development expenses were treated as capital expenditure. The CIT(A) denied this claim, stating there was no evidence that the know-how was put to use during the financial year. The Tribunal set aside this issue to the AO for verification of the actual use of the project report and payment during the year.

3. Disallowance of 100% Depreciation on Particle Size Analyzer:

The Assessee claimed 100% depreciation on Particle Size Analyzer, classifying it as Air Pollution Control Equipment. The AO allowed only 15% depreciation, questioning its classification. The CIT(A) upheld the AO's decision, stating the equipment's primary function was not pollution control. The Tribunal directed the AO to re-calculate depreciation considering the date of purchase and use of the equipment, and whether it qualifies as Pollution Control Equipment.

4. Restriction of Depreciation on Opening Balance of Block of 100% Depreciable Assets:

The AO restricted depreciation on the opening balance of 100% depreciable assets to 15%, arguing that 100% depreciation should have been claimed in the earlier year. The CIT(A) upheld this restriction. The Tribunal noted the AO had accepted 100% depreciation in the preceding year and directed the AO to allow the remaining depreciation for the current year.

5. Reduction of Disallowance under Section 14A:

The AO disallowed Rs. 7.29 lacs under Section 14A, applying Rule 8D. The CIT(A) reduced this to Rs. 6.31 lacs, excluding investments in foreign subsidiaries as dividend from them is taxable. The Tribunal upheld the CIT(A)'s decision, agreeing that investments yielding taxable income should not be considered for disallowance under Section 14A.

6. Deletion of Addition on Account of Capitalization of Interest:

The AO disallowed Rs. 62.85 lacs of interest, treating it as attributable to capital work-in-progress. The CIT(A) deleted this addition, noting the Assessee had already capitalized Rs. 16.27 lacs in work-in-progress. The Tribunal found the CIT(A) accepted the Assessee's claim without allowing the AO to verify and set aside the issue for further verification by the AO.

Conclusion:

The Tribunal allowed the Assessee's appeal for statistical purposes and partly allowed the Revenue's appeal, directing further verification by the AO on specific issues.

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