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2018 (8) TMI 1851 - ITAT MUMBAIDisallowance of expenses u/s. 14A read with Rule 8D - HELD THAT:- AO has not recorded its satisfaction by giving specific reasons as to the correctness of the claim of the assessee, therefore, we set aside the order of CIT(A) and remit the matter back to the file of AO with a direction to verify regarding the claim of assessee that no expenses were incurred for earning the exempt income, having regard to the accounts of the assessee. AO shall also verify any other claim if so raised by the assessee, and thereafter pass afresh order of assessment. It is needless here to mention that before passing the order of assessment, the AO shall provide sufficient opportunity of hearing to the assessee. Pre-operative Expenses - AO concluded that no manufacturing activity was carried out by the assessee during the entire previous year relevant to impugned assessment year under consideration and the assessee is merely at a pre-operative stage which led the AO to hold that the expenses are pre-operative expenses being capital in nature which cannot be allowed as Revenue expenses - HELD THAT:- The assessee claims that it kept highly technical and supervisory staff to oversee these activities including reviewing of assembly operation sheets supplied by Lockheed Martin Aerostructure Corporation, USA but in our considered view these are normal requirements in connection with setting up of manufacturing / assembly unit at Hyderabad for manufacturing/assembly of center wing box and empennages for C130/C130J aircraft , which is highly technical and complex activity requiring highly specialised technical staff. The activities of assembly and manufacturing of center wing box and empennages for C130/C130J aircraft being highly complex , technologically sophisticated activity involving guarded technology need highly specialised , experienced and technical personnels , and the assessee cannot afford to appoint necessary staff only after the unit becomes operational as by the time unit goes into production, the assessee ought to have all specialised, trained, experience and technical staff with it ready and well versed/trained to handle actual manufacturing/assembly of center wing boxes and empennages for C130/C130J aircrafts. The appointing of technical and specialised staff prior to unit being installed and ready to commence production will not make the same as revenue expenses even though these technical and specialised staff were reviewing the assembly operation sheets for manufacturing/assembly of center wing boxes and empennages for C130/C130J aircraft for which order was already received by the assessee from Lockheed Martin Aerostructure Corporation, USA, as all these are pre-operative expenses which needed to be capitalised as part of the cost of the project because there was no possibility of commencing production/manufacturing/assembly unless the unit is ready to commence production which in the instant case even by the year end unit was neither installed nor trial runs commenced. Thus, based on our detailed reasoning and discussions as set out above, we do not find any merits in the contentions of the assessee and thus, the appellate order of learned CIT(A) is set aside and additions as were made by the AO are sustained with the conclusions and reasoning as are arrived at by us as above. The ground no 2(a) to 2(c) are allowed.
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