M/S JBM AUTO SYSTEMS PRIVATE LIMITED, KANCHEEPURAM V. DCIT COMPANY CIRCLE II(3), CHENNAI

ITA 635/CHNY/2018

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 7532 (ITAT-CHENNAI)
• Duration Of Justice: 4 year(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-03-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2011-2012
• Appeal Filed On: 20-02-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Opportunity of being heard; Capital expenditure
• Section: 143(3)

Judgement Text

आयकर अपीलीय अिधकरण, ‘डी’ यायपीठ, चे ई IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI ी महावीर सह, उपा य एवं ी िगरीश अ वाल, लेखा सद य के सम BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENT AND SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER आयकर अपील सं./ITA No.: 635/CHNY/2018 िनधा"रण वष" /Assessment Year: 2011 - 2012 M/s. JBM Auto System Private Limited, No.1, Ford Supplier’s Park, S.P. Koil Post, Chengalpattu Taluk, Kancheepuram District, Tamil Nadu – 603 204. PAN : AAACK 8997 R Vs. The Deputy Commissioner of Income Tax, Corporate Circle – 2(3), Chennai – 600 034. Tamil Nadu (अपीलाथ /Appellant) ( यथ /Respondent) अपीलाथ क ओर से/Appellant by : Mr. S. Sridhar, Advocate यथ क ओर से/Respondent by : Mr. G. Johnson, Addl. CIT सुनवाई क तारीख/Date of Hearing : 01.03.2022 घोषणा क तारीख/Date of Pronouncement : 04.03.2022 आदेश आदेशआदेश आदेश / // /O R D E R PER GIRISH AGRAWAL, AM: This appeal by the Assessee is arising out of the order of the learned Commissioner of Income Tax (Appeals)-13, Chennai in ITA No.32/CIT(A)-13/2011-12; dated 21.12.2017 against the Assessment Order made u/s.143(3) of the Income-tax Act, 1961 (hereinafter ‘the Act’), dated 21.03.2014 passed by the Deputy Commissioner of Income Tax, Company Circle – II(3) Chennai for the Assessment Year 2011 – 2012. :: 2 :: I.T.A. No. 635/Chny/2018 2. The moot point before the Tribunal in this appeal relates only to the treatment of product development expenses as to whether those are in the nature of capital or revenue expenses. The Assessee has taken several grounds in this respect which need not be reproduced for the sake of brevity. 3. Brief facts as culled out from the records are that the Assessee is a company which filed its return of income for the Assessment Year 2011 – 2012 reporting an income of Rs.19,41,98,203/-. The assessment u/s. 143(3) of the Act was completed on 21.03.2014. While completing the impugned assessment, the learned Assessing Officer had disallowed a sum of Rs.37,18,344/- out of Rs.49,57,793/- claimed by the assessee as revenue expenses by way of a debit in the profit and loss account towards (i) product development expenses (ii) software license fee for the usage of design software license. It is claimed that the product development expense consists of expenditure incurred towards license fees, lease rental charges and annual maintenance contract, etc. The learned Assessing Officer after treating these product development expenses as capital in nature allowed depreciation at the rate of 25% being Rs.12,39,448/- and disallowed the balance of Rs.37,18,344/-. Ld. AO held that the said expenditure which is in the nature of software license fee paid is mainly for the usage of design software, being capital in nature. Aggrieved, the :: 3 :: I.T.A. No. 635/Chny/2018 Assessee went into an appeal before the learned Commissioner of Income Tax (Appeals). 4. In the course of first appellate proceedings, the Assessee submitted that the assessment was completed without taking cognizance of the fact that the nomenclature “Product Development Expenses” could not form the basis for disallowance. It was also submitted that the learned Assessing Officer ignored the appellate order for the assessment year 2009 – 2010 which was decided in favour of the Assessee on the same ground of treating the product development expenses as revenue expenditure and not as capital expenditure which was repeated in the impugned assessment year. The copy of the appellate order was placed on record as noted by the learned Commissioner of Income Tax (Appeals) in his order at page no. 5. The learned Commissioner of Income Tax (Appeals) sustained the disallowance by holding that the learned Assessing Officer has rightly treated the payment of product development expenses towards license fee for the usage of design software license as capital expenditure and dismissed the appeal. Aggrieved, the Assessee is in appeal before the Tribunal. 