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DCIT, Circle 12 (1) , New Delhi and others Versus M/s Hella India Electronics P. Ltd. (formerly known as M/s Padmini Engg. Pvt. Ltd) and others

2015 (7) TMI 526 - ITAT DELHI

Disallowance of the Research & Development expenses - CIT(A) granting relief of 50% - Held that:- As perused the copy of the ledger account of the R & D expenditure, it is very clear that the expenditure incurred is in the nature of routine expenditure for maintenance of Quality Control Department. Obviously, this expenditure had not resulted in creation of an asset of enduring nature and therefore, we hold that the entire expenditure should be allowed as Revenue expenditure. - Decided against r .....

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lopment - Held that:- The issue in appeal is squarely covered by the Special Bench decision in the case of Amway Products Vs. DCIT (2008 (2) TMI 454 - ITAT DELHI-C ). Therefore, we direct the Assessing Officer to allow the same as a revenue expenditure - Decided against revenue.

Disallowance of repair and maintenance expenditure of the building - Held that:- As a result of this expenditure no new asset had been created and the expenditure was incurred mainly for the purpose of mainta .....

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ication. The ratio laid down in the case of AMD Mertplas Pvt. Ltd vs. CIT, (2011 (12) TMI 320 - Delhi High Court ) is squarely applicable to the facts of the case. - Decided against revenue.

Taxability of DEPB incentives on the exports made - Held that:- This issues is no more res integra and is covered by the Hon’ble Supreme Court decision in the case of Topman Exports Pvt. Ltd. Vs. CIT, (2012 (2) TMI 100 - SUPREME COURT OF INDIA ) wherein held that the DEPB credit chargeable as inc .....

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ri G.C. Gupta and Shri Inturi Rama Rao, JJ. For the Petitioner : Sh. Rajeev Jain, CA For the Respondent : Sh. Gaurav Dudeja, Sr. DR ORDER PER INTURI RAMA RAO, A.M.: These are the cross appeals for the assessment year 2005-06 filed by the assessee as well as by the Revenue impugning the order of learned CIT(A)-X, New Delhi,dated 26.02.2013. Appeal in ITA No.2585/Del/2013 is filed by the Revenue and appeal inITA No. 2750/Del/2013 is filed by the assessee company. 2. In ITA no. 2585/Del/2013, the R .....

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of appeal raised above at the time of the hearing. 3. In ITA No. 2750/Del/2013, the assessee has raised the following grounds of appeal: i. That on the facts and in the circumstances of the case where the Id. AO made an addition of ₹ 6,93,653/ - by disallowing the Research & Development expenses aggregating to ₹ 9,24,871/ - which were treated as capital expenditure being classified as Intangible Assets after allowing depreciation @ 25%, the Id CIT(A)-X, New Delhi was wrong in di .....

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d the remaining as revenue. iii. That the Id CIT(A)-X, New Delhi, was wrong in sustaining the addition of ₹ 1,82,000/- made by the Id AO by disallowing Software development and maintenance charges amounting to ₹ 4,55,000/- which were treated as capital expenditure after allowing depreciation @ 60%. iv. That the Id CIT(A)-X, New Delhi, was wrong in sustaining the addition of ₹ 7,19,675/- made by the Id AO by disallowing Building Repair and Maintenance Expenses amounting to ͅ .....

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e of hearing. 4. The briefly stated facts of the case are that the appellant company is a private limited company incorporated under the provisions of the Companies Act, 1956. The assessee company is engaged in the business of manufacturing of auto electronics parts and accessories. The return of income for the assessment year 2005-06 was filed on 28.10.2005 declaring income of ₹ 11,66,73,707/- and this was revised on 23rd March, 2007 disclosing of ₹ 11,60,78,244/-. After processing .....

