ACIT, New Delhi V. M/s. Class India Pvt. Ltd., New Delhi

ITA 1171/DEL/2012

• Counselvise Citation: 117120114 RSA 2012
• Duration Of Justice: 1 year(s) 10 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 08-01-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 06-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SRINIWAS KUMAR
• Keywords: Depreciation; Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B: NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI RAJPAL YADAV, JUDICIAL MEMBER ITA NO. 1171/DEL/2012 ASSESSMENT YEAR: 2007-08 ACIT, CIRCLE 3(1), NEW DELHI. VS. CLASS INDIA PVT. LTD., 39, 1 ST FLOOR, NEW FRIENDS COLONY, NEW DELHI. AAACE0762A (APPELLANT) (RESPONDENT) ITA NO. 829/DEL/2013 ASSESSMENT YEAR: 2008-09 DCIT, CIRCLE 3(1), NEW DELHI. VS. CLASS INDIA PVT. LTD., 39, 1 ST FLOOR, NEW FRIENDS COLONY, NEW DELHI. AAACE0762A (APPELLANT) (RESPONDENT) APPELLANT BY: SH. SRINIWAS KUMAR, SR. DR RESPONDENT BY: NONE O R D E R PER S.V. MEHROTRA, A.M. THESE APPEALS FILED BY THE REVENUE ARE DIRECTED AG AINST THE TWO SEPARATE ORDERS OF LD. CIT(A)-VI, NEW DELHI, DATED 01/12/2011 FOR A.Y. 2007- 08 AND LD. CIT(A)-VI, NEW DELHI, DATED 27/11/2012 F OR A.Y. 2008-09. INSPITE OF NOTICE TO ASSESSEE-RESPONDENT, NONE WAS PRESENT AT THE TIME OF HEARING. ITA NOS. 1171/DEL/2012 & 829/D/2013 2 WE, THEREFORE, PROCEED TO DECIDE THE DEPARTMENTS A PPEAL EX-PARTE QUA THE ASSESSE-RESPONDENT. 2. FIRST WE ARE TAKING UP ITA NO. 1171/D/12 FOR A.Y . 2007-08. 3. THE ASSESSEE COMPANY, IN THE RELEVANT ASSESSMENT YEAR, WAS ENGAGED IN THE BUSINESS OF INDUSTRIAL ACTIVITY OF M ANUFACTURE AND SALE OF HARVESTER COMBINES WHICH FACILITATE MECHANIZED HARV ESTING OF RICE AND WHEAT CROPS. THE ASSESSEE COMPANY HAD FILED ITS RE TURN OF INCOME DECLARING AN INCOME OF RS. 4,67,97,770/-. THE ASSESSMENT WAS COMPLETED AT A TOTAL INCOME OF RS. 6,68,01,949/- AFTER MAKING FOLLOWING ADDITIONS/DISALLOWANCES: A) DEFERRED REVENUE EXPENDITURE DISALLOWED RS. 1,98 ,68,372/-; B) DEPRECIATION ON COMPUTER PERIPHERALS RS. 1,35,807/-. 4. LD. CIT(A) ALLOWED THE ASSESSEES APPEAL ON BOTH THE COUNTS. 4.1 BEING AGGRIEVED WITH THE ORDER OF LD. CIT(A), T HE DEPARTMENT IS IN APPEAL BEFORE US AND HAS TAKEN FOLLOWING GROUNDS OF APPEAL: 1. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN D ELETING THE ADDITION OF RS. 19868372/- MADE BY THE AO ON ACCOUNT OF DISALLOWANC E OF DEFERRED REVENUE EXPENSES; 2. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DEL ETING ADDITIONS OF RS. 135807/- MADE BY AO ON ACCOUNT OF EXTRA DEPRECIATIO N CLAIMED BY THE ASSESSEE ON COMPUTER PERIPHERALS. 5. BRIEF FACTS APROPOS GROUND NO. 1 ARE THAT THE AO NOTICED FROM THE STATEMENT OF TAXABLE INCOME THAT ASSESSEE HAD CLAIM ED DEFERRED REVENUE EXPENDITURE OF RS. 1,98,68,372/- UNDER THE HEAD MI SCELLANEOUS ITA NOS. 1171/DEL/2012 & 829/D/2013 3 EXPENDITURE. IN REPLY TO THE SHOW CAUSE NOTICE, T HE ASSESSEE SUBMITTED AS UNDER: THE ASSESSE HAS VERY INSIGNIFICANT PRESENCE IN NO RTH INDIA WHERE WHEEL TYPE HARVESTOR COMBINE ARE MAINLY IN DEMAND . IN ORDER TO CAPTURE A BIGGER PORTION OF THE NORTH INDIAN MARKET , THE ASSESSEE STARTED DEVELOPING ANOTHER MODEL OF WHEEL TYPE HA RVESTOR COMBINES NAMELY TAF (TANGENTIAL AXIAL FLOW) 60 (COMMERCIAL N AME-CROP TIGER 60). THIS WAS AN IMPROVISED VERSION OF THE E XISTING WHEEL TYPE HARVESTOR COMBINES MACHINES WHICH THE ASSESSEE WAS SELLING. TAF 60 (CROP TIGER 60) IS A LARGER YET COMPACT MACHINE, EQ UIPPED WITH A 15 FEET WIDE CUTTER BAR WHICH IS SUITABLE FOR USE BOTH IN LARGE AS WELL AS SMALL FIELDS AND WHICH OPTIMALLY ADJUSTS TO GROUND CONTOURS. THE INTAKE AUGER EQUIPPED WITH MULTIPLE TIMES ENSURES C ONTINUOUS CROP FLOW. THE EXPENDITURE INCURRED ON DEVELOPMENT OF THIS NE W PRODUCT HAS BEEN CLAIMED BY THE ASSESSEE AS A DEDUCTIBLE EX PENDITURE. THE TOTAL EXPENSE INCURRED DURING THE YEAR (BEFORE THE DATE OF COMMERCIAL LAUNCH) ON DEVELOPMENT OF THIS NEW PRODUCT WAS RS. 142.31 LACS OUT OF WHICH A SUM OF AROUND RS. 90 LACS IS TOWARDS SALARY ITSELF OF THE STAFF INVOLVED IN THE ACTIVITY OF DEVELOPMENT. REFER ANN EXURE 7 FOR DETAILS OF EXPENSES INCURRED DURING THE YEAR UNDER ASSTT. IN REGARD TO THE CLAIM MADE IN TAX COMPUTATION, KINDLY SEE PARA 6 BE LOW. THE TECHNOLOGICAL FEASIBILITY OF THE NEW PRODUCT W AS ESTABLISHED IN MARCH 03 WITH THE COMPLETION OF THE DETAILS PROG RAM DESIGN AND IT WAS EXPECTED THAT THE PRODUCT WILL BE LAUNCHED BY M AY 1, 2007. EXPENSES CLAIMED IN THE P/L ACCOUNT THE EXPENSES INCURRED ON DEVELOPMENT OF TAF 60 HAS BEEN CHARGED TO THE P/ L ACCOUNT AS PER THE ACCOUNTING TREATMENT LAID DOWN IN AS-8 A CCOUNTING FOR RESEARCH AND DEVELOPMENT ISSUED BY THE ICAI. AS P ER THIS ITA NOS. 1171/DEL/2012 & 829/D/2013 4 ACCOUNTING STANDARD, THE EXPENDITURE INCURRED PRIOR TO THE ESTABLISHMENT OF TECHNOLOGICAL FEASIBILITY IS CHARG ED