M/s. Behr India Limited, Pune V. Income-tax Officer, Pune

ITA 779/PUN/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 59995 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 9 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-02-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 02-02-2012
• Assessment Year: 2001-2002
• Appeal Filed On: 24-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: R D ONKAR
• Keywords: Depreciation; Opportunity of being heard; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI I C SUDHIR, JUDICIAL MEMBER AND SHRI G.S. PANNU, ACCOUNTANT MEMBER ITA NO. 779/PN/10 (ASSTT. YEAR: 2001-02) BEHR INDIA LIMITED, .. APPELLANT 29 MILESTONE, PUNE NASHIK HIGHWAY, PUNE 410501 PAN AABCB2186L VS. INCOME-TAX OFFICER, .. RESPONDE NT WD. 8(1) PUNE APPELLANT BY : SHRI R D ONKAR RESPONDENT BY : MS NEERA MALHOTRA DATE OF HEARING : 14.02.2 012 DATE OF PRONOUNCEMENT : 26.03 .2012 ORDER PER G.S. PANNU, A.M .: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER O F THE COMMISSIONER OF INCOME-TAX (APPEALS)-V, PUNE DATED 15.0 2.2010 WHICH, IN TURN, HAS ARISEN FROM ORDER DATED 26.3.2004 PASSED BY T HE ASSESSING OFFICER, UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (IN SH ORT THE ACT), PERTAINING TO THE ASSESSMENT YEAR 2001-02. 2. THE SOLITARY GROUND RAISED BY THE ASSESSEE IN THIS APPE AL READS AS FOLLOWS: THE LD CIT(A) ERRED IN DISALLOWING EXPENSES ON PRO DUCT TESTING AND VALIDATION RS 42,21,665/- (NET) GROUNDED UNDER PRODUCT DEVELOPMEN T EXPENSES BY TREATING THE SAID EXPENSES AS CAPITAL IN NATURE. 3. THE DISPUTE IN THIS APPEAL RELATES TO THE TREATMEN T OF AN EXPENDITURE OF RS 42,21,665/-. THE SAID EXPENSE WAS DEB ITED UNDER THE HEAD PROJECT DEVELOPMENT EXPENDITURE. IN THE ACCOUNT BOO KS, THE SAID EXPENDITURE HAD BEEN TREATED AS A DEFERRED REVENUE EXPENDITURE W HEREAS THE SAME WAS CLAIMED AS A REVENUE EXPENDITURE IN THE COURSE OF ASSESSME NT PROCEEDINGS. THE ASSESSING OFFICER AS WELL AS THE COMMISSIONER OF INCOME- TAX (APPEALS) HAVE NOT AGREED TO THE CLAIM OF THE ASSESSEE OF TREATIN G THE SAID EXPENDITURE AS REVENUE IN NATURE AND INSTEAD, IT HAS BEEN HELD TO BE A CAPITAL EXPENDITURE. 4. BEFORE US, IT IS SUBMITTED BY THE APPELLANT THAT TH E IMPUGNED EXPENDITURE WAS INCURRED ON TESTING AND VALIDATION OF THE PRODUCTS ALREADY MANUFACTURED AND SOLD BY THE ASSESSEE AND THE SAME HAS BE EN INCURRED DURING THE YEAR IN THE ORDINARY COURSE OF THE BUSINESS. THE SAID EXPENDITURE IS INCURRED BY WAY OF PAYMENTS TO ASSESSEES FOREIGN COLLABORA TOR I.E. BEHR GMBH, GERMANY. AT THE VERY OUTSET, THE LEARNED COUNS EL FOR THE ASSESSEE SUBMITTED THAT IN THE