2013 (10) TMI 924 - AT - Income Tax

Die tooling charges as revenue expenditure or capital expenditure Held that - Tribunal in the case of DCIT vs Metalman Auto Private Ltd 2000 (6) TMI 123 - ITAT CHANDIGARH-A Chandigarh, on identical fact, decided in favour of the assessee - It was held to be revenue in nature since the expenditure were incurred for modernization of existing projects, which was already manufacturing the same products, and simply to increase the business more efficiently and more profitability, especially when the expenses were incurred for making technological changes. It is not the case of the revenue that new machinery was installed rather the assessee incurred expenses for the improvement of product and quality with an object of achieving maximum output by improving the already existing machinery, therefore, it cannot be said that it is setting up of altogether new business Decided in favor of Assessee. Expenditure as Revenue or capital - The assessee paid a sum of Rs. 58,44,711/-, under technical collaboration agreement, to M/s Ring Tech Company. Japan. A sum of Rs. 25,53,906/- was paid under the original agreement for the period of 3 years from 23.6.97 to 22.6.2000 and Rs. 32,90,805/- was paid under the new agreement which is extension of original agreement from 23.6.2000 to 22.6.2002, for a period of 2 years - Main purpose of these agreements was to increase the productivity from present average level of 210 wheels pear hours to 340 wheels per hours and further for reduction of rejections substantially - Main object of the second agreement was to improve productivity, resolution of licenses, chronic quality problems, reducing process rejection/rework and technical up-gradation in the existing car line and introducing of the manufacturing facility of tractor wheels Held that - The object was to effect economy and efficiency in the manufacturing process. The acquisition of the knowledge has helped in substantial increase in production but in face of swift changes occurring in the technological world, it cannot be said that the changed method of the technology acquired by the appellant would be of permanent nature. Reliance has been placed upon the judgment in the case of CIT vs Swaraj Engines Ltd 2006 (5) TMI 57 - PUNJAB AND HARYANA HIGH COURT , wherein the assessee claimed deduction for an amount of Rs. 26,65,340/- paid to M/s Kirloskar Oil Engines Ltd as royalty on the basis of agreement for the purposes of acquiring technical know how. It was decided in favour of the assessee by upholding the decision of the Tribunal.

Summary

Issues Involved:
1. Disallowance of notional sales tax liability as capital receipt.
2. Disallowance of depreciation on assets due to subsidy.
3. Assessment of die tooling charges as capital expenditure.
4. Assessment of technical know-how expenditure as capital expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of Notional Sales Tax Liability as Capital Receipt:
During assessment, the Assessing Officer (AO) observed that the assessee received a sales tax subsidy amounting to Rs. 6,65,19,673/-, treated as a capital receipt by the assessee. The AO, referencing the Punjab & Haryana High Court decision in Abhishek Industries Ltd (286 ITR 1), classified the subsidy as revenue receipt. The CIT(A) upheld this view, following the Tribunal's decision in the earlier years. The Tribunal, after considering the rival submissions, reiterated its stance from ITA No. 756/Chd/2011, confirming that sales-tax subsidy quantified at a percentage of fixed capital investment is a revenue receipt, thus deciding against the assessee.

2. Disallowance of Depreciation on Assets Due to Subsidy:
The AO reduced the subsidy amount from the Written Down Value (WDV) of the assets, thereby reducing depreciation by Rs. 6,36,750/-, citing Explanation 10 to Section 43(1) of the Income Tax Act, 1961. The assessee contended that the subsidy was for expansion and not specific to any asset. However, the CIT(A) upheld the AO's decision, and the Tribunal confirmed this, stating that subsidy must be reduced from the cost of fixed assets as per Explanation 10 to Section 43(1).

3. Assessment of Die Tooling Charges as Capital Expenditure:
The AO disallowed die tooling charges of Rs. 6,57,48,421/-, treating them as capital expenditure. The assessee argued that these expenses were for improving existing products and should be classified as revenue expenditure. The CIT(A) allowed the appeal, referencing the Tribunal's decision for the assessment year 2008-09. The Tribunal, considering the rival submissions, upheld the CIT(A)'s decision, noting that the expenses were for modernization and efficiency improvement, aligning with the Tribunal's previous decisions in similar cases, thus deciding in favor of the assessee.

4. Assessment of Technical Know-how Expenditure as Capital Expenditure:
The AO disallowed technical know-how expenses of Rs. 48,53,094/-, classifying them as capital expenditure. The assessee argued that these expenses were for improving manufacturing efficiency and did not result in acquiring a new capital asset. The CIT(A) allowed the appeal, referencing the Tribunal's decision for the assessment year 2008-09. The Tribunal upheld the CIT(A)'s decision, citing previous Tribunal decisions that classified similar expenses as revenue expenditure, thus deciding in favor of the assessee.

Conclusion:
The Tribunal dismissed both the assessee's and the Revenue's appeals, upholding the CIT(A)'s decisions on all issues. The sales tax subsidy was confirmed as a revenue receipt, depreciation was correctly reduced by the subsidy amount, and both die tooling and technical know-how expenses were classified as revenue expenditure. The judgment emphasizes adherence to legal precedents and specific provisions of the Income Tax Act.