AS AN EXPENSE IN THE YEAR OF INCURRENCE AND THE EXPENSE ON DEVELOPME NT IS TREATED AS A DEFERRED REVENUE EXPENDITURE AND CHARGED OVER THE P ERIOD TILL THE COMMENCEMENT OF COMMERCIAL PRODUCTION. ACCORDINGLY, THE EXPENSE INCURRED TILL MARCH 2003 AMOUNTING TO RS. 49.24 LACS WAS FULLY WRITTEN OFF IN THE BOOK S DURING THE FY 2003-04 RELEVANT TO AY 2004-05. THE TOTAL EXPENDIT URE INCURRED AFTER 01.04.03 DURING THE FY 2003-04, FY 04-05 & FY 06-07 HAS BEEN TREATED AS A DEFERRED REVENUE EXPENDITURE AND HAVE BEEN WRITTEN OFF IN EQUAL PROPORTIONS, STARTING FROM THE YEAR IN WHICH THE EXPENDITURE IS INCURRED AND UPTO 01.05.07, WHICH WAS THE EXPECTED LAUNCH DATE FOR THE PRODUCT. A TABLE SHOWING THE ACCOUNTING TREATMENT OF THE EX PENDITURE BEGINNING WITH FY 03-04 UPTO FY 06-07 IS ENCLOSED A S ANNEXURE 7. EXPENSE CLAIMED IN THE TAX COMPUTATION IN THE CO MPUTATION OF TOTAL INCOME UNDER THE INCOME TAX, IT WAS CONSIDERE D PRUDENT THAT THE EXPENDITURE INCURRED UPTO MARCH 03 BE CLAIMED OVER 4 YEARS IN SUCH A PR OPORTION THAT THE ENTIRE EXPENDITURE GETS CLAIMED OVER THE S AID PERIOD WITH THE LAST YEAR OF THE CLAIM BEING FY 07-08 RELE VANT TO AY 08-09, I.E. THE YEAR IN WHICH THE PRODUCT WAS EXPEC TED TO BE COMMERCIALLY LAUNCHED. IN FY 03-04 BE CLAIMED OVER 4 YEARS IN SUCH A PROPO RTION THAT THE ENTIRE EXPENDITURE GETS CLAIMED OVER THE SAID P ERIOD WITH THE LAST YEAR OF THE CLAIM BEING FY 07-08 RELEVANT TO AY 08-09, I.E. THE YEAR IN WHICH THE PRODUCT WAS EXPECTED TO BE COMMERCIALLY LAUNCHED. ITA NOS. 1171/DEL/2012 & 829/D/2013 5 IN FY 04-05 BE CLAIMED OVER 3 YEARS AND 1 MONTH IN SUCH A PROPORTION THAT THE ENTIRE EXPENDITURE GETS CLAIMED OVER A PERIOD OF 3 YEARS AND 1 MONTH WITH THE LAST YEAR OF CLAIM BEING FY 07-08, I.E. THE YEAR IN WHICH THE PRODUCT WAS EX PECTED TO BE COMMERCIALLY LAUNCHED. IN FY 05-06 BE CLAIMED OVER 2 YEARS AND 1 MONTH IN SUCH A PROPORTION THAT THE ENTIRE EXPENDITURE GETS CLAIMED OVER A PERIOD OF 2 YEARS AND 1 MONTH WITH THE LAST YEAR OF CLAIM BEING FY 07-08, I.E. THE YEAR IN WHICH THE PRODUCT WAS EX PECTED TO BE COMMERCIALLY LAUNCHED. IN FY 06-07 BE CLAIMED OVER 1 YEAR AND 1 MONTH IN S UCH A PROPORTION THAT THE ENTIRE EXPENDITURE GETS CLAIMED OVER A PERIOD OF 1 YEAR AND 1 MONTH WITH THE LAST YEAR OF CLAIM BEING FY 07-08, I.E. THE YEAR IN WHICH THE PRODUCT WAS EX PECTED TO BE COMMERCIALLY LAUNCHED. A TABLE DEPICTING THE CALCULATION OF THE