Best Value Chem Pvt.Ltd., Baroda V. The Income tax Officer,Ward-1(3), Baroda

ITA 2694/AHD/2011

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 1146 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 8 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-07-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 02-05-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 02-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Revenue expenditure; Capital expenditure

Judgement Text

, A IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI MANISH BORAD, ACCOUNTANT MEMBER ./ ITA NO.2694/AHD/2011 /BLOCK ASSTT. YEAR: 2006-07 BEST VALUE CHEM PVT.LTD. 4, PRABHU PARK SOCIETY NO.2 NR. ANAND BALWADI AMRAKUNJ EXTENSIONS BARODA 390 023. PAN : AAACB 9400 C. VS THE ITO, WARD - 1(3) BARODA. %& / (APPELLANT) '( %& / (RESPONDENT) ASSESSEE BY : SHRI TUSHAR HEMANI REVENUE BY : SHRI JAMESH KURIAN, SR.DR / DATE OF HEARING : 02/05/2016 / DATE OF PRONOUNCEMENT: 11/07/2016 )*/ O R D E R PER RAJPAL YADAV, JUDICIAL MEMBER: THE ASSESSEE IS IN APPEAL BEFORE US AGAINST THE OR DER OF THE LD.CIT(A)-I, BARODA DATED 27.9.2011 PASSED FOR THE ASSTT.YEAR 2006-07. 2. THOUGH THE ASSESSEE HAS TAKEN THREE GROUNDS OF A PPEAL, BUT ITS GRIEVANCE REVOLVES AROUND A SINGLE ISSUE, VIZ. THAT THE LD.CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF RS.49,22,75 2/-. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE-CO MPANY AT THE RELEVANT TIME WAS MANUFACTURING PERFUMERY CHEMICALS . IT HAS FILED ITS RETURN OF INCOME ON 29.12.2006 DECLARING TOTAL INCO ME AT RS.NIL AFTER ADJUSTMENT OF BROUGHT FORWARD LOSS OF EARLIER YEARS . THE CASE OF THE ITA NO.2694/AHD/2011 2 ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT AND N OTICE UNDER SECTION 143(2) WAS ISSUED AND SERVED UPON THE ASSESSEE. ON SCRUTINY OF THE ACCOUNTS, IT REVEALED TO THE AO THAT IN SCHEDULE-J, THE ASSESSEE HAS SHOWN AN AMOUNT OF RS.49,22,752/-. THIS AMOUNT HAS BEEN SHOWN AS DEFERRED REVENUE EXPENDITURE IN THE BOOKS OF THE CO MPANY. HOWEVER, WHILE FILING THE RETURN, THIS HAS BEEN CLAIMED AS D EDUCTION. THE LD.AO TREATED THE EXPENDITURE AS CAPITAL IN NATURE AND DI SALLOWED THE CLAIM OF THE ASSESSEE. 4. ON APPEAL, THE LD.CIT(A) HAS CONFIRMED THE FINDI NG OF THE AO BY OBSERVING AS UNDER: 5.2 I HAVE CONSIDERED FACTS OF THE CASE AND APPELL ANT'S SUBMISSIONS. THE EXPENSES IN QUESTION WERE INCURRED TO DEVELOP TWO NEW PRODUCTS NAMELY; C-LL ALDEHYDE AND UNDECAVE RTOL. AFTER THE DEVELOPMENT OF TWO PRODUCTS, DURING THE YEAR IT SELF, APPELLANT STARTED SELLING THESE TWO PRODUCTS. ON BEING ASKED ABOUT THE EQUIPMENTS USED FOR DEVELOPING THE PRODUCTS, AR'S S UBMISSION WAS THAT THE PRODUCTS WERE DEVELOPED IN THE EXISTIN G