DCIT, CHENNAI V. M/s. Magnetic Meter Systems India Ltd., CHENNAI

ITA 117/CHNY/2011

• Counselvise Citation: [2011] 119 COUNSELVISE.COM (IT) 6582 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-07-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 29-06-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 25-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R VISWANATHAN
• Assessee Lawyers: T N SEETHARAMAN
• Keywords: Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH C CHENNAI BEFORE U.B.S.BEDI, JUDICIAL MEMBER AND SHRI ABRAHAM P.GEORGE, ACCOUNTANT MEMBER .. ITA NO.117/MDS./2011 ASSESSMENT YEAR:2004-05 DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE IV(1), CHENNAI. VS. M/S.MAGNETIC METER SYSTEMS INDIA LTD., RAHEJA TOWERS BETA WING, UNIT NO.708, 7 TH FLOOR, 177 ANNA SALAI, CHENNAI 600 002. PAN AAACM 2448 P (APPELLANT) (RESPONDENT) DEPARTMENT BY : SHRI R.VISWANATHAN ASSESSEE BY : SHRI T.N.SEETHARAMAN O R D E R PER ABRAHAM P.GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY REVENUE, ITS GRIEVANCE I S THAT COMMISSIONER OF INCOME TAX(A) DELETED A DISALLOWANC E OF RS.27,05,401/- MADE BY ASSESSING OFFICER ON DEVELOP MENT OF A NEW PRODUCT. AS PER THE REVENUE, ASSESSEE HAD CL ASSIFIED PAGE OF 8 ITA. 117/MDS/11 2 SUCH EXPENSES AS PRE-PRODUCTION EXPENSES, IN ITS BO OKS AND THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT I N THE CASE OF COMMISSIONER OF INCOME TAX VS. RANE (MADRAS) ( 293 ITR 459) HAD NOT BECOME FINAL. 2. SHORT FACTS, APROPOS ARE THAT ASSESSEE ENGAGED IN T HE MANUFACTURE OF PERMANENT MAGNETS, HAD IN ITS BOOKS SHOWN UNDER THE HEAD MISCELLANEOUS EXPENDITURE A SUM OF RS.27,05,401/- BEING PRE-PRODUCTION EXPENSES IN REL ATION TO BONDED PERMANENT MAGNET. AS PER THE DETAILS GIVEN BY THE ASSESSEE, SUCH PRE-PRODUCTION EXPENSES COMPRISED OF THE FOLLOWING:- AS PER ASSESSEE, SUCH AMOUNT WAS INCURRED IN CONNEC TION WITH EXTENSION OF ITS EXISTING BUSINESS AND THEREFORE, I T HAD TO BE PREPRODUCTION EXPENSES AMOUNT IN LAKHS TRAVELLING EXPENSES 14.17 MARKET SALARY AND EXECUTION EXPENSES 8.20 MATERIAL CHARGES 1.09 SALARIES ANDWAGES 2.17 SPARES AND TOOLS 1.15 PROFESSIONAL FESS 0.30 TOTAL 27.08 PAGE OF 8 ITA. 117/MDS/11 3 ALLOWED FOR TAX PURPOSE. ASSESSEE ALSO SUBMITTED T HAT SEC.35D OF THE ACT COULD NOT BE APPLIED, SINCE THAT SECTION DEALT WITH CAPITAL EXPENDITURE ONLY. ACCORDING TO THE ASSESSEE, WHAT WAS CLAIMED WAS PURELY REVENUE EXPENDITURE. H OWEVER, ASSESSING OFFICER WAS NOT IMPRESSED. AS PER THE AS SESSING OFFICER, ASSESSEE ITSELF HAVING SHOWN SUCH EXPENDIT URE UNDER THE HEAD PRE-PRODUCTION EXPENSES AND HAVING CAPIT ALIZED IT AS A PART OF MISCELLANEOUS EXPENSES IN ITS BALANCE SHE ET, COULD NOT CLAIM IT AS REVENUE OUTGOES. IN THE OPINION OF THE LD. ASSESSING OFFICER SUCH EXPENDITURE COULD BE CONSIDE RED FOR AMORTIZED ALLOWANCE AS SPECIFIED IN SECTION 35D OF THE ACT. HE, THEREFORE DISALLOWED THE CLAIM. 