ACCOUNT BOOKS THE SAID EXPENSES HAVE BEEN INCORRECTLY GROUPED UNDER THE HEAD PRODUCT DEVELOPMENT EXPENDI TURE. EXPLAINING THE BACKGROUND BY WAY OF WRITTEN SUBMISSIONS DATED 10.2.2012, IT IS SUBMITTED AS UNDER:- 5. ELABORATING FURTHER THE LEARNED COUNSEL SUBMITTED THAT THE PROJECT DEVELOPMENT EXPENDITURE WAS INCURRED BY THE ASSESSEE IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 1998-99 I.E. BEFORE IT COMMENCED PRODUCTION AND, THEREFORE, THE SAME WERE TREATED AS A DEFERRED REVENUE EXPENDITURE IN THE ACCOUNT BOOKS AND WERE AMORTIZED FROM THE ASSESSMENT Y EAR 1999-2000 ONWARDS AND DEDUCTION UNDER SECTION 35AB OF THE ACT WAS ACCORDINGLY CLAIMED. SO, HOWEVER, THE IMPUGNED EXPENDITURE HAD N OTHING TO DO WITH THE PROJECT DEVELOPMENT EXPENDITURE INCURRED IN THE ASSESSME NT YEAR 1998-99 AND STANDS ON A DIFFERENT FOOTING. THE SAID EXPENDITUR E WAS INCURRED ON TESTING AND VALIDATION OF THE PRODUCTS MANUFACTURED BY THE ASSESS EE AND WAS INCURRED IN THE COURSE OF BUSINESS AND WAS ONLY SPECIAL DEVE LOPMENT COSTS. IN THIS REGARD, IT IS SUBMITTED THAT THE TESTING IS CARRIED OUT AT THE COLLABORATORS PLACE IN GERMANY UNDER STIMULATED CONDITIONS AND THE SAI D TESTS ARE REQUIRED TO BRING IN IMPROVISATION AND MODIFICATIONS IN THE PR ODUCTS MANUFACTURED BY THE ASSESSEE. AT PAGES 23 TO 67 OF THE PAPER BOOK DATED 10.2.2012, THE PHOTOCOPY OF INVOICES RAISED FOR THE TESTING OF THE PROD UCTS AND THE TEST REPORTS ISSUED BY THE COLLABORATOR BEHR GMBH, GERMANY HAVE BEE N ENCLOSED IN SUPPORT OF SUCH PLEA. 6. THE LEARNED COUNSEL SUBMITTED THAT THE ASSESSING OFFIC ER PROCEEDED ON AN INCORRECT ASSUMPTION THAT THE EXPENDITURE WAS INCUR RED ON PREPARATION OF DESIGN, DRAWING AND DEVELOPMENT OF PROTOTYPE SAMPL ES. IT WAS, THEREFORE, CONTENDED THAT THE IMPUGNED EXPENDITURE HAS BEEN WRON GLY TREATED TO BE A CAPITAL EXPENDITURE AND ON THE CONTRARY SUCH LIKE EXPEND ITURE IS LIABLE TO BE TREATED AS REVENUE EXPENDITURE INCURRED IN THE ORDINA RY COURSE OF BUSINESS AND IN SUPPORT RELIANCE HAS BEEN PLACED ON FOLLOWING D ECISIONS: (I) ACIT V. SPICER INDIA LTD. PUNE VIDE ITA NO 1191, 1192/PN/07 & 102/PN/08 (TRIB)(PUNE); (II) GUJARAT SMALL SCALE INDUSTRIES CORPORATION LTD. V . CIT 142 ITR 35 (GUJ); AND, (III) CIT V. REVATHI C.P. EQUIPMENTS LTD. 245 ITR 68 6 (MAD.) 7. