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2015 (8) TMI 328 - AT - Income TaxCapital or revenue expenditure - Disallowance of expenses by way of professional charges and legal fees paid to Pacific Consultants for the Green Field Project executed in China - CIT(A) deleted the addition - Held that - We find that the expenditure incurred by the assessee was not for the purpose of exporting goods from India to China. The expenditure incurred by the assessee company to find out the feasibility of proposed new establishment in China. Therefore, the expenditure incurred by the assessee is for the purpose feasibility of establishing a new company i.e. Green Field Project in China cannot be said that it is for the purpose of the business of the assessee. It is not the case of the assessee that the project carried out by the assessee ultimately not materialized. It is only a case of the assessee that the expenditure incurred is revenue expenditure. In our opinion, the expenditure incurred by the assessee for the purpose of establishing a new manufacturing unit in China and the expenses incurred for feasibility status of the company given enduring benefit to the company which proposed to be established by the assessee. Therefore, it has to be treated as capital expenditure in the hands of the assessee company proposed to be established by the assessee and not as revenue expenditure in the hands of the assessee. CIT(A), without considering the facts in proper prospective, simply allowed the ground raised by the assessee by observing that it is for the business expedience of the assessee and directed the Assessing Officer to allow the expenditure under section 37 of the Act. We find that the order passed by the ld. CIT(A) is not correct and he has not considered the facts in right prospective. The ld. CIT(A) proceeded that the assessee company and the subsidiary which the assessee wanted to establish are one and the same. We therefore, reverse the order passed by the ld. CIT(A) on this issue. - Decided in favour of revenue. Consultancy charges paid to M/s. Chaturvedi & Shah, Chartered Accountants - Held that - The professional charges paid was relating to the proposed green field project to be established by the assessee company in China, which is not relating to the business and we find that it is not a revenue expenses. The ld. CIT(A) has observed that the expenditure incurred in the course of business. The ld. CIT(A) ignoring the material fact that the expenditure incurred by the assessee is not for the purpose of assessee s business or for the purpose of new establishment in China. We find that it cannot be said that it is for the purpose of assessee s own business and the expenditure incurred was relating to the proposed new establishment, which the assessee wanted to establish in China and therefore, it is capital expenditure. Thus, we reverse the order passed the ld. CIT(A) on this issue - Decided in favour of revenue. Disallowance of R&D expenses - CIT(A) allowed claim - Held that - The Assessing Officer has not commented anything about the supplementary agreement. It appears from the order of the ld. CIT(A) that the assessee has also filed a technical report before the ld. CIT(A). Based on that report, he has made certain observations. Such report was also not placed before us for our consideration. Before us, the ld. Counsel for the assessee has not able to explain the R&D activities carried out by the assessee on the machineries utilized by M/s. Super Sales India Limited or furnished copy of the agreement/supplementary agreement entered into between the assessee and M/s. Super Sales India Limited to consider the actual terms and conditions agreed upon by them or any other technical reports generated by the R&D department. Therefore, under these facts and circumstances, we set aside the order passed by the ld. CIT(A) on this issue and direct the Assessing Officer to examine the issue in detail by considering the terms and conditions entered into between them and the technical report as stated to have filed before the ld. CIT(A) as to whether the machineries installed by the assessee was actually used for R&D activities by the assessee and decide the issue in accordance with law. - Decided in favour of revenue for statistical purposes..
Issues Involved:
1. Condonation of delay in filing the appeal. 2. Addition of Rs. 67,24,547/- as capital expenditure. 3. Deduction of R&D expenses amounting to Rs. 4,56,43,185/-. Detailed Analysis: 1. Condonation of Delay in Filing the Appeal: The Revenue's appeal was filed late by six days. The Assessing Officer filed an affidavit requesting condonation of the delay. The assessee's counsel did not seriously object to this request. Consequently, the delay was condoned, and the appeal was admitted for hearing. 2. Addition of Rs. 67,24,547/- as Capital Expenditure: The assessee, a textile machinery manufacturer, incurred expenses of Rs. 67,24,547/- for professional charges paid to Pacific Consultants for a Green Field Project in China and legal fees of Rs. 51,00,000/- for establishing a subsidiary in China. The Assessing Officer disallowed these expenses, treating them as capital expenditure since they were related to forming a new subsidiary and not directly related to the assessee's business in India. The CIT(A) allowed the expenses under section 37(1) of the Income Tax Act, stating they were incurred for expanding the existing business and were necessary for the trade. The Tribunal, however, disagreed, concluding that the expenses were for establishing a new company in China, providing an enduring benefit, and thus should be treated as capital expenditure. The Tribunal reversed the CIT(A)'s order, allowing the ground raised by the Revenue. 3. Deduction of R&D Expenses Amounting to Rs. 4,56,43,185/-: The assessee claimed a deduction for R&D expenses incurred on installing machinery in a pilot mill. The Assessing Officer disallowed the claim, noting that the pilot mill was leased to Super Sales India Limited (SSIL), which used its resources to manufacture yarn and provided feedback to the assessee. The Assessing Officer concluded that since the machinery was used by a third party, it was not directly used for R&D by the assessee. The CIT(A) allowed the claim, stating that the machinery was used for scientific research related to the business, and the feedback from SSIL was used to improve the machinery. The Tribunal found that the CIT(A) did not properly examine the facts and agreements between the assessee and SSIL. The Tribunal set aside the CIT(A)'s order and directed the Assessing Officer to re-examine the issue, considering the agreements and technical reports to determine if the machinery was indeed used for R&D activities by the assessee. Conclusion: The appeal of the Revenue was partly allowed for statistical purposes, with the Tribunal reversing the CIT(A)'s decision on the capital expenditure and directing a re-examination of the R&D expenses.
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