KARLA ENGINE COMPONENTS LTD, MUMBAI V. DCIT 8(1)(OSD), MUMBAI

ITA 3460/MUM/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3578 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-06-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 16-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SURINDER JIT SINGH
• Assessee Lawyers: DR K SHIVARAM
• Keywords: Capital asset; Depreciation; Condonation of delay; Revenue expenditure; Capital expenditure
• Section: 37(1); 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, MUMBAI . .. . . . . . , ,, , !'# !'# !'# !'# $ $ $ $ %$$ $& %$$ $& %$$ $& %$$ $&, ,, , ' !'# ' !'# ' !'# ' !'# !( !( !( !( BEFORE SHRI P.M. JAGTAP, AM AND SHRI VIVEK VARMA , JM !./ I.T.A. NO. 32/MUM/2012 ( '* & $+& '* & $+& '* & $+& '* & $+& / / / / ASSESSMENT YEAR : 2007-08) KARLA ENGINE COMPONENTS LTD. 31, GOLDEN BEACH, RUIA PARK, JUHU, VILE-PARLE, MUMBAI-400049 * * * * / VS. DCIT - 8(3) (OSD), MUMBAI, R.NO. 204, 2 ND FLR. AAYAKAR BHAVAN, M.K.MARG, MUMBAI-400020 #, ! ./ PAN : AABPC2955K ( ,- / // / APPELLANT ) .. ( ./,- / RESPONDENT ) !./ I.T.A. NO. 3460/MUM/2012 ( '* & $+& '* & $+& '* & $+& '* & $+& / / / / ASSESSMENT YEAR : 2008-09) KARLA ENGINE COMPONENTS LTD. 31, GOLDEN BEACH, RUIA PARK, JUHU, VILE-PARLE, MUMBAI-400049 * * * * / VS. D CIT - 8(1 ) (OSD), MUMBAI, R.NO. 204, 2 ND FLR. AAYAKAR BHAVAN, M.K.MARG, MUMBAI-400020 #, ! ./ PAN : AABPC2955K ( ,- / // / APPELLANT ) .. ( ./,- / RESPONDENT ) ,- 0 1 ! / APPELLANT BY : SHRI DR.K.SHIVARAM ./,- 0 1 ! / RESPONDENT BY : SHRI SURINDER JIT SINGH ! *$ 0 / // / DATE OF HEARING : 06-06-2013 23+ 0 / DATE OF PRONOUNCEMENT :21 .06.2013 '4 / O R D E R PER P.M. JAGTAP, A.M . .. , !'# : THESE TWO APPEALS PREFERRED BY THE ASSESSEE ARE DIR ECTED AGAINST THE ORDERS OF THE LD. CIT(A)-17 MUMBAI, DAT ED 24.06.2011 2 ITA NO.32 &3460/MUM/2012 KARLA ENGINE COMPONENTS LTD. AND LD. CIT(A)16, MUMBAI, DATED 15.02.2012 FOR A.Y. 2007-08 AND 2008-09 RESPECTIVELY. SINCE A COMMON ISSUE RELATING TO DEDUCTION CLAIMED BY THE ASSESSEE ON ACCOUNT OF RES EARCH AND DEVELOPMENT EXPENDITURE IS INVOLVED IN THESE TWO AP PEALS, THE SAME HAVE BEEN HEARD TOGETHER AND ARE BEING DISPOSE D OF BY THIS SINGLE CONSOLIDATED ORDER FOR THE SAKE OF CONVENIEN CE. 2. AT THE OUTSET, IT IS NOTED THAT THERE IS A DELA Y OF 112 DAYS ON THE PART OF THE ASSESSEE IN FILING ITS APPE AL FOR A.Y. 2007- 08. IN THIS REGARD THE ASSESSEE HAS FILED AN APPLI CATION SEEKING CONDONATION OF SAID DELAY ON THE FOLLOWING GROUNDS: - O THE CIT(A) PASSED THE ORDER DATED 24.06.11 CONFIRMI NG THE DISALLOWANCE. THE SAID ORDER WAS RECEIVED BY US 15 .07.2011, WHICH WAS FORWARDED TO THE CHARTERED ACCOUNTANT, R. A. JAGTAP & CO. O THE CHARTERED ACCOUNTANT INSTRUCTED TO PAY THE TRIB UNAL APPEAL FEES WHICH WAS PAID ON 25.07.2011. THE APPE AL WAS PREPARED AND FORWARDED BACK TO US BY THE CHARTERED ACCOUNTANT FOR SIGNATURES. O THE APPEAL PAPERS WERE SIGNED BY THE MANAGING DIREC TOR, MR. AMBRISH VIJAY SHAH ON 27.07.2011 AND WAS FORWARDED TO THE CHARTERED