DCIT, Bangalore V. M/s Tejas Networks Limited, Bangalore

ITA 476/BANG/2012

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7020 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 8 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 01-10-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 02-04-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K R VASUDEVAN SHRI FAR
• Keywords: Capital asset; Depreciation; Opportunity of being heard; Earning of tax free income; Question of law; Notional interest; Commercial expediency; Revised return; Unabsorbed depreciation; Revenue expenditure; Capital expenditure
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BEFORE SHRI N.V. VASUDEVAN , JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T.A. NO. 476 /BANG/201 2 (ASSESSMENT YEAR : 200 7 - 08 ) DY. COMMISSIONER OF INCOME TAX, CIRCLE 12(4), BANGA LORE. VS. M/S. TEJAS NETWORKS LIMITED, NO.58, 1 ST MAIN ROAD, J.P. NAGAR, 3 RD PHASE, BANGALORE - 560 078 PAN AABCT 1670M APPELLANT RESPONDENT. I.T.A. NO.503/BANG/2012 (ASSESSMENT YEAR 2007 - 08) (BY ASSESSEE) ASSESSEE BY : SHRI K.R. VASUDEVAN, ADVOCATE . RESPONDENT BY : SHRI FARHAT HUSSAIN QURESHI, CIT (D.R) DATE OF H EARING : 17.10. 2 01 4 . DATE OF P RONOUNCEMENT : 31.12. 201 4 . O R D E R PER SHRI JASON P. BOAZ, A.M. : THESE ARE CROSS APPEALS, BY BOTH THE ASSESSEE AND REVENUE, AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) - III, BANGALORE DT.25.1.2012 FOR ASSESSMENT YEAR 2007 - 08. 2. THE FACTS OF THE CASE, BR IEFLY, ARE AS UNDER : - 2.1 THE ASSESSEE, A COMPANY ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND MANUFACTURING AND TRADING OF NET WORKING EQUIPMENT, FILED ITS RETURN OF INCOME FOR 2 ITA NOS.476 & 503/BANG/2012 ASSESSMENT YEAR 2007 - 08 ON 31.10.2007 DECLARING NIL INCOME, AFTER CLAIMING SET OFF OF BROUGHT FORWARD LOSSES TO THE EXTENT OF RS.7,92,32,389. SUBSEQUENTLY, THE ASSESSEE FILED A REVISED RETURN OF INCOME ON 31.3.2009 AGAIN DECLARING NIL INCOME AFTER SETTING OFF BROUGHT FORWARD LOSSES OF RS.7,94,30,188. THE CASE WAS PICKE D UP FOR SCRUTINY AND THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT 'THE ACT') VIDE ORDER DT.26.12.2010 WHEREIN THE INCOME WAS DETERMINED AT RS.12,76,52,189 AS AGAINST NIL INCOME DECLARED, IN VIEW OF THE FOLLOWING ADDITIONS / DISALLOWANCES : - (I) PRODUCT DEVELOPMENT EXPENSES : RS.9,65,83,825. (II) EXEMPT INCOME : RS.4,05,096. (III) WARRANTY PROVISION : RS.29,90,994. (IV) LOANS AND ADVANCES : RS.9,43,079. (V) EXP. CAPITAL IN NATURE : RS.9,27,657. (VI) FOR NON - DEDUCTION OF TAX. : RS.3,00,000. (VII) FOREIGN EXCHANGE LOSS : RS.6,03,170. THE ASSESSING OFFICER WHILE DETERMINING THE INCOME ALLOWED THE ASSESSEE SET OFF OF BUSINESS LOSSES OF RS.1,82,05,810 AND RS.8,07,765 PERTAINING TO ASSESSM ENT YEARS 2005 - 06 AND 2006 - 07 RESPECTIVELY AND SET OFF OF UNABSORBED DEPRECIATION OF RS.;1,62,33,185 AND RS.1,92,85,101 FOR ASSESSMENT YEARS 2005 - 06 AND 2006 - 07 RESPECTIVELY. 3 ITA NOS.476 & 503/BANG/2012 2.2 AGGRIEVED BY THE ORDER OF ASSESSMENT FOR ASSESSMENT YEAR 2007 - 08 DT.26.1 2.2010, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT (APPEALS) III, BANGALORE. THE LEARNED CIT (APPEALS) DISPOSED OFF THE ASSESSEE'S APPEAL BY THE IMPUGNED ORDER DT.25.1.2012 ALLOWING THE ASSESSEE PARTIAL RELIEF. 3. BOTH REVENUE AND THE ASSESSEE ARE AGGRIEVED BY THE IMPUGNED ORDER OF THE LEARNED CIT (APPEALS) III, BANGALORE DT.25.1.2012 FOR ASSESSMENT YEAR 2007 - 08 AND HAVE FILED CROSS APPEALS RAISING THE FOLLOWING GROUNDS : - 3.1 IN THE REVENUE S APPEAL, THE GROUNDS RAISED ARE : - 1. THE ORDER OF THE LEARNED CIT (APPEALS) IS OPPOSED TO LAW AND FACTS OF THE CASE. 2. THE CIT (APPEALS) ERRED IN HOLDING PRODUCT DEVELOPMENT EXPENDITURE OF RS.9,65,83,825 AS REVENUE EXPENDITURE BY RELYING ON THE ITAT S ORDER IN THE ASSESSEE'S OWN CASE FOR A.YS 2 002 - 03 AND 2004 - 05 WHICH HAVE NOT BEEN ACCEPTED BY THE DEPARTMENT AND CONTESTED BEFORE THE HON'BLE HIGH COURT IN APPEALS U/S.260A. 3. THE CIT (APPEALS) ERRED IN HOLDING SUCH HUGE EXPENDITURE INCURRED ON DEVELOPING IMPROVISED VERSIONS OF OPTICAL TRANSMISSI ON TELECOM EQUIPMENTS WHICH WOULD YIELD ENDURING BENEFITS TO THE ASSESSEE AND TRANSLATE INTO INTANGIBLE ASSET OF THE NATURE OF INTELLECTUAL PROPERTY FOR FUTURE EXPLOITATION AS REVENUE EXPENDITURE. 4. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CIT (APPEALS) IN SO FAR AS IT RELATES TO THE ABOVE GROUNDS MAY BE REVERSED AND THAT OF THE ASSESSING OFFICER MAY BE RESTORED. 5. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND / OR DELETE ANY OF TH E GROUNDS MENTIONED ABOVE. 