ACIT, Meerut V. M/s. Besson Musical Instrument Pvt. Ltd., Meerut

ITA 3893/DEL/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7274 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 3 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-10-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 09-10-2014
• Assessment Year: 2004-2005
• Appeal Filed On: 18-06-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: Y KAKKAR
• Assessee Lawyers: V K GOEL
• Keywords: Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : A : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND SHRI GEORGE GEORGE K. , JM ITA NO.3893/DEL/2013 ASSESSMENT YEAR : 2004-05 A CIT, CIRCLE-1, MEERUT. VS. BESSON MUSICAL INSTRUMENT PVT. LTD., 107, KOTHI ATANAS, DELHI ROAD, MEERUT. PAN : AACCB3068J ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY : SHRI V.K. GOEL, ADVOCATE DEPARTMENT BY : S MT. Y. KAKKAR, DR ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE REVENUE ARISES OUT OF THE ORDER PASSED BY THE CIT(A) ON 15.03.2013 IN RELATION TO THE ASSESSMENT YEAR 2004-05. 2. THE ONLY ISSUE RAISED IN THIS APPEAL IS AGAINST THE DELETION OF ADDITION OF `14,10,032/- WHICH WAS MADE BY THE AO B Y TREATING R&D EXPENSES AS OF CAPITAL NATURE AND GIVING BENEFIT OF ENDURING NATURE TO THE ASSESSEE. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN MANUFACTURING OF MUSICAL INS TRUMENTS. ITA NO.3893/DEL/2013 2 DEDUCTION OF `14,10,032/- WAS CLAIMED ON ACCOUNT OF RESEARCH AND DEVELOPMENT EXPENSES. ON BEING CALLED UPON TO EXPL AIN AS TO WHY THESE R&D EXPENSES BE NOT TREATED AS CAPITAL, THE A SSESSEE STATED THAT THE COMPANY WAS MANUFACTURING BRASS MUSICAL IN STRUMENTS AS PER THE SAMPLES/SPECIFICATIONS GIVEN BY THE BUYERS. IT WAS EXPLAINED THAT ON RECEIVING THE SAMPLES/SPECIFICATIONS, THE C OMPANY DEVELOPS THE PRODUCTS IN-HOUSE TO THE SATISFACTION OF THE BU YER. DURING THE YEAR IN QUESTION, THE ASSESSEE COMPANY RECEIVED SAMPLES FROM M/S W. SCHREIBER OF GERMANY AND BESSON MUSICAL INSTRUMENTS LTD. OF GREAT BRITAIN WHICH WERE ITS MAJOR CUSTOMERS. THE ASSESSE E STATED THAT IT RECEIVED SAMPLES AND ON THAT BASIS, DEVELOPED PROTO TYPES FOR REGULAR PRODUCTION FOR THE CUSTOMERS. THE BREAK-UP OF RESE ARCH AND DEVELOPMENT EXPENSES WAS SUBMITTED BEFORE THE AO AS UNDER:- A. CUSTOM DUTY/EXPENSES ON IMPORTING OF FREE SAMPLES. RS.3,36,289/- B. CONSULTANCY CHARGES PAID TO M/S BESSON MUSICAL INSTRUMENTS LIMITED, U.K. THROUGH BANKING CHANNELS UNDER THE OGL SCHEME OF RBI FOR ACQUIRING THE KNOWLEDGE FOR LACQUERING OF INSTRUMENTS. RS.3,38,000/ - C. COST OF MATERIAL USED FOR IN HOUSE DEVELOPMENT OF PROTOTYPES TRANSFERRED FROM RAW MATERIALS COST RS.3,87,680/- D. COST OF DIRECT LABOUR USED FOR DEVELOPMENT OF PROTOTYPE TRANSFERRED FROM LABOUR COST RS.3,48,163/ - . RS.14,10,132/- ITA NO.3893/DEL/2013 3 3. THE AO OBSERVED THAT THE PROTOTYPES WERE PREPARE D FOR PROCURING ORDERS AS PER THE SPECIFICATIONS OF THE C USTOMERS BUT DURING THE PERIOD UNDER CONSIDERATION NO SUCH ORDERS FOR P URCHASE OF GOODS FROM SAMPLES/PROTOTYPES WERE RECEIVED BY THE ASSESS EE. HE TREATED SUCH EXPENDITURE TO BE OF THE CAPITAL NATURE INCURR ED ONCE AND FOR ALL WITH A VIEW TO BRING INTO EXISTENCE AN ASSET OR ADV ANTAGE OF ENDURING NATURE. BY TREATING THIS AMOUNT OF ` 14,10,032/- A S CAPITAL EXPENDITURE, THE AO DISALLOWED THE SAME. THE LD. CI T(A) CONCURRED WITH THE SUBMISSIONS ADVANCED ON BEHALF OF THE ASSE SSEE AND ORDERED FOR THE DELETION OF THE ADDITION. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE ON THE FAC T THAT THE ASSESSEE IS A COMPANY IN EXISTENCE FOR LAST MORE THAN TWENTY YEARS DOING THE SAME BUSINESS. DURING THE YEAR UNDER CONSIDERATION IT INCURRED THE ABOVE REFERRED EXPENDITURE ON R & D FOR DEVELOPING PROTOTYPES OF THE PRODUCTS TO BE SUPPLIED TO SPECIFIC CUSTOMERS STRIC TLY AS PER THE SPECIFICATIONS AND SAMPLES GIVEN BY THEM. IT IS FU RTHER A MATTER OF RECORD THAT IF THE PROTOTYPE SO DEVELOPED DOES NOT CONFORM TO THE SAMPLES SUPPLIED BY THE CUSTOMER, NO ORDERS CAN BE EXPECTED, IN ITA NO.3893/DEL/2013 4 WHICH CASE THE EXPENDITURE SO INCURRED ON DEVELOPIN G THE PROTOTYPES CONSTITUTES A SHEER LOSS. IT IS STILL FURTHER RELE VANT TO NOTE THAT THE MANUFACTURING OF PRODUCTS FROM SUCH DEVELOPED PROTO TYPES WAS MEANT ONLY TO THE CUSTOMERS WHO HAD GIVEN SAMPLE AN D THE PRODUCTS SO MANUFACTURED COULD NOT BE SOLD TO ANYONE ELSE. THESE FACTS CLEARLY INDICATE THAT IT IS NOT THE CASE THAT THE ASSESSEE SET UP ITS BUSINESS FOR THE FIRST TIME ON THE BASIS OF PROTOTYPES DEVELOPED BY SPENDING ON R&D DURING THE YEAR IN QUESTION. IT IS IN THE SAME BUSINESS FOR MORE THAN TWO DECADES. THE EXPENSES INCURRED BY THE ASSE SSEE DURING THE YEAR UNDER CONSIDERATION WERE ONLY TO CONFORM TO TH E SPECIFICATIONS OF CUSTOMERS SO AS TO GET THE SUPPLY ORDERS IN THE REG ULAR COURSE OF BUSINESS. FURTHER SUCH PROTOTYPES WERE OF LIMITED U SE MEANT ONLY FOR MANUFACTURING THE PRODUCTS FOR A SPECIFIC CUSTOMER. 5. SECTION 35 DEALS WITH THE DEDUCTIBILITY OF RES EARCH AND DEVELOPMENT EXPENSES. SUB-SECTION (1) OF SECTION 3 5 PROVIDES THAT THE EXPENDITURE INCURRED ON SCIENTIFIC RESEARCH ON THE ITEMS GIVEN UNDER VARIOUS CLAUSES SHALL BE ALLOWED AS DEDUCTION . CLAUSE (I) OF SECTION 35 (1) PROVIDES THAT THE DEDUCTION SHALL BE ALLOWED IN RESPECT OF : ANY EXPENDITURE (NOT BEING IN THE NATURE OF C APITAL EXPENDITURE) LAID OUT OR EXPENDED ON SCIENTIFIC RESEARCH RELATED TO THE BUSINESS. A ITA NO.3893/DEL/2013 5 BARE PERUSAL OF THIS PROVISION INDICATES THAT ANY E XPENDITURE INCURRED ON THE RESEARCH AND DEVELOPMENT RELATING TO THE BUS INESS, IN THE NATURE OF REVENUE EXPENDITURE, SHALL BE ALLOWED AS DEDUCTION. 6. WHEN WE PERUSE THE DETAILS OF TOTAL R&D EXPEN SES, AS REPRODUCED ABOVE, IT BECOMES MANIFEST THAT ALL THE FOUR ITEMS, NAMELY - CUSTOM DUTY/EXPENSES ON IMPORTING OF FREE SAMPLES; CONSULT ANCY CHARGES; COST OF MATERIAL USED FOR IN-HOUSE DEVELOPMENT TRAN SFERRED FROM RAW MATERIAL COST; AND COST OF DIRECT LABOUR TRANSFERRE D FROM LABOUR COST - ARE IN THE NATURE OF REVENUE EXPENSES. NO SHRED OF SUCH EXPENSES CAN BE CONSTRUED AS CAPITAL EXPENDITURE. THE FACT T HAT THE ASSESSEE INCURRED TOTAL R&D EXPENSES AS ABOVE HAS NOT BEEN D ISPUTED BY THE AO. RATHER, THE UNDISPUTED NATURE OF SUCH EXPENSES HAS BEEN REPRODUCED IN THE ASSESSMENT ORDER. THE ABOVE DISC USSION SHOWS THAT THE ASSESSEE INCURRED R&D EXPENSES IN RELATION TO ITS BUSINESS AND THESE WERE OF THE REVENUE NATURE. GOING BY THE MANDATE OF SECTION 35(1)(I), SUCH AMOUNT IS ELIGIBLE FOR DEDUC TION. WE, THEREFORE, UPHOLD THE IMPUGNED ORDER ON THIS COUNT. ITA NO.3893/DEL/2013 6 7. IN THE RESULT, THE APPEAL IS DISMISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 10.10.201 4. SD/- SD/- [ GEORGE GEORGE K. ] [ R.S. SYAL ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 10 TH OCTOBER, 2014. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.