JCB India Ltd., New Delhi V. ACIT, New Delhi

ITA 3762/DEL/2013

• Counselvise Citation: 376220114 RSA 2013
• Duration Of Justice: 1 year(s) 9 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-03-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 29-01-2015
• Assessment Year: 2004-2005
• Appeal Filed On: 12-06-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P DA MKAUNAJMA
• Assessee Lawyers: G C SRIVASTAVA; SOURABH SRIVASTAVA
• Keywords: Depreciation; Capital receipt; Revenue expenditure; Reassessment proceedings; Capital expenditure
• Section: 143(3); 37

Judgement Text

I.T.A. NO.: 3762/DEL/2013 ASSESSMENT YEARS 2004-05 PAGE 1 OF 6 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI D BENCH, NEW DELHI [CORAM: I.C. SUDHIR, JM AND PRAMOD KUMAR, AM] I.T.A. NO.: 3762/DEL/2013 ASSESSMENT YEAR: 2004-05 JCB INDIA LIMITED, .APPELLANT B-1/1-1, 2 ND FLOOR, MOHAN CO-OPERATIVE INDUSTRIAL ESTATE, MATHURA ROAD, NEW DELHI 110 044 [PAN: AAACE 0078 P] VS. ASSISTANT COMMISSIONER OF INCOME TAX, .RESPONDENT CIRCLE- 4(1), NEW DELHI. APPEARANCES BY: G.C. SRIVASTAVA & SOURABH SRIVASTAVA, FOR THE APPELLANT P. DAM KAUNAJMA, FOR THE RESPONDENT DATE OF CONCLUDING THE HEARING: 29 TH JANUARY, 2015 DATE OF PRONOUNCING THE ORDER: 27 TH MARCH, 2015 O R D E R PER PRAMOD KUMAR: 1. THIS APPEAL, FILED BY THE ASSESSEE, IS DIRECTED AGAINST THE ORDER DATED 30 TH MARCH, 2013 PASSED BY THE LEARNED CIT(A) IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) R.W.S. 147 OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT), FOR THE ASSESSMENT YEAR 2004-05. 2. GRIEVANCES OF THE ASSESSEE, AS PRESSED BEFORE US , ARE AS FOLLOWS :- 2. THAT THE LD. CIT(A), ERRED ON FACTS AND IN LAW, B Y CONFIRMING THE DISALLOWANCE OF THE EXPENDITURE OF RS.18,731,381 ON ACCOUNT OF DEVELOPMENT CHARGES INCURRED IN THE NORMAL COURSE OF CARRYING ON THE BUSINESS, CONSIDERING THE SAME TO BE IN THE NATURE O F CAPITAL EXPENDITURE. I.T.A. NO.: 3762/DEL/2013 ASSESSMENT YEARS 2004-05 PAGE 2 OF 6 3. THAT WITHOUT PREJUDICE TO THE GROUND NO.2 ABOVE, T HE LD. CIT(A) HAS ERRED IN FACTS AND IN LAW, BY CONFIRMING THE ACTION OF THE LD. AO OF NOT ALLOWING DEPRECIATION ON DEVELOPMENT EXPENSES, THOUGH THE LD. A O HAD RECORDED IN THE REASONS FOR REOPENING OF THE ASSESSMENT THAT DEPRECIA TION @ 25% WAS ALLOWABLE ON THE DEVELOPMENT CHARGES. 