3.2 IN THE ASSESSEE'S APPEAL, THE GROUNDS RAISED ARE : - 1. TAXING EXEMPTED INCOME RS.4,05,096. 1.1 THE LD. CIT (APPEALS) III, BANGALORE ERRED IN DIRECTING THE ASSESSING OFFICER TO DISALLOW THE EXPENDITURE TO BE COMPUTED AS PER SECTION 14A OF THE INCOME TAX ACT ( THE ACT ) READ WITH RULE 8D OF THE INCOME TAX RULES BASED ON THE AVERAGE VALUE OF INVESTMENTS EVEN IF SMALLER NO EXPENDITURE WAS INCURRED BY THE APPELLANT. 4 ITA NOS.476 & 503/BANG/2012 1.2 THE LD. CIT (APPEALS) OUGHT TO HAVE APPRECIATED THAT THE EXEMPT INCOME EARNED FROM INVESTMENTS WERE NOT MADE OUT OF THE BORROWED FUNDS AND THERE IS NO EXPENDITURE INCURRED TOWARDS EARNING THE EXEMPT INCOME. 2. NOTIONAL INTEREST ON LOAN TO SUBSIDIARY RS.9,43,079. 2.1 THE LD. CIT (APPEALS) HAS ERRED IN UPHO LDING THE ORDER OF THE LEARNED A.O. WHEREIN THE LEARNED A.O. HAS EXCLUDED NOTIONAL INTEREST ON LOAN TO SUBSIDIARY OF RS.9,43,079 (12.25% OF RS.76,98,600), FROM THE TOTAL INTEREST EXPENDITURE CLAIMED BY THE ASSESSEE. 2.2 THE LD. CIT (APPEALS) ERRED IN NOT ACCEPTING THE APPELLANT S CONTENTION THAT THE LOAN TO THE COMPANY S SUBSIDIARY TEJAS SINGAPORE PTE. LTD. WAS ADVANCED USING THE COMPANY S INTERNAL ACCRUALS AND NOT BORROWED FUNDS. THE LD. CIT (APPEALS) ALSO DID NOT CONSIDER THE FACT THAT THE LOAN WAS G IVEN FOR THE PURPOSES OF THE BUSINESS AND AS A MEASURE OF COMMERCIAL EXPEDIENCY. 2.3 THE LD. CIT (APPEALS) ERRED IN NOT FOLLOWING THE DECISION OF THE SUPREME COURT IN THE CASE OF S.A. BUILDERS V ACIT (206 CTR 631). 3. DISALLOWANCE OF LEGAL AND PROFES SIONAL EXPENSES RS.9,27,697. 3.1 THE LD. CIT (APPEALS) ERRED IN UPHOLDING THE ORDER OF THE A.O. IN DISALLOWING THE EXPENDITURE ON LEGAL AND PROFESSIONAL EXPENSES AMOUNTING TO RS.9,27,697 RELATING TO THE PAYMENTS MADE TO KUMARAN & SAGAR TOWARDS INSPEC TION AND SCRUTINY OF PATENT APPLICATIONS, BY HOLDING THAT THE SAME IS CAPITAL IN NATURE. THE APPELLANT CRAVES LEAVE TO ADD, TO ALTER OR AMEND ALL OR ANY OF THE AFORESTATED GROUNDS OF APPEAL. FOR THE ABOVE AND ANY OTHER GROUNDS WHICH MAY BE REVISED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LD. CIT (APPEALS) BE SET ASIDE. REVENUE S APPEAL IN ITA NO.476/BANG/2012 FOR A.Y. 2007 - 08. 4. THE GROUNDS AT S.NOS.1, 4 & 5 ARE GENERAL IN NATURE AND THEREFORE NO ADJUDICATION IS CALLED FOR THEREO N. 5 ITA NOS.476 & 503/BANG/2012 5. PRODUCT DEVELOPMENT EXPENDITURE : RS.9,65,83,825. 5.1 IN THE GROUNDS AT S.NOS.2 AND 3 , REVENUE CHALLENGES THE ACTION OF THE LEARNED CIT (APPEALS) IN ALLOWING THE ASSESSEE'S CLAIM IN RESPECT OF EXPENDITURE OFRS.9,65,83,825 INCURRED ON PRODUC T DEVELOPMENT EXPENDITURE FOLLOWING THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2002 - 03 IN ITA NO.470/BANG/2006 WHICH HAS NOT SO FAR BEEN ACCEPTED BY THE DEPARTMENT. 5.2 .1 THE FACTS OF THE MATTER ARE THAT , IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE DEBITED AN AMOUNT OF RS.9,65,83,825 TOWARDS PRODUCT DEVELOPMENT EXPENSES, THE DETAILS OF WHICH ARE AS UNDER : - DESIGN LAYOUT - COMPONENTS & PROTOTYP ES : RS.8,04,66,457. EMPLOYEES COST PRODUCT DEVELOPMENT : RS.1,88,26,500. EMPLOYEES COST STPI DIVISION : RS.4,15,70,500 TOTAL : RS.14,08,63,165 . FROM THE ABOVE, AN AMOUNT OF R S.4,42,79,340 WAS CAPITALIZED AND THE BALANCE OF RS.9,65 ,83,825 WAS CLAIMED AS PRODUCT DEVELOPMENT EXPENSES. 5.2 .1 THE ASSESSEE SUBMITTED THAT THE ABOVE EXPENDITURE WAS INCURRED FOR THE PURPOSE OF DEVELOPING ENHANCED AND IMPROVED VERSIONS OF OPTICAL TELECOM EQUIPMENTS AND IS THEREFORE REVENUE IN NATURE. IT W AS ALSO SUBMITTED THAT THE JURISDICTIONAL TRIBUNAL, IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2002 - 03 IN ITA NO.470/BANG2006 DT.8.6.2007 6 ITA NOS.476 & 503/BANG/2012 HAS DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSEE. THE ASSESSING OFFICER HOWEVER DID NOT AGREE WITH THE ASSESSEE' S CONTENTION AND DISALLOWED THE ASSESSEE'S CLAIMS MAKING THE FOLLOWING OBSERVATIONS : - (I) THE EXPENSES INCURRED TOWARDS PRODUCT DEVELOPMENT HAS RESULTED IN THE NATURE OF ENDURING BENEFIT TO THE ASSESSEE AND THEREFORE HELD THAT THE SAME IS NOT REVENUE EX PENDITURE AND SHOULD BE TREATED AS CAPITAL WORK - IN - PROGRESS; (II) THE EXPENDITURE BEING IN THE NATURE OF CONTINUOUS PROCESS TO DEVELOP AND IMPROVISE NEW PRODUCTS, CREATES VALUE ADDITION, WHICH IS AN ENDURING BENEFIT, AND IS THUS CAPITAL IN NATURE. (III) THE ORDER, CITED BY THE ASSESSEE, OF THE JURISDICTIONAL TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2002 - 03 HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND THE APPEAL AGAINST THE SAME IS PENDING DISPOSAL BEFORE THE HON'BLE HIGH COURT. 