2023 (3) TMI 1522 - AT - Income Tax

Nature of expenses - Disallowance of product development expenses - DRP has taken the view that the beneficiary of these expenses is the AE of the assessee - HELD THAT - Since the issue involved in the impugned assessment year is akin to the order passed in assessee s own case for the assessment year 2014-15 2022 (2) TMI 1338 - ITAT BANGALORE wherein as noticed that the expenses incurred by the assessee under this head consisted of Registration expenses, Field Trial expenses, Cost of samples issued and Testing fee other charges. We notice that the AO has taken the view that these expenses are capital in nature. On the contrary, the Ld DRP has taken the view that the beneficiary of these expenses is the AE of the assessee. Hence, it is necessary to find out as to whether the assessee has incurred all these expenses on its own account or on behalf of its AE. If the assessee has incurred expenses on behalf of the AE and the benefits of these expenses go the AE, then the Ld DRP was justified in disallowing this claim. If it is not so, then the assessee is required to prove that these expenses are not capital in nature. The facts available on record are not clear as to whether these expenses are routine expenses incurred for expansion of existing business or not. If it is so, then the relevant expenses are allowable as revenue expenditure. In the absence of relevant details, we feel it proper to restore this issue to the file of AO for examining it afresh in the light of discussions made supra and also in accordance with law. Accordingly we restore this issue to the file of AO. Disallowance of finance lease expenses - HELD THAT - As decided in assessee s own case for the assessment year 2014-15 2022 (2) TMI 1338 - ITAT BANGALORE this issue is now settled by Hon ble Supreme Court in the case of ICDS 2013 (1) TMI 344 - SUPREME COURT wherein the Hon ble Apex Court held that the lessor is the owner of the leased property in case of finance lease and he is entitled to depreciation on it. The contra is that the lessee is eligible to claim the lease payments as deduction. Hence the view taken by the tax authorities are against the decision rendered by Hon ble Supreme Court. Accordingly we direct the AO to allow the claim of the assessee in accordance with the decision. Setting off of brought forward losses - DRP direct the AO to verify the records and allow the Claim - HELD THAT - We are in agreement with the direction of the DRP, therefore, the AO is directed to verify the claim of the assessee and allow the set off of brought forward losses if available for set off as per provisions of the Act, therefore, this ground is allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of product development expenses.
2. Disallowance of finance lease expenses.
3. Incorrect computation of brought forward losses.

Detailed Analysis:

1. Disallowance of Product Development Expenses
Facts:
The assessee incurred product development expenses amounting to INR 3,11,88,108, which were claimed as revenue expenditure. The expenses included costs related to registration, testing, and incidental charges necessary for obtaining approval from the Central Insecticide Board (CIB) for commercial use of pesticides.

AO's Contentions:
The AO disallowed the expenses, categorizing them as capital expenditure because they provided enduring benefits to the assessee, leading to the commercial utilization of pesticides.

Appellant's Contentions:
The appellant argued that these expenses were integral to the profit-earning process and did not result in the acquisition of any asset or enduring benefit. The expenses were incurred to expand the existing business line and should be deductible under section 37(1) of the Act.

DRP's Directions:
The DRP upheld the AO's decision, stating that the expenses were capital in nature as they helped generate intangible assets like patents and intellectual property rights (IPR).

Tribunal's Decision:
The Tribunal referred to the assessee's own case for the assessment year 2014-15, where a similar issue was remanded to the AO for fresh examination. The Tribunal directed the AO to reassess whether the expenses were routine and necessary for business expansion or if they were indeed capital in nature. The AO was instructed to decide the issue afresh in accordance with the law.

2. Disallowance of Finance Lease Expenses
Facts:
The assessee took vehicles on finance lease and claimed annual lease rental payments as revenue expenditure. The vehicles were not added to the block of assets, and no depreciation was claimed.

AO's Contentions:
The AO disallowed the expenses, arguing that the lease provided enduring benefits and was capital in nature. The AO also noted that the finance lease term was six years, and the vehicles would be used for a substantial part of their economic life.

Appellant's Contentions:
The appellant contended that the lease payments were for utilizing the vehicles for business purposes and should be deductible under section 37(1). The appellant also cited CBDT Circular No. 2 dated 9 February 2001 and previous years' assessments where similar claims were allowed.

DRP's Directions:
The DRP upheld the AO's decision, stating that the finance lease payments were capital expenditure and not allowable as revenue expenditure.

Tribunal's Decision:
The Tribunal referred to the Supreme Court's decision in ICDS vs CIT (2013) (350 ITR 527), which held that the lessor is the owner of the leased property and entitled to depreciation, while the lessee can claim lease payments as deductions. The Tribunal directed the AO to allow the claim in accordance with this Supreme Court decision.

3. Incorrect Computation of Brought Forward Losses
Facts:
The AO computed the business loss and unabsorbed losses as INR 96,26,53,346 instead of INR 158,32,42,033.

Appellant's Contentions:
The appellant argued that the AO and DRP erred in their computation, which was consequential to earlier years' assessment proceedings.

DRP's Directions:
The DRP directed the AO to verify the records and allow the setting off of brought forward losses if available, in accordance with the provisions of the Act.

Tribunal's Decision:
The Tribunal agreed with the DRP's direction and instructed the AO to verify the claim and allow the set-off of brought forward losses as per the law.

Conclusion:
The appeal was partly allowed for statistical purposes, with directions for the AO to reassess and verify the claims related to product development expenses, finance lease expenses, and brought forward losses. The Tribunal's decisions were grounded in previous judgments and relevant legal provisions, ensuring a thorough and fair reassessment.