ACCOUNTANT FOR FILING THE SAME TO THE TRI BUNAL. O HOWEVER, ONE OF THE STAFF I.E. MR. MITHILESH KUMAR RAJDEV SINGH, WORKING AT R.A. JAGTAP & CO, HAD KEPT THE AP PEAL PAPERS IN THE DRAWER, AS THEY WERE BUSY IN PREPARIN G AND FILING RETURNS FOR 31 ST JULY 2011. O MR. MITHILESH KUMAR R.SINGH, FORGOT THE WORK OF FIL ING THE APPEAL. ON 28 TH DECEMBER 2011 WHILE SEARCHING SOME OTHER PAPERS, MR. MITHILESH KUMAR FOUND THE BUNCH OF APPE AL PAPERS. HE INFORMED MR. J.R. JAGTAP. O THEREAFTER, AFFIDAVIT OF THE MANAGING DIRECTOR MR. AMBRISH VIJAY SHAH AND AFFIDAVIT OF MR. MITHILESHKUMAR WAS PREPARED 3 ITA NO.32 &3460/MUM/2012 KARLA ENGINE COMPONENTS LTD. INSCRIBING THE FACTS. THE APPEAL WAS THUS FILED ON 03.01.2012, ALONG WITH THE AFFIDAVITS. 3. WE HAVE CONSIDERED THE SUBMISSIONS MADE BY THE A SSESSEE IN ITS APPLICATION FOR CONDONATION OF DELAY AND ALS O HEARD THE LD. DR ON THIS ISSUE. IT IS OBSERVED THAT THE REQUIRED APPEAL FEE FOR FILING THE APPEAL BEFORE THE TRIBUNAL WAS PAID BY T HE ASSESSEE WITHIN TIME ON 25.07.2011 WHICH CLEARLY SHOWS THE I NTENTION OF THE ASSESSEE TO FILE THE APPEAL IN TIME. EVEN THE APPE AL PAPERS DULY SIGNED BY THE MANAGING DIRECTOR OF THE ASSESSEE-COM PANY WERE FORWARDED TO THE CHARTERED ACCOUNTANT ON 27.07.2011 I.E. WELL IN TIME FOR FILING THE SAME TO THE TRIBUNAL. THERE WA S HOWEVER A DELAY ON THE PART OF THE OFFICE OF CA TO FILE THE APPEAL OF THE ASSESSEE WITHIN TIME AND THE SAID DELAY ALSO HAS BEEN EXPLAI NED BY THE CONCERNED PERSON DULY SUPPORTED BY HIS AFFIDAVIT. KEEPING IN VIEW THE DEPOSITIONS MADE IN THE SAID AFFIDAVIT AS WELL AS OTHER FACTS BORNE OUT FROM THE RECORD INCLUDING THE FACT THAT T HE TRIBUNAL APPEAL FEE WAS PAID BY THE ASSESSEE WELL IN TIME, W E ARE SATISFIED THAT THE DELAY IN FILING THE APPEAL IS FOR SUFFICIE NT CAUSE AND IT IS A FIT CASE TO CONDONE THE SAID DELAY. ACCORDINGLY, W E CONDONE THE SAID DELAY AND NOW PROCEED TO DISPOSE OF THE APPEAL OF THE ASSESSEE ON MERIT. 4. FIRST WE SHALL TAKE UP THE APPEAL OF THE ASSESS EE FOR A.Y.2007-08. THE RELEVANT FACTS OF THE CASE GIVING RISE TO THIS APPEAL ARE AS FOLLOWS. THE ASSESSEE IS A COMPANY W HICH IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF AUTOMOBILE PART S AND CASTINGS. THE RETURN OF INCOME FOR A.Y. 2007-08 WAS FILED BY THE ASSESSEE ON 31.10.2007 DECLARING TOTAL INCOME OF RS. 48, 02,740 /-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE AO THAT THE ASSESSEE HAS INCURRED PRODUCT DEVELOPMENT EXPEN DITURE OF RS.3,80,58,493/- IN THE YEAR UNDER CONSIDERATION WH ICH WAS 4 ITA NO.32 &3460/MUM/2012 KARLA ENGINE COMPONENTS LTD. CAPITALIZED IN THE BOOKS OF ACCOUNT. FOR THE PURPO SE OF COMPUTATION OF ITS TOTAL INCOME FOR INCOME-TAX PURP OSE, THE ASSESSEE HOWEVER CLAIMED DEDUCTION ON ACCOUNT OF EN TIRE DEVELOPMENT EXPENDITURE. WHILE JUSTIFYING THE SAID CLAIM, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE BEFORE THE AO T HAT A NEW PRODUCT VIZ. STAINLESS STEEL LINERS WAS BEING DEVELOPED HAVING APPLICATION IN OIL AND NATURAL GAS PIPELINES, CHEMI