9911796707
TMI Blog2013 (11) TMI 466X X X X Extracts X X X X X X X X Extracts X X X X ..... as capital expenditure – In the computation these expenditure were claimed under section 37/ 35(1)(iv) of the Act and going into the nature of expenditure it was held that the expenditure did not reflect that any new capital asset had came into existence. The expenditure were held to be allowable under section 37(1) of the Act – In the present case, expenditure claimed by the assessee are revenue expenditure and are allowable in the year under consideration under section 37(1) of the Act – Decided in favor of Assessee. - ITA No.5311/Mum/2011 - - - Dated:- 16-4-2013 - I P Bansal and D Karunakar Rao, JJ. For the Appellant : Shri S V Pathak For the Respondent : Shri A C Tejpal ORDER:- Per: I P Bansal: This is an appeal filed by the assessee. It is directed against the order passed by Ld. CIT(A)-17 Mumbai dated 30/05/2011 for A.Y 2006-07. The grounds of appeal read as under: The following grounds are taken without prejudice to each other on facts and in law, 1) The learned CIT (A) erred in confirming the disallowance of Research and Development Expenditure incurred by the appellant company of Rs. 2,23,02,662/- 2) The learned CIT (A) erred in hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 0 TOTAL 3,25,38,952 2,23,02,662 5,57,41,614 0 2.1 The A.O asked the assessee to explain the nature of the assets on which 100% depreciation was claimed. Vide letter dated 23/11/2008 , copy of which is placed at page 2 3 of the paper book, it was explained that these are revenue expenditure which include the material cost; sub-contract charges, salary; car, travelling; telephone; employees of the R D Department; profession fees; freight; power and fuel; printing and stationary, financial cost etc. and it was submitted that all these expenditure are revenue in nature and they should be allowed at 100% under section 35(1)(i) and 35(1)(iv) of the Income Tax Act, 1961 (the Act). It was also submitted that there was no question of wrong claim and entire amount has rightly claimed which has to be allowed. Again vide letter dated 24/12/2008 similar submissions were made and it was submitted that on the brought forward part i.e. Rs.3,25,38,952/- depreciation @ 25% should be allowed and on another amount of Rs. 2,23,02,662/- being representing revenue expenditure should be allowed in their entirety. On these submissions Ld. AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance only to the extent of Rs.2,23,02,662/- which pertain to expenditure incurred in the year under consideration. During the course of hearing before Ld. CIT(A) a detailed reply was filed by the assessee which is dated 15/12/2009, copy of which is placed at pages 79 to 88 of the paper book, in which it was stated that the claim of the assessee is now limited to a sum of Rs.2,23,02,662/- instead of original claim of Rs.5,48,42,614/-. The submissions of the assessee in the letter dated 15/12/2009 have been summarized by Ld. CIT(A) in page- 3 of his order and for the sake of convenience they are reproduced below: That the assessee is manufacturing automobile parts and exporting the same as well as supplying them to local OEMS (Original Equipments Manufactures). To manufacture these parts substantial R D is required. This is basically to meet requirement of the OEMS. In the earlier years the assessee had incurred expenditure of this nature on GE Liner Development Project and EATON Project. The same was capitalized and depreciation claimed in the current year. Even though it had claimed 100% depreciation in the current year however, it was not pressing its claim in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Development expenditure and EATON project development expenditure are written off. Development expenditure incurred during the year is treated as revenue expenditure for the Income-tax purposes 3.2 He further observed that under Schedule V of the balance sheet the expenditure of Rs.2,23,02,662/- was shown as an addition to G.E. Product Development expenditure and such fact shows that current year expenditure is also with regard to G.E. Product expenditure and is not a separate expenditure. Referring to clause -15 of Form 3CD, where auditor of the assessee had stated N.A against the amount stated to be admissible under section 35 and thus he observed that the current year expenditure are on account of G.E Liner Development expenditure which were capitalized by the assessee in its books of account in the past years also on the ground that this is a new line of business and no depreciation was claimed on the same. In the current year it is clear from the depreciation chart that assessee has claimed depreciation on the same on the ground that business had commenced during the year. Therefore, he observed that assessee is not right in claiming that the current year expenditure hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Interest 1215313 Total 22302663 He submitted that in the replies filed before AO it was time and again submitted that all these expenditure are in the nature of revenue. Though these expenditure were capitalized in the books of account but it was claimed @100% in the computation of income. Referring to the assessment order it was submitted by Ld. AR that even