AMOUNT CLA IMED AS DEDUCTION IN THE INCOME TAX RETURN IS ENCLOSED AS A NNEXURE-7A. NOTWITHSTANDING THE MANNER OF ACCOUNTAL IN THE BOOK S OF RECKONING THE UNIFORM NATURE OF EXPENDITURE INCURRE D, THE CO. CONSIDERED IT PRUDENT TO CLAIM EXPENDITURE FOR TAX PURPOSES, IN A CONSISTENT MANNER SPREADING IT OVER THE PERIOD TILL THE COMMERCIAL LAUNCH OF THE PRODUCT. THIS TREATMENT IS IN LINE W ITH THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MADRAS IND USTRIAL INV. CORPN. LTD. [225 ITR 802] COPY ENCLOSED AS ANNEXU RE 8. I MAY PLEASE BE NOTED THAT WHILE WORKING OUT THE T AXABLE INCOME THE ASSESSEE HAS ADDED BACK THE DEFERRED REV ENUE EXPENDITURE CHARGED IN THE P/L ACCOUNT AND CLAIMED THE EXPENSE AS PER WORKING PROVIDED IN ANNEXURE 7A. ITA NOS. 1171/DEL/2012 & 829/D/2013 6 THE HONBLE DELHI HIGH COURT IN THE CASE OF JAY EN GG. WORKS LTD. VS. CIT [212 CTR 562] HELD THAT EVEN THE PRE O PERATIVE EXPENSES INCURRED ON A NEW PROJECT WERE ALLOWED AS DEDUCTIBL E. IN THE CASE OF HONDA SIEL CARD INDIA LTD. VS. ACIT [111 TTJ 630] THE ASSESSEE WAS ALREADY IN THE BUSINESS OF MA NUFACTURING CARS. IT MADE PAYMENTS TO AUTOMOTIVE RESEARCH ASSOCIATION OF INDIA, WITH A VIEW TO BRING ABOUT IMPROVEMENT IN THE QUALITY OF C ARDS, AND TO CUT REPETITIVE COSTS. NO SEPARATE UNIT WAS SET UP TO M ANUFACTURE THE NEW MODEL. IT MAY BE STATED THAT IN THE FOLLOWING CASE LAWS T HE EXPENDITURE ON DEVELOPMENT OF PRODUCT HAS BEEN TREATED AS FULLY ALLOWABLE. 6. THE AO, HOWEVER, DID NOT AGREE WITH ASSESSEES C ONTENTIONS BUT LD. CIT(A) ALLOWED THE ASSESSEES APPEAL. 6.1 WE HAVE CONSIDERED THE SUBMISSIONS OF LD. DR. 6.2 THE AO HIMSELF OBSERVED THAT THE PROVISIONS OF SECTION 35D WERE NOT APPLICABLE. THEREFORE, THE ONLY QUESTION THAT REMA IN FOR CONSIDERATION IS WHETHER THE EXPENDITURE WAS INCURRED IN REVENUE FIE LD OR CAPITAL FIELD. FROM THE REPLY OF ASSESSEE FILED BEFORE AO, NOTED EARLIE R, IT IS EVIDENT THAT THE EXPENDITURE WAS INCURRED ON DEVELOPMENT OF IMPROVIS ED VERSION OF THE EXISTING WHEEL TYPE HARVESTOR COMBINE MACHINES WH ICH THE ASSESSEE WAS SELLING. THUS, THE EXPENDITURE RESULTED IN ONLY IM PROVING THE EXISTING MACHINE BUT DID NOT BRING INTO EXISTENCE ANY NEW PR OFIT EARNING APPARATUS. HENCE, IT WAS IN REVENUE FIELD AND NOT IN CAPITAL F IELD. THE ASSESSEE HAD PRIMARILY CLAIMED THE EXPENDITURE IN SUCH A MANNER SO THAT THE ENTIRE EXPENDITURE IS CLAIMED OVER THE PERIOD BY WHICH