CAL AND PETRO- CHEMICAL INSTALLATIONS AND PRESSURE VALVES. DETAILS OF THE DEVELOPMENT EXPENSES CLAIMED WERE ALSO FURNISHED BY THE ASSESSEE BEFORE THE ASSESSING OFFICER AS UNDER. DETAILS OF DEVELOPMENT EXPENSES PARTICULARS RS. RAW MATERIAL 34913259.00 STORES AND SPARES 199503.00 PROCESSING CHARGES ACCOUNT 278774.00 SALARY FACTORY STAFF 1232989.00 ADMIN PROVIDENT FUND 147959.00 POWER & FUEL 207242.00 INTEREST 1078767.00 TOTAL 38058493.00 LRSS: DEP RECIATION ON DEVELOPMENT EXPENSES @ 20% 7611698.60 TOTAL 30446794.40 BALANCE AS PER BALANCE - SHEET 30446794.40 DIFFERENCE 5. ON THE BASIS OF ABOVE DETAILS, IT WAS CONTENDED ON BEHALF OF THE ASSESSEE THAT THE EXPENDITURE INCURRED ON DEVEL OPMENT IS OF REVENUE NATURE WHICH COULD NOT BE TREATED AS CAPITA L MERELY ON THE BASIS OF ACCOUNTING TREATMENT GIVEN IN THE BOOKS. IT WAS CONTENDED THAT THE EXPENDITURE ON PRODUCT DEVELOPME NT WAS 5 ITA NO.32 &3460/MUM/2012 KARLA ENGINE COMPONENTS LTD. INCURRED FOR THE EXPANSION OF EXISTING BUSINESS AND THE SAME WAS ALLOWABLE AS DEDUCTION BEING REVENUE EXPENDITURE. 6. THE AO DID NOT FIND THE STAND OF THE ASSESSEE T O BE ACCEPTABLE. ACCORDING TO HIM, THE FACT THAT ASSESSE E HAD CAPITALIZED THE PRODUCT DEVELOPMENT EXPENSES IN ITS BOOKS OF AC COUNT WAS SUFFICIENT TO SHOW THAT THE SAME CONSTITUTED CAPITA L EXPENDITURE. HE HELD THAT THE FACT THAT THE SAID EXPENDITURE HAD RESULTED IN GROWTH IN THE TURNOVER OF THE ASSESSEE IN THE SUBSE QUENT YEARS WAS SUFFICIENT TO SHOW THAT THE SAME WAS OF ENDURING B ENEFIT TO THE ASSESSEE. HE, THEREFORE, TREATED THE ENTIRE PRODUC T DEVELOPMENT EXPENDITURE OF RS. 3,80,58,793/- AS CAPITAL EXPEN DITURE RESULTING IN CREATION OF A INTANGIBLE ASSET AND ALLOWED ONLY DEPRECIATION THEREON AT THE RATE OF 25% WHICH RESULTED IN THE DI SALLOWANCE OF BALANCE 75% AMOUNT EXPENDITURE AMOUNTING TO RS.2,85 ,43,870/-. 7. THE DISALLOWANCE MADE BY THE AO ON ACCOUNT OF P RODUCT DEVELOPMENT EXPENDITURE TREATING THE SAME AS OF CAP ITAL NATURE WAS CHALLENGED BY THE ASSESSEE IN THE APPEAL FILED BEFORE THE LD. CIT(A), AND THE FOLLOWING CONTENTIONS WERE RAISED O N BEHALF OF THE ASSESSEE BEFORE THE LD. CIT(A.) IN SUPPORT OF ITS C ASE ON THIS ISSUE: THAT THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURI NG OF ORIGINAL PARTS FOR AUTOMOBILE MANUFACTURERS, WHICH REQUIRE EXPENDITURE IN R & D. FROM THE DETAILS OF EXPENDITURE IN QUESTION IT CAN BE SEEN THAT THESE ARE REVENUE IN NATURE. THE EXPENDITURE CAPITALIZED IN THE BOOKS OF ACCOUNT S PERTAINS TO THE R & D DEPARTMENT; RELATING TO PRODU CT DEVELOPMENT AND HENCE, ALLOWABLE U/S. 37/35. 6 ITA NO.32 &3460/MUM/2012 KARLA ENGINE COMPONENTS LTD. IT IS TRITE LAW THAT EXPENDITURE INCURRED ON DEVELO PMENT OF NEW PRODUCT IN THE EXISTING LINE OF BUSINESS IS REV ENUE IN NATURE. RELIANCE IS PLACED UPON SEVERAL DECISIONS. DEPICTION OF AN EXPENDITURE IN THE BOOKS OF ACCOUNT S IS NOT A DECIDING FACTOR FOR DETERMINING THE NATURE OF THE EXPENSE. RELIANCE WAS PLACED UPON A NUMBER OF DECISIONS. 