5.3 ON APPEAL, THE LEARNED CIT (APPEALS) DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE FOLLOWING THE DECISION OF A CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEE'S OWN CASE IN ITA NO.470/BANG/2006 DT.8.6.2007 FOR ASSESSMENT YEAR 2002 - 03. 5.4 THE LEARNED DEPARTMENTAL REPRESENTATIVE WAS HEARD AND STRONGLY REITERATED THE GROUNDS RAISED BY REVENUE ON THIS ISSUE. 7 ITA NOS.476 & 503/BANG/2012 5.5 THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW. IN THE COURSE OF HEARI NGS, THE LEARNED AUTHORISED REPRESENTATIVE ALSO BROUGHT TO OUR NOTICE THAT THE HON'BLE KARNATAKA HIGH COURT IN ITS ORDER IN ITA NO.813 OF 2007 DT.25.8.2014 HAS UPHELD THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASS ESSMENT YEAR 2002 - 03 (SUPRA) ON THE ISSUE OF PRODUCT DEVELOPMENT EXPENDITURE ; WHICH WAS THE BASIS FOR THE LEARNED CIT (APPEALS) ALLOWING THE ASSESSEE'S CLAIM IN THE IMPUGNED ORDER. A COPY OF THE HON'BLE HIGH COURT S ORDER (SUPRA) HAS BEEN PLACED ON RECOR D VIDE THE ASSESSEE'S LETTER DT.30.9.2014. THE LEARNED AUTHORISED REPRESENTATIVE CONTENDED THAT BY VIRTUE OF THE ORDERS OF THE HON'BLE HIGH COURT OF KARNATAKA (SUPRA) WHICH HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE, THE REVENUE S APPEAL ON THIS IS SUE OUGHT TO BE DISMISSED. 5.6.1 WE HAVE HEARD BOTH PARTIES AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD, INCLUDING THE JUDICIAL DECISIONS WHICH HAD PLACED RELIANCE ON BY THE ASSESSEE. IT IS NOT IN DISPUTE THAT A CO - ORDINATE BENCH OF TH IS TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2002 - 03 (IN ITA NO.470/BANG/2006 DT.8.6.2007) HAD, AFTER CONSIDERING AND ANLAYSING THE ISSUE IN DETAIL, AND TAKING COGNIZANCE OF VARIOUS JUDICIAL RULINGS ON THE SIMILAR ISSUE , HELD AS UNDER AT PAR AS 1 9 & 20 OF ITS ORDER : - 19. IN THE INSTANT CASE, THE BENEFIT IS NOT DERIVED FOR A PERIOD OF MORE THAN FIVE YE A RS. HENCE, IN THE INSTANT CASE, IT CANNOT BE SAID THAT THE BENEFIT IS OF ENDURING NATURE AND THE EXPENDITURE IS TO BE TREATED AS CAPITAL. ACCORDINGLY, WE HOLD THAT THE EXPENDITURE ON PROTOTYPE DEVELOPMENT IS TO BE TREATED AS REVENUE AND NOT AS CAPITAL. 8 ITA NOS.476 & 503/BANG/2012 20. WE ALSO FIND FORCE IN THE ALTERNATIVE SUBMISSIONS OF THE LEARNED AR. IN VIEW OF THE CASE LAWS RELIED ON BY THE LEARNED AR, WE ARE OF THE VIEW THAT EXPENDITURE IS ALLOWABLE U/S. 35(1)(IV), EVEN IF THE SAME IS TO BE HELD AS CAPITAL. 5.6.2 ON PERUSAL OF THE DECISION OF THE HON'BLE KARNATAKA HIGH COURT IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2002 - 03 IN ITA NO.813 OF 2007 DT. 25.8.2014, WE FIND THAT WHILE UPHOLDING THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL AT PARAS 11 TO 14 OF ITS ORDER THEIR LORDSHIPS HAVE HELD AS UNDER : - 11. IN THE LIGHT OF THE AFORESAID FACTS AND THE RIVAL CONTENTIONS, IT IS CLEAR THT THE A SSESSEE IS IN THE BUSINESS OF DEVELOPING AND SELLING LEADING EDGE OPTICAL NETWORKING PRODUCTS FOR WORLDWIDE CUSTOMERS. IT HAS DEVELOPED SOFTWARE DIFFERENTIATED, NEXT GENERATION PRODUCTS THAT ENABLE TELECOMMUNICATION CARRIERS TO BUILD CONVERGED NETWORKS. THE LIFE SPAN OF THIS PRODUCT IS HARDLY A YEAR. BECAUSE OF COMPETITION IN THE MARKET, THE ASSESSEE HAS TO COME OUT WITH NEW FEATURES EVERY YEAR IF THEY WANT TO BE IN THE FIELD. THEREFORE, THERE IS A CONSTANT UPGRADATION OF THE ORIGINAL PRODUCT. IT IS IN THAT CONTEXT SUBSTANTIAL AMOUNT IS SPENT TOWARDS EMPLOYEES COST AND THE UPGRADATION ALSO INCLUDES USE OF COMPONENTS ARE USED FOR MANUFACTURING PRINTED CIRCUIT BOARDS. EVERY YEAR THESE CIRCUIT BOARDS UNDER GO MODIFICATION, CHANGES. THEREFORE, THE EXPENSES INCURRED IN THIS REGARD IS IN THE NATURE OF REVENUE EXPENDITURE. 12. THE APEX COURT IN THE CASE OF EMPIRE JUTE COMPANY LTD. VS. CIT (1980 VOL. 124 PAGE1) HAS HELD THAT, THE DECIDED CASES HAVE, FROM TIME TO TIME, EVOLVED VARIOUS TESTS FOR DISTINGUISHING BETWEEN CAPITAL AND REVENUE EXPENDITURE BUT NO TEST IS PARAMOUNT OR CONC L USIVE. THERE IS NO ALL EMBRACING FORMULA WHICH CAN PROVIDE A READY SOLUTION TO THE PROBLEM; NO TOUCHSTONE HAS BEEN DEVISED. EVERY CASE HAS TO BE DECIDED ON ITS OWN FACTS, KEEPING IN MIND THE BROAD PICTURE OF THE WHOLE OPERATION IN RESPECT OF WHICH THE EXPENDITURE HAS BEEN INCURRED. FURTHER THEY HELD THAT, THERE MAY BE CASES WHERE EXPENDITURE, EVEN IF INCURRED FOR OBTAINING ADVANTAGE OF ENDURING BENEFIT, MAY, NONE THE LESS, BE ON REV ENUE ACCOUNT AND THE TEST OF ENDURING BENEFIT MAY BREAK DOWN. IT IS NOT EVERY ADVANTAGE OF ENDURING NATURE ACQUIRED BY AN ASSESSEE THAT MAKES IT A CAPITAL