3. IT IS A CASE OF REOPENED ASSESSMENT AND ONE OF T HE REASONS FOR REOPENING THE ASSESSMENT WAS THAT THE ASSESSEE HAD CLAIMED AN EXP ENDITURE OF RS.1,87,31,381/- AGAINST DEVELOPMENT CHARGES IN THE PROFIT AND LOSS ACCOUNT, WHEREAS, ACCORDING TO THE ASSESSING OFFICER, SINCE THE EXPENDITURE IS ON MAC HINE, THE EXPENDITURE SO MADE SHOULD HAVE BEEN CAPITALISED AND THE DEPRECIATION @ 25% WA S ALLOWABLE. DURING THE COURSE OF REASSESSMENT PROCEEDINGS, AND IN RESPONSE TO THE AS SESSING OFFICERS REQUISITION FOR FURTHER DETAILS, THE ASSESSEE SUBMITTED AS FOLLOWS :- IT IS RESPECTFULLY SUBMITTED THAT NO EXPENDITURE O F ANY CAPITAL NATURE IS INCURRED BY THE COMPANY. THE TERM DEVELOPMENT CHARGES IS A NOMENCLATURE FOR ROUTINE EXPENDITURE FOR RESEARCH AN D TESTING OF EQUIPMENT, COMPONENTS OF THE COMPANY ON A YEAR TO YE AR BASIS. THIS EXPENDITURE DEBITED IN THIS HEAD INTER ALIA INCLUDES EXPENSES ON:- - TESTING THE PERFORMANCE OF LOCAL COMPONENTS (VEND OR & JCB INDIA VIS-A-VIS SIMILAR COMPONENTS USED IN JCB MACHINES OU TSIDE INDIA. - COMPONENT TESTING/RESEARCH TO IMPROVE PERFORMANCE, IMPORT SUBSTITUTION AND MONITOR COMPLIANCE WITH PRESCRIBED SAFETY STANDARDS. - TESTING OF COMPETITOR MACHINES/COMPONENTS TO BENCHM ARK PERFORMANCE OF JCB MACHINES/COMPONENTS 4. THIS EXPLANATION, HOWEVER, DID NOT IMPRESS THE A SSESSING OFFICER. HE PROCEEDED TO REJECT THE EXPLANATION AND DISALLOW THE SAME BY RATHER BRIEFLY OBSERVING AS FOLLOWS :- THE SUBMISSIONS MADE BY THE ASSESSEE WERE EXAMINED, CONSIDERED AND HOWEVER, NOT FOUND ACCEPTABLE. ON THE SIMILAR ISSUE ADDITION FOR A.Y. 2007- 08 WAS SUGGESTED IN THE DRAFT ASSESSMENT ORDER U/S 1 44C HOLDING THEM AS I.T.A. NO.: 3762/DEL/2013 ASSESSMENT YEARS 2004-05 PAGE 3 OF 6 EXPENSES OF CAPITAL NATURE WHICH HAS BEEN CONFIRMED BY THE HONBLE DISPUTE RESOLUTION PANEL-I, NEW DELHI. ACCORDINGLY, THE ADDIT ION AS SUGGESTED IN THE DRAFT ORDER HAS BEEN MADE. ON THE SIMILAR LINES, THE DEVELOPMENT CHARGES AMOUNTING TO RS.1,87,31,381/- DEBITED TO THE P&L ACC OUNT DURING THE YEAR UNDER CONSIDERATION REVENUE EXPENDITURE ARE HELD TO BE EXPENSES OF CAPITAL IN NATURE. THEREFORE, THE DEVELOPMENT EXPENSES OF RS .1,87,31,381/- ARE DISALLOWED. ACCORDINGLY, AN ADDITION OF RS.1,87,31 ,381/- IS MADE. 5. AGGRIEVED BY THE DISALLOWANCES MADE, ASSESSEE CA RRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A) BUT WITHOUT ANY SUCCESS,. WH ILE REJECTING THE GRIEVANCE OF THE ASSESSEE, LEARNED CIT(A) REASONED AS FOLLOWS :- I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT FINDINGS OF THE AO AND THE FACTS ON RECORD. THE DEDUCTION UNDER SECTI ON 37 OF THE ACT IS PERMISSIBLE IN RESPECT OF ANY EXPENDITURE LAID OUT OR INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THERE ARE EXCEPTIONS PROVIDED AIN