8. THE ABOVE CONTENTIONS RAISED ON BEHALF OF THE A SSESSEE WERE NOT FOUND ACCEPTABLE BY THE LD. CIT(A). HE HELD TH AT THE EXPENDITURE INCURRED BY THE ASSESSEE ON DEVELOPMENT OF A NEW LINE OF PRODUCTS WAS IN THE NATURE OF CAPITAL EXPENDITUR E. HE ALSO HELD THAT THE ASSESSEE WAS IN THE BUSINESS OF MANUFACTUR ING OF PARTS FOR THE AUTOMOBILE INDUSTRY AND SINCE THE EXPENDITURE I N QUESTION WAS INCURRED ON DEVELOPMENT OF STAINLESS STEEL LINERS F OR USE IN THE OIL EXPLORATION INDUSTRY AND OIL REFINERIES, IT CLEARLY CONSTITUTED THE EXPENDITURE INCURRED ON DEVELOPMENT OF A NEW LINE O F PRODUCTS. ACCORDING TO LD. CIT(A), THE STAINLESS STEEL LINERS BEING DEVELOPED BY THE ASSESSEE THUS WAS A NEW PRODUCT AND SINCE TH E COMMERCIAL PRODUCTION OF STAINLESS STEEL LINERS WAS COMMENCED ONLY IN THE SUBSEQUENT YEARS, THE EXPENDITURE INCURRED ON DEVEL OPMENT OF THE SAID PRODUCT IN THE YEAR UNDER CONSIDERATION WAS OF CAPITAL NATURE. HE ACCORDINGLY UPHELD THE ACTION OF THE AO IN TREAT ING THE EXPENDITURE IN QUESTION INCURRED BY THE ASSESSEE ON PRODUCTS DEVELOPMENT AS CAPITAL EXPENDITURE AND CONFIRMED TH E DISALLOWANCE MADE BY THE AO ON THIS ISSUE. AGGRIEV ED BY THE ORDER DATED LD. CIT(A), THE ASSESSEE HAS PREFERRED THIS A PPEAL BEFORE THE TRIBUNAL. 9. LD. COUNSEL FOR THE ASSESSEE AT THE OUTSET INVI TED OUR ATTENTION TO THE DETAILS OF THE PRODUCT DEVELOPMENT EXPENDITURE GIVEN ON PAGE NO. 6 OF THE ASSESSMENT ORDER AND SUB MITTED THAT THE SAID EXPENSES INCURRED ON RAW-MATERIAL, STORES & SPARES STAFFS SALARY, INTEREST ETC WHERE PURELY OF REVENUE NATURE . HE SUBMITTED 7 ITA NO.32 &3460/MUM/2012 KARLA ENGINE COMPONENTS LTD. THAT EXPENDITURE OF SIMILAR NATURE WAS INCURRED IN THE CASE OF ASSESSEES HOLDING COMPANY M/S. PERFECT ENGINEERING PVT. LTD. AND THE DISALLOWANCE OF THE SAID EXPENDITURE MADE BY TH E ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(A) HAS BEEN DE LETED BY THE TRIBUNAL VIDE ITS ORDER DATED 16.04.2013 PASSED IN ITA NO. 5311/MUM/2011. HE TOOK US THROUGH A COPY OF THE SA ID ORDER PLACED IN HIS PAPER BOOK AT PAGE NOS. 59-74 TO SHOW THAT THE ISSUE INVOLVED IN THE PRESENT CASE AS WELL AS ALL THE MAT ERIAL FACTS RELEVANT IN THERETO ARE SIMILAR TO THE CASE OF M/S. PERFECT ENGINEERING PRODUCTS LTD.. HE FURTHER SUBMITTED THA T THE SIMILAR COMPONENTS I.E. LINERS WERE BEING MANUFACTURED BY T HE ASSESSEE OUT OF CASTING MATERIAL AND THE DEVELOPMENT EXPENDI TURE IN QUESTION WAS INCURRED TO DEVELOP THE SAID PRODUCTS IN STAINLESS STEEL MATERIAL. HE CONTENDED THAT MERELY BECAUSE T HE STAINLESS STEEL LINERS HAVE APPLICATION IN OTHER INDUSTRIES A LSO, THE SAME CANNOT BE CONSIDERED AS ALL TOGETHER NEW LINE OF PR ODUCTS. HE CONTENDED THAT THE MANUFACTURING OF STAINLESS STEEL LINERS THUS WAS NOT A NEW LINE OF BUSINESS AND THE SAME BEING E XPANSION OF THE EXISTING BUSINESS OF THE ASSESSEE, THE EXPENDIT URE INCURRED ON DEVELOPMENT OF STAINLESS STEEL LINERS IS PURELY OF REVENUE NATURE. HE CONTENDED THAT THE SAID EXPENDITURE THUS IS ALLO WABLE AS DEDUCTION U/S 37(1) AS HELD BY THE TRIBUNAL IN THE CASE OF M/S. PERFECT ENGINEERING PRODUCTS (SUPRA). 