TMI Blog2015 (5) TMI 426X X X X Extracts X X X X X X X X Extracts X X X X ..... as afore-stated, we find force in the contention of the counsel of the assessee and direct that only ₹ 1,72,879/- suo- motto disallowed by the assessee can be upheld and the rest of the addition made need to be deleted. - Decided in favour of assessee. Addition on account of product development expenses as deferred revenue expenses - CIT(A) deleted addition - Held that:- Such expenses were claimed by the assessee in earlier years too and were being allowed by department. So by applying the rule of consistency as laid by the Hon’ble Supreme Court in Radhasoami Satsang Vs. CIT (1991 (11) TMI 2 - SUPREME Court ), we are of the opinion that there was no need to take a different view, because, the facts permeating in earlier years have not changed. We concur with the opinion of the ld CIT(A) that expenses incurred for developing samples as per the requirement of customers are allowable expenses u/s 37(1) of the Act and are not covered by Section 35D of the Act. - Decided in favour of assessee. - ITA No. 1718/Del/2012, ITA No. 2550/Del/2012 - - - Dated:- 30-4-2015 - Shri S. V. Mehrotra And Shri A. T. Varkey,JJ. For the Petitioner : Sh. Salil Agarwal, Adv Sh. Sailesh Gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A). Ground No.1 and 2 of revenue is regarding disallowance partly deleted by the ld CIT(A) on this issue. Since the effective sole ground of the assessee and ground Nos.1 and 2 of the revenue is the same, we propose to dispose of these grounds by a common order. 4. We note that the assessee has suo motu made disallowance of ₹ 1,72,879/- on dividend income earned only of ₹ 1,18,076/-. 5. Brief facts of the case are that the assessee company is engaged in manufacturing and export of readymade fashion garments outside India to countries like USA, Canada etc. During the year under consideration the assessee company has done sales both export sales as well as domestic sales. The assessee had electronically (e-return) filed return of income on 30.09.2008 at a total income of ₹ 19,04,66,504/- after claiming deduction under chapter VI-A of the Act. This return was processed u/s 143(1) of the on 15.03.2010. The case was selected for scrutiny assessment and notices u/s 143(2) of the Act. 6. The AO noted that during the year under consideration, the assessee company has shown dividend on mutual fund/ shares of ₹ 1,18,076/- and claimed the same as exempt u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther reference was made to the decision of CIT vs. Hero Cycles, decided by Hon ble Punjab and Haryana High Court decided on November 4, 2009, wherein the court has given decision as under (Head-note only): The assessee earned dividend income on shares which was exempt from tax. The AO took the view that the investment in shares was' made out of borrowed funds on which interest expenditure was incurred and consequently made. a disallowance U/S 14A. This was partly upheld by the CIT (A). On further appeal by the assessee, the Tribunal deleted the disallowance by noting that the assessee had proved that the investment in shares was made out of non-interest bearing funds. It held that unless there was evidence to show that the interest - bearing funds had been invested in the tax - free investments and the nexus was established by the Revenue, s. 14A could not be applied on mere presumption. The Revenue appealed to the High Court and claimed that in view of s. 14A (2) and Rule 8D (1)(b), a disallowance could be made even if the assessee claimed that no expenditure had been incurred in 'respect of the tax - free income. HELD dismissing the appeal: (i) If the investment in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the light of the aforesaid facts and circumstances and the precedents relied upon the ld counsel prayed that the disallowance partly confirmed by the ld CIT(A) also need to be deleted. 13. On the other hand, the ld DR relied on the order of the AO and defended the action of the AO in applying Rule 8D which according to him was in force during the relevant assessment year and the ld CIT(A) erred in giving partial relief to the assessee, which according to him need to be set right and so he pleaded that the order of the ld CIT(A) may be reversed and AO s order be restored. 14. We have heard both the parties and perused the records and have gone through the case laws cited by both the parties. We find that the ld CIT(A) has noted the facts of the case as given in the assessment order and the submission of the AR of the appellant, it is seen that the assessee had share capital of ₹ 19.29 crores and reserves and surplus of ₹ 201.15 crores, sum of which far exceeded the investments of ₹ 41.68 crores of the assessee company in shares and mutual funds at the end of the year and therefore, as held by various Hon'ble Courts, no interest expenditure can be held to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urisdiction. 16. Here the facts clearly indicates, as claimed by the assessee that no borrowed funds were utilized for earning the exempt income by the assessee and further the dividend were directly credited in the bank account of the assessee and no expenditure was claimed. Whatever it may be, we find that the assessee only received ₹ 1,18,076/- as dividend income, therefore, there is no question of disallowance of ₹ 18,02,321/- by invoking section 14A r.w. Rule 8D (2)(iii) under the facts available on record. It was also explained by the ld. Counsel for the assessee that on identical facts in earlier years, no disallowance was made by the assessee and it was accepted. In the present assessment year also, no borrowed funds were invested by the assessee for making investment in shares or for earning dividend income. Disallowance u/s 14A r.w. Rule 8D cannot in any rate exceed the expenditure that has been actually incurred by the assessee as per its books of account for earning exempt income and in the absence of exercise not carried out by the AO as prescribed by section 14A before invoking Rule 8D as afore-stated, we find force in the contention of the counsel of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO. 20. On the other hand the ld counsel submitted that during the year under consideration, the assessee company incurred an expenditure of ₹ 11.87 cr on development of samples/ preparation of samples as per the requirements of the foreign buyers. These expenses are of revenue nature and no benefit of enduring nature is available to the assessee as the market of readymade garments is seasonal and short lived; and style changes from season to season. A detailed note on product development expenses was shown to us enclosed along with detail exceeding ₹ 3,000/- to substantiate the claim of the assessee company. It was submitted that the expenditures are in the nature of sampling expenses and no new asset was created and also no benefit of enduring nature is derived from such expenditures. Keeping in view the short life and nature of styles and designs in readymade garments business, it cannot be said that the assessee has acquired benefit of enduring nature of developing samples of garments as per requirements of the buyers as compared to other business areas. The ratio of the judgment in the case of Madras Industrial Investment Corporation Ltd. 225 ITR 802 is not appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws cited by both the parties. We find that ld CIT(A) has followed the order of his predecessor, who has held as follows:- There is no doubt that the assessee company is into the business of manufacturing readymade garments and exporting them outside the country. It is an established trade practice that before the start of the season or even during the season itself, the manufacturers are supposed to develop samples and send to the prospective buyers on the basis of which the orders are placed. In view of the fact that the Department has consistently allowed these expenses in the assessee case in earlier years there seems to be no reason on which the AO can disallow these expenses especially when the AO has not made out any case that these expenses are either bogus in nature or capital in nature. 24. And the ld CIT(A) concluded as under:- Also, the expenses were not subject to section 35D of the Act as they were allowable under section 37(1) of the Act, even if the assessee had amortized these expenses in its books of account. In conclusion, I hold that having regard to the aforesaid discussion the claim of the appellant for allowability of impugned expenditure as revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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