EXPENDITURE. WHAT IS MATERIAL TO CONSIDER IS THE NATURE OF THE ADVANTAGE IN A COMMERCIAL SENSE. IF THE ADVANTAGE CONSISTS MERELY IN FACILITATING THE ASSESSEE'S TRADING OPERATIONS OR ENABLING THE MANAGEMENT AND CONDUCT OF THE ASSESSEE'S BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY WHILE LEAVING THE FIXED CAPITAL UNTOUCHED, THE EXPENDITU RE WOULD BE ON REVENUE ACCOUNT, EVEN THOUGH THE ADVANTAGE 9 ITA NOS.476 & 503/BANG/2012 MAY ENDURE 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 FACTS AND CIRCUMSTANCES OF A GIVEN CASE. 13. IN FACT, THE APEX COURT IN THE CASE OF ALEMBIC CHEMICAL WORKS CO. LTD., VS. CIT, GUJARAT (1989 VOL. 177 PAGE 377) HELD THAT, IT WOULD BE UNREALISTIC TO IGNORE THE RAPID ADVANCES IN RESEARCH IN ANTIBIOTIC ME DICAL MICROBIOLOGY AND TO ATTRIBUTE A DEGREE OF ENDURABILITY AND PERMANENCE TO THE TECHNICAL KNOW - HOW AT ANY PARTICULAR STAGE IN THIS FAST CHANGING AREA OF MEDICAL SCIENCE. THE STATE OF THE ART IN SOME OF THESE AREAS OF HIGH PRIORITY RESEARCH IS CONSTANTL Y UPDATED SO THAT THE KNOW - HOW CANNOT BE SAID TO BE THE ELEMENT OF THE REQUISITE DEGREE OF DURABILITY AND NONEPHEMERALITY TO SHARE THE REQUIREMENTS AND QUALIFICATIONS OF AN ENDURING CAPITAL ASSET. THE RAPID STRIDES IN SCIENCE AND TECHNOLOGY IN THE FIELD SHOULD MAKE US A LITTLE SLOW AND CIRCUMSPECT IN TOO READILY PIGEON - HOLING AN OUTLAY SUCH AS THIS AS CAPITAL. THE IMPROVISATION IN THE PROCESS AND TECHNOLOGY IN SOME AREAS OF THE ENTERPRISE WAS SUPPLEMENTAL TO THE EXISTING BUSINESS AND THERE WAS NO MATER IAL TO HOLD TH A T IT AMOUNTED TO A NEW OR FRESH VENTURE. THE FURTHER CIRCUMSTANCE THAT THE AGREEMENT PERTAINED TO A PRODUCT ALREADY IN THE LINE OF THE ASSESSEE'S ESTABLISHED BUSINESS AND NOT TO A NEW PRODUCT INDICATES THAT WHAT WAS STIPULATED WAS AN IMPRO VEMENT IN THE OPERATIONS OF THE EXISTING BUSINESS AND ITS EFFICIENCY AND PROFITABILITY NOT REMOVED FROM THE AREA OF THE DAY TO DAY BUSINESS OF THE ASSESSEE'S ESTABLISHED ENTERPRISE. 14. WE ARE OF THE VIEW THE AFORESAID STATEMENT OF LAW EQUALLY HOLDS GO OD IN THE AREA OF TELECOMMUNICATION, MAY BE WITH MORE FORCE. HAVING REGARD TO THE FACTS OF THIS CASE, THE EXPENDITURE THAT IS CLAIMED IS FOR UPGRADING THE EXISTING PRODUCT. THEREFORE, THE PRODUCT SO UPGRADED GOES ON CHANGING AS TIME PROGRESSES, KEEPING IN MIND THE REQUIREMENT AND THE COMPETITION IN THE MARKET. THE TRIBUNAL RIGHTLY HELD THAT THE EXPENDITURE IS NOT IN THE NATURE OF CAPITAL EXPENDITURE BUT IS REVENUE EXPENDITURE. THEREFORE, THE FIRST SUBSTANTIAL QUESTION OF LAW IS ANSWERED IN FAVOUR OF THE A SSESSEE AND AGAINST THE REVENUE. RESPECTFULLY FOLLOWING THE DECISION OF THE HON'BLE KARNATAKA HIGH COURT IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2002 - 03 IN ITA NO.813 OF 2007 DT.25.8.2014 (SUPRA), ON THE ISSUE OF PRODUCT DEVELOPMENT EXPENDI TURE, WE ALSO HOLD THAT THE SAID EXPENDITURE IS REVENUE IN NATURE . C ONSEQUENTLY, WE UPHOLD THE ORDER OF THE LEARNED CIT (APPEALS) ON THIS ISSUE AND DISMISS THE GROUNDS AT S.NOS.2 AND 3 RAISED BY REVENUE. 10 ITA NOS.476 & 503/BANG/2012 6. IN THE RESULT, REVENUE S APPEAL FOR ASSESSMEN T YEAR 2007 - 08 IS DISMISSED. ASSESSEE'S APPEAL IN ITA NO.503/BANG/2012 FOR ASST. YEAR 2007 - 08. 7. GROUND NO.1 (1.1 AND 1.2) 7.1 IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD CLAIMED AN AMOUNT O F RS.4,05,096 AS DIVIDEND INCOME EXEMPT FORM TAX, WHICH HAS BEEN EARNED FROM INVESTMENTS MADE IN SHARES. THE ASSESSING OFFICER OBSERVING THAT THE ASSESSEE WAS NOT IN POSSESSION OF ANY INTEREST FR EE FUNDS WHICH WAS INVESTED IN SHARES, SU RMISED THAT THE INVE STMENT IN SHARES HAS BEEN MADE OUT OF INTEREST BEARING FUNDS ON WHICH THE ASSESSEE HAS PAID INTEREST. BEING OF THE VIEW THAT THE INVESTMENT HAS BEEN MADE F R O M OUT OF INTEREST BEARING FUNDS, THE ASSESSING OFFICER DISALLOWED THE ASSESSEE'S CLAIM OF EXEMPTI ON ON THE ENTIRE DIVIDEND INCOME AND ADDED THE SAME TO THE INCOME OF THE ASSESSEE. 7.2 ON APPEAL, THE LEARNED CIT (APPEALS) OBSERVED THAT THE RELEVANT PROVISIONS OF LAW DO NOT PROVIDE THAT EXEMPT INCOME BE ADDED BACK TO THE PROFITS AND DELETED THE ADD ITION OF RS.4,05,096. THE LEARNED CIT (APPEALS), HOWEVER, HELD THAT THE ASSESSING OFFICER OUGHT TO HAVE EXAMINED THE APPLICABILITY OF SECTION 14A OF THE ACT AND DIRECTED THE ASSESSING OFFICER TO VERIFY THE CLAIM OF THE ASSESSEE THAT IT HAS NOT INCURRED AN Y EXPENDITURE TOWARDS EARNING THE EXEMPT INCOME IN THE PERIOD UNDER CONSIDERATION. HAVING ISSUED SUCH A DIRECTION IN PARA 6.2 OF THE IMPUGNED ORDER, THE LEARNED CIT (APPEALS) AT 11 ITA NOS.476 & 503/BANG/2012 PARA 6.5 OF THE IMPUGNED ORDER DELETED THE ADDITION AND DIRECTED THE ASSESSIN G OFFICER TO APPLY THE PROVISIONS OF SECTION 14A R.W. RULE 8D ON THE AVERAGE VALUE OF INVESTMENTS. 