10. THE LD. DR, ON THE OTHER HAND, SUBMITTED THAT THE ASSESSEE HIMSELF TREATED EXPENDITURE IN QUESTION INCURRED ON PRODUCT DEVELOPMENT AS CAPITAL EXPENDITURE IN THE BOOKS OF ACCOUNT AND THIS TREATMENT GIVEN BY THE ASSESSEE CLEARLY SHOWS THAT THE SAME IS OF CAPITAL NATURE. HE CONTENDED THAT THE DETAILS O F THE SAID EXPENDITURE AS GIVEN ON PAGE NO. 6 OF ASSESSMENT OR DER SHOW THAT A SEPARATE WING OR SECTION WAS WORKING FOR THE PROD UCT 8 ITA NO.32 &3460/MUM/2012 KARLA ENGINE COMPONENTS LTD. DEVELOPMENT WHICH WAS NOT A PART OF THE EXISTING BU SINESS OF THE ASSESSEE BUT WAS A NEW LINE OF BUSINESS. HE SUBMIT TED THAT EVEN THE APPLICATION OF THE NEW PRODUCT BEING DEVELOPED BY THE ASSESSEE WAS IN ALL TOGETHER DIFFERENT FIELDS. HE CONTENDED THAT THE MANUFACTURING OF THE STAINLESS STEEL LINERS THUS WA S A NEW PROJECT AND THE EXPENDITURE INCURRED FOR THE DEVELOPMENT OF STAINLESS STEEL LINERS, THE MANUFACTURING OF WHICH WAS TO BE COMME NCED ONLY IN THE SUBSEQUENT YEARS, WAS OF CAPITAL NATURE AS RIGH TLY HELD BY THE AO & THE LD. CIT(A). IN SUPPORT OF THIS CONTENTION , LD. DR RELIED ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF TRIVENI ENGINEERING WORKS LTD. 100 TAXMAN 19. 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND A LSO PERUSED THE MATERIAL ON RECORD. IT IS OBSERVED THAT THE AS SESSEE-COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF AUTO MOBILE PARTS AND CASTING AND AS PAR THE QUANTITATIVE DETAILS FUR NISHED IN THE NOTES FORMING PARTS OF THE ACCOUNT, AS GIVEN ON PAG E NO. 18 OF ASSESSEE PAPER BOOK, THE PRODUCTS SO MANUFACTURED A LSO INCLUDED LINERS. AS SUBMITTED BY THE LD. COUNSEL FOR THE AS SESSEE, THE LINERS WE WERE BEING MANUFACTURED BY THE ASSESSEE OUT OF C ASTING MATERIAL AND THE EXPENDITURE IN QUESTION WAS INCURR ED ON DEVELOPMENT OF THE LINERS IN STAINLESS STEEL MATERI AL. THE SAID EXPENDITURE THUS WAS INCURRED BY THE ASSESSEE ON DE VELOPMENT OF EXISTING PRODUCTS BEING MANUFACTURED BY IT ALTHOUGH FROM A DIFFERENT MATERIAL I.E. STAINLESS STEEL AND MERELY BECAUSE THE NEW LINERS BEING DEVELOPED BY THE ASSESSEE IN STAINLESS STEEL HAD APPLICATION IN INDUSTRIES OTHER THAN AUTOMOBILE IND USTRY, WE ARE OF THE VIEW THAT THE MANUFACTURING OF STAINLESS STEEL LINERS CANNOT BE CONSIDERED AS A NEW LINE OF BUSINESS. IT WAS A CA SE OF EXPANSION OF EXISTING BUSINESS OF THE ASSESSEE OF MANUFACTURI NG LINERS BY DIVERSIFYING THE EXISTING PRODUCTS USING DIFFERENT MATERIALS FOR MAKING THE SAME SUITABLE FOR EVEN OTHER APPLICATION S. THE 9 ITA NO.32 &3460/MUM/2012 KARLA ENGINE COMPONENTS LTD. EXPENDITURE INCURRED BY THE ASSESSEE ON DEVELOPMENT OF STAINLESS STEEL LINERS THUS WAS RELATING TO ITS EXISTING BUSI NESS AND THE SAME, IN OUR OPINION, CANNOT BE TREATED AS CAPITAL EXPENDITURE MERELY ON THE BASIS OF ACCOUNTING TREATMENT GIVEN B Y THE ASSESSEE. MOREOVER A PERUSAL OF THE DETAILS OF THE DEVELOPMEN T EXPENDITURE IN QUESTION INCURRED BY THE ASSESSEE CLEARLY SHOWS THA T THE ENTIRE EXPENDITURE INCURRED BY THE ASSESSEE WAS BASICALLY OF REVENUE IN NATURE AND IT CANNOT BE SAID BY ANY STRETCH OF IMAG INATION THAT SAME RESULTED IN ANY ENDURING BENEFITED TO THE ASSE SSEE AND THAT TOO IN THE CAPITAL FILED. 