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ing Officer allowed the depreciation on such amount. Further, the Assessing Officer also made disallowance of the expenditure incurred in connection with the T.S. Certification and, however, allowed the depreciation and thereby making addition of ₹ 2,01,442/-. Another item of disallowance of software development expenditure incurred on the development of customized ERP software of ₹ 4,55,000/- the Assessing Officer, however, allowed the depreciation at the rate of 60% of ₹ 4,55 .....

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e Act. The Assessing Officer brought to tax sum of ₹ 80,76,609/- on the ground that the assessee company should have accounted for the DEPB benefits on the accrual basis. Aggrieved by the above additions, an appeal was filed before the CIT(A) who vide order dated 13th February, 2013 partly allowed the grounds of appeal. Aggrieved by this order, the assessee is before us with the present appeal, which we shall now deal with ground-wise. ITA No. 2750/Del/2013 for AY 2005-06: 5. Ground no. 1 .....

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the Research and Development Department is as under: a. To analyze the technical requirements of the final product as per the specifications of the Original Equipment Manufacturers and other customers and to design samples of finished product. b. To devise details, design samples and other technical specifications and parameters for purchase of various components to be procured from the vendors. c. To check whether the supplies from the vendors are in accordance with the technical specification .....

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5.2 It was submitted by the learned Authorized Representative before us that the total expenditure relates to the Quality and Control Department though termed as R & D expenditure and the copy of the ledger extract of the account is placed vide page no. 82 to 105 of the paper book. Therefore, he submitted that the entire expenditure should be allowed as deduction. 5.3 On the other hand, learned DR objected to even allowance of 50% of the expenditure on the ground that the entire expenditure .....

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ground no. 1 raised by the assessee is allowed. 6. Ground no. 2 relates to the disallowance of TS 16949 certification charges of ₹ 2,68,589/-. The assessee company made the following submissions before the CIT(A): 13. The company caters to OEM's customers in the domestic market as well as in the international market. The ISO/TS 16949 an international standard for technical specification which was jointly developed by the International Automotive Task Force (IATF) members. This documen .....

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icates. The certificate validity generally is three years. The audit may be necessary again in case or changes/modification in the ISO/TS 16949 document or as and when required by the customer. 14. During the year an amount of ₹ 2,68,859/- was incurred under this head detailed as under: a. ₹ 1,80,570/- were paid to M/S Det Norske Veritas, the auditors for conducting audit. b. ₹ 84,600/- to M/s Goel Departmental Store on account of stationer used for compliance TS 16949 document .....

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ghts or license fees for three years. 16. The expenses are purely of revenue expenses in nature which are incurred wholly and exclusively for the purpose of the business carried on by the assessee company and no intangible asset being know how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature ever came into existence and are allowable u/s 37 of the Income Tax Act, 1961. 17. In view of the above the action of the Id AO to treat the .....

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d by this, the assessee had come up before us. 6.2 From the perusal of the material available on record as well as the expenditure furnished before the Assessing Officer, we are of the opinion that the expenditure incurred is revenue in nature and does not create an asset of enduring nature and therefore, we direct the Assessing Officer to allow the entire expenditure. Accordingly, the ground no. 2 raised by the assessee is allowed. Ground no. 3 relates to the capitalization of the expenditure i .....

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for ₹ 4,55,000/-. After installation it was found unsuccessful therefore its use was suspended and no asset of any enduring benefit came into existence. 20. In order to decide the nature of expenditure whether it is capital or revenue three tests i.e. ownership test, enduring benefit test and functional test have to be applied and if acquisition of a computer software results into accrual of advantage of enduring nature i.e. more than two years it may be capitalized provided functional te .....

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d unjustified and the expenditure which is incurred wholly and exclusively for the purpose of business is a revenue expenditure allowable u/s 37(1) of the Act and the addition made on this account deserves to be deleted. 7.1 The learned CIT(A), after considering the submissions and the evidence on record, had dismissed the ground of appeal. Hence, the assessee had come before us raising this ground of appeal. 7.2 It was submitted before us by the learned AR that the software developed was not su .....

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IT(A) s order on this ground should be upheld. 7.4 We have considered the rival submissions of the parties and perused the material on record. We are of the opinion that the issue in appeal is squarely covered by the Special Bench decision in the case of Amway Products Vs. DCIT (supra). Therefore, we direct the Assessing Officer to allow the same as a revenue expenditure. 7.5 Respectfully following the ratio laid down in the above case, we allow this ground of appeal filed by the appellant. Acco .....

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8377; 7,99,639/- which were treated as capital expenditure u/h Factory Building after allowing depreciation @ 10%. 24. The factory building of the company with the gross block aggregating to ₹ 3,75,22,448/- came up in the earlier years. During the year under consideration no construction of any capital nature whatsoever has been undertaken by the company. The existing factory building as well as other facilities needs and require continuous sometimes maintenance/upkeepment and renovation/r .....

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existing 94,560/- An existing facility where lab existing plaster was replaced with tiles and replacement of old wooden partitions. 26. It is apparent that each and every expenditure incurred related to the existing structures/building and facilities, which required repair/replacement/renovation and no new/fresh structure of any nature whatsoever came into existence. Further, the expenses incurred are immaterial considering the magnitude and size of gross block of factory building. 27, In view .....

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e expenditure resulted in creation of new asset. Aggrieved by this order, the assessee company is before us. 8.2 It was submitted before us that the expenditure has not resulted in creation of any new asset. This expenditure was incurred only for the maintenance of existing buildings and he has relied upon the decisions of Hon ble Supreme Court in the cases of Ballimal Naval Kishore Vs. CIT, 224 ITR 414 in support of the proposition that the expenditure for current repair charges. 8.3 On the oth .....

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ground is allowed. 9. Ground no. 5 relates to the disallowance of commission paid to Managing Director of ₹ 37,48,450/-. The Assessing Officer disallowed it on the ground that the same was otherwise payable as dividend and profit and therefore invoked the provisions of Section 36(1)(ii) of the Act. On appeal before the learned CIT(A), the assessee company submitted as under: 28. Ground No. 6 challenges the addition of ₹ 37,48,4501- made by disallowing the commission paid to the mana .....

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he total paid up capital of the company as at 31.03.2005 stood at ₹ 31,27,920/- divided into 3,12,792 equity shares of ₹ 10/- each fully paid up as under: Folio Name & Address No. of Shares (%) 4. Mr. R.K. Bhandari 138896 (44.41) 5. Ms. Sonia Bhadari 17500 (05.59) 6. M/s Hella Asia Pacific 56396 (50.00) Holdings Pvt. Ltd. Total 312792 (100.0) Out of the total share capital. Shri Rahul Kabir Bhandari, MD was holding the 138896 equity shares i.e. 44.41% of the total shareholding of .....

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m of ₹ 37,48,450/- as commission to director, the assessee has only reduced the corpus available for distribution as dividend. Thus, commission paid to the managing director at ₹ 37,48,450/-was disallowed as not allowable u/s 36(1) (ii) of the Act. 32. The observation of the Id AO is against the legal provisions and settled law. Submitted that bonus or commission paid to an employee is allowable under this clause subject to the condition specified u/s 36(I)(ii) of the Income Tax Act .....

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sum as is paid by way of bonus or commission would otherwise have been payable to employees as profits or dividend, the assessee cannot be deprived of the benefit of such clause. 33. Therefore, where the shareholders of a private company are also employees in their own company and receive remuneration by reference to their services and not by reference to their shareholding in the company, the bonus or commission would be an admissible deduction under this clause. Because, in such a case the emp .....

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ssed this ground of appeal. Hence, the assessee had come up before us with the present ground of appeal. 10.1 The learned Authorized Representative reiterated the submissions made before the CIT(A) and relied upon on the decisions of AMD Mertplas Pvt. Ltd. Vs. CIT, 341 ITR 563 in support of the proposition that the provisions of Section 36(1)(ii) of the Act are not applicable where the commission paid to the Directors on par with the other means of the company. 10.2 We have heard the rival submi .....

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