ACIT, Coimbatore V. M/s. Meltech Castings (P) Ltd., Coimbatore

ITA 53/CHNY/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61261 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 5 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-07-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 24-05-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 15-01-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: H BURMAN IRS
• Assessee Lawyers: DR ANITA SUMANTH
• Keywords: Depreciation; Competent authority; Revenue expenditure; Capital expenditure
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI BEFORE DR. O.K. NARAYANAN, VICE PRESIDENT AND SHRI V. DURGA RAO, JUDICIAL MEMBER I.T.A. NO. 53/MDS/2010 (ASSESSMENT YEAR : 2006-07) A. C.I.T COMPANY CIRCLE (IV)(2) COIMBATORE (APPELLANT) VS. M/S MELTECH CASTINGS (P) LTD 8/116-C, ATHIPALAYAM ROAD CHINNAVEDAMPATTI, GANAPATHY COIMBATORE PAN : AABCM2280J (RESPONDENT) REVENUE BY : SHRI H.BURMAN , IRS, CIT ASSESSEE BY : DR. ANITA SU MANTH , ADVOCATE DATE OF HEARING : 24.05.2012 DATE OF PRONOUNCEMENT : 09. 07.2012 O R D E R PER V. DURGA RAO, JM : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAI NST THE ORDER OF THE LD. CIT(A-IV, CHENNAI DATED 12.11.2009 FOR A SSESSMENT YEAR 2006-07. - - ITA 53 OF 2010 2 2. FACTS, IN BRIEF, ARE THAT THE ASSESSEE FILED RET URN OF INCOME DECLARING TOTAL INCOME OF RS. 71,85,223/-. THE ASS ESSEE CLAIMED RESEARCH AND DEVELOPMENT EXPENDITURE OF RS. 32,34,0 15/-. THE ASSESSING OFFICER REQUIRED THE ASSESSEE TO FILE DET AILS IN RESPECT OF RESEARCH AND DEVELOPMENT ACTIVITIES UNDERTAKEN BY T HE ASSESSEE. IN RESPONSE TO THAT, THE ASSESSEE SUBMITTED HIS REPLY STATING THAT IMPORTED PRODUCTS WERE ANALYZED FOR DESIGN, STRUCTU RE AND MATERIAL COMPOSITION AND THE SAME WAS USED TO IMPROVE THE CO MPONENTS IN THE PRODUCTS MANUFACTURED BY THE COMPANY. THE PROD UCTS IMPORTED WERE UNIQUE IN NATURE AND NOT RESALABLE AN D THE PRODUCTS WERE COMPLETELY STRIPPED AND BROKEN FOR ANALYSIS AN D HAD NO FURTHER RESALE VALUE. PUMPS IMPORTED WERE OF DIFFE RENT TYPES IN SINGLE UNITS AND WERE NOT OF COMMERCIAL NATURE. TH E EXPENDITURE INCURRED BY THE ASSESSEE WAS FOR INVESTIGATION AND RESEARCH IN NATURE AND HENCE ALLOWABLE AS REVENUE EXPENDITURE. 3. THE ASSESSING OFFICER, AFTER CONSIDERING THE ABO VE EXPLANATION OF THE ASSESSEE OBSERVED THAT IMPORTED DEVICES AND PRODUCTS WERE BROKEN TO SEE THE MECHANISM OF THE DEVICES AND PROD UCTS WHICH - - ITA 53 OF 2010 3 COULD BE ADOPTED BY THE ASSESSEE IN THE MANUFACTURE OF ITS OWN PRODUCTS AND THIS CANNOT BE TERMS AS RESEARCH AND D EVELOPMENT ACTIVITY. HE FURTHER OBSERVED THAT THE MEANING OF RESEARCH AND DEVELOPMENT IN AN INDUSTRY IS A WORK DIRECTED TOWAR DS INNOVATION IN AND IMPROVEMENT OF PRODUCTS AND PROCESSES. THE ASS ESSING OFFICER WAS OF THE OPINION THAT THE ACTIVITIES OF THE ASSES SEE COULD NOT BE TERMED AS EITHER ACQUISITION OF PATENT RIGHTS