7.3 THE LEARNED AUTHORISED REPRESENTATIVE WAS HEARD IN SUPPORT OF THE GROUNDS RAISED ON THIS ISSUE. IT WAS CONTENDED THAT DURING THE YEAR ENDING 31.3.20 07, THE ASSESSEE HAD INVESTED AN AMOUNT OFRS.36,00,00,000 IN MUTUAL FUNDS ( MF ) FOR THE FIRST TIME AND EARNED DIVIDENDS AMOUNTING TO RS.4,05,096 THEREFROM. THE DIVIDENDS SO EARNED WERE CLAIMED AS EXEMPT UNDER SECTION 10(34) OF THE ACT. THE LEARNED AUTHO RISED REPRESENTATIVE CONTENDED THAT THERE IS NO PROVISION IN THE ACT FOR SUCH DISALLOWANCE / ADDITION OF EXEMPT INCOME. IT WAS SUBMITTED THAT SECTION 14A OF THE ACT PROVIDES THAT NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED IN RELATI ON TO EXEMPT INCOME AND THAT THE ASSESSEE HAS NOT INCURRED ANY DIRECT EXPENSES IN EARNING FOR TAX FREE INCOME. THE LEARNED AUTHORISED REPRESENTATIVE ALSO SUBMITTED THAT IN THE PERIOD UNDER CONSIDERATION, THE ASSESSEE HAS RAISED FUNDS AMOUNTING TO RS.106,3 3,23,250 FROM ISSUE OF SHARE CAPITAL AND RS.120,20,05,398 FROM SALE OF INVESTMENTS, PART OF WHICH WERE UTILIZED FOR INVESTING IN THE MUTUAL FUNDS AND THAT THE ASSESSEE HAS NOT PURCHASED / INVESTED IN THE MUTUAL FUNDS FROM BORROWED INTEREST BEARING FUNDS BU T F R O M ITS OWN FUNDS. THE LEARNED AUTHORISED REPRESENTATIVE ALSO INVITED OUR ATTENTION TO A CASH FLOW STATEMENT, FORMING PART OF THE FINANCIAL STATEMENTS, TO SUBMIT THAT THE ASSESSEE HAD NOT BORROWED ANY LOANS DURING THE RELEVANT FINANCIAL YEAR; BUT IN FA CT, HAS REPAID EXISTING LOANS DURING THIS PERIOD. IN SUPPORT 12 ITA NOS.476 & 503/BANG/2012 OF THE ASSESSEE'S STAND, THE LEARNED AUTHORISED REPRESENTATIVE PLACED RELIANCE ON THE FOLLOWING JUDICIAL PRONOUNCEMENTS : - (I) CCI LTD V JCIT (2012) 206 TAXMAN 563 (KAR HC); (II) WALFORT SHARE & STOCK PVT. LTD. 326 ITR 1 (SC); (III) HERO CYCLES LTD. 189 TAXMAN 50 (P & H) ; (IV) ACIT V ORIENTAL STRUCTURAL ENGINEERS (P) LTD. (2013) 35 TAXMAN.COM 210 (DEL); (V) CIT V SUSHMA KAPOOR 319 ITR 299 (DEL). THE LEARNED AUTHORISED REPRESENTATIVE ALSO AS SAILED THE DIRECTIONS OF THE LEARNED CIT (APPEALS) TO THE ASSESSING OFFICER TO APPLY THE PROVISIONS OF RULE 8D OF THE IT RULES, 1962. IT WAS SUBMITTED THAT IT IS SETTLED PRINCIPLE THAT THE APPLICABILITY OF RULE 8D IS PROSPECTIVE IN NATURE AND IS APPLICABL E FROM A.Y. 2008 - 09 AND ONWARDS AND THEREFORE CANNOT BE APPLIED TO A.Y. 2007 - 08, I.E. THE YEAR UNDER CONSIDERATION. 7.4 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE FINDING OF THE LEARNED CIT (APPEALS) ON THIS ISSUE IN THE IMPUGNE D ORDER. 7.5.1 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUDING THE JUDICIAL DECISIONS CITED (SUPRA). ON AN APPRECIATION OF FACTS ON RECORD, WE AGREE WITH THE VIEW OF THE LEARNED CIT (APPEALS) T HAT THE ACT DOES NOT PROVIDE THAT THE ENTIRE EXEMPT INCOME BE ADDED BACK TO THE PROFITS OF THE ASSESSEE AND THEREFORE THE ADDITION MADE BY THE ASSESSING OFFICER IS INCORRECT. WE ALSO AGREE WITH THE CONTENTIONS OF THE ASSESSEE THAT THE PROVISIONS OF RULE 8 D OF THE IT RULES, 1962 13 ITA NOS.476 & 503/BANG/2012 IS APPLICABLE FORM A.Y. 2008 - 09 AND ONWARDS AND THEREFORE CANNOT BE APPLIED TO A.Y. 2007 - 08; I.E. THE YEAR UNDER CONSIDERATION. 7.5.2 THE PROVISIONS OF SECTION 14A OF THE ACT AS APPLICABLE FOR ASSESSMENT YEAR 2007 - 08; I.E. THE YEAR UNDER CONSIDERATION , PROVIDES THAT NO DEDUCTION IS ALLOWED IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO THE EARNING OF EXEMPT INCOME. WHILE THE ASSESSEE HAS CONTENDED BEFORE US THAT IT HAS INCURRED NO EXPENDITURE IN RELATION TO THE EXEMPT INCOM E, HOWEVER , IN OUR VIEW, IT WOULD BE APPROPRIATE IF THE CLAIM OF THE ASSESSEE IS EXAMINED BY THE ASSESSING OFFICER AND A FINDING IS RECORDED THEREON BY THE ASSESSING OFFICER WHILE DECIDING THE ISSUE. WE THEREFORE REMAND THIS ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER FOR VERIFICATION OF THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE FOR EARNING THE EXEMPT INCOME AND TO THEREAFTER DECIDE THE ISSUE IN THE LIGHT OF THE PROVISIONS OF SECTION 14 OF THE ACT, AFTER AFFORDING THE ASSESSEE ADEQUATE OPPORTUNITY OF BEING HEARD AND TO FILE SUBMISSIONS REQUIRED. CONSEQUENTLY, THE GROUND AT S.NO.1 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 8. GROUND NO.2 (2.1 TO 2.3) NOTIONAL INTEREST ON LOAN TO SUBSIDIARY RS.9,43,079 . 