PLANT ONLY WITH SAME EQUIPMENT/PLANT & MACHINERY AND NO NEW EQ UIPMENTS WERE PURCHASED FOR THIS PURPOSE. ON BEING ASKED ABO UT THE MACHINERY USED TO MANUFACTURE THE PRODUCTS ON A COM MERCIAL SCALE AFTER PRODUCT DEVELOPMENT, THE AR SUBMITTED T HAT SAME MACHINERY CONTINUED TO BE USED. FROM THE SCHEDULE O F 'FIXED ASSETS' TO THE BALANCE SHEET AS ON 31.3.2006, IT IS SEEN THAT THERE WAS ADDITION OF RS.1,07,00,517/- DURING THE YEAR TO THE OPENING BALANCE OF BLOCK OF PLANT AND MACHINERY OF RS. 1,26 ,62,342/-. THUS, THERE WAS SIGNIFICANT ADDITION TO THE BLOCK O F PLANT AND MACHINERY DURING THE YEAR. SALE OF NEW PRODUCTS DUR ING THE YEAR WAS RS.47.6 LAKH AND IN SUBSEQUENT YEARS, THE SALE OF NEW PRODUCTS WAS SUBMITTED BY THE AR TO BE MORE THAN RS .6-7 CRORE PER YEAR. THUS, EVEN IF SAME/COMMON MACHINERY WAS U SED FOR DEVELOPING AND MANUFACTURING THE PRODUCTS, SIGNIFIC ANT CAPITAL EXPENDITURE WAS INCURRED TO ACQUIRE NEW PLANT AND M ACHINERY TO INCREASE THE INSTALLED MANUFACTURING CAPACITY OF AP PELLANT COMPANY. IT WAS A DIRECT FALL OUT OF INCURRING OF P RODUCT DEVELOPMENT EXPENDITURE. THE AMOUNT SPENT ON PRODUC T DEVELOPMENT WAS NOT FOR THE PURPOSE OF FACILITATING APPELLANT'S EXISTING TRADING OPERATIONS OR ENABLING THE MANAGEM ENT AND CONDUCT OF APPELLANT'S EXISTING BUSINESS TO BE CARR IED ON MORE EFFICIENTLY OR MORE PROFITABLY WHILE LEAVING FIXED CAPITAL UNTOUCHED. AS HELD BY DELHI HIGH COURT IN THE CASE OF TRIVENI ITA NO.2694/AHD/2011 3 ENGINEERING WORKS LTD (1998) 100 TAXMANN 19 (DELHI) , WHERE DEVELOPMENT OF NEW PRODUCTS GOT CONVERTED INTO MANU FACTURING, REQUIRING INVESTMENT OF FRESH CAPITAL AND COMING IN TO EXISTENCE OF ADDITIONAL FIXED ASSETS, EXPENDITURE WAS ATTRIBUTAB LE TO CAPITAL HAVING BEEN INCURRED WITH A VIEW TO BRINGING AN ASS ET OR ADVANTAGE INTO EXISTENCE AND HAVING ENDURING BENEFI T. IN THE CASE OF J.K. CHEMICALS (1995) 80 TAXMAN 19 (BOMBAY), IT WAS HELD THAT WHERE THE EXPENDITURE INCURRED WAS TO DECIDE W HETHER TO ACQUIRE SOME PROFIT MAKING ASSETS FOR THE PURPOSE O F BUSINESS, IT WOULD INTO ADVANTAGE OF ENDURING NATURE AND WAS TO BE VIEWED AS CAPITAL IN NATURE. THE COURT HELD ,THAT SIMPLY BECA USE ASSESSEE HAD A RUNNING BUSINESS OF MANUFACTURING FERTILIZERS , IT COULD NOT BE SAID THAT EXPENSE FOR OBTAINING THE PROJECT REPORT TO MANUFACTURE NEW FERTILIZER WAS PART OF EXPENSES INCURRED FOR RU NNING THE BUSINESS. IN APPELLANT'S CASE, THE PROJECT DEVELOPM ENT EXPENDITURE WAS INCURRED, NEW PRODUCTS WERE DEVELOP ED AND THE SAME RESULTED INTO SUBSTANTIAL ADDITION TO PLANT AN D MACHINERY AS MENTIONED. IT IS HELD THAT PRODUCT DEVELOPMENT EXPE NDITURE OF RS.49,22,752/- WAS RIGHTLY DISALLOWED AS CAPITAL EX PENDITURE. 