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPR ESENTATIVE SUBMITTED THAT THE LOWER AUTHORITIES HAVE PROCEEDED TO DETERMIN E THE NATURE OF EXPENDITURE ON THE BASIS OF THE ASSERTIONS OF THE ASSESSEE AND FOR THAT MATTER, POINTED OUT THE FOLLOWING DISCUSSION IN THE ASSESSMENT ORD ER:- DISALLOWANCE OF CLAIM OF DEVELOPMENT COST DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AS SESSEE COMPANY HAS CLAIMED DEDUCTION IN RESPECT OF DEVELOPMENT COST OF RS 42,2 1,665/- WHICH HAVE BEEN INCURRED DURING THE RELEVANT PREVIOUS YEAR. IT WAS SUBMITTED THAT THE ABOVE EXPENDITURE (WHICH IS TREATED AS DEFERRED REVENUE EXPENDITURE IN THE B OOKS OF ACCOUNTS) WAS INADVERTENTLY NOT CLAIMED IN THE RETURN OF INCOME. IT IS SUBMITTED THAT THE ABOVE REPRESENTS SPECIAL DEVELOPMENT COSTS PAID TO BEHR G MBH & CO. GERMANY FOR PREPARATION OF DESIGN AND DRAWINGS AND DEVELOPMENT OF PROTOTYPE SAMPLES. IN MY OPINION, THE ABOVE EXPENSES ARE NOT OF REVENU E NATURE AND REPRESENT CAPITAL EXPENDITURE IN THE NATURE OF INTANGIBLE ASSETS AND HENCE, DEPRECIATION IS ALLOWABLE THEREON. THOUGH THE ASSESSEE COMPANY HAS OPTED NOT TO CLAIM DEPRECIATION ON ALL OTHER ASSETS, DEPRECIATION IS ALLOWABLE ON DEVELOPM ENT COSTS OF RS 42,21,665/- AS INTANGIBLE ASSETS IN VIEW OF MY DETAILED DISCUSSION MADE IN EARLIER PARA. ON THE ABOVE BASIS, IT WAS POINTED OUT THAT THE ASSESSEE ITSELF SUBMITTED THAT THE EXPENDITURE REPRESENTED SPECIAL DEVELOPMENT COST PA ID TO BEHR GMBH & CO. GERMANY FOR PREPARATION OF DESIGN, DRAWINGS AND D EVELOPMENT OF PROTOTYPE SAMPLES AND THEREFORE, NO FAULT CAN BE FOU ND WITH THE DETERMINATION OF THE NATURE OF THE EXPENDITURE MADE BY THE LOWER AUTHORITIES. IT IS SUBMITTED THAT PRESENTLY THE ASSESSEE IS MAKING OUT FACTS DIFFERENT F ROM THOSE PLEADED BEFORE THE LOWER AUTHORITIES AND, THEREFORE, NO INTE RFERENCE IS CALLED FOR IN THE ORDERS OF THE AUTHORITIES BELOW. IN THE ALTERNATIVE, IT WAS ALSO SUBMITTED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT IN CASE THE F RESH PLEA OF THE ASSESSEE THAT THE EXPENDITURE WAS INCURRED TOWARDS TESTING AND VALIDATION OF PRODUCTS IS TO BE ENTERTAINED, THE MATTER BE SET ASIDE TO THE FILE OF THE ASSESSING OFFICER TO BE EXAMINED AFRESH. 8. IN RESPONSE, LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT THAT DUE TO INCORRECT GROUPING OF THE EXPENDITURE IN ACCOUNT BOOKS UNDER THE HEAD PROJECT DEVELOPMENT EXPENDITURE IT WAS INAPPROPRIATELY SUBMI TTED BEFORE THE ASSESSING OFFICER THAT THE EXPENDITURE WAS ON ACCOUNT OF PA YMENT TO BEHR GMBH & CO. GERMANY FOR PREPARATION OF DESIGN, DRAWIN GS AND DEVELOPMENT OF PROTOTYPE SAMPLES, SO, HOWEVER, BEFORE THE COMMISSIONE R OF INCOME-TAX (APPEALS), IT WAS BROUGHT OUT THAT THE EXPENDITURE WA S INCURRED FOR THE TESTING OF THE PRODUCTS AND WAS NOT INCURRED IN CONNECTION WITH D EVELOPMENT OF ANY PRODUCT BEFORE COMMENCEMENT OF BUSINESS. IN THIS CASE, RE FERENCE AS BEEN MADE TO PARA 17 OF THE ORDER OF THE COMMISSIONER OF I NCOME-TAX (APPEALS) WHEREIN THE PLEAS OF THE ASSESSEE HAVE BEEN ENUMERATED IN POINTS (I) TO (V). IT WAS, THEREFORE, CONTENDED THAT THE NATURE OF THE EXPE NDITURE BE DETERMINED ON THE BASIS OF THE POSITION THAT IT HAS BEEN INCURRED ON TESTING AND VALIDATION OF THE PRODUCTS IN THE COURSE OF CARRYING ON OF THE BUSINESS A ND WAS LIABLE TO BE TREATED AS REVENUE EXPENDITURE FOLLOWING THE RATIO O F THE JUDGMENTS STATED AFORESAID. 