Thuse Elektronics Pvt. Ltd., Pune V. Assistant Commissioner of Income-tax,

ITA 1132/PUN/2016

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 5232 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 8 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-02-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 05-02-2019
• Assessment Year: 2010-2011
• Appeal Filed On: 27-05-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: THIS CONSOLIDATED
• Assessee Lawyers: RELATE TO ASSESSMENT YEARS
• Keywords: Depreciation; Revenue expenditure; Capital expenditure; Set aside

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER . / ITA NOS.1130 TO 1132/PUN/16 / ASSESSMENT YEARS : 2007-08, 2008-09 & 2010-11 THUSE ELECTRONICS PVT. LTD., PLOT NO.33A, SECTOR-7, PCNTDA, BHOSARI, PUNE 411 003 PAN : AAACT6285F VS. ADDL.CIT, RANGE-7, PUNE/ DCIT, CIRCLE-7, PUNE (APPELLANT) (RESPONDENT) / ORDER PER R.S.SYAL, VP : THESE THREE APPEALS BY THE ASSESSEE RELATE TO THE ASSESSMENT YEARS 2007-08, 2008-09 & 2010-11. SINCE SO ME OF THE ISSUES RAISED IN THESE APPEALS ARE COMMON, WE ARE, THEREFORE, PROCEEDING TO DISPOSE THEM OFF BY THIS CONSOLIDATE D ORDER FOR THE SAKE OF CONVENIENCE. A.Y. 2007-08 : 2. THE FIRST GROUND IS AGAINST DISALLOWING RESEARCH & DEVELOPMENT CAPITAL EXPENDITURE OF RS.1,26,100/- ON THE APPELLANT BY SHRI C.H. NANIWADEKAR RESPONDENT BY MS. SHABANA PARVEEN DATE OF HEARING 05-02-2019 DATE OF PRONOUNCEMENT 06-02-2019 ITA NOS. 1130 TO 1132/PUN/2016 THUSE ELECTRONICS PVT LTD., 2 GROUND THAT NO DOCUMENTARY EVIDENCE OF ANY REAL R&D ACTIVITY BY THE ASSESSEE, WAS FURNISHED. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESS EE COMPANY IS MANUFACTURING ELECTRONIC PRODUCTS SINCE 1989. I T CLAIMED DEDUCTION OF R&D CAPITAL EXPENDITURE OF RS.1,26,100/- AND REVENUE EXPENDITURE OF RS.1,01,45 5/-. THE ASSESSING OFFICER ALLOWED DEDUCTION IN RESPECT OF THE REVEN UE EXPENDITURE. AS REGARDS THE CAPITAL EXPENSES OF RS.1,26, 100/-, THE AO HELD THAT THE CLAIM MADE U/S.35(2) OF THE INCOME-T AX ACT, 1961 (HEREINAFTER ALSO CALLED `THE ACT) WAS NOT SUSTAINABLE AS THE ASSESSEE WAS NOT APPROVED BY ANY CEN TRAL GOVERNMENT AGENCY. TREATING SUCH AMOUNT OF RS.1,26,100 /- AS CAPITAL EXPENDITURE, THE AO ALLOWED DEPRECIATION @15% AND MADE DISALLOWANCE OF RS.1,16,550/-. THE LD. CIT(A) HELD THAT THERE WAS NO REQUIREMENT OF REGISTRATION AS HELD BY THE AO. HE HOWEVER, DID NOT ALLOW ANY RELIEF ON THE GROUND THAT THE ASSESSEE COULD NOT PROVE THE FACT OF HAVING CARRIED OUT ANY R&D ACTIVITY, AGAINST WHICH THE ASSESSEE HAS APPROACHED THE TRIBUNAL. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND GONE THROUGH THE RELEVANT MATERIAL ON RECORD. SECTION 35(1) OF THE ACT ITA NOS. 1130 TO 1132/PUN/2016 THUSE ELECTRONICS PVT LTD., 3 PROVIDES FOR DEDUCTION IN RESPECT OF RESEARCH & DEVELOPM ENT EXPENDITURE. CLAUSE (I) OF SECTION 35(1) STATES THAT ANY EXPENDITURE, NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE, LA ID OUT OR EXPENDED ON SCIENTIFIC RESEARCH RELATED TO THE BUSINES S SHALL BE ALLOWED AS DEDUCTION. CLAUSE (IV) OF SECTION 35(1) PROVIDES THAT DEDUCTION IN RESPECT OF EXPENDITURE OF CAPITAL NATURE ON SCIENTIFIC RESEARCH RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE SHALL BE ALLOWED AS DEDUCTION IN TERMS OF SU B- SECTION (2). SUB-SECTION (2) OF SECTION 35, IN SO FAR AS IT CONCERNS THE ISSUE IN THE INSTANT APPEAL, PROVIDES FOR AL LOWING THE DEDUCTION FOR THE FULL AMOUNT OF CAPITAL EXPENDITURE. THU S, IF SOME CAPITAL EXPENDITURE IS INCURRED ON RESEARCH & DEVELOPMENT, THE SAME HAS TO BE ALLOWED AS DEDUCTION IN FULL IN THE YEAR OF INCURRING. IF ON THE OTHER HAND, THE ASS ESSEE FAILS TO PROVE THAT THE EXPENDITURE OF CAPITAL NATURE WAS IN CONNECTION WITH THE RESEARCH AND SUCH EXPENDITURE INVOLVES CREATION OF ANY ASSET, THE SAID EXPENDITURE ENTITLES THE ASSESS EE TO CLAIM DEPRECIATION AT THE ELIGIBLE RATE. 5. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE ASSESSEE CLAIMED TO HAVE INCURRED CAPITAL EXPENDITURE OF RS.1,26,100/-. DESPITE THE AOS REQUIREMENT, THE ASSESSE E COULD NOT PRODUCE ANY EVIDENCE TO SHOW THAT IT WAS REALLY ITA NOS. 1130 TO 1132/PUN/2016 THUSE ELECTRONICS PVT LTD., 4 ENGAGED IN DOING SOME RESEARCH ACTIVITY. SIMILAR POSITION PREVAILED BEFORE THE LD. CIT(A). IT HAS BEEN RECORDED IN PARA 3.3 OF THE IMPUGNED ORDER THAT NO DOCUMENTARY EVIDENCE O N REAL RESEARCH & DEVELOPMENT ACTIVITIES WAS FURNISHED. THE POSITION IS NO BETTER BEFORE US AS WELL. ON A SPECIFIC REQUISITION, THE LD. AR COULD NOT DRAW OUR ATTENTION TOWARDS ANY COGENT MATERIAL OR EVIDENCE TO DEMONSTRATE THAT IT WAS ENGAGED IN CARRYING OUT ANY REAL RESEARCH ACTIVITY. UNDER SUCH CIRCUMSTANCES, ACTION OF THE AUTHORITIES BELOW IN ALLOWING DEPRECIATION @15%, AS AGAINST 100% CLAIMED BY THE ASSESSE E ON THE CAPITAL EXPENDITURE, IS UNIMPEACHABLE. THIS GROUND IS NOT ALLOWED. 6. GROUND NO.2 IS AGAINST DISALLOWANCE OF WARRANTY EXPENSES. THE FACTS OF THIS ISSUE ARE THAT THE ASSESSEE C REATED WARRANTY PROVISION FOR THE YEAR AT RS.22 LAKHS AGAINST SA LES TO IFB AT RS.3.78 CRORE. THIS WAS IN CONTRAST TO THE WARRANTY PROVISION OF RS.9 LAKHS AGAINST THE SALE TO IFB AT RS.3.81 CRORE FOR THE A.Y. 2006-07 AND WARRANTY PROVISION OF RS.3.90 LAKHS AGAINST SALES TO IFB AT RS.2.55 CRORE FOR THE A.Y. 2005-06 . THE ASSESSING OFFICER OBSERVED THAT NO EXPENDITURE WAS ACTUALLY INCURRED FOR THE A.YS. 2005-06 AND 2006-07 AND ONLY A SUM OF RS.11,39,474/- WAS DEBITED BY IFB FOR THE EXTAN T ITA NOS. 1130 TO 1132/PUN/2016 THUSE ELECTRONICS PVT LTD., 5 YEAR. HE FURTHER OBSERVED THAT THE WARRANTY PROVISIONS OF RS.20 LAKHS AND