5. WITH THE ASSISTANCE OF THE LD.REPRESENTATIVES, W E HAVE GONE THROUGH THE RECORD CAREFULLY. AS OBSERVED BY THE L D.CIT(A), THE ASSESSEE HAS INCURRED EXPENDITURE FOR DEVELOPMENT O F TWO NEW PRODUCTS VIZ. C11 ALDEHYDE AND UNDECAVERTOL. IT HAS INCURRE D THE FOLLOWING EXPENDITURE: A) DEPRECIATION : RS.5,82,769/- B) RAW MATERIAL : RS.37,05,606/- C) POWER AND FUEL : RS.3,61,335/- D) PROCESS CHARGES : RS.1,36,688/- E) FREIGHT CHARGES : RS.22,869/- F) LABOUR CHARGES : RS1,13,486/- TOTAL : RS.49,22,752/- 6. THE ASSESSEE HAS SHOWN SALE OF NEW PRODUCTS TO T HE EXTENT OF RS.47.76 LAKHS AND IN SUBSEQUENT YEARS, THE SALE OF NEW PRODUCT WAS MADE IN BETWEEN RS.6 TO 7 CRORES PER YEAR. THE CAS E OF THE ASSESSEE IS THAT, NATURE OF THE EXPENDITURE ITSELF SUGGESTS THA T THEY ARE REVENUE IN NATURE. ON THE OTHER HAND, THE LD.CIT(A) HAS MADE AN ANALYSIS OF THIS DETAILS AND OBSERVED THAT THERE IS SUBSTANTIAL ADDI TION TO THE FIXED ASSETS. THEREFORE, THE AMOUNT SPENT BY THE ASSESSE E ON PRODUCT ITA NO.2694/AHD/2011 4 DEVELOPMENT WAS NOT FOR THE PURPOSE OF FACILITATING THE ASSESSEES EXISTING TRADE, RATHER, IT HELPS THE ASSESSEE TO DE VELOP NEW PRODUCTS WHICH WILL BE OF ENDURING IN NATURE, AND THEREFORE, IT WILL RESULT IN SUBSTANTIAL ADDITION TO THE PLANT AND MACHINERY. 7. ON DUE CONSIDERATION OF ABOVE FACTS AND CIRCUMST ANCES, WE ARE OF THE VIEW THAT THE LD.CIT(A) HAS FAILED TO APPRECIAT E THE FACTS IN RIGHT PERSPECTIVE. AS FAR AS THE ADDITION TO THE PLANT A ND MACHINERY IS CONCERNED, THIS ADDITION HAS NOT BEEN CLAIMED BY TH E ASSESSEE AS REVENUE EXPENDITURE. THE NATURE OF EXPENDITURE TOW ARDS DEVELOPMENT OF NEW PRODUCTS DOES NOT REPRESENT ACQUISITION OF A NY ASSET. IN OTHER WORDS, BY INCURRING THE EXPENDITURE ON RAW-MATERIAL , THE ASSESSEE HAS NOT PROCURED ANY NEW PRODUCTS WHICH CAN BE USED IN THE PLANT & MACHINERY. SIMILARLY, POWER, FUEL AND PROCESSING C HARGES ARE CONCERNED, THEY ARE ORDINARY ROUTINE EXPENDITURE FO R RUNNING THE BUSINESS. A PERUSAL OF THE EXPENDITURE WOULD SUGGE ST THAT THESE EXPENSES ARE NOT REPRESENTED BY ANY TANGIBLE ASSETS , BUT THESE WERE REQUIRED FOR SALE OF THE PRODUCTS. IF AN EXPENDITU RE IS BEING INCURRED BY AN ASSESSEE TO FACILITATE SMOOTH RUNNING OF THE BUS INESS, THEN SUCH EXPENDITURE WOULD BE REVENUE IN NATURE. THE LD.CIT (A) HAS INTER-LINKED TWO ISSUES I.E. ADDITION TO THE PLANT & MACHINERY A ND EXPENDITURE INCURRED FOR DEVELOPMENT OF NEW PRODUCTS, WHICH ARE DIFFERENT IN NATURE. THEREFORE, WE ALLOW THE APPEAL OF THE ASSESSEE AND DELETE THE DISALLOWANCE. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED. ORDER PRONOUNCED IN THE COURT ON 11 TH JULY, 2016 AT AHMEDABAD. SD/- SD/- (MANISH BORAD) ACCOUNTANT MEMBER (RAJPAL YADAV) JUDICIAL MEMBER AHMEDABAD; DATED 11/07/2016