8.1 IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAD ADVANCED INTEREST FREE LOANS AMOUNTING TO RS.76,98,000 TO ITS SUBSIDIARY WHILE IT DID NOT HAVE ANY INTEREST FREE FUND AVAILABLE. IN THIS VIEW OF THE MA TTER, THE ASSESSING OFFICER COMPUTED THE INTEREST ON THESE LOANS TO ITS SUBSIDIARY AT RS.9,43,079 @ 14 ITA NOS.476 & 503/BANG/2012 12.25%; BEING THE PRIME LENDING RATE OF SBI ON 31.3.2008 AND ADDED THE SAME TO THE INCOME OF THE ASSESSEE. 8.2 ON APPEAL, THE LEARNED CIT (APPEALS) UPHE LD THE ADDITION MADE BY THE ASSESSING OFFICER OBSERVING THAT THE ASSESSEE HAS NOT SPECIFIED THE EXACT NATURE OF COMMERCIAL EXPEDIENCY FOR THESE LOANS AND THE NEXUS BETWEEN THE BUSINESS OF THE ASSESSEE VIS - - VIS THE ACTIVITIES OF THE SUBSIDIARY IS NOT BROUG HT OUT IN THE APPELLATE PROCEEDINGS. 8.3.1 THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE WAS HEARD IN SUPPORT OF THE GROUNDS RAISED AND CONTENDED THAT THE ASSESSEE HAD ADVANCED INTEREST FREE LOANS TO ITS S UBSIDIARY OUT OF ITS OWN FUNDS AND THE OUTSTANDING RECEIVABLE AT THE YEAR ENDING 31.3.2007 AMOUNTED TORS.76,98,600. IT WAS SUBMITTED THAT THE LOAN TO THE SUBSIDIARY, VIZ. TEJAS SINGAPORE PTE. LTD., WAS ADVANCED USING THE COMPANY S INTERNAL ACCRUALS AND N OT OUT OF BORROWED FUNDS; AS WAS THE VIEW OF THE ASSESSING OFFICER AND THAT THESE ADVANCES WERE GIVEN FOR BUSINESS PURPOSES, AS A MEASURE OF COMMERCIAL EXPEDIENCY AS THE SUBSIDIARY IS THE TRADING ARM OF THE ASSESSEE. IT WAS SUBMITTED THAT THE LOAN WAS ADV ANCED BY THE ASSESSEE TO THE SUBSIDI AR Y FOR THE PURPOSE OF FUNDING ITS WORKING CAPITAL REQUIREMENTS AND THEREFORE THE ADVANCE IS PROVIDED FOR EXPEDIENCY AND HENCE THE ADDITION OF NOTIONAL INTERST THEREON IS NOT TENABLE. 8.3.2 IN SUPPORT OF THE ASSESSE E'S CONTENTION, RELIANCE WAS PLACED ON THE DECISION OF THE HON'BLE APEX COURT IN THE CASE OF S.A. BUILDERS LTD. V ACIT (2007) 288 ITR 1 (SC) WHEREIN IT WAS HELD THAT INTEREST ON BORROWED LOAN HAS TO BE ALLOWED IF THE ASSESSEE 15 ITA NOS.476 & 503/BANG/2012 ADVANCES IT TO ITS SISTER CON CERN WITHOUT CHARGING INTEREST FOR COMMERCIAL EXPEDIENCY. THE HON'BLE COURT OBSERVED THAT ONCE IT IS ESTABLISHED THAT THERE IS A NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSES OF BUSINESS, REVENUE CANNOT JUSTIFIABLY PUT ITSELF IN THE ARM CHAIR OF THE BUS INESSMAN OR THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE, HAVING REGARD TO THE CIRCUMSTANCE OF THE CASE. THE LEARNED AUTHORISED REPRESENTATIVE ALSO SUBMITTED THAT THERE IS NO PROVISION IN LAW THAT ALLOWS THE ASSES SING OFFICER TO TAX A NOTIONAL INCOME AND IN TH IS CONTEXT CITED THE DECISION OF THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT V J. CHELLADURAI (2012) 204 TAXMAN 258 (MADRAS). 8.4 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE IM PUGNED ORDER OF THE LEARNED CIT (APPEALS) ON THIS ISSUE. 8.5 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD, INCLUDING THE JUDICIAL DECISIONS CITED. EVEN AS PER THE DECISION OF THE HON'BLE APEX COURT IN THE CASE OF S.A. BUILDERS LTD. (SUPRA) CITED BY THE ASSESSEE, COMMERCIAL EXPEDIENCY FOR THE LOANS IS NECESSARY FOR ADVANCING MONEY TO THE SISTER CONCERN WITHOUT CHARGING INTEREST. THE ASSESSEE CONTENDS THAT THE SUBSIDIARY TO WHOM THE LOANS HAVE BEEN ADVA NCED IS A TRADING AR M OF THE ASSESSEE AND THAT THE LOAN HAS BEEN ADVANCED FOR WORKING CAPITAL REQUIREMENTS. IT IS ALSO CLAIMED THAT SUCH LOANS HAVE BEEN ADVANCED FROM OUT OF INTERNAL ACCRUALS / OWN FUNDS AND NOT FROM BORROWED FUNDS. HOWEVER, WE FIND THA T THIS CLAIM OF THE ASSESSEE HAS NOT BEEN EXAMINED OR VERIFIED ; EITHER 16 ITA NOS.476 & 503/BANG/2012 BY THE ASSESSING OFFICER OR THE LEARNED CIT (APPEALS). IN THIS VIEW OF THE MATTER, WE ARE OF THE CONSIDERED OPINION THAT THIS ISSUE BE RESTORED TO THE FILE OF THE ASSESSING OFFICER FOR EXAMINATION AND VERIFICATION OF THE ASSESSEE'S CLAIM THAT THE LOANS HAVE BEEN ADVANCED TO THE ASSESSEE'S SUBSIDIARY ON GROUNDS OF COMMERCIAL EXPEDIENCY AND THAT THE LOANS HAVE BEEN ADVANCED OUT OF OWN FUNDS AND NOT F RO M BORROWED , INTEREST BEARING FUNDS AND FOR ADJUDICATION THEREON AFTER AFFORDING THE ASSESSEE ADEQUATE OPPORTUNITY OF BEING HEARD AND TO FILE DETAILS / SUBMISSIONS REQUIRED WHICH SHALL BE CONSIDERED. IT IS ORDERED ACCORDINGLY. CONSEQUENTLY, THE GROUND RAISED AT S.NO.2 IS TRE A TED AS ALLOWED FOR STATISTICAL PURPOSES. 9. GROUND NO.3 : DISALLOWANCE OF LEGAL AND PROFESSIONAL EXPENSES : RS.9,27,697. 9.1 IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAD DEBITED AN AMOUNT OF RS.9,27,697 TOWARDS RATES AND TAXES. THE ASSESSING OFFICER ON EXAMINATION THEREOF ASCERTAINED THAT THESE EXPENSES W ERE INCURRED TOWARDS EXAMIN ATION, SCRUTINY OF DOCUMENTS AND APPLICATI ON OF PATENTS AND HOLDING THEM T O BE CAPITAL IN NATURE , AS PATENTS ARE CAPITAL ASSETS, DISALLOWE D THE ASSESSEE'S CLAIM FOR THEM BEING ALLOWED AS REVENUE EXPENSES. 