AO has admitted that the expenditure incurred by the assessee is relatable to the business of the assessee but AO has rejected the claim of the assessee as according to him those expenditure have enduring benefit. Therefore, Ld. A.O has held that entire amounts of expenditure has to be treated as capital expenditure. He submitted that even before Ld. CIT(A) vide letter dated 15/12/2009 vide para 11 it was clearly submitted that the expenditure has been incurred for development of new products or modification of existing product and such fact has also been accepted by the A.O. The expenditure was basically in the nature of research and development in assessee s existing line of business. Ld. AR further submitted that summary of parts developed during the relevant financial year was al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... developed various products which were sold to different customers. These expenditure comprised of employees salaries, software consultancy/training expenditure and indirect cost by way of administrative and other expenses, e.g. power and fuel, printing and stationary, marketing, rent, professional, office expenses, rate and tax, books and periodicals etc. From those expenditure it was found that these expenditure cannot be said to have resulted in acquisition of new asset, therefore, the contention of the revenue that these expenditure should be considered to be capital expenditure as they have given an enduring benefit to the assessee was to be rejected. Reference by the Tribunal was also made to the decision of Hon ble Supreme Court in the case of Empire Jute Co. Ltd. vs. CIT, 124 ITR 1 (SC), wherein it was held that the true test to ascertain the nature and import of expenditure is to examine the same from commercial perspective. Even if, it has to be accepted that the expenditure results in an enduring benefit to the assessee, yet every incidence of enduring benefit would not result in classification of expenditure as a capital expenditure Thus it was held that the expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... custom duty on imported material, testing charges, tooling charges, development of PCBs, Laser print for PCB layouts etc., it was held that from nature of these expenditure do not reflect that new capital asset had come into existence. Therefore, the claim was allowed under section 37(1) of the Act. (4) DCIT vs. Reddiff.com India Ltd., 144 TTJ 679: The assessee in that case is engaged in internet related services. It had incurred software usage product development expenses which was held to be allowable as revenue expenditure to the extent the same were routine and periodic expenditure not resulting in creation of new assets. 4.1 Thus it was pleaded by Ld. AR that the claim of the assessee should be allowed. 5. On the other hand, relying upon the observation of Ld. CIT(A) in para 3.8 it was submitted by Ld. DR that the expenditure incurred by the assessee were capitalized in the books in the past year on the ground that this was new line of business. Ld. D.R further submitted that even audit report submitted by the assessee did not mention about these expenditure being for research and development activity being entitled for deduction under section 35. He submitted that accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as capital expenditure, which is also the case with the assessee as they themselves had recognized it as capital expenditure in al the three years. However, depreciation is allowed @ 25% on the same, including the expenditure incurred in the year under consideration. Thus, after allowing dprepciation @ 25% on the amount of capital expenses of Rs.1,39,35,404/- the balance amount of Rs.4,18,06,211/- is disallowed. (emphasis ours) Thus, mainly the case of AO is that assessee could not substantiate its claim that these expenditure were for scientific research and development, hence according to AO these could not be allowed under section 35(i) and 35(iv) of the Act. Though the expenditure incurred are relatable to the business of assessee but they cannot be allowed in their entirety on the ground that they have given enduring benefit to the assessee. The AO has also supported his action on the basis of treatment given by the assessee to these expenditure in earlier year where these were treated as deferred revenue expenditure and they were shown as intangible assets on which depreciation @25% was claimed. 6.1 We have also carefully gone through the submissions made by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom commercial perspective. Even if, it is being accepted that the expenditure results in an enduring benefit to the assessee, yet every incidence of enduring benefit would not result in a classification of expenditure as a capital expenditure and this is clear from the following observation from the said decision. There may be cases where expenditure even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may breakdown. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is nature of the principle laid down in this test. What is material to consider is nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee s trading operations or enabling the management and conduct of the assessee s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