12. IT IS ALSO OBSERVED THAT IN THE CASE OF RENU E LECTRONICS PVT. LTD. (ITA NO.1709/PN/2005 ORDER DATED 30 TH APRIL 2009), A SIMILAR ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASS ESSEE BY PUNE BENCH OF THIS TRIBUNAL. IN THE SAID CASE, THE ASSE SSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING OF PROGRAMMABLE LO GIC CONTROLLERS FOR USE IN VARIOUS CONSUMER ELECTRONIC PRODUCTS. D URING THE RELEVANT YEAR, PRODUCT DEVELOPMENT EXPENDITURE OF R S. 15,37,582/- WAS INCURRED BY THE ASSESSEE AND THE SAME WAS CAPIT ALIZED IN THE BOOKS OF ACCOUNT UNDER THE HEAD RESEARCH AND DEVEL OPMENT CLAIMING DEPRECIATION THEREON. IN THE COMPUTATION OF TOTAL INCOME FOR THE PURPOSE OF INCOME-TAX, THE PRODUCT DEVELOPM ENT EXPENDITURE HOWEVER WAS ENTIRELY CLAIMED BY THE ASS ESSEE AS DEDUCTION BEING REVENUE IN NATURE. THE AO, HOWEVER , TREATED THE SAID EXPENDITURE AS CAPITAL IN NATURE ON THE GROUND THAT IT HAD GENERATED INTANGIBLE ASSET AND ACCORDINGLY ALLOWED ONLY DEPRECIATION THEREON. WHEN THE MATTER WAS CARRIED TO THE TRIBUNAL, THE CLAIM OF THE ASSESSEE WAS THAT THE PR ODUCT DEVELOPMENT EXPENDITURE WAS ALLOWABLE U/S-35(1)(IV) AS WELL AS SECTION 37(1). THE TRIBUNAL FIST EXAMINED THE CLAI M OF THE ASSESSEE U/S-37(1) AND HELD THAT THE EXPENDITURE IN QUESTION INCURRED BY 10 ITA NO.32 &3460/MUM/2012 KARLA ENGINE COMPONENTS LTD. THE ASSESSEE ON THE RAW-MATERIAL, ENGINEERS SALARY, TESTING CHARGES , TOOLING CHARGES , DEVELOPMENT EXPENSES ETC WAS RE VENUE IN NATURE WHICH WAS ALLOWABLE U/S-37(1). 13. IT IS FURTHER OBSERVED THAT THE COORDINATE BEN CH OF THIS TRIBUNAL HAD AN OCCASION TO CONSIDER A SIMILAR ISSU E IN THE CASE OF HOLDING COMPANY OF THE ASSESSEE VIZ. PERFECT ENGINEERING PRODUCTS LTD. AND THE SAME WAS DECIDED BY THE TRIBUNAL IN FA VOUR OF THE ASSESSEE VIDE ITS ORDER DATED 16.04.2013(SUPRA) FO R THE FOLLOWING REASONS GIVEN IN PARAGRAPH NO. 6.1 TO 6.3 6.1 WE HAVE ALSO CAREFULLY GONE THROUGH THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE LD. CIT(A), COPY OF WHICH HAS BEEN FILED AT PAGES 79 TO 88 OF T HE PAPER BOOK. IN THE SAID SUBMISSION IT WAS CLEARLY MENTIONED THAT THE EXPENDITURE ON THE PRODUCT DEVELOPMENT DOES NOT RESULT IN OBTAINING ANY ASSET BECAUSE TECHNOLOGY CHANGES VERY FAST AND WHAT IS DEVELOPED AT THE RESEARCH AND DEVELOPMENT TODAY BECOMES OBSOLETE TOMORROW. WHEN THE ASSESSEE COMPANY IS ALREADY IN THE BUSINESS AND HAD INCURRED EXPENDITURE ON DEVELOPMENT OF NEW PRODUCTS RELATING TO SOME BUSINESS, THE EXPENDITURE INCURRED HAS TO BE TREATED AS REVENUE EXPENDITURE AS NO NEW CAPITAL AS SET IS ACQUIRED BY THE COMPANY. REFERENCE WAS MADE TO SEVERAL DECISIONS. IN PARA- 11 IT WAS CLEARLY SUBMI TTED THAT EXPENDITURE INCURRED IS IN THE EXISTING LINE O F BUSINESS. IN PARA-5 IT WAS SUBMITTED THAT THE PHOTOGRAPHS OF PRODUCTS DEVELOPED ARE ALSO FURNISHE D AND DETAILS REGARDING GROWTH IN THE BUSINESS OF THE ASSESSEE WAS ALSO GIVEN. IN THE YEAR 2005-06 ASSESSEES TURNOVER WAS TO THE TUNE OF RS.42.72 CRO RES WHICH RISES TO RS.135.83 CRORES IN 2008-09 AND THIS WAS ONLY DUE TO THE REASON THAT ASSESSEE WAS CONTINUOUSLY DEVELOPING NEW PRODUCTS AND THUS IT WA S CLAIMED THAT EXPENDITURE INCURRED IS ALLOWED UNDER SECTION 35/37 OF THE ACT . 