2020 (10) TMI 404 - AT - Income Tax

Nature of expenditure - R D expenditure - revenue or capital expenditure - Alternative claim u/s 35(1)(iv) r.w.s. 35(2)(ia) - As per assessee expenditure incurred for development of new product range as well as valued engineering of existing product ranges and same resulted into enduring benefit to the assessee - CIT(A) rejected the contentions of the assessee and affirmed the finding of the ld.AO - HELD THAT - AO has not even granted depreciation - overall analysis of the record would indicate that the assessee has incurred this expenditure for fulfilling the requirement of a specified product required to be supplied to a particular customer. Raw- Material, tools designs ultimately determined by the assessee and used for manufacture of customised products were not meant for uniform application for other customers also, and therefore the expenditure incurred for development of customized products and manufactured and sold by the assessee need not to be capitalized. These are to be treated as revenue expenditure and deserve to be allowed under section 37 of the Income Tax Act. Alternative argument of assessee even in that case the expenditure is allowable under section 35 - These are the expenditure which were incurred by the assessee for preparing pro-type or preparing a product specifically required by its customers. In other words, it has incurred certain expenditure for development on a mechanism which can help it to produce a product specifically demanded by a specific customer, and according to the needs of that customer. If any amount is being incurred towards R D for the purpose of business for manufacturing customized products, then that can be considered under R D which can be allowed under section 35(1)(iv) r.w.s. 35(2)(ia) of the Act. In view of the above discussion, we are of the view that the claim of the assessee deserves to be allowed.

Issues Involved:
1. Reopening of the assessment under section 148 of the Income Tax Act, 1961.
2. Disallowance of alleged R&D expenditure amounting to ?10,42,41,078/-.
3. Levy of interest under sections 234A, 234B, and 234C of the Act.
4. Initiation of penalty under section 271(1)(c) of the Act.

Issue-wise Detailed Analysis:

1. Reopening of the assessment under section 148 of the Income Tax Act, 1961:
The assessee challenged the reopening of the assessment by issuance of a notice under section 148. However, no arguments were advanced by the counsel for the assessee during the hearing. Consequently, the Tribunal deemed it unnecessary to comment on this issue and rejected this ground of appeal.

2. Disallowance of alleged R&D expenditure amounting to ?10,42,41,078/-:
The assessee filed its original return declaring a total income of ?27,37,55,058/-. The assessment was reopened on the belief that the R&D expenditure claimed as revenue expenditure should have been capitalized. The AO issued a detailed show-cause notice and after considering the assessee’s submissions, disallowed the claim of ?10,42,41,078/- as revenue expenditure, treating it as capital in nature, and did not allow depreciation.

The assessee contended that the expenditure was incurred for manufacturing customized products based on specific customer requirements and should be treated as revenue expenditure. The Tribunal noted that the AO failed to appreciate the nature of the assessee’s business and generalized the activities, leading to an incorrect conclusion. The Tribunal emphasized that the expenditure was incurred for fulfilling specific customer requirements and did not result in an enduring benefit. Therefore, the expenditure should be allowed as revenue expenditure under section 37 of the Income Tax Act.

Alternatively, the Tribunal considered the argument that the expenditure, even if treated as capital in nature, should be allowed under section 35 of the Act. The Tribunal referred to relevant provisions and judgments, including the Gujarat High Court’s judgment in CIT Vs. Gujarat Aluminium Extrusions, which supported the assessee’s claim. The Tribunal concluded that the expenditure incurred for preparing a product specifically required by customers should be allowed under section 35(1)(iv) r.w.s. 35(2)(ia) of the Act. Consequently, the disallowance of ?10,42,41,078/- was deleted.

3. Levy of interest under sections 234A, 234B, and 234C of the Act:
The assessee challenged the levy of interest under sections 234A, 234B, and 234C. The Tribunal noted that this issue was consequential in nature and rejected the ground of appeal.

4. Initiation of penalty under section 271(1)(c) of the Act:
The assessee challenged the initiation of penalty under section 271(1)(c). The Tribunal found this issue to be premature at this stage and noted that the assessee would get a fresh opportunity to adjudicate whether the penalty should be imposed. Hence, this ground of appeal was also rejected.

Conclusion:
The appeal of the assessee was partly allowed, with the significant relief being the deletion of the disallowance of ?10,42,41,078/- towards R&D expenditure. The Tribunal pronounced the order on 5th October 2020 at Ahmedabad.

← Previous Next →