MAHINDRA AUTOMOBILE DISTRIBUTOR P.LTD, MUMBAI V. DCIT CIR 2(2), MUMBAI

ITA 3476/MUM/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 3371 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 10 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-03-2016
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 21-05-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 16-05-2012
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH SONKAR
• Assessee Lawyers: MANSI CHITRODA
• Keywords: Depreciation; Revenue expenditure; Capital expenditure
• Section: 32

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B , BENCH MUMBAI BEFORE SHRI R.C.SHARMA , A M & SHRI RAM LAL NEGI , J M ./ ITA NO . 3476 /MUM /20 1 2 ( / ASSESSMENT YEAR : 20 0 7 - 20 0 8 ) MAHI NDRA AUTOMOBILE DISTRIBUTOR PRIVATE LIMITED, C/O AUTOMOTIVE SECTOR, MAHINDRA TOWERS, FIRST FLOOR, AKURLI ROAD, KANDIVALI, MUMBAI - 400001 VS. DCIT, CIRCLE - 2(2), MUMBAI ./ ./ PAN/GIR NO. : A A ECM 2999 P ( / APPELLANT ) .. ( / RESPONDENT ) /ASSESSEE BY : SHRI BHAVIN SHAH & MANSI CHITRODA /REVENUE BY : MR. PEEYUSH SONKAR / DATE OF HEARING : 07 / 1 2 / 201 5 / DATE OF PRONOUNCEMENT 30/03 /2 01 6 / O R D E R PER R.C.SHARMA (A.M) : TH IS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A), MUMBAI , DATED 9 - 2 - 2012 , FOR THE ASSESSMENT YEAR 200 7 - 0 8 , IN THE MATTER OF ORDER PASSED U/S.143(3) OF THE I.T.ACT . 2 . IN THIS APPEAL THE ASSESS EE IS AGGRIEVED FOR DISALLOWING DEVELOPMENT EXPENDITURE. 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. FROM THE RECORD WE FOUND THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAD FILED RETURN OF INCOME AT A LOSS OF RS.85.77 CRORES. THE A SSESSEE HAS CLAIMED DEVELOPMENT EXPENDITURE OF RS.1,28,15,029/- IN THE COMPUTATION OF INCOME. AO DISALLOWED ASSESSEES CLAIM BY OBSERVING THAT A S PER THE BALANCE SHEET SUBMITTED BY THE ASSESSEE, SCHEDULE 4 COMPRISING DETAILS OF ITA NO. 3476 /1 2 2 FIXED ASSETS HAS BEEN ATTAC HED. AS PER THIS SCHEDULE, ASSESSEE HAS MADE DEVELOPMENT EXPENDITURE OF RS.1,28,15,029/ - . THIS AMOUNT HAS BEEN CAPITALIZED AS PER THE BALANCE SHEET SUBMITTED BY THE ASSESSEE WHICH HAS BEEN ACCEPTED BY ITS SHAREHOLDERS. THE BALANCE SHEET HAS BEEN SUBMITTED TO THE MINISTRY OF COMPANY AFFAIRS ALSO. HOWEVER, ASSESSEE CLAIMED THIS EXPENSE AS REVENUE EXPENDITURE IN ITS COMPUTATION OF INCOME. IN VIEW OF THE ACCOUNTING TREATMENT AS PER THE ANNUAL ACCOUNTS ADOPTED BY THE SHAREHOLDERS, THE ESTABLISHED ACCOUNTING PRIN CIPLE OF MATCHING EXPENDITURE TO REVENUE THE SETTLED POSITION OF LAW, THE SPECIFIC PROVISIONS OF SECTION 32 TO TREAT KNOW HOW AS INTANGIBLE ASSET AND THE FACTS PECULIAR TO THE ASSESSEE'S CASE, THE DEVELOPMENT EXPENSES OF RS. 1,28, 15,029/ - IS TO BE TREATED AS CAPITAL EXPENDITURE. HOWEVER, DEPRECIATION AT 25% OF RS.32,03,757/ - ON THE SAME IS BEING ALLOWED. 4. BY THE IMPUGNED ORDER, THE CIT(A) CONFIRMED AOS ACTION AND ASSESSEE IS IN FURTHER APPEAL BEFORE US. 5 . WE HAVE CONSIDERED RIVAL CONTENTIONS. FROM THE R ECORD WE FOUND THAT THE COMPANY IS IN THE BUSINESS OF DESIGNING, MANUFACTURING, AND MARKETING LOGAN VEHICLES. IT COMMENCED BUSINESS IN FEBRUARY 2006. IT COMMENCED PRODUCTION FROM 14 TH FEBRUARY 2007. DURING THE YEAR ENDED 31 ST MARCH 2007 IT PRODUCED 614 VE HICLES. OUT OF THESE 189 WERE PRODUCED AS TRIAL CARS. AS PER INDUSTRY PRACTICE THESE TRIAL CARS WERE USED FOR DEVELOPMENT, TESTING AND VALIDATION. OUT OF THESE, 35 CARS WERE PRODUCED AFTER 14 TH FEBRUARY 2007 BEING THE DATE OF COMMENCEMENT OF COMMERCIAL PRO DUCTION. WHILE COST OF 154 VEHICLES MANUFACTURED PRIOR TO COMMENCEMENT OF COMMERCIAL PRODUCTION WAS SPREAD OVER COST OF PLANT AND MACHINERY(NET OF ECONOMIC ITA NO. 3476 /1 2 3 VALUE), COST OF 35 VEHICLES, MANUFACTURED AFTER 14111 FEBRUARY 2007, NET OF ECONOMIC VALUE, WAS REFL ECTED AS DEVELOPMENT EXPENDITURE. IN TERMS OF EXPLANATION 8 TO SECTION 43(1) AND EVEN AS PER ACCOUNTING STANDARD 10 DEALING WITH ACCOUNTING FOR FIXED ASSETS, CAPITALIZATION OF COST OF FIXED ASSETS HAS TO CEASE AT THE TIME THE FIXED ASSETS ARE FIRST PUT TO USE, IN THIS CASE, WHEN COMMERCIAL PRODUCTION STARTED ON 14 TH FEBRUARY 2007. THESE EXPENSES ARE FOR DEVELOPING, TESTING, VALIDATING LOGAN VEHICLES. IN THE AUTOMOBILE INDUSTRY, IT IS COMMON KNOWLEDGE THAT BEFORE THE VEHICLES ARE DECLARED FIT FOR BEING PUT O N ROAD THEY HAVE TO BE TESTED AND VALIDATED WITH A VIEW TO REMOVE THE GLITCHES AND THE ROUGH EDGES THAT DO NOT ALWAYS SURFACE DURING TEST RUNS. THIS IS AN INTERNATIONAL PRACTICE. THE FINDINGS OF SUCH TESTING AND VALIDATION ARE USED AS A FEEDBACK FOR CARRYI NG OUT REQUIRED MODIFICATIONS. ACCORDINGLY, WE DO NOT FIND ANY MERIT FOR DISALLOWING ASSESSEES CLAIM OF DEVELOPMENT EXPENDITURE INCURRED DURING THE YEAR. 6 . IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED . O RDER PRONOUNCED IN THE OPEN COURT ON THIS 30/03 / 201 6 . SD/ - SD/ - ( RAM LAL NEGI ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 30/03 /201 6 . . /PKM , . / PS / COPY OF THE ORDER FORWARDED TO : / BY ORDER, / ( ASSTT. REGISTRAR) , / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A), MUMBAI. 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE. //TRUE COPY//