OR CO PY RIGHT/ACQUIRING KNOW-HOW FOR THE USE OF ITS BUSINESS OR INVOLVED IN ANY SCIENTIFIC RESEARCH SO THAT THE EXPENDITURE OF CAPITAL NATURE EXPENDED ON ACQUISITION OF THE PATENT RIGHTS COULD BE ALLOWED U /S 35A OF THE ACT. THE ASSESSEES ACTIVITY CANNOT ALSO BE TERMED AS AC TIVITY OF RESEARCH AND DEVELOPMENT SO THAT THE EXPENDITURE ON SUCH ACT IVITY CAN BE ALLOWED U/S 35A SUBJECT TO APPROVAL OF SUCH SCIENTI FIC RESEARCH BY COMPETENT AUTHORITY. THE MACHINERY AND DEVICES IMP ORTED THUS CANNOT BE CALLED CONSUMABLES AS THESE MACHINERIES H AVE NOT BEEN USED IN THE MANUFACTURE OF ITS OWN PRODUCTS. AS TH ESE DEVICES HAD BEEN BROKEN INTO THEY ARE NO LONGER IN THE SAME STA TUS AS WHEN THEY WERE IMPORTED AND SO THESE DEVICES WERE NOT SU BJECT TO DEPRECIATION. THE EXPENDITURE INCURRED BY THE ASSE SSEE CAN ONLY BE TERMED AS FANCIFUL THROUGH WHICH THE ASSESSEE GAINS KNOWLEDGE BUT - - ITA 53 OF 2010 4 BITS AND PIECES. THERE IS NO EVIDENCE TO SUCH KNOW LEDGE HAVING BEEN USED IN INNOVATING ITS PRODUCTS. HENCE, THE A SSESSING OFFICER CAME TO A CONCLUSION THAT THE EXPENDITURE ON THIS S CORE CANNOT BE CONSIDERED AS INCURRED TOTALLY AND EXCLUSIVELY FOR THE PURPOSE OF ASSESSEES BUSINESS TO BE ELIGIBLE FOR DEDUCTION U/ S 37 OF THE ACT. ON BEING AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE TRIBUNAL. 4. BEFORE THE LD. COMMISSIONER OF INCOME-TAX(APPEAL S), THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IMPORTED PR ODUCTS WERE ANALYZED FOR DESIGN, STRUCTURE AND MATERIAL COMPOSI TION AND THE SAME WAS USED TO IMPROVE THE COMPONENTS IN THE PROD UCTS MANUFACTURED BY THE COMPANY. THE PRODUCTS IMPORTED WERE UNIQUE IN NATURE AND NOT RESALABLE AND THE PRODUCTS WERE C OMPLETELY STRIPPED AND BROKEN FOR ANALYSIS AND HAD NO FURTHER RESALE VALUE. PUMPS IMPORTED WERE OF DIFFERENT TYPES IN SINGLE UN ITS AND WERE NOT OF COMMERCIAL NATURE. THE EXPENDITURE INCURRED BY THE ASSESSEE WAS FOR INVESTIGATION AND RESEARCH. IN SUPPORT OF HIS SUBMISSIONS, THE LD. COUNSEL FOR THE ASSESSEE RELIED ON THE DECI SION OF THE HON'BLE - - ITA 53 OF 2010 5 KERALA HIGH COURT IN THE CASE OF CIT VS. KERALA STA TE INDUSTRIAL DEVELOPMENT CORPORATION LTD REPORTED IN 182 ITR 62. 5. THE LD. COMMISSIONER OF INCOME-TAX(APPEALS), AFT ER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, OBSERV ED THAT THE ASSESSEES MAIN BUSINESS IS MANUFACTURE OF CI ROUGH CASTINGS, COMPONENTS FOR PUMPS AND MOTORS AND GENERATION OF P OWER BY WIND MILLS. THE ASSESSEE CLAIMED AN AMOUNT OF RS. 32,34 ,015/- AS EXPENDITURE INCURRED TOWARDS RESEARCH AND DEVELOPME NT. DURING THE YEAR, THE ASSESSEE EFFECTED A SALE OF RS. 62 LA KHS AND JOB WORK CHARGES OF RS. 12.34 CRORES. THE MAIN ARGUMENT OF THE ASSESSEE IS THAT THE PUMPS AND MOTORS ARE IMPORTED FOR ANALYZIN G THE QUALITY OF THE COMPONENTS USED IN THOSE PUMPS SO AS TO ENABLE THEM TO ATTAIN BETTER STANDARDS. THE LD. COMMISSIONER OF INCOME-T AX(APPEALS) FURTHER