9.2 ON APPEAL, THE LEARNED CIT (APPEALS) UPHELD THE ASSESSING OFFICER S DECISION HOLDING THAT PATENTING IS PART OF THE PROCESS TO SECURE A GRANT, PRIVILEGE OR AUTHORITY OVER A KNOW - HOW OR TECHNICAL PRODUCT AND THEREFORE THE EXPENSES INCURRED HAD AN ENDURING BENEFIT OVER THE YEARS. 17 ITA NOS.476 & 503/BANG/2012 9.3 THE LEARNED AUTHORISED REPRESENTATIVE WAS HEARD IN SUPPORT OF THE GROUNDS RAISED. IT WAS SUBMITTED THAT THE AMOUNTS INVOLVED WERE PAYMENTS MADE TO A CONSULTANT FOR INSPECTION, SCRUTINY AND FILING FEES FOR PATENT APPLICATIONS MADE DURING THE YEAR UNDER CONSIDERATION. IT WAS FURTHER SUBMITTED THAT, AS CAN BE SEEN FROM THE DETAILS GIVEN IN THE IMPUGNED ORDER OF THE LEARNED CIT (APPEALS), THE ENTIRE PAYMENT IS MA DE TO THE CONSULTANT FOR PATENT FILING FEES, EXAMINATION FEE FOR PATENT APPLICATION, PATENT REGISTRATION FEES AND PROFESSIONAL SERVICE CHARGES. IT WAS SUBMITTED THAT THE PAYMENTS MADE TO THE CONSULTANT HAVE NOT RESULTED IN ANY ENDURING BENEFIT TO THE ASSE SSEE AND THAT SUCH EXPENSES ARE REVENUE IN NATURE. IN SUPPORT OF THIS CONTENTION, THE LEARNED AUTHORISED REPRESENTATIVE PLACED RELIANCE ON THE DECISION OF THE ITAT, AHMEDABAD BENCH IN THE CASE OF CADILA HEALTHCARE LTD. (2012) 21 TAXMAN.COM 483 (AHMEDABAD - T RIB.) 9.4 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW ON THIS ISSUE. 9.5 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. IT IS NOT IN DISPUTE TH AT THE IMPUGNED EXPENSES ARE PAYMENTS MADE TO CONSULTANTS FOR PATENT RELATED ACTIVITIES LIKE FILING FEES, REGISTRATION FEES, ETC. THE ISSUES FOR CONSIDERATION BEFORE US IS WHETHER THESE EXPENSES ARE IN THE NATURE OF CAPITAL EXPENDITURE OR REVENUE EXPENDIT URE. AS SUBMITTED BY THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE, THESE EXPENSES ARE INCIDENTAL TO THE REGISTRATION OF PATENTS AND DO NOT FORM PART OF THE EXPENSES FOR CREATION OF THE PATENT. IN OUR VIEW, THE 18 ITA NOS.476 & 503/BANG/2012 DECISION OF THE ITAT, AHMEDABAD BENC H IN THE CASE OF CADILA HEALTHCARE LTD. (2012) 21 TAXMAN.COM 483 (AHMEDABAD - TRIB.), CITED BY THE LEARNED AUTHORISED REPRESENTATIVE WOULD SQUARELY APPLY TO THE FACTS OF THE CASE. IN THIS DECISION AT PARAS 3.10 TO 3.12 , IT HAS BEEN HELD AS UNDER : - 3.10 WE HAVE HEARD BOTH THE SIDES ON THIS ISSUE. WE HAVE ALSO PERUSED THE DET A ILS FURNISHED IN THE FORM OF A COMPILATION. UNDER THE HEAD OTHER MARKETING EXPENSES THE ASSESSEE HAS CLAIMED PRODUCT REGISTRATION EXPENSES . THE ASSESSEE HAS ALSO CLAIMED T RADE - MARK REGISTRATION FEES AND PATENT REGISTRATION EXPENSES . THE ASSESSEE HAS ALSO CLAIMED TRADE - MARK REGISTRATION FEES AND PATENT REGISTRATION FEES. THE QUESTION WHICH WAS RAISED BY THE REVENUE DEPARTMENT W A S THAT WHETHER BY INCURRING THOSE EXPENDIT URE THE ASSESSEE HAS CREATED AN INTANGIBLE ASSET. THE REVENUE HAS ALSO RAISED A QUESTION THAT WHETHER BY INCURRING THOSE EXPENDITURE THE ASSESSEE HAS ENJOYED LONG DRAWN ENDURING BENEFIT. WE HAVE NOTED THAT FOR PHARMACEUTICAL PRODUCT THE ASSESSEE IS REQUI RED TO OBTAIN A REGISTRATION FROM GOVERNMENT DRUG REGULATORY AUTHORITY. WE HAVE BEEN INFORMED THAT THE ASSESSEE COMPANY HAS OBTAINED ITS VARIOUS PRODUCTS REGISTERED IN OTHER COUNTRIES. WE HAVE ALSO BEEN INFORMED THAT THE PHARMACEUTICAL PRODUCTS HAVE ALSO BEEN REGISTERED BY THE LOCAL AUTHORITIES AS ALSO THE MEDICAL ASSOCIATIONS SITUATED IN INDIA. ABOUT TRADEMARK AND PATENT REGISTRATION, THE ADMITTED FACTUAL POSITION IS THAT THE ASSESSEE IS MANUFACTURING PHARMACEUTICAL PRODUCTS. THOSE PRODUCTS HAVE B E EN BRA NDED WITH THEIR DISTINCTIVE TRADEMARKS. BY THE REGISTRATION OF THE PRODUCT THE ASSESSEE HAS S AFEGUARD AGAINST INFRINGEMENT OF ITS PATENT. BY THE REGISTRATION OF TRADEMARK AND PATENT THE ASSESSEE HAS EXCLUSIVE RIGHT OF USE. BY INCURRING THE SAID EXPENDITUR E THE ASSESSEE HAS PROTECTION OF ITS RUNNING BUSINESS. WITH THIS FACTUAL BACKGROUND WE HAVE EXAMINED THE CASE LAWS CITED BY BOTH THE SIDES. IT IS NOTICEABLE THAT THE ASSESSEE HAS NOT OBTAINED ANY NEW PRODUCT OR ACQUIRED ANY NEW TRADEMARK OR ACQUIRED ANY NEW PATENT RIGHTS. THE PRODUCTS WERE STATED TO BE IN EXISTENCE AND NOTHING NEW HAS BEEN ACQUIRED OR PURCHASED BY THE ASSESSEE. THE EXPENDITURE HAS ENABLED THE ASSESSEE TO RUN THE EXISTING BUSINESS SMOOTHLY. UNDER THE FACTS AS NARRATED TO US IT IS WRONG TO SUGGEST THAT AN ASSET EITHER TANGIBLE OR INTANGIBLE WAS ACQUIRED BY THE ASSESSEE. THE ASSESSEE IS ALREADY IN THE BUSINESS OF MANUFACTURING OF PHARMACEUTICAL PRODUCTS. THE ASSESSEE HAS TO GET THE PATENT REGISTERED. RATHER IT IS FALLACIOUS TO PRESUME TH AT AN INTANGIBLE ASSET WAS ACQUIRED. ENDURING BENEFIT IS NOT THE ONLY CRITERIA. AN ENDURING BENEFIT HAS TO BE COUPLED WITH THE ACQUISITION OF AN ASSET. 