3. BEFORE THE COMMISSIONER OF INCOME TAX(A), ASSES SEE IN ITS APPEAL, SUBMITTED THAT THE EXPENDITURE WAS FOR DEVELOPMENT OF A NEW PRODUCT IN THE SAME LINE OF BUSINESS THAT THE ASSESSEE WAS ALREADY ENGAGED IN. AS PER ASSESSEE, THE NEW PRODUCT, NAMELY BONDED PERMANENT MAGNET, THOUGH IT USED SOME DIFFERENT RAW MATERIAL, WAS CLOSELY CONNECTED AND RELATABLE TO THE EXISTING PRODUCT MANUFACTURED BY I T. AGAIN AS PER ASSESSEE, THE EXPENDITURE CLAIMED WERE PRIMA RILY OF REVENUE NATURE AND HENCE IT OUGHT HAVE BEEN ALLOWED IN- TOTO. RELIANCE WAS PLACED ON THE DECISION OF HONB LE JURISDICTIONAL HIGH COURT IN THE CASE OF COMMISSION ER OF INCOME TAX VS. RANE (MADRAS) LTD.,(SUPRA). AS PER THE CONTENTION OF THE ASSESSING OFFICER THAT ASSESSEE I TSELF HAD TREATED SUCH EXPENSES AS CAPITAL OUTGOES IN ITS BOO KS, ARGUMENT OF THE ASSESSEE WAS THAT SUCH MISCELLANEO US EXPENDITURE THOUGH SHOWN IN THE ASSETS SIDE OF IT S BALANCE- PAGE OF 8 ITA. 117/MDS/11 4 SHEET PREPARED IN ACCORDANCE WITH THE MANDATE UNDER COMPANIES ACT, 1956, THIS WAS NOT A DECISIVE TEST T O BE APPLIED FOR THE PURPOSE OF DETERMINING ALLOWANCE UN DER THE INCOME TAX ACT, 1961. LD. COMMISSIONER OF INCOME T AX(A) WAS APPRECIATIVE OF THESE CONTENTIONS. RELYING ON T HE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN TH E CASE OF RANE (MADRAS) LTD.,(SUPRA)., LD COMMISSIONER OF INC OME TAX(A) CAME TO A CONCLUSION THAT ASSESSEE WAS INTR ODUCING ONLY A NEW PRODUCT IN THE SAME LINE OF BUSINESS THA T IT WAS ALREADY ENGAGED IN AND HENCE, THE AMOUNT HAD TO BE ALLOWED AS REVENUE EXPENDITURE. LD. COMMISSIONER OF INCOME TAX(A) ALSO RELIED ON THE DECISION OF HONBLE JURISDICTION AL HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. SAKTHI SOYAS LTD. (2006) 283 ITR 194 (MAD.), FOR JUSTI FYING DIFFERENCE IN TREATMENT BETWEEN THE BOOKS OF ACCOUN TS AND FOR TAX PURPOSE. 4. NOW, BEFORE US, LD. DR ASSAILING THE ORDER OF T HE COMMISSIONER OF INCOME TAX(A) SUBMITTED THAT SOME P ART OF EXPENDITURE COMPRISED OF ROYALTY PURCHASED FROM ONE M/S.MAX BSERMANN GMBH. AS PER LD. DR, THE EXPENDIT URE FOR INTRODUCTION OF A NEW PRODUCT, INCURRED DURING THE PRE- PRODUCTION STAGE, COULD ONLY BE CONSIDERED AS CAPIT AL EXPENDITURE. FURTHER SUBMISSION WAS THAT ONLY ON S TART OF COMMERCIAL OPERATION, COULD ANY EXPENDITURE, EVEN I F IT WAS RECURRING NATURE BE ALLOWED TO AN ASSESSEE. PER CO NTRA LD. AR SUPPORTED THE ORDER OF THE COMMISSIONER OF INCOM E TAX(A) AND ALSO RELIED ON DECISION OF HONBLE JURIS DICTIONAL PAGE OF 8 ITA. 117/MDS/11 5 HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TA X VS. SAKTHI SUGARS LTD., 194 TAXMAN 91. 5. WE HAVE PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND HEARD RIVAL CONTENTIONS. THAT THE ASSESSEE WAS AN EXISTING MANUFACTURER OF PERMANENT MAGNETS IS CLEAR FROM THE ASSESSMENT ORDER AND THIS IS MENTIONED AT SL. NO.9 OF THE FACING SHEET OF THE ASSESSMENT ORDER. THEREFORE, THERE IS NO DOUBT THAT THE MANUFACTURE OF NEW PRODUCT, CALLED BONDED PERMANENT MAGNET WAS IN THE SAME LINE OF BUSINES S. ASSESSEE WAS NOT A NEW CONCERN STARTING MANUFACTURI NG OF MAGNETS, BUT ON THE OTHER HAND HAD BEEN IN THE BUSI NESS AND WAS ONLY TRYING TO INTRODUCE A NEW TYPE OF MAGNET. IF WE LOOK AT THE EXPENDITURE DETAILS GIVEN AT PARA- 2 ABOVE, WHICH HAS BEEN TAKEN FROM THE ASSESS MENT ORDER, NONE OF THE AMOUNTS COULD BE CONSIDERED AS C APITAL OUTGOES. BUT FOR THE FACT THAT THESE WERE INCURRED IN CONNECTION WITH DEVELOPMENT OF A NEW PRODUCT, THESE WOULD AUTOMATICALLY BE ALLOWEABLE AS REVENUE EXPENDITURE . BUT AS ALREADY MENTIONED BY US, THE NEW PRODUCT FELL UNDER THE SAME GENRE OF THE PRODUCTS THAT THE ASSESSEE WAS AL READY MANUFACTURING VIZ. PERMANENT MAGNETS. WE ARE OF T HE OPINION THAT COMMISSIONER OF INCOME TAX(A) HAD RIGH TLY RELIED ON THE DECISION OF HONBLE JURISDICTIONAL HI GH COURT IN THE CASE OF RANE (MADRAS) LTD.