OBSERVED THAT THE EXPENDITURE INCURRED BY T HE ASSESSEE HAS NEXUS WITH REGARD TO THE BUSINESS OF THE APPELLANT WHICH IS WHOLLY AND EXCLUSIVELY EXPENDED FOR THE PURPOSE OF BUSINES S. MOREOVER, THE EXPENDITURE CANNOT BE CONSIDERED AS CAPITAL EXP ENDITURE AS THERE WAS NO ENDURING BENEFIT DERIVED BY THE ASSESS EE AS THESE PUMPS AND MOTORS WERE DISMANTLED TO TEST THE QUALIT Y OF THE - - ITA 53 OF 2010 6 MATERIAL AND OTHER PARAMETERS WHICH HELPS THE ASSES SEE FOR IMPROVING THE QUALITY OF ITS PRODUCTS AND DESIGN SO AS TO COMPETE WITH THE COMPETITIONS IN THE MARKET. THE LD. COMMIS SIONER OF INCOME-TAX(APPEALS), AFTER CONSIDERING THE DECISION OF THE HON'BLE KERALA HIGH COURT, DIRECTED THE ASSESSING OFFICER T O ALLOW THE SAID EXPENDITURE WHILE COMPUTING THE TOTAL INCOME. AGGR IEVED, THE REVENUE CARRIED THE MATTER IN APPEAL BEFORE THE TRI BUNAL. 6. BEFORE US, THE LD. COUNSEL FOR THE REVENUE RELIE D ON THE ORDER OF THE ASSESSING OFFICER AND SUBMITTED THAT THE IMP ORTING OF PUMPS AND MOTORS FOR RESEARCH AND DEVELOPMENT ARE NOT CON NECTED TO ASSESSEES BUSINESS AND THEREFORE, THE ASSESSEE IS NOT ELIGIBLE FOR DEDUCTION U/S 37 OF THE ACT. THE ASSESSEE HAS NOT FILED ANY EVIDENCE TO SUBSTANTIATE HIS CASE NEITHER BEFORE TH E ASSESSING OFFICER NOR BEFORE THE LD. COMMISSIONER OF INCOME-T AX(APPEALS) OR EVEN BEFORE THE TRIBUNAL THAT SUBMERSIBLE PUMPS AND MOTORS IMPORTED WERE USED FOR THE BUSINESS OF THE ASSESSEE . THEREFORE, THE ORDER PASSED BY THE LD. COMMISSIONER OF INCOME- TAX(APPEALS) HAS TO BE REVERSED AND THE ORDER OF THE ASSESSING O FFICER HAS TO BE UPHELD. - - ITA 53 OF 2010 7 7. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSES SEE REITERATED THE SUBMISSIONS MADE BEFORE THE LD. COMMISSIONER OF INCOME-TAX(A) AND SUBMITTED THAT THE ASSESSEE HAS IMPORTED VARIOU S PUMPS AND MOTORS FOR BENCH MARKING THE COMPONENTS MANUFACTURE AND USED IN PRODUCTION. THE IMPORTED PRODUCTS WERE ANALYZED FO R DESIGN, STRUCTURE AND MATERIAL COMPOSITION AND THE SAME WAS USED TO IMPROVE THE COMPONENTS IN THE PRODUCTS MANUFACTURED BY THE COMPANY. THE PRODUCTS IMPORTED WERE UNIQUE IN NATU RE AND NOT RESALABLE AND THE PRODUCTS WERE COMPLETELY STRIPPED AND BROKEN FOR ANALYSIS AND HAD NO FURTHER RESALE VALUE. PUMPS IM PORTED WERE OF DIFFERENT TYPES IN SINGLE UNITS AND WERE NOT OF COM MERCIAL NATURE. THE LD. COUNSEL FOR THE ASSESSEE STRONGLY SUPPORTED THE ORDER OF THE LD. COMMISSIONER OF INCOME-TAX(APPEALS) AND SUBMITT ED THAT THE EXPENDITURE INCURRED ON PUMPS AND MOTORS WAS ONLY F OR THE PURPOSE OF BUSINESS AND ALLOWABLE U/S 37 OF THE ACT. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS, THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RE CORD. THE ONLY ISSUE FOR OUR CONSIDERATION IS WHETHER THE ASSESSEE IS ENTITLED FOR DEDUCTION OF THE EXPENDITURE INCURRED FOR THE PURPO SE OF THE BUSINESS - - ITA 53 OF 2010 8 UNDER SECTION 37 OF THE INCOME-TAX ACT, 1961, OR NO T. THE CASE OF THE ASSESSEE IS THAT IT HAS INCURRED EXPENSES ON RESEAR CH AND DEVELOPMENT AMOUNTING TO ` 32,34,015/-. THE SAME WAS DISALLOWED BY THE ASSESSING OFFICER BY HOLDING THAT THE SAID E XPENDITURE IS NOT IN THE NATURE OF RESEARCH AND DEVELOPMENT EXPENDITURE. WE FIND FROM THE ORDER OF THE ASSESSING OFFICER THAT WHEN THE AS SESSING OFFICER ASKED FOR THE DETAILS OF THE RESEARCH AND DEVELOPME NT EXPENDITURE, THE ASSESSEE HAS NOT GIVEN ANY DETAILS. IT WAS SUBM ITTED BEFORE THE ASSESSING OFFICER THAT THE ASSESSEE HAS INCURRED TH ESE EXPENSES FOR THE PURPOSE OF IMPORT OF CERTAIN PRODUCTS AND DEVIC ES. THESE DEVICES ARE BROKEN DOWN TO SEE WHAT THESE DEVICES CONTAIN S O THAT THE MECHANISM OF THE DEVICES CAN BE ADOPTED BY THE ASSE SSEE IN THE MANUFACTURE OF ITS OWN PRODUCTS. IT WAS SUBMITTED BEFORE THE C.I.T.(A) THAT THE ASSESSEE HAS IMPORTED SUBMERSIBL E PUMPS AND MOTORS WHICH ARE COMPLETELY STRIPPED AND BROKEN FOR ANALYSIS HAVING NO FURTHER RESALE VALUE. IN THIS CONNECTION WE OBS ERVE THAT SUBMERSIBLE PUMP GENERALLY CONTAINS COPPER WIRE. T HEREFORE, EVEN IF IT IS STRIPPED AND BROKEN, THE WIRE WILL BE HAVING ITS VALUE. IT IS ALSO NOT CLEAR FROM THE ORDERS OF THE AUTHORITIES BELOW THAT HOW MANY PUMPS AND MOTORS WERE PURCHASED BY THE ASSESSEE AND WHAT IS THE - - ITA 53 OF 2010 9 CAPACITY/STAGE OF THE PUMPS. THEREFORE, WE FIND THA T THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS), WITHOUT CONSID ERING THE ISSUE PROPERLY, BY SIMPLY FOLLOWING THE DECISION OF THE H ONBLE KERALA HIGH COURT IN THE CASE OF CIT VS. KERALA STATE INDUSTRIA L DEVELOPMENT CORPORATION LTD., 182 ITR 62, HAS HELD THAT THE ASS ESSEE HAS INCURRED THESE EXPENSES FOR THE PURPOSE OF THE BUSI NESS. WE FIND THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS NO T EXAMINED THE DETAILS WITH REGARD TO THE PURCHASE OF THE PUMPS AN D ALSO WHETHER THE ASSESSEE HAS PURCHASED ONLY THE PUMPS WITHOUT T HE MOTORS. THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ALLOWED THE CLAIM OF THE ASSESSEE UNDER SECTION 37 OF THE ACT, WITHOUT EXAMI NING THE ABOVE FACTS. WE FIND THAT THE ORDER PASSED BY THE LEARNE D COMMISSIONER OF INCOME-TAX(APPEALS) IS NOT CORRECT. THEREFORE, WE S ET ASIDE THE ORDER PASSED BY THE COMMISSIONER OF INCOME-TAX(APPEALS) A ND REMIT THE MATTER BACK TO THE ASSESSING OFFICER TO DECIDE THE ISSUE AFRESH AFTER EXAMINING THE ENTIRE DETAILS. WE ALSO DIRECT THE A SSESSEE TO PRODUCE THE DETAILS WITH REGARD TO THE PUMPS/MOTORS, THE CA PACITY AND THE QUANTITY OF PURCHASES MADE BY THE ASSESSEE, ETC. 9. IN THE RESULT THE APPEAL FILED BY THE REVENUE I S TREATED AS ALLOWED FOR STATISTICAL PURPOSES. - - ITA 53 OF 2010 10 ORDERS PRONOUNCED ON MONDAY, THE 9 TH OF JULY, 2012 AT CHENNAI. SD/- SD/- (DR. O.K.NARAYANAN) (V.DURGA RAO) VICE-PRESIDENT JUDICIAL MEMBER CHENNAI, DATED, THE 9 TH JULY, 2012. VL/V.A.P. COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR 6. GF.