THE PRODUCT WAS EXPECTED TO ITA NOS. 1171/DEL/2012 & 829/D/2013 7 BE COMMERCIALLY LAUNCHED. THE EXPENDITURE WAS INCU RRED BETWEEN FY 03-04 UPTO FY 06-07 AND THE ASSESSEE HAD ADOPTED A CONSIS TENT METHOD FOR CLAIMING THE EXPENDITURE. LD. CIT(A) HAS RIGHTLY O BSERVED THAT ASSESSEE HAD NOT CLAIMED THE DEFERRED REVENUE EXPENDITURE BY WAY OF AMORTIZATION @ 10% FOR A PERIOD OF 10 YEARS. FURTHER THE ASSESSEE NEV ER REPRESENTED THAT THE DEFERRED REVENUE EXPENSES WERE OF THE NATURE OF PRE -OPERATIVE EXPENSES AND, ACCORDINGLY, NEVER CLAIMED THEM U/S 35D. WE, THEREFORE, DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF LD. CIT(A ). 7. IN THE RESULT, THIS GROUND IS DISMISSED. 8. BRIEF FACTS APROPOS GROUND NO. 2 ARE THAT ASSESS EE HAD CLAIMED DEPRECIATION @ 60% IN RESPECT OF COMPUTER UNDER THE HEAD FIXED ASSETS. FROM THE DETAILS FILED BY ASSESSEE, THE AO NOTICED THAT ASSESSEE HAD MADE PURCHASES OF COMPUTER ACCESSORIES AND PERIPHERALS A MOUNTING TO RS. 3,50,924/- AND, THEREFORE, ALLOWED DEPRECIATION @ 1 5%. HE, THEREFORE, MADE AN ADDITION OF RS. 1,35,802/-. LD. CIT(A) ALLOWED THE ASSESSEES APPEAL FOLLOWING THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. BSES RAJDHANI POWER LIMITED (ITA NO. 1266/2010) DAT ED 31 ST AUGUST, 2010, WHEREIN IT HAS BEEN HELD THAT COMPUTER ACCESSORIES AND PERIPHERALS SUCH AS PRINTERS, SCANNERS, SERVER FORM AN INTEGRAL PART OF COMPUTER SYSTEM AND ARE ENTITLED TO DEPRECIATION AT A HIGHER RATE OF 60%. ITA NOS. 1171/DEL/2012 & 829/D/2013 8 8.1 HAVING HEARD BOTH THE PARTIES, WE DO NOT FIND A NY INTERFERE WITH THE ORDER OF LD. CIT(A) AS THE ISSUE IS COVERED BY THE DECISION OF HONBLE DELHI HIGH COURT. 9. IN THE RESULT, THIS GROUND IS DISMISSED. 10. NOW WE ARE TAKING UP ITA NO. 829/2013 FOR A.Y. 2008-09. 10.1 GROUND NO. 1 IS IDENTICAL TO GROUND NO. 1 OF I TA NO. 1171/2012 FOR A.Y. 2007-08 AND, THEREFORE, FOLLOWING THE REASONING GIV EN IN THE SAID ORDER, THIS GROUND IS DISMISSED. 11. SIMILARLY, GROUND NO. 2 IS IDENTICAL TO GROUND NO. 2 OF ITA NO. 1171/2012 FOR A.Y. 2007-08. THEREFORE, THIS GROUND IS DISMISSED. 12. IN THE RESULT, BOTH THE APPEALS OF DEPARTMENT A RE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 31/01/2014 SD/- SD/- (RAJPAL YADAV) JUDICIAL MEMBER (S.V. MEHROTRA) ACCOUNTANT MEMBER DATED: 31/01/2014 *KAVITA COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI. TRUE COPY BY ORDER ASSISTANT REGISTRAR