TMI Blog2015 (8) TMI 328X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit to the company which proposed to be established by the assessee. Therefore, it has to be treated as capital expenditure in the hands of the assessee company proposed to be established by the assessee and not as revenue expenditure in the hands of the assessee. CIT(A), without considering the facts in proper prospective, simply allowed the ground raised by the assessee by observing that it is for the business expedience of the assessee and directed the Assessing Officer to allow the expenditure under section 37 of the Act. We find that the order passed by the ld. CIT(A) is not correct and he has not considered the facts in right prospective. The ld. CIT(A) proceeded that the assessee company and the subsidiary which the assessee wanted to establish are one and the same. We therefore, reverse the order passed by the ld. CIT(A) on this issue. - Decided in favour of revenue. Consultancy charges paid to M/s. Chaturvedi & Shah, Chartered Accountants - Held that:- The professional charges paid was relating to the proposed green field project to be established by the assessee company in China, which is not relating to the business and we find that it is not a revenue expenses. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal of the Revenue is found to have been filed late by six days. The Assessing Officer has filed affidavit for condonation of delay. By pleading the reasons stated in the affidavit, the ld. DR has requested for condoning the delay and to admit the appeal for hearing. The ld. Counsel for the assessee has not seriously object to the submissions of the ld. DR. Accordingly, we condone the delay of six days in filing the appeal and admit the appeal for hearing. 3. The first ground raised in the appeal of the Revenue is with regard to the addition in respect of ₹ 67,24,547/-. 4. Brief facts of the case are that the assessee is a textile machinery manufacturer. In the assessment order, the Assessing Officer has observed that the assessee has incurred expenses amounting to ₹ 67,24,547/- by way of professional charges paid to Pacific Consultants for the Green Field Project executed in China and also legal fees paid of ₹ 51,00,000/- in respect of company law matters for the purpose of establishing subsidiary company in China for the Green Field Project. These expenses are incurred in connection with the feasibility studies and forming wholly owned subsidiary company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow. The assessee is a manufacturing company i.e., M/s. Lakshmi Machine Works Ltd., Coimbatore. The assessee intends to expand its business by setting up of new manufacturing textile Machinery Company in China. For that purpose, the assessee has consulted Pacific Consult AG, Zurich, Switzerland in connection with feasibility state of the prospects available for the proposed new company. Accordingly, the company Pacific Consult AG conducted survey and reports were submitted. The assessee has claimed the above expenditure incurred as revenue expenses and claimed deduction under section 37 of the Act. The Assessing Officer disallowed the same on the ground that it has incurred in connection with the feasibility status for forming wholly owned subsidiary company in China and it is capital expenditure to form new subsidiary company, it cannot be allowed under section 37 of the Act. On appeal, the ld. CIT(A) has observed that the expenditure incurred in the ordinary course of the business of the company and also for finding avenues for export of the manufactured machinery of the assessee outside of India and directed the Assessing Officer to allow the expenditure under section 37(1) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eria to decide whether the expenditure was capital or revenue in nature, unless a new asset comes into existence. But, if a new asset has come into existence which was of enduring benefit, then such expenditure would be of capital nature. In the present, it is not the case of the assessee that the proposed new company has come into existence. It is only case of the assessee that the expenditure is for the purpose of business and has no application to the facts of the present case. 12. In the case of CIT v. Priya Village Roadshows Ltd. (supra), the Hon'ble Delhi High Court has observed that if there is no creation of a new asset, then the expenditure incurred would be of revenue nature. In the present case, it is not the case of the assessee that the assessee has not created any new asset. Therefore, the case law has no application to the facts of the case. 13. In so far as case law relied on by the ld. DR is concerned, in the case of Triveni Engg. Works Ltd. v. CIT (supra), the Hon'ble Delhi High Court has observed that the expenditure was attributable to capital having been incurred with a view to bringing an asset or advantage into existence and having enduring bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee, during the year has claimed deduction of expenditure incurred on installation of machinery in pilot mill amounting to ₹ 4,56,43,185/-. The Assessing Officer has observed that the assessee has claimed deduction of expenditure incurred on installation of machinery in pilot mill. The assessee has stated that it had entered into an agreement with Super Sales India Limited, a related party vide agreement dated 05.05.2008 to lease out the building and the machineries erected in the Pilot Mill to that company. The lease deed was