19 ITA NOS.476 & 503/BANG/2012 3.11 IN THE CASE OF SHRI DIGVIJAY CEMENT CO. LTD. (SUPRA) THE ASSESSEE HAS INCURRED EXPENDITURE FOR OBTAINING A FEASIBILITY REPORT FOR SETTING UP A SHIPYARD. THE SAID EXPENDITURE HAVING BEEN INCURRED WITH THE VIEW TO BRING INTO EXISTENCE AN ADVANTAGE BY CREATING AN ASSET OF PERMANENT NATURE THEREFORE THE COURT HAS CONSIDERED THAT IT WAS FOR ENDURING BE NEFIT HENCE CAPITAL IN NATURE. ON THE MATTER OF PRINCIPLE AS WELL AS AUTHORITY WE ARE OF THE VIEW THAT THE RELIANCE BY THE LD. DR IS MISPLACED. IN THE CASE OF MASCHEMEIJER AROMATICS (INDIA) (P) LTD. (SUPRA) THE FACTS HAVE REVEALED THAT THE PAYMENT WAS F OR TECHNICAL KNOW - HOW AND FOR USER OF PATENTS, DESIGNS, TRADEMARKS, LICENSES ETC. THOSE PURCHASES WERE AGAINST THE ISSUE OF SHARES. THE HON'BLE COURT HAS FOUND THAT THE ASSESSEE HAS ALLOTTED SHARES TO ITS FOREIGN COLLABORATOR IN CONSIDERATION OF KNOW HOW , USE OF PATENTS, TRADEMARKS, ETC. THEREFORE THE FACTS HAVE CLEARLY STATED THAT THERE WAS ACQUISITION OF CERTAIN RIGHTS FOR USE OF TRADEMARK AND PATENTS. ON THOSE FACTS IT WAS HELD THAT UNDOUBTEDLY THE CONSIDERATION PAID WAS CAPITAL IN NATURE. EVEN THIS PRECEDENT IS NOT GOING TO HELP THE REVENUE. WE HAVE PERUSED L&T DEMAG PLASTIC MACHINERY (P) LTD. (SUPRA) AND HAVE NOTICED THAT A PAYMENT WAS MADE FOR ACQUISITION OF TRADEMARK. THE SAID COMPANY HAD ENTERED INTO AN AGREEMENT WITH L&T, WHEREBY THE LATTER PE RMITTED THE ASSESSEE TO USE ITS TRADEMARK IN CONSIDERATION OF PAYMENT OF A HUGE SUM OF RS.3 CRORES. HENCE IT WAS HELD THAT THE COST INCURRED BY THE ASSESSEE WAS FOR ACQUITTING NEW TRADEMARK AND WAS A CAPITAL EXPENDITURE. WHEREAS IN THE CASE IN HAND IT WA S NOT AN ACQUISITION OF TRADE - WORK BUT ONLY REGISTRATION OF AN EXISTING TRADE - WORK. WE, THEREFORE, HOLD THAT THE RELIANCE PLACED BY THE REVENUE DO NOT TALLY WITH THE FACTS OF THE CASE IN HAND, HENCE REJECTED. 3.12 WE HEREBY HOLD THAT THE PAYMENTS IN QUESTION ARE INEXTRICABLY LINKED WITH THE WORKING OF THE ASSESSEE'S BUSINESS. BY INCURRING THOSE EXPENDITURE THE ASSESSEE HAS NOT ACQUIRED ANY NEW RIGHT OF PERMANENT CHARACTER. THE LICENSES OR THE REGISTRATIONS ARE REQUIRED TO BE RENEWED AND THEREFORE PA RT OF THE DAY TO DAY RUNNING EXPENDITURE OF THE BUSINESS. {VODAFONE ESSAR GUJARAT LTD. (SUPRA)}. IF AN EXPENDITURE CAN GIVE A BENEFIT WHICH IS SAID TO BE ENDURED FOR ONE YEAR OR EVEN ANNUALLY YEAR AFTER YEAR THEN IT IS UNREASONABLE TO HOLD THAT ANY ENDURIN G BENEFIT TAKEN PLACE TO THE ASSESSEE. [COSMAT MAX LTD. (SUPRA)]. AN EXPENDITURE INCURRED IN THE EXISTING LINE OF BUSINESS IN ORDER TO RUN THE BUSINESS SMOOTHLY THEN THOUGH THE BUSINESS MAY RUN SMOOTHLY IN FUTURE IN THE YEARS TO COME BUT IN THE ABSENCE O F CREATION OF ANY NEW ASSET WE HEREBY HELD THAT SUCH AN ENDURING BENEFIT MAY NOT TANTAMOUNT TO RENDERING OF CAPITAL EXPENDITURE. {CORE HEALTHCARE LTD. (SUPRA)}. A VERY IDENTICAL CASE LAW HAS ALSO BEEN CITED PRONOUNCED BY THE HON'BLE SUPREME COURT IN THE C ASE OF FINLAY MILLS LTD. (SUPRA) AND THE OPINION EXPRESSED WAS THAT AN EXPENDITURE INCURRED IN REGISTERING FOR THE FIRST TIME ITS TRADEMARK, THEN BY REGISTRATION THE OWNER IS MERELY ABSOLVED THEREAFTER FROM OBLIGATION TO PROVE HIS OWNERSHIP OF TRADEMARK. AS PER THE HON'BLE 20 ITA NOS.476 & 503/BANG/2012 COURT THE EXPENDITURE IS NEITHER FOR THE CREATION OF AN ASSET NOR AN ADVANTAGE FOR EVER. WE THEREFORE HOLD THAT THIS PRECEDENT HAS DIRECT APPLICATION ON THE PRESENT ISSUE, THEREFORE FOLLOWING THE SAME AND CONSIDERING THE TOTALITY OF TH E FACTUAL MATRIX, WE HEREBY ALLOW THE CLAIM. RESULTANTLY, GROUND NOS.2 & 3 ARE ALLOWED. FOLLOWING THE DECISION OF THE ITAT, AHMEDABAD BENCH IN THE CA S E OF CADILA HEALTHCARE LTD. (SUPRA), WE HOLD THAT THE EXPENSE S IN QUESTION, AMOUNTING TO RS.9,27 ,697, ARE REVENUE IN NATURE AND NOT IN CAPITAL FIELD AND THEREFORE DELETE THE ADDITION MADE. CONSEQUENTLY, GROUND NO.3 IS ALLOWED. 10. IN THE RESULT, THE ASSESSEE'S APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST DECEMBER, 201 4 . SD/ - SD/ - ( N.V. VASUDEVAN ) ( JASON P BOAZ ) JUDICIAL MEMBER ACCOUNTA NT MEMBER *REDDY GP COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, - B BENCH. 6. GUARD FILE. (TRUE COPY) BY OR DER ASST. REGISTRAR, ITAT, BANGALORE