RS.15 LAKHS WERE CREATED FOR THE A.Y. 2 008- 09 AND 2009-10 AS AGAINST THE ACTUAL EXPENDITURE INCURRED OF RS.4.65 LAKHS AND RS.3.19 LAKHS FOR SUCH YEARS. CON SIDERING THE INCREMENTAL INCREASE IN WARRANTY PROVISION, THE AO DISALLOWED RS.13 LAKHS (RS.22 LAKHS PROVISION FOR THE YEAR AND RS.9 LAKHS PROVISION FOR IMMEDIATELY PRECEDING YEAR). THE LD. CIT(A) DID NOT ALLOW ANY RELIEF ON THIS ISSUE, AGAINST WHICH THE ASSESSEE HAS COME UP IN APPEAL BEFORE THE TRIBUNAL. 7. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE RELEVANT MATERIAL ON RECORD. THE HONBLE SUPREME COURT IN ROTORK CONTROLS INDIA (P) PVT. LTD. VS. CIT (2009) 314 ITR 62 (SC) HAS HELD THAT A PROVISION MADE BY AN ASSESSEE FOR WARRANTY CLAIM ON THE BASIS OF ITS EXPENDITURE IS ALLOWABLE AS DEDUCTION U/S.37 OF THE ACT. WHILE ALLOWING DEDUCTION ON ACCOUNT OF WARRANTY PROVISION, THE HONBLE APEX COURT AD DED A CAVEAT BY OBSERVING IN PARA NO.44 OF ITS JUDGMENT THAT : IT WOULD DEPEND ON THE NATURE OF BUSINESS, THE NATURE OF SALE S, THE NATURE OF THE PRODUCT MANUFACTURED AND SOLD AND THE SCIENTIFIC METHOD OF ACCOUNTING BEING ADOPTED BY THE ASSESSEE. IT WILL ALSO DEPEND ON THE HISTORICAL TREND. IT IS CLEAR FROM THE RATIO DECIDENDI IN ROTORK CONTROLS INDIA (P) LTD. (SUPRA) ITA NOS. 1130 TO 1132/PUN/2016 THUSE ELECTRONICS PVT LTD., 6 THAT THOUGH WARRANTY PROVISION IS A PERMISSIBLE DEDUCTION BUT THE PROVISION MUST BE MADE ON A SCIENTIFIC BASIS. ANY WARRANTY PROVISION MADE DE HORS ANY SCIENTIFIC CALCULATION OR CONSIDERING THE PAST TREND OF SALES AND ACTUAL EXPENDITURE ETC ., CANNOT QUALIFY FOR DEDUCTION. 8. REVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND FROM PARA NO.4 OF THE ASSESSMENT ORDER THAT THE ASSESSEE CREA TED PROVISION OF RS.3.90 LAKH FOR THE A.Y. 2005-06 BUT THE EXPENDITURE INCURRED ON REPAIR WAS NIL. FOR THE A.Y. 2006- 07, PROVISION WAS MADE FOR RS.9 LAKH BUT THE EXPENDITURE INCUR RED WAS AGAIN NIL. SUCH PROVISION OF RS.9 LAKH WAS MADE AS AGAINST SALES TO IFB AT RS.3.81 CRORE. FOR THE YEAR UNDER CONSIDERATION, WHEN THE AMOUNT OF SALES DIPPED TO RS.3.78 CRORE, AMOUNT OF PROVISION INCREASED MULTIFOLD FROM RS.9 LA KH TO RS.22 LAKH AS AGAINST THE ACTUAL EXPENDITURE INCURRED ON REPAIRS STANDING ONLY AT RS.11,39,474/-. THIS NARRATION OF FACTS AMPLY PROVES THAT THE CREATION OF WARRANTY PROVISION WAS NO T BASED ON ANY SCIENTIFIC CALCULATION BUT WAS RATHER AN AD HOC EXERCISE. UNDER SUCH CIRCUMSTANCES, WE CANNOT GRANT DEDUCTION IN RESPECT OF WARRANTY PROVISION. ITA NOS. 1130 TO 1132/PUN/2016 THUSE ELECTRONICS PVT LTD., 7 9. ONCE IT IS HELD THAT THE CREATION OF PROVISION CANNOT BE ALLOWED AS DEDUCTION, IT IS FURTHER CLARIFIED THAT THE REVERSAL O F PROVISION SHOULD ALSO NOT BE BROUGHT TO TAX, IF THE CREATION O F SUCH PROVISION WAS EARLIER NOT ALLOWED AS DEDUCTION. TO