2020 (11) TMI 417 - AT - Income Tax

Violation of the provisions of Rule 46A of Income Tax Rule - assessee has made a fresh claim before CIT-(A) which was not made either in the Income tax Return or before the AO during the assessment proceedings - HELD THAT - Income of the assessee has to be determined under the provisions of Act. In case the assessee unknowingly omitted to claim the deduction either in the Income Tax Return or during the assessment proceedings it is entitled claim the benefit of such deduction before the higher authorities In holding so we place our reliance on the judgment in case of CIT vs. Mitesh Impex Ors 2014 (4) TMI 484 - GUJARAT HIGH COURT The assessee, indeed made a fresh claim before the Learned CIT-(A) but did not file any fresh documents. Moreover, the Learned CIT-(A) after admitting the fresh claim directed the AO to allow the deduction of the same after verification and quantification of the expenses - AO is still empowered to reject the claim of the assessee if such expenses represents the capital expenditure within the provisions of law. As such, we find that there was no fresh evidences as alleged by the revenue, which were entertained by the Learned CIT-(A) in violation of the provisions of Rule 46A of Income Tax Rule. Accordingly, we hold that there was no violation of the provisions of Rule 46-A of Income Tax rules. Product Development Expenses - Nature of expenses - Expenses are recurring in nature - We also note that the ld. DR has not brought anything on record suggesting that there was any benefit of enduring nature or any new assets coming into existence out of such expenses. Accordingly, we hold that such expenses are of revenue in nature but subject to verification of the AO as held by the CIT-(A). Hence, we uphold the finding of the Learned CIT-(A). Thus, the ground of appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Whether the CIT(A) erred in directing the AO to allow Product Development Expenses as revenue expenses.
2. Whether the CIT(A) violated Rule 46A by admitting a fresh issue during the appellate proceedings.

Detailed Analysis:

Issue 1: Allowance of Product Development Expenses as Revenue Expenses:

The Revenue contended that the CIT(A) erred in directing the AO to allow Product Development Expenses amounting to ?3,47,32,310/- for A.Y. 2013-14 and ?3,72,39,500/- for A.Y. 2014-15 as revenue expenses. They argued these expenses were capital in nature since they were incurred for developing new products, providing benefits extending to succeeding years.

The assessee, a limited company engaged in manufacturing automotive products, filed returns for the respective years and later claimed these expenses under Section 37(1) of the Income Tax Act. The CIT(A) allowed the fresh claim, referencing past judgments, including the Hon’ble Gujarat High Court in CIT vs. Mitesh Impex & Ors (2014) and the Hon’ble Bombay High Court in CIT vs. Pruthvi Brokers & Shareholders (2012).

The CIT(A) found that similar claims were allowed by the ITAT in earlier years (ITA Nos. 1337 & 1339/Ahd/2011). Thus, the CIT(A) directed the AO to allow the claim after verification and quantification of expenses. The ITAT upheld this decision, noting that the Revenue did not provide evidence of any enduring benefit or new assets resulting from these expenses. The ITAT concluded that the Product Development Expenses were recurring and revenue in nature, subject to AO's verification.

Issue 2: Violation of Rule 46A:

The Revenue argued that the CIT(A) violated Rule 46A by admitting a fresh issue not claimed during the assessment proceedings. However, the assessee contended that appellate authorities are empowered to entertain fresh claims, supported by the Hon’ble Gujarat High Court in CIT vs. Mitesh Impex & Ors and the Hon’ble Bombay High Court in CIT vs. Pruthvi Brokers & Shareholders.

The ITAT noted that the assessee did not submit fresh documents but made a fresh claim based on existing records. The CIT(A) directed the AO to verify and quantify the expenses, ensuring no violation of Rule 46A occurred. The ITAT cited the Supreme Court's judgment in Jute Corpn. of India Ltd. v. CIT, affirming that appellate authorities can entertain new claims if facts are already on record.

Judgment:

The ITAT dismissed the Revenue's appeals for both A.Y. 2013-14 and A.Y. 2014-15. It upheld the CIT(A)'s decision to allow the Product Development Expenses as revenue expenses, subject to AO's verification, and found no violation of Rule 46A. The ITAT emphasized that the expenses were recurring and did not result in any enduring benefit or new assets.

Conclusion:

The ITAT confirmed that the Product Development Expenses should be treated as revenue expenses, aligning with previous ITAT decisions and judicial precedents. The appeals filed by the Revenue were dismissed, affirming the CIT(A)'s orders for both assessment years.