2015 (11) TMI 1827 - AT - Income Tax

Nature of expenses - research and development expenses - revenue or capital expenditure - Revenue pointed out that the expenditure claimed by the assessee on research and development was because of the own R D expenses carried on by the assessee - HELD THAT - Looking at the nature of expenditure incurred by the assessee, we are of the view that the same is revenue expenditure allowable as deduction in the hands of assessee either under the provisions of section 35(1)(i) or 37(1) - expenditure having been incurred by the assessee by way of research, which resulted in reduction in the weight of body parts and also generation of revenue in the hands of assessee to the extent of ₹ 4.20 crores cannot be said to be capital expenditure. Even if the expenditure is of enduring benefit, but having not been incurred in the capital field, is to be allowed as deduction in view of the ratio laid down by Pune Bench of Tribunal in Opus Software Solutions (P.) Ltd. . 2012 (11) TMI 619 - ITAT PUNE - As the nature of expenditure is not such that it can be said to be capital expenditure and in the absence of product developed by the assessee having been patented, we find no merit in the order of Assessing Officer in this regard - Decided against revenue Disallowance of premium paid on cancellation of foreign currency cover - CIT-A allowed claim - CIT(A) was of the view that the aforesaid expenditure related to payment of commitment charges for canceling agreement entered into by the assessee for FOREX cover, purchased for Dollar fluctuation relating to repayment of ECB loan and interest, therefore, the same was not in the nature of interest - HELD THAT - In order to avail the foreign exchange cover offered by Citi Bank, it had to close its agreement with DBS Bank and for pre-mature closure of the offer made by DBS Bank, the prepayment charges / commitment charges relating to the cancellation of the said foreign exchange cover was paid by the assessee. The said commitment charges are not relatable to the acquisition of any foreign assets, but are on account of business agreement entered into by the assessee, which because of its business exigencies, had to be foreclosed, in view of the offer made by the principal lender i.e. Citi Bank. Such commitment charges paid by the assessee having been paid during the course of carrying on its business are allowable as revenue expenditure in the hands of the assessee. The same are not relatable to loan taken by the assessee from Citi Bank for acquisition of assets. However, the foreign exchange cover was taken by the assessee in order to prevent itself from future currency rate fluctuations. The expenses have been incurred for the purpose of business are incidental to carrying on of the business by the assessee, are allowable as expenditure under section 37(1) - See Hon ble Supreme Court in DCIT Vs. Gujarat Alkalies Chemicals Ltd. 2008 (2) TMI 11 - SUPREME COURT and Addl.CIT Vs. Akkamba Textiles Ltd. 1996 (10) TMI 71 - SC ORDER for the said proposition. We uphold the order of CIT(A) in this regard. - Decided against revenue.

Summary

Issues Involved:

1. Deletion of addition on account of disallowance of research and development expenses.
2. Deletion of addition on account of disallowance of premium paid on cancellation of foreign currency cover.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Disallowance of Research and Development Expenses:

The Revenue's appeal concerns the deletion of an addition made by the Assessing Officer (A.O.) concerning Rs. 11,15,01,210/- spent on research and development (R&D). The assessee, engaged in manufacturing auto parts, capitalized the R&D expenses in its books but claimed them as a deduction in its total income computation. The A.O. disallowed this, viewing the expenses as capital in nature, arguing they brought an enduring benefit and created a new asset. The CIT(A) noted no dispute on the expenditure's purpose or nature, which included salary, labor charges, and purchases. The CIT(A) concluded the expenses were for improving designs and processes, thus qualifying as revenue expenditure, not capital. The CIT(A) held the expenses allowable under section 35(1)(i) or 37(1) of the Income-tax Act, 1961, as they did not result in a capital asset or enduring benefit.

The Tribunal upheld the CIT(A)'s order, emphasizing that the accounting treatment in the books does not determine the deductibility of the expenditure. The Tribunal found the expenses to be revenue in nature, incurred for business purposes, and resulting in revenue generation, thus allowable under sections 35(1)(i) or 37(1) of the Act.

2. Deletion of Addition on Account of Disallowance of Premium Paid on Cancellation of Foreign Currency Cover:

The second issue relates to the deletion of an addition made by the A.O. concerning Rs. 67,51,549/- paid as premium for canceling a foreign currency cover. The assessee had taken a loan from Citi Bank and entered into a forward cover agreement with DBS Bank to mitigate exchange rate fluctuation risks. Later, Citi Bank offered a better rate, leading the assessee to cancel the DBS Bank contract, incurring commitment charges. The A.O. disallowed the proportionate premium, viewing it as capital expenditure related to acquiring fixed assets and foreign subsidiaries.

The CIT(A) held the expenditure as not being in the nature of interest under section 36(1)(iii) but allowable under section 37(1) of the Act as it was incurred wholly and exclusively for business purposes. The Tribunal upheld this view, noting the commitment charges were not for acquiring assets but were business expenses incurred due to business exigencies. The Tribunal found the expenses allowable under section 37(1), supported by the Supreme Court rulings in DCIT Vs. Gujarat Alkalies & Chemicals Ltd. and Addl.CIT Vs. Akkamba Textiles Ltd.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s findings that both the R&D expenses and the commitment charges for canceling the foreign currency cover were revenue expenditures allowable under the relevant sections of the Income-tax Act, 1961. The Tribunal emphasized the business purpose and nature of the expenses, aligning with established legal principles and precedents.