PU T IT SIMPLY, NEITHER THE CREATION OF PROVISION NOR ITS REVERSAL, IF EARLIER NOT ALLOWED AS DEDUCTION AT THE TIME OF MAKING IT, WOULD LEAD TO DEDUCTION OR TAXABILITY OF ANY SUM BUT THE ACTUAL EXPENDITURE INCURRED BY THE ASSESSEE ON REPAIRS ON YEAR TO YEAR BASIS WOULD QUALIFY FOR DEDUCTION. WITH THESE OBSERVATIONS, WE SET ASIDE THE IMPUGNED ORDER TO THIS EXTENT AND REMIT THE MATTER TO THE FILE OF AO FOR DECIDING THE ISSUE IN ACCORDANCE WITH OUR ABOVE DIRECTIONS. 10. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. A.Y. 2008-09 : 11. BOTH THE GROUNDS RAISED BY THE ASSESSEE FOR THIS YEAR ARE MUTATIS MUTANDIS SIMILAR TO THOSE FOR THE A.Y. 2007-08. FOLLOWING THE VIEW TAKEN HEREINABOVE, WE DECIDE THE FIRST GROUND AGAINST THE ASSESSEE BY HOLDING THAT RESEARCH & DEVELOPMENT CAPITAL EXPENDITURE CANNOT BE GRANTED 100% DEDUCTION, BUT THE SAME SHOULD BE ALLOWED DEPRECIATION AT THE ITA NOS. 1130 TO 1132/PUN/2016 THUSE ELECTRONICS PVT LTD., 8 ELIGIBLE RATES. SECOND GROUND OF WARRANTY EXPENSE IS ALSO DECIDED ACCORDINGLY IN AS MUCH AS NEITHER THE PROVISION FOR WARRANTY WILL BE ALLOWED AS DEDUCTION NOR ITS REVERSAL, IF NO T ALLOWED AS DEDUCTION AT THE TIME OF CREATION OF PROVISION, SHOULD BE CHARGED TO TAX AND THE ACTUAL AMOUNT OF EXPENDITUR E ON REPAIR SHOULD BE ALLOWED AS DEDUCTION. 12. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. A.Y. 2010-11 : 13. FIRST TWO GROUNDS ARE SIMILAR TO THOSE OF PRECEDING TWO ASSESSMENT YEARS. WE HOLD ACCORDINGLY THAT THE RESEARCH & DEVELOPMENT CAPITAL EXPENDITURE CANNOT BE ALLOWED AS DEDUCTION @100% BUT DEPRECIATION SHOULD BE ALLOWED AT THE ELIGIBLE RATE. SIMILARLY, IN SO FAR AS WARRANTY PROVISION IS CONCERNED, IT IS HELD THAT PROVISION FOR WARRANTY SHOULD NO T BE ALLOWED AS DEDUCTION; REVERSAL OF THE PROVISION IN THE YEAR, IF NOT ALLOWED AS DEDUCTION AT THE TIME OF ITS CREATION, SHOULD NOT BE CHARGED TO TAX BUT THE ACTUAL EXPENDITURE INCURRED SHOULD BE ALLOWED AS DEDUCTION. 14. LAST GROUND REGARDING THE DISALLOWANCE U/S.14A OF THE ACT WAS NOT PRESSED BY THE LD. AR, WHICH IS HEREBY DISMIS SED. ITA NOS. 1130 TO 1132/PUN/2016 THUSE ELECTRONICS PVT LTD., 9 15. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 06 TH FEBRUARY, 2019. SD/- SD/- (VIKAS AWASTHY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESID ENT PUNE; DATED : 06 TH FEBRUARY, 2019 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. ( ) / THE CIT (APPEALS)-5, PUNE 4. 5. THE PR.CIT-4, PUNE , , / DR A, ITAT, PUNE; 6. / GUARD FILE. // TRUE COPY // / BY ORDER, // TRUE COPY // SENIOR PRIVATE SECRETARY , / ITAT, PUNE ITA NOS. 1130 TO 1132/PUN/2016 THUSE ELECTRONICS PVT LTD., 10 DATE 1. DRAFT DICTATED ON 05-02-2019 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 05-02-2019 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *