2015 (7) TMI 526 - AT - Income Tax

Disallowance of the Research & Development expenses - CIT(A) granting relief of 50% - Held that - As perused the copy of the ledger account of the R & D expenditure it is very clear that the expenditure incurred is in the nature of routine expenditure for maintenance of Quality Control Department. Obviously this expenditure had not resulted in creation of an asset of enduring nature and therefore we hold that the entire expenditure should be allowed as Revenue expenditure. - Decided against revenue. Disallowance of TS 16949 certification charges - Held that - From the perusal of the material available on record as well as the expenditure furnished before the Assessing Officer we are of the opinion that the expenditure incurred is revenue in nature and does not create an asset of enduring nature and therefore we direct the Assessing Officer to allow the entire expenditure. - Decided against revenue. Capitalization of the expenditure incurred on software development - Held that - The issue in appeal is squarely covered by the Special Bench decision in the case of Amway Products Vs. DCIT (2008 (2) TMI 454 - ITAT DELHI-C ). Therefore we direct the Assessing Officer to allow the same as a revenue expenditure - Decided against revenue. Disallowance of repair and maintenance expenditure of the building - Held that - As a result of this expenditure no new asset had been created and the expenditure was incurred mainly for the purpose of maintaining the existing buildings. Therefore the ratio laid down by the Hon ble Supreme Court in the case of Ballimal Naval Kishore Vs. CIT (1997 (1) TMI 3 - SUPREME Court) is squarely applicable.- Decided against revenue. Disallowance of commission paid to Managing Director - Held that - It appears from the material on record that the commission to the Managing Director was paid on par with the other employees of the company and therefore the provisions of Section 36(1)(ii) have no application. The ratio laid down in the case of AMD Mertplas Pvt. Ltd vs. CIT (2011 (12) TMI 320 - Delhi High Court ) is squarely applicable to the facts of the case. - Decided against revenue. Taxability of DEPB incentives on the exports made - Held that - This issues is no more res integra and is covered by the Hon ble Supreme Court decision in the case of Topman Exports Pvt. Ltd. Vs. CIT (2012 (2) TMI 100 - SUPREME COURT OF INDIA ) wherein held that the DEPB credit chargeable as income under Section 28(iiib) in the year in which the assesee applied for DEPB credit against the exports made and therefore we restore this issue back to the file of the Assessing Officer with the direction that the income on account of DEPB credit should be taken into account only in the year in which the assessee had applied for the credit against the export made. Decided partly in favour of revenue for statistical purposes.

Issues Involved:
1. Disallowance of research and development expenses.
2. Disallowance of TS 16949 certification charges.
3. Capitalization of software development expenses.
4. Capitalization of building repair and maintenance expenses.
5. Disallowance of commission paid to Managing Director.
6. Taxability of DEPB incentives on accrual basis.

Issue-wise Analysis:

1. Disallowance of Research and Development Expenses:
The appellant company contended that their R&D department's expenses were routine and did not result in the creation of an asset of enduring nature. The CIT(A) had allowed 50% of the expenses as revenue expenditure. However, the Tribunal found that the entire expenditure should be allowed as revenue expenditure, as it was routine and related to the maintenance of the Quality Control Department. Therefore, the assessee's ground was allowed.

2. Disallowance of TS 16949 Certification Charges:
The assessee argued that the expenses incurred for TS 16949 certification were recurring and necessary for maintaining quality standards, and thus, should be treated as revenue expenditure. The CIT(A) had allowed 50% of these expenses as revenue expenditure. The Tribunal held that the entire expenditure was revenue in nature and directed the Assessing Officer to allow the entire amount. Consequently, this ground was allowed in favor of the assessee.

3. Capitalization of Software Development Expenses:
The assessee claimed that the software developed was unsuccessful and did not provide any enduring benefit. The CIT(A) had treated the expenditure as capital in nature. The Tribunal, referencing the Special Bench decision in Amway Products Vs. DCIT, directed that the expenditure be allowed as revenue expenditure since no enduring benefit was derived. Thus, this ground was allowed.

4. Capitalization of Building Repair and Maintenance Expenses:
The assessee argued that the expenses were for the maintenance of existing structures and did not result in the creation of new assets. The CIT(A) had upheld the Assessing Officer's decision to capitalize these expenses. The Tribunal, referencing the Supreme Court decision in Ballimal Naval Kishore Vs. CIT, held that the expenses were for maintaining existing buildings and should be treated as revenue expenditure. Therefore, this ground was allowed.

5. Disallowance of Commission Paid to Managing Director:
The Assessing Officer disallowed the commission paid, invoking Section 36(1)(ii) of the Act, arguing it was otherwise payable as dividend. The CIT(A) upheld this disallowance. The Tribunal found that the commission was paid for services rendered and not by virtue of shareholding, referencing the decision in AMD Mertplas Pvt. Ltd. Vs. CIT. Consequently, this ground was allowed in favor of the assessee.

6. Taxability of DEPB Incentives on Accrual Basis:
The CIT(A) had accepted the assessee's contention that DEPB incentives should not be taxed on an accrual basis. The Tribunal referenced the Supreme Court decision in Topman Exports Pvt. Ltd. Vs. CIT, which held that DEPB credits should be taxed in the year they are applied for. The Tribunal restored this issue to the Assessing Officer to account for DEPB credits in the appropriate year. Thus, this ground was partly allowed for statistical purposes.

Conclusion:
The appeal of the assessee was allowed, and the appeal of the Revenue was partly allowed for statistical purposes. The decision was pronounced in the open court on 8th July, 2015.

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