9 WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. THE CRUX OF THE CONTROVERSY REVOLVES AROUND THE NATURE OF THE EXPENDIT URE OF RS 42,21,665/- WHICH HAS BEEN DEBITED IN THE ACCOUNT BOOKS UNDER THE HEA D PRODUCT DEVELOPMENT EXPENDITURE. THE ASSESSING OFFICER AS WELL AS COMMISSIONER OF INCOME-TAX (APPEALS) HAS TREATED THE SAME AS CAPITAL EXPE NDITURE BY NOTICING THAT IT REPRESENTED SPECIAL DEVELOPMENT COST PAID TO THE FOREIGN COLLABORATOR BEHR GMBH & CO. GERMANY FOR PREPARATION OF DESIGN, D RAWINGS AND DEVELOPMENT OF PROTOTYPE SAMPLES. THE COMMISSIONER OF I NCOME-TAX (APPEALS) HAS FURTHER SUPPORTED THE ACTION OF THE ASSESSIN G OFFICER BY OBSERVING THAT THE CLAIM WAS NOT INITIALLY MADE BY THE ASSESSEE IN ITS RETURN OF INCOME AND WAS MADE ONLY DURING THE COURSE OF ASSESSMENT P ROCEEDINGS (IN THE ACCOUNT BOOKS IT WAS TREATED AS DEFERRED REVENUE EXPE NDITURE) AND, THEREFORE, THE CONCLUSION OF THE ASSESSING OFFICER IN TREA TING THE SAID EXPENDITURE AS CAPITAL EXPENDITURE HAS BEEN JUSTIFIED. IN SO FAR AS THE LATTER ASPECT IS CONCERNED, IN OUR CONSIDERED OPINION, THE CLAIM HAS TO BE VIEWED ON THE BASIS OF THE APPROPRIATE FACTS AND LEGAL POSITION T HERETO AND NOT ON THE BASIS IN WHICH THE ASSESSEE HAS MADE THE ENTRIES IN THE ACCOUN T BOOKS OR THE CLAIM HAVING BEEN MADE ONLY DURING THE COURSE OF ASSESSME NT PROCEEDINGS. IN OTHER WORDS, THE NATURE OF THE EXPENDITURE IS TO BE DETERMINED ON THE BASIS OF THE APPLICABLE LEGAL POSITION ALONE. THEREFORE, THE STAND OF THE COMMISSIONER OF INCOME-TAX (APPEALS) IN REJECTING THE CLAIM MERELY O N ACCOUNT OF THE ASSESSEE HAVING PUT-FORTH SUCH CLAIM ONLY AT THE TIME OF ASSE SSMENT PROCEEDINGS, IS NOT DETERMINATIVE. SO, HOWEVER, BEFORE PROCEEDING TO EXAMINE AS TO WHETHER THE EXPENDITURE QUALIFIES TO BE REVENUE EXPENDITURE AS CLAIMED BY THE ASSESSEE, IT IS SINE QUA NON THAT APPROPRIATE FACTS ARE TAKEN INTO CONSIDERATION. 