THE LANGUAGE OF SECTION 37 ITSELF WHICH TAKE OUT SPECIF IED EXPENDITURE OUT OF THE AMBIT OF SECTION 37. SUCH EXCEPTIONS ARE IN RESPEC T OF THE EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 AND THE EXPEN DITURE WHICH IS IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE. IN THE CASE OF ATHERTON VS. BRITISH INSULATED & HELSBY CAB LES LTD. (1925) 10 TAX CASES 155 (HL), THE ASSESSEE COMPANY CLAIMED TO DEDUCT A SUM WHICH IT HAD SETTLED UPON TRUST TO FORMA THE NUCLEUS OF A PENSION FUND F OR ITS EMPLOYEES. THE HOUSE OF LORDS REJECTED THE CLAIM ON THE GROUND THA T THE EXPENDITURE WAS CAPITAL IN NATURE. IN THIS CASE, THE FOLLOWING PRI NCIPLE WAS LAID DOWN: WHEN AN EXPENDITURE IS MADE, NOT ONLY ONCE AND FOR ALL, BUT WITH A VIEW TO BRINGING INTO EXISTENCE AN ASSET OR AN ADVA NTAGE FOR THE ENDURING BENEFIT OF A TRADE, THERE IS VERY GOOD REASON. IN THE ABSENCE OF SPECIAL CIRCUMSTANCES LEADING TO AN OPPOSITE CONCLUSION FOR TREATING SUCH AN EXPENDITURE AS PROPERLY ATTRIBUTABLE NOT TO REVENUE BUT TO CAPITAL. THIS PRINCIPLE OF LAW HAS BEEN APPLIED WITH APPROVA L BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. FINLAY MILLS L TD. (1951) 20 ITR 475 (SC) AT P. 477, IN THE CASE OF INDIAN MOLASSES COL. LTD. VS . CIT (1959) 37 ITR 66 (SC) AT P. 162. FURTHER, THIS PRINCIPLE OF LAW HAS BEEN EXP LAINED BY THE HONBLE SUPREME COURT IN THE CASE OF EMPIRE JUTE CO. LTD. V S. CIT (19080) 17 CTR (SC) 113: (1980) 124 ITR 1 (SC). IN THIS CASE, THE HON BLE SUPREME COURT HAS LAID DOWN THE FOLLOWING PRINCIPLES OF LAW :- (I) IT IS NOT A UNIVERSALLY TRUE PROPOSITION THAT WHAT MAY BE A CAPITAL RECEIPT IN THE HANDS OF THE PAYEE MUST NECESSARILY BE CAPITAL EXPENDITURE IN RELATION TO THE PAYER. THE FACT THAT A CERTAIN PAYMENT I.T.A. NO.: 3762/DEL/2013 ASSESSMENT YEARS 2004-05 PAGE 4 OF 6 CONSTITUTES INCOME OR CAPITAL RECEIPT IN THE HANDS OF THE RECIPIENT IS NOT MATERIAL IN DETERMINING WHETHER THE PAYMENT IS REVENUE OR CAPITAL DISBURSEMENT QUA THE PAYER; (II) THERE MAY BE CASES WHERE EXPENDITURE, EVEN IF INCURRED FOR OBTAINING ADVANTAGE OF ENDURING BENEFIT, MAY, NONETHELESS, BE ON REVENUE ACCOUNT AND THE TEST OF ENDURING BENEFIT MAY BREAK DOWN. IT IS NOT EVERY ADVANTAGE OF ENDURING NATURE ACQUIRED BY AN A SSESSEE THAT BRINGS THE CASE WITHIN THE PRINCIPLE LAID DOWN IN T HIS TEST. WHAT IS MATERIAL TO CONSIDER IS THE NATURE OF THE ADVANTAGE IN A COMMERCIAL SENSE AND IT IS ONLY WHERE THE ADVANTAGE IS IN THE CAPITAL FIELD THAT THE EXPENDITURE WOULD BE DISALLOWABLE ON AN APPLICATION OF THIS TEST. IF THE