6.2 DESPITE ALL THESE SUBMISSIONS LD. CIT(A) HAS JUST SIMPLY RELIED UPON THE FACT THAT IN THE AUDIT REPOR T IN THE 11 ITA NO.32 &3460/MUM/2012 KARLA ENGINE COMPONENTS LTD. COLUMN DESCRIBED FOR EXPENDITURE TO BE INCURRED UND ER SECTION 35 THE AUDITOR HAD MENTIONED NA, IN THE EARLIER YEARS THE ASSESSEE HAD CAPITALIZED SIMILAR EXPENDITURE ON THE GROUND THAT IT WAS A NEW LINE OF BUSINESS. HOWEVER WE FIND THAT NO SUCH MATERIAL EXI ST ON RECORD ACCORDING TO WHICH IT CAN BE SAID THAT AN Y EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE IN TH E NEW LINE OF BUSINESS. THESE OBSERVATIONS OF LD. CIT (A) ARE ALSO CONTRARY TO THE OBSERVATION OF AO WHICH HA VE BEEN REPRODUCED IN THE ABOVE PART OF THIS ORDER AS AO HAS OBSERVED THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IS RELATABLE TO ITS BUSINESS. AS PER WELL ESTABLISHED LAW TREATMENT IN THE ACCOUNTS BOOK IS N OT CONCLUSIVE FACTOR TO DETERMINE THE NATURE OF THE EXPENDITURE AND REFERENCE IN THIS REGARD CAN BE MAD E TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE O F KEDARNATH JUTE MFG. CO. LTD. VS. CIT (SUPRA). AS PE R DECISION OF HONBLE SUPREME COURT IN THE CASE OF EM PIRE JUTE COMPANY LTD. (SUPRA) THE TRUE TEST TO ASCERTAI N THE NATURE AND IMPORT OF EXPENDITURE IS TO EXAMINE THE SAME FROM COMMERCIAL PERSPECTIVE. EVEN IF, IT IS BE ING ACCEPTED THAT THE EXPENDITURE RESULTS IN AN ENDURIN G BENEFIT TO THE ASSESSEE, YET EVERY INCIDENCE OF END URING BENEFIT WOULD NOT RESULT IN A CLASSIFICATION OF EXPENDITURE AS A CAPITAL EXPENDITURE AND THIS IS CL EAR FROM THE FOLLOWING OBSERVATION FROM THE SAID DECISI ON. THERE MAY BE CASES WHERE EXPENDITURE EVEN IF INCUR RED 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. W HAT IS MATERIAL TO CONSIDER IS NATURE OF THE PRINCIPLE LAI D DOWN IN THIS TEST. WHAT IS MATERIAL TO CONSIDER IS NATURE O F THE ADVANTAGE IN A COMMERCIAL SENSE AND IT IS ONLY WHER E THE ADVANTAGE IS IN THE CAPITAL FIELD THAT THE EXPENDIT URE WOULD BE DISALLOWABLE ON AN APPLICATION OF THIS TEST. IF THE ADVANTAGE CONSISTS MERELY IN FACILITATING THE ASSES SEES TRADING OPERATIONS OR ENABLING THE MANAGEMENT AND C ONDUCT OF THE ASSESSEES BUSINESS TO BE CARRIED ON MORE EF FICIENTLY OR MORE PROFITABLY WHILE LEAVING THE FIXED CAPITAL UNT OUCHED, THE EXPENDITURE WOULD BE OF REVENUE ACCOUNT, EVEN THOUG H THE ADVANTAGE MAY ENDURE FOR AN INDEFINITE FUTURE. 