10. IN THIS CONNECTION, IT APPEARS FROM THE RECORD THAT BOTH THE AUTHORITIES BELOW HAVE PROCEEDED ON THE BASIS THAT THE EXPENDITU RE WAS INCURRED ON PAYMENT TO BEHR GMBH & CO. GERMANY FOR PREPARATION OF DESIGN, DRAWINGS AND DEVELOPMENT OF PROTOTYPE SAMPLES. OSTENSIBLY, THE SA ID ASSUMPTION OF FACTS BY THE ASSESSING OFFICER IS ON THE BASIS OF THE STATEME NTS MADE BY THE ASSESSEE. BEFORE THE COMMISSIONER OF INCOME-TAX (APPEALS) A ND, IN A MORE DETAILED MANNER BEFORE US, IT HAS BEEN PLEADED THAT T HE EXPENDITURE WAS ON ACCOUNT OF PRODUCT TESTING AND VALIDATION AND WAS DISTIN CT FROM THE EXPENDITURE FOR PREPARATION OF DESIGN AND DRAWINGS AND DEVELOPME NT OF PROTOTYPE SAMPLES. IN OUR CONSIDERED OPINION, BEFORE ADDRESSING T HE LEGAL ASPECTS OF THE CONTROVERSY, IT IS IMPERATIVE THAT THE COMPLETE AN D TRUE PARTICULARS OF THE EXPENDITURE ARE CULLED OUT. BEFORE US, THE ASSESSEE HAS SUBMITTED PHOTOCOPIES OF INVOICES RAISED BY BEHR GMBH & CO. GERMA NY, WHICH HAVE BEEN PLACED AT PAGES 26 TO 67 OF THE PAPER BOOK, WHICH PRIMA FACIE SUPPORT THE ASSERTION OF THE ASSESSEE THAT THE EXPENDITURE IS TOWA RDS TESTING OF THE PRODUCTS MANUFACTURED BY THE ASSESSEE. SO, HOWEVER, IT IS APPARENT THAT THE AFORESAID FACTUAL ASSERTION WAS NOT MADE BEFORE THE ASSESSI NG OFFICER. SUCH A PLEA, THOUGH IN A GENERALIZED FORMULATION, WAS MADE BEFORE THE COMMISSIONER OF INCOME-TAX (APPEALS) AS IT APPEARS FROM PARA 17 OF THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS). OF-COURSE THERE IS NO DETERMINATION ON THIS ASPECT MADE BY THE COMMISSIONER OF INCOME-TAX (A PPEALS) WHO HAS PROCEEDED ON THE SAME BASIS AS THAT OF THE ASSESSING OFFICER. BE THAT AS IT MAY, IN OUR VIEW, IT IS IMPERATIVE THAT THE COMPLETE PARTICULARS OF THE EXPENDITURE ARE CULLED OUT AND SINCE THE SAME REQUIRES FACTUAL APPRECIATION, WE DEEM IT FIT AND PROPER TO RESTORE THE MATTER TO T HE FILE OF THE ASSESSING OFFICER. THE ORDERS OF THE AUTHORITIES BELOW ARE ACCORDI NGLY SET ASIDE AND THE ISSUE IS RESTORED TO THE FILE OF THE ASSESSING OFFICER, WHO SHALL CULL OUT THE APPROPRIATE FACTS AND THEREAFTER, DETERMINE THE NATUR E OF THE EXPENDITURE IN ACCORDANCE WITH LAW. NEEDLESS TO MENTION, THE ASSESSING OFF ICER SHALL ALLOW THE ASSESSEE A REASONABLE OPPORTUNITY OF BEING HEARD IN SUPPORT OF ITS CLAIM OF TREATING THE AMOUNT OF EXPENDITURE REPRESENTED BY R S 42,21,665/- AS A REVENUE EXPENDITURE. THE ASSESSING OFFICER SHALL CONSIDER THE SUBMISSIONS AND MATERIAL THAT MAY BE PUT-FORTH BY THE ASSESSEE AND THEN ADJUDICATE THE MATTER IN ACCORDANCE WITH LAW. WE HOLD SO. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWE D FOR STATISTICAL PURPOSES. DECISION PRONOUNCED IN THE OPEN COURT ON 26 TH DAY OF MARCH, 2012. SD/- SD/- (I C SUDHIR) (G.S . PANNU) JUDICIAL MEMBER ACCOUNTANT MEMB ER PUNE, DATED 26 TH MARCH, 2012 B COPY TO:- 1) BEHR INDIA LTD. PUNE, 2) ITO WD 8(1) PUNE, 3) THE CIT(A)-V, PUNE 4) CIT-V, PUNE 5) DR, B BENCH, I.T.A.T., PUNE. 6) GUARD FILE TRUE COPY BY ORDER SR. PS, ITAT PUNE