2014 (3) TMI 1188 - AT - Income Tax

Disallowance u/s 14A of the Act read with Rule 8D -CIT-A deleted the addition - HELD THAT - The impugned Assessment Year is 2007-2008. The jurisdictional High Court in the case of Maxopp Investment Ltd. 2011 (11) TMI 267 - DELHI HIGH COURT has laid down that Rule 8D would apply only from the AY 2009-10. Thus the order of the Ld.CIT(A) on this count is hereby upheld. Disallowance of product development expenses on the ground that the same is deferred revenue expenditure - only ground of disallowance is that the assessee has got an enduring benefit for a period of 3 years - HELD THAT - Undisputed fact is that the expenditure in question is incurred for preparation of samples as per requirement of foreign buyers.The assessee company dealing with the wide range of buyers for apparels, home furnishings and other accessories. It has a separate dedicated product team, working to create new designs in style. Prototype designs are developed and sent to different buyers - As decided in MAX INDIA LTD. 2006 (6) TMI 422 - ITAT AMRITSAR the expenses incurred by the assessee for improving and developing new varieties of films were not capital in nature since these did dnot pertain to extension of its business nor there was any ;change in the installed capacity. Also, the expenses were donot subject to section 35D of the Act as they were allowable u/s 37(1) of the Act even if the assessee had amortised these expenses in its books of accounts - claim of the appellant for allowability of impugned expenditure as revenue expenditure is justified - Decided in favour of assessee.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act.
2. Disallowance of product development expenses as deferred revenue expenditure.

Issue 1 - Disallowance under section 14A:
The appeal was filed by the Revenue against the order of the Ld.CIT(A)-XVI, New Delhi for the Assessment Year 2007-08. The Assessing Officer made a disallowance under section 14A by applying Rule 8D. The first appellate authority allowed the appeal. The Revenue challenged the deletion of the disallowance before the ITAT Delhi. The ITAT upheld the order of the Ld.CIT(A) based on the jurisdictional High Court's ruling that Rule 8D would apply only from the AY 2009-10. The ITAT also found no infirmity in the Ld.CIT(A)'s decision on the quantity of disallowance under section 14A, as upheld in previous years' cases. The ITAT dismissed the Revenue's appeal on this ground.

Issue 2 - Disallowance of product development expenses as deferred revenue expenditure:
The Revenue appealed against the deletion of the addition made by the Assessing Officer on account of 1/3rd of product development expenses. The ITAT referred to the judgment of the Hon'ble Delhi High Court in a similar case, which held that the expenditure on publicity and advertisement should be treated as revenue in nature and allowed fully in the year incurred. The ITAT applied this principle to the case at hand, where the expenditure was incurred for preparing samples for foreign buyers. The ITAT noted that the genuineness of the expenditure was not questioned, and the only ground for disallowance was the alleged enduring benefit for 3 years. However, the ITAT upheld the first Appellate Authority's decision, citing various case laws supporting the allowability of such expenses as revenue expenditure. Consequently, the ITAT dismissed the Revenue's appeal on this ground as well.

In conclusion, the ITAT Delhi upheld the orders of the Ld.CIT(A) on both issues, dismissing the Revenue's appeal in its entirety.