to be renewed 11 months. The lessee was to purchase raw material and manufacture yarn with its own funds and employees. The lessee Super Sale India Ltd. was to give feedback on the performance of the machineries to the assessee company so that it can be used by R D department to rectify any short-comings in these machineries. So, the assessee has claimed that these machineries are used in R D work and should be allowed under section 35(iv) of the Act. The Assessing Officer has inspected to verify the actual R D work carried out and found that outing building 1/3rd portion of being used for the purpose of actual working of R D and its personnel are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer has merely denied the deduction u/s 35(iv) because of the fact that the appellant did not invest in raw materials, did not employ its own employees in the process of manufacture of yarn and did not market the yarn and also did not admit income from the activity of manufacture and sale of yarn. It is submitted that they are factors to be considered for purpose of Section 35(iv) and are not relevant. So long as the scientific research was facilitated as a result of expenditure of claim, the expenditure claimed would qualify for deduction u/s 35(iv). The reference to scientific research in Section 43(4) related to business shall include in scientific research which may lead to or facilitate extension of such business. It is also submitted that the Ministry of Science and Technology, Government of India had recognized the in-house R D activity of the appellant company by according periodical renewals from time to time. Copies of the report of the staff of R D department of the appellant company regarding their observations through a study of the performance of the textile machinery under mill conditions at the Pilot project are enclosed. They were highly useful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and fine tune of the various aspects of that machine. I had examined the agreement entered on 5th May 2008 between the appellant company and SSIL. There was also a supplementary agreement on the same day whereby LMW has permitted SSIL to operate its Pilot mill situated at Perianaickenpalayam. As seen from this agreement, LMW after' manufacturing a machine, before commercialization of the same, it required thorough testing and validation in mill condition. The machinery before release into market was being further improved with modification after being operational in mill condition and also input data was used for future machinery development. 5.4 As seen from this agreement, SSIL has agreed for LMW's proposal to make trial run and evaluate the performance of textile machinery in mill condition and to provide expert knowledge for the running and evaluation of the performance of the machinery. The appellant after manufacturing of the machine, before commercialization, have named them as Pilot machinery and has given code number as seen from the information filed before me. I have also examined the list of R D machines capitalized during the financial year 2008-09. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s employed in that business or, as the case may be all businesses of that class. 5.6 The company provided in-house facilities for conducting of its scientific research by installing its machinery in its pilot batch. The appellant is not well versed in running the spinning mill and also it includes projects of raw materials, cotton, etc., along with work force to manufacture the yarn. The primary purpose of the pilot mill was to evaluate the machines in the actual practical situations before commercialization of the product. I had gone through some of the reports of the R D department regarding the observations and action taken in the development of Speed frame LF 4200A. S.No. Observation Action taken 1. Flyer trough vibration at 1350 rpm New housing with right tolerance under manufacturing. 2. Flyer run out is more Flyer run is correct to less than 0.5 mm by bending the center stem. This is to- be monitored further. R D to recommend the allowable run out. Spindle speed to be increased from 1000 rpm to 1350 rpm and observe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt to ₹ 4,56,43,185/- for R D purpose. In the assessment order, the Assessing Officer has observed that the assessee has entered into an agreement with M/s. Super Sales India Limited vide agreement dated 05.05.2008 and leased out the building and machineries erected in the pilot mill to that company. As per the lease agreement dated 05.05.2008 [as stated in the assessment order] lease deed was executed and renewed every eleven months and the lessee was to purchase raw materials, manufacture of yarn with its own fund and employees. The lessee M/s. Super Sales India Limited was to give a feed back on the performance of the machineries to the assessee company so that it can be used by the R D department to rectify any short coming. From that it is very clear that the machineries installed in the pilot mill are used by the lessee M/s. Super Sales India Limited and not by the assessee directly. M/s. Super Sales India Limited has to give a performance report of the machineries to the assessee company and thereby the R D department rectify any shortcoming based on the report given by M/s. Super Sales India Limited. Ultimately, M/s. Super Sales India Limited has utilised the machine ..... X X X X Extracts X X X X X X X X Extracts X X X X
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