ADVANTAGE CONSISTS MERELY IN FACILITATING THE A SSESSEES TRADING OPERATIONS OR ENABLING THE MANAGEMENT AND CONDUCT O F THE ASSESSEES BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY WHILE LEAVING THE FIXED CAPITAL UNTOUCHED, THE EXPENDITUR E WOULD BE ON REVENUE ACCOUNT, EVEN THOUGH THE ADVANTAGE MAY ENDU RE FOR AN INDEFINITE FUTURE. THE TEST OF ENDURING BENEFIT IS , THEREFORE, NOT A CERTAIN OR CONCLUSIVE TEST AND IT CANNOT BE APPLIED BLINDLY AND MECHANICALLY WITHOUT REGARD TO THE PARTICULAR FATS AND CIRCUMSTANCES OF A GIVEN CASE. (III) WHAT IS AN OUTGOING OF CAPITAL AND WHAT IS AN OUTGOING ON ACCOUNT OF REVENUE DEPENDS ON WHAT THE EXPENDITURE IS CALCULAT ED TO EFFECT FROM A PRACTICAL AND BUSINESS POINT OF VIEW RATHER THAN UPON THE JURISTIC CLASSIFICATION OF THE LEGAL RIGHTS, IF ANY, SECURED , EMPLOYED OR EXHAUSTED IN THE PROCESS. THE QUESTION MUST BE VIE WED IN THE LARGER CONTEXT OF BUSINESS NECESSITY OR EXPEDIENCY. ON THE ANALYSIS OF THE ABOVE QUOTED DECISIONS, THE FOLLOWING PRINCIPLES OF LAW EMERGE:- (I) GENERALLY. WHEN THE EXPENDITURE IS INCURRED FOR OBTAINING AN ADVANTAGE OF ENDURING BENEFIT, IT WOULD BE ON CAPIT AL ACCOUNT. SO, HOWEVER, THERE MAY BE CASES WHERE THE TEST OF ENDUR ING BENEFIT MAY BREAKDOWN. (II) LN ORDER TO DETERMINE THE NATURE OF AN EXPENDI TURE TO BE REVENUE OR CAPITAL ACCOUNT, IT IS NECESSARY TO CONSIDER THE EF FECT OF THE EXPENDITURE FROM THE PRACTICAL AND BUSINESS POINT O F VIEW TAKING INTO CONSIDERATION THE LARGER CONTEXT OF BUSINESS NECESS ITY OR EXPEDIENCY. IN THE LIGHT OF THE ABOVE PRINCIPLES THE NATURE OF EXPE NDITURE INCURRED BY THE APPELLANT IS TO BE EXAMINED. PERUSA L OF THE DETAILS OF EXPENSES FILED BY THE APPELLANT SHOW THAT THE EXPENSE H AS BEEN INCURRED ON I.T.A. NO.: 3762/DEL/2013 ASSESSMENT YEARS 2004-05 PAGE 5 OF 6 PAYMENT OF TESTING CHARGES WHICH HAVE RESULTED IN ENDUR ING BENEFIT TO THE APPELLANT. SINCE THE EXPENDITURE INCURRED BY THE APPELLANT HAS RE SULTED INTO ENDURING BENEFIT TO THE APPELLANT, AND THEREFORE, THE EXPENSES ARE CAPITAL IN NATURE. IN VIEW OF THE FINDINGS ABOVE THE DISALLOWA NCE MADE BY THE AO IS AS PER LAW. THIS GROUND OF APPEAL IS DISMISSED. 6. THE ASSESSEE IS NOT SATISFIED WITH THE STAND SO TAKEN BY THE LEARNED CIT(A) AND IS IN FURTHER APPEAL BEFORE US. 7. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE AP PLICABLE LEGAL POSITION. 