5. The learned Counsel for the Assessee, Mr. S. Sridhar, Advocate strongly represented that the product development expenses comprise of license fee, lease rental charges and annual :: 4 :: I.T.A. No. 635/Chny/2018 maintenance contract, etc, for the usage of design software which are product specific and unusable after the model is discontinued by the Original Equipment Manufacturer [OEM] and hence they are revenue in nature and therefore to be allowed as revenue expenditure as claimed by the Assessee in its profit and loss account. The learned Counsel for the Assessee further contended that for the payment of such application software, though there is enduring benefit, it does not result into acquisition of any capital asset. The same merely enhances the productivity or efficiency and hence to be treated as revenue expenditure. The application software enables the Assessee to carry out its business operations efficiently and smoothly. The learned senior Departmental Representative supported the order of the Assessing Officer and the learned Commissioner of Income Tax (Appeals). 6. We have heard the rival contentions, perused material on record and submissions made by both the parties in the course of hearing. From the facts on record, we find that the learned Assessing Officer treated the product development expenses of Rs.49,57,793/- as capital expenditure, allowed 25% depreciation on the same and made a net disallowance of Rs.37,18,344/- under the head “capital expenditure”. :: 5 :: I.T.A. No. 635/Chny/2018 7. On perusal of the assessment order, we find that the learned Assessing Officer has neither done any proper examination nor verification so as to arrive at a conclusion on treating the product development expenses debited in the profit and loss account as capital expenditure. It is seen that the learned Assessing Officer has gone merely by the nomenclature of the expenses i.e. “product development expenses”. The Hon’ble Supreme Court in the case of Kedarnath Jute Manufacturing Company Limited Vs. Commissioner of Income Tax reported in [1971] 82 ITR 363 (SC) 9367) held that accounting nomenclature cannot be the basis for treatment of the expenditure in making the assessment of income under the Act. The Hon’ble Supreme Court stated, whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. Treating an item of expenditure as capital or revenue, ought to be made having regard to the facts of each case, as no one test or principle criteria is conclusive or has universal application. Further, we find that a reference is made before the learned Commissioner of Income Tax (Appeals) on the appellate order by the learned Commissioner of Income Tax (Appeals)-13 for the Assessment Year 2009 – 2010 which was decided in favour of the Assessee on the same grounds. :: 6 :: I.T.A. No. 635/Chny/2018 8. In the light of these facts and circumstances, we deem it fit to set aside the order of the learned Commissioner of Income Tax (Appeals) and remit the matter back to the file of the learned Assessing Officer with a direction to verify and examine the expenses claimed under the head “product development expenses” vis-à-vis, the nature of business undertaken by the Assessee and arrive at a conclusion in accordance with law and in the light of decision of the Hon’ble Supreme Court (supra). Needless to say, the Assessee be given reasonable opportunity of being heard to make his submissions and produce all the relevant documentary evidences to prove its claim of deduction for the expenses. Accordingly, in terms of the above, we allow the appeal of the Assessee for statistical purposes. 9. In the result, the appeal of the Assessee is allowed statistical purposes. Order pronounced in the court on 4 th March, 2022 at Chennai. Sd/- Sd/- (महावीर सह ) (MAHAVIR SINGH) उपा य /VICE PRESIDENT (िगरीश अ वाल) (GIRISH AGRAWAL) लेखा सद य /ACCOUNTANT MEMBER चे ई/Chennai, दनांक/Dated, the 4 th March, 2022 IA, Sr. PS आदेश की ितिलिप अ ेिषत/Copy to: 1. अपीलाथ /Appellant 2. थ /Respondent 3. आयकर आयु (अपील)/CIT(A) 4. आयकर आयु /CIT 5. िवभागीय ितिनिध/DR 6. गाड फाईल/GF