(SUPRA). RELEVANT PA RA OF THE JUDGEMENT OF JURISDICTIONAL HIGH COURT, AS REPRODUC ED BY THE COMMISSIONER OF INCOME TAX(A) IN HIS ORDER WOULD BE VERY RELEVANT, FOR BREVITY, THIS IS REPRODUCED HEREUNDE R:- PAGE OF 8 ITA. 117/MDS/11 6 ONCE THERE IS NO DIFFICULTY TO REACH A CONCLUSION THAT THE PRODUCT REMAINS ONE AND THE SAME, VIZ., STEERIN G GEARS, WE DO NOT HESITATE TO HOLD THAT THE INDUSTRY SET UP AT PONDICHERRY IS NOTHING BUT AN EXTENSION OF TH E EXISTING INDUSTRIES AT VELACHERY AND MYSORE AND THE DEDUCTION CLAIMED BY THE ASSESSEE WITH REGARD TO TH E EXPENDITURE INCURRED IN CONNECTION WITH THE NEW UNI T AT PONDICHERRY, EVEN THOUGH IT IS INDEPENDENT, BECA USE OF THE INTER-CONNECTION OF MANAGEMENT, FINANCIAL, ADMINISTRATIVE AND PRODUCTION ASPECTS, SUCH EXPENDITURE HAS TO BE CONSTRUED AS REVENUE IN NATUR E AND THEREFORE, DEDUCTIBLE, VIDE THE DECISIONS OF TH E KARNATAKA HIGH COURT IN COMMISSIONER OF INCOME TAX V. INDIAN TELEPHONE INDUSRIES LTD. [1989] 175 ITR 2 15 AND IN COMMISSIONER OF INCOME TAX V. HINDUSTAN MACHINE TOOLS LTD., (NO.1) [1989] 175 ITR 212 (KAR. ); AS WELL AS THE DECISION OF THE DEHI HIGH COURT IN REWARI ELECTRIC SUPPLY & GENERAL INDUSTRIES CASE (SUPRA), THE BOMBAY HIGH COURT IN ANILINE DYESTUFFS & PHARMACEUTICALS (P) LTD.S CASE (SUPRA), THIS COURT IN SOUTH INDIA VISCOSE LTD., (NO.S)S CASE (SUPRA) AND THE DECISION OF MADHYA PRADESH HIGH COURT IN BILAI IRON FOUNDRY (P) LTD.S CASE (SUPRA). 6. THOUGH THE REVENUE HAS EXPRESSED RESERVATION ON THE DECISION OF THE JURISDICTIONAL HIGH COURT MENTIONED ABOVE, WE FIND THAT SIMILAR VIEW HAS AGAIN BEEN TAKEN BY T HE JURISDICTIONAL HIGH COURT IN A LATER CASE RELIED ON BY THE LD. PAGE OF 8 ITA. 117/MDS/11 7 A.R. VIZ. THAT OF SAKTHI SUGARS (SUPRA). IN THE L ATTER CASE, ASSESSEE WHICH HAD THREE SUGAR MANUFACTURING UNITS, HAD SET UP TWO NEW SUGAR FACTORIES AND CLAIMED EXPENSES INC URRED BY WAY OF SALARY, WAGES, MANUFACTURING ETC. IN RESP ECT OF THE TWO UNITS AS REVENUE OUTGOES. HONBLE JURISDI CTIONAL HIGH COURT HELD THAT THIS COULD BE CLAIMED AS REVEN UE EXPENDITURE. WE ALSO FIND FROM THE ORDER OF JURI SDICTIONAL HIGH COURT MENTIONED SUPRA, THAT A SPECIAL LEAVE PETITION FILED BY THE REVENUE AGAINST THE ORDER OF THE JURIS DICTIONAL HIGH COURT IN THE CASE OF RANE (MADRAS) LTD., WAS D ISCUSSED BY THE HONBLE APEX COURT VIDE ITS ORDER DT.16.03.0 9 IN SLP NO.10373 OF 2008. IN THESE CIRCUMSTANCES, WE DO NO T FIND ANY MERIT IN THE APPEAL FILED BY THE REVENUE. 7. IN THE RESULT, APPEAL OF REVENUE IS DISMISSED. ORDER PRONOUNCED ON 8 TH JULY, 2011. SD/- SD/- ( U.B.S.BEDI ) ( ABRAHAM P. GEORGE ) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 8 TH TH JULY, 2011. K S SUNDARAM COPY TO: ASSESSEE/AO/CIT (A)/CIT/D.R./GUARD FILE PAGE OF 8 ITA. 117/MDS/11 8 DATE INITIALS 1. DRAFT DICTATED ON 30.06.1 1 2. DRAFT PLACED BEFORE AUTHORITY 30.06.11 3. DRAFT PLACED BEFORE THE SECOND MEMBER 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER 5. APPROVED DRAFT COMES TO P.S. 6. KEEP FOR PRONOUNCEMENT ON 7. FILE SENT TO THE BENCH CLERK 8. DATE ON WHICH FILE GOES TO THE 9. DATE OF DISPATCH OF ORDER