8. WE FIND THAT SIMILAR DISALLOWANCE FOR THE ASSESS MENT YEAR 2007-08 WHICH WAS THE SOLE BASIS FOR IMPUGNED DISALLOWANCE HAS BEEN D ELETED BY A CO-ORDINATE BENCH OF THIS TRIBUNAL. VIDE ORDER DATED 18 TH SEPTEMBER, 2013, AND WHILE SO DELETING THE DISALLOWANCE, THE CO-ORDINATE BENCH HAS OBSERVED AS FOLLOWS :- 15. GROUND NO.2 OF THE ASSESSEES APPEAL IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THIS BENCH OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1996-97, WHEREIN THE TRIB UNAL FOLLOWED ITS OWN ORDER FOR THE ASSESSMENT YEAR 1994-95 ORDER DT. 27 TH DECEMBER, 2012 AND FOR THE ASSESSMENT YEAR 1995-96 VIDE ORDER DT. 2 5 TH FEB., 2004. IT WAS SUBMITTED TO US THAT THE DEPARTMENT HAS ACCEPTED THIS D ECISION OF THE ITAT ON THIS ISSUE. THE LD. D.R. COULD NOT CONTROVERT THESE SUBMISSIONS OF THE LD. COUNSEL FOR THE ASSESSEE. IN VIEW OF THE SAME, RESP ECTFULLY FOLLOWING THE DECISION OF THE CO-ORDINATE BENCH OF THE TRIBUNAL IN T HE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1995-96 WE ALLOW THIS GROUND OF THE ASSESSEE FOR BOTH THE AYS 2007-08 AND 2008-09. 9. WE HAVE ALSO NOTICED THAT IT IS AN UNDISPUTED PO SITION THAT EXPENSES IN QUESTION ARE INCURRED ON TESTING THE PERFORMANCE OF LOCAL CO MPONENTS VIS--VIS SIMILAR I.T.A. NO.: 3762/DEL/2013 ASSESSMENT YEARS 2004-05 PAGE 6 OF 6 COMPONENTS USED OUTSIDE INDIA, TO IMPROVE PERFORMAN CE, IMPORT SUBSTITUTION AND MONITORING COMPLIANCE WITH SAFETY STANDARDS, AND FO R BENCH MARKING PERFORMANCE OF ITS PRODUCTS. THIS EXERCISE IS ESSENTIALLY A CONT INUOUS PROCESS WHICH PERMEATES DIFFERENT ACCOUNTING YEARS, AND DOES NOT RESULT IN SUCH AN ENDURING ADVANTAGE SO AS TO RENDER THE EXPENSES AS CAPITAL EXPENDITURE IN NATUR E. TESTING FOR PRODUCTS IS NOT A ONE TIME EVENT WHICH LEADS TO BENEFIT IN THE CAPITAL FI ELD PARTICULARLY IN A SITUATION LIKE THIS WHERE IT IS AN INTEGRAL PART OF ROUTINE MANUFACTURI NG AND MONITORING ACTIVITY. VIEWED THUS, THE AUTHORITIES BELOW WERE CLEARLY IN ERROR I N HOLDING THE DEVELOPMENT EXPENSES TO BE CAPITAL EXPENDITURE. 10. IN VIEW OF THE ABOVE DISCUSSIONS, AS ALSO BEARI NG IN MIND ENTIRETY OF THE CASE, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO DELETE THE IMPUGNED DISALLOWANCE OF RS.1,87,31,381/-. THE ASS ESSEE GETS THE RELIEF ACCORDINGLY. 11. IN THE RESULT, THE APPEAL IS ALLOWED IN THE TER MS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT TODAY ON 27 TH MARCH, 2015. SD/- SD/- I.C. SUDHIR PRAMOD KUMA R (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) NEW DELHI, THE 27 TH DAY OF MARCH, 2015 COPIES TO: (1) THE APPELLANT (2) THE RESPONDE NT (3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ETC ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES, NEW DELHI