6.3 IF THE FACTS OF THE PRESENT CASE IS EXAMINED IN THE LIGHT OF THE AFOREMENTIONED LEGAL PRINCIPLES IT CAN BE FOUND FROM THE DETAILS OF EXPENDITURE THAT THESE EXPENDITURE ARE INCURRED ON RAW MATERIAL, SUB- 12 ITA NO.32 &3460/MUM/2012 KARLA ENGINE COMPONENTS LTD. CONTRACTING CHARGES, POWER AND FUEL, SALARY AND WAG ES, BONUS, P.F, ESI, LWF, LEAVE ENCASHMENT, CANTEEN, TELEPHONE EXPENSES, PRINTING AND STATIONARY, FOREIG N TRAVEL EXPENSES AND INTEREST. NONE OF THESE EXPENDI TURE CAN BE SAID TO HAVE FORMED A NEW ASSET AND A.O HAS ADMITTED THAT THESE EXPENDITURE ARE RELATABLE TO TH E BUSINESS OF THE ASSESSEE THEN SIMPLY FOR THE REASON S THAT THESE HAVE GIVEN SOME ENDURING BENEFIT TO THE ASSESSEE CANNOT BE REGARDED AS CAPITAL EXPENDITURE. THE CASE LAW RELIED UPON BY THE AR SUPPORTS THE CAS E OF THE ASSESSEE AND FACTS OF THE PRESENT CASE ARE VERY NEAR TO THE FACTS OF THE CASE OF M/S. RENU ELECTRON ICS PVT. LTD. (SUPRA) WHERE SIMILAR CLAIM WAS MADE BY T HE ASSESSEE INITIALLY ON RESEARCH AND DEVELOPMENT AND DEPRECIATION WAS CLAIMED. 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 EXPENDIT URE WERE HELD TO BE ALLOWABLE UNDER SECTION 37(1) OF TH E ACT. 14. KEEPING IN VIEW THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF RENU ELECTRONICS PVT. L TD. (SUPRA) AND PERFECT ENGINEERING PRODUCTS LTD.(SUPRA) WHICH IS S QUARELY APPLICABLE TO THE ISSUE INVOLVED IN THE PRESENT CAS E AND HAVING REGARD TO THE RELEVANT FACTS OF THE CASE DISCUSSED ABOVE, WE ARE OF THE VIEW THAT THE EXPENDITURE IN QUESTION INCURRED BY THE ASSESSEE ON PRODUCT DEVELOPMENT IS REVENUE EXPENDITURE ALLOW ABLE U/S- 37(1) AS CLAIMED BY THE ASSESSEE. IN THAT VIEW OF THE MATTER, WE DELETE THE ADDITION MADE BY THE AO AND CONFIRMED BY THE LD. CIT(A) BY DISALLOWING THE SAID EXPENDITURE TREATING IT AS CAPITAL IN NATURE AND ALLOW THE APPEAL OF THE ASSESSEE FOR THE A.Y. -2007-08. 15. AS REGARDS APPEAL OF THE ASSESSEE FOR THE A.Y. 2008-09, IT IS OBSERVED THAT THE SOLITARY ISSUE INVOLVED THE REIN RELATING TO THE ASSESSEES CLAIM FOR DEDUCTION ON ACCOUNT OF RESEAR CH AND DEVELOPMENT EXPENDITURE IS SIMILAR TO THE ONE INVOL VED IN A.Y.- 2007-08. SINCE ALL THE MATERIAL FACTS RELEVANT TO THE SAID ISSUE AS 13 ITA NO.32 &3460/MUM/2012 KARLA ENGINE COMPONENTS LTD. INVOLVED IN A.Y. 2008-09 AS WELL AS ARGUMENT OF THE BOTH THE SIDES ARE SIMILAR TO THAT OF AY-2007-08, WE FOLLOW THE CO NCLUSION DRAWN BY US IN A.Y.-2007-08 AND DELETE THE DISALLOWANCE M ADE BY THE AO AND CONFIRMED BY THE LD. CIT(A) ON ACCOUNT OF RESEA RCH AND DEVELOPMENT EXPENDITURE IN A.Y.-2008-09. 16. IN THE RESULT, BOTH THESE APPEALS OF THE ASSES SEE ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST JUNE.2013 '4 0 23+ 5'*6 21 ST JUNE.2013 3 0 SD/- SD/- ( VIVEK VARMA ) (P.M. JAGTA P ) ' !'# JUDICIAL MEMBER !'# / ACCOUNTANT MEMBER MUMBAI ; 5'* DATED 21.06.2013 '*.!./ S.S.K , PS '4 0 .'7% 8%+ '4 0 .'7% 8%+ '4 0 .'7% 8%+ '4 0 .'7% 8%+/ COPY OF THE ORDER FORWARDED TO : 1. ,- / THE APPELLANT 2. ./,- / THE RESPONDENT. 3. 9 ( ) / THE CIT (A) - , MUMBAI 4. 9 /CIT MUMBAI 5. %$< .''* , , / DR, ITAT, MUMBAI BENCH 6. =& > / GUARD FILE. '4* ! '4* ! '4* ! '4* ! / BY ORDER, !/% .' //TRUE COPY// ? ?? ?/ // /!@ !@ !@ !@ ( DY./ASSTT. REGISTRAR) , , , , / ITAT, MUMBAI