TMI Blog2018 (8) TMI 675X X X X Extracts X X X X X X X X Extracts X X X X ..... e Institute of Chartered Accountants of India on treatment of expenditure during construction period, which provides that if any revenue is realized during the trial run or product development stage, the same should be set off against the expenditure incurred in connection with the said project/products. - No addition - Decided in favor of assessee. Disallowance of certain sum paid treating the expenses as relatable to Capital Work-in-progress - Held that:- the assessee has explained with reasons the apportionment of expenses into revenue and capital account in which no defects or deficiencies were pointed out. After perusing the said reply we certainly feel that the apportionment of expenses were made correctly. Moreover there is no materials brought before us by the revenue to take a view supporting the order of CIT(A). The Assessing Officer has also treated the expenditure as capital in nature without giving any reasons which is highly subjective and whimsical. The assessee has rightly apportioned the expenses depending upon the nature and purpose of expenses with adequate reasoning. - Decided in favor of assessee. - ITA No.730/Mum/2013 - - - Dated:- 10-8-2018 - Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase and in law, the said expenses ought to be allowed as revenue expenditure. 3. The issue raised in ground no.1 is against the confirmation of the action of the Assessing Officer in holding the receipt on sale of 3 Alygn Machines for ₹ 59, 20, 849/- and rent of ₹ 64, 200/- as revenue in nature and liable to taxed. According to the assessee the same were capital in nature as the said sale was made of trial/demo machines and the rent was received when the project was in the development stage and the expenditure incurred in connection there with were debited to the capital Work-in-progress account (Product development Expenditure (RCS)). The facts in brief are that the assessee is engaged in the business of providing integrated solutions, Machine-to-machine technology (M2M), a concept wherein the performance of industrial equipment is remotely monitored, analyzed and corrected to improve machine and process reliability. During the assessment proceedings, the Assessing Officer noticed that the assessee has closing work-inprogress at ₹ 5, 67, 66, 927/-, which is comprised of following: Capital WIP (Software) ₹ 91, 33, 547 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome of the assessee and need not be reduced from cost of the products. The claim of the assessee that it has given a different treatment in the books of account will have no impact on the taxability of any such receipt because assessee can give any treatment as it likes or as may be recommended by accounting bodies but for income-tax purposes it is not necessary that the same view is followed. The sale consideration is clearly taxable. The case law cited by the assessee have already been dealt by the A.O. and I fully agree with the A.O. on this issue that the facts of the assessee's case are different from the facts of the case laws cited by the assessee. Therefore, the sale consideration on sale of the three machines is taxable in the year under consideration and similarly rental income is also taxable in the year under consideration because product development 6. The assessee has also claimed that while treating the sale of three machines and rental income as income pertaining to this year and taxable, A.O. has only allowed the direct expenses and indirect expenses have not been allowed. Whereas, indirect expenses are overhead expenses and they are not directly connec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to product failure, which may cause huge damage to the reputation of the assessee and entail huge financial loss. The learned AR also brought to the notice of the Bench the classification of the said expenses as Capital Work-in-progress including Product Development Expenses shown under the head Fixed Assets and the amount during the year was ₹ 5, 67, 66, 727/- viz-a-viz ₹ 2, 09, 38, 494/- in the corresponding previous year. While referring to page 257 of the paper-book, the learned counsel submitted that the said fact was duly disclosed by the assessee by way of note under the Schedule 18 Notes to account , stating that Capital Work-inprogress represents Project Development Expenses incurred in developing company s products and after completion of the project i.e. available for commercial sale, the expenses will be amortized based on economic useful life as estimated by the management and similarly goodwill (included as intangible asset under fixed asset) will also be amortized from the period the project development expenses are capitalized. It was also stated in the said note that company had sold trial/demo machines during the year, which were regarded as project ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned DR, on the other hand, heavily relied on the orders of the authorities below and submitted that the sale of three machines to three different parties represented regular sales and not sale of trial/demo products during the Product Development as the assessee has fully developed the machines and the same were altered and tuned to the requirements of the respective buyers. The learned DR also distinguished the decisions relied upon by the learned AR by submitted that the facts of these cases are different and, therefore, the same are not applicable to the case of the assessee. 7. We have heard the rival parties and perused the material available on record including the orders of the authorities below and the decisions relied on by the learned AR. The undisputed facts of the case are that the assessee is engaged in the development of Machine 2 Machine (M2M) and Register Control System (RCS) and whatever expenses incurred were debited to Capital Work-in-progress including the Project Development Expenses. During the year the total expenditure was ₹ 5, 67, 66, 927/-, the break-up of which has been given in the foregoing paragraphs. During the year the assessee sold th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the previous year relevant to the assessment year under dispute, such preoperative income has been set off against the preoperative expenses of ₹ 3, 17, 02, 632/-, which consisted of berth hire charges in the sum of ₹ 16, 84, 562/- and ₹ 3, 00, 18, 070/- being cargo handling charges and the balance amount was capitalized to be apportioned to fixed asset. The specious finding of the AO that loading and unloading of cargo during the period from 07.12.2003 to 13.01.2004 on trial basis was commercial activity of the assessee and the receipts earned there from was assessed as income from business which is totally untenable and inconsistent with the facts of the case since it was done at the behest of the Holdia Dock Complex authorities in order to establish the stability of the berth. It is an admitted fact that even during a period of test runs and experimentation, a plant may be engaged in actual production, but until the test runs are completed and the plant is properly adjusted on the basis thereof, it cannot be said to be ready for commercial production . The expression Commercial Production refers to production in commercially feasible quantities and in a com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be adjusted against the preoperative expenses and the same was confirmed by the Ld. CIT(A). However, we observe that it was the condition in the agreement that the trial run has to be carried out before the beginning of commercial operation. The ld. AR drew our attention on pages 17, 18, 19, 20, 21 of the Paper Book where the requirement for the trial run was requested before the beginning of actual operation. The purpose of the trial run was to check whether there is any flaw in the system or not so that remedial action can be taken well in time in the event of any flaw in the system. So it is clear that the purpose of the trial run was to check the flaw in the system and not to begin the commercial operations. In the instant case the trial run was successfully completed on dated 13/1/2004 without any flaw in the system. Therefore the commercial operation began immediately thereafter on dated 15/1/2004. Now the question here arises that in case of any flaw caught during the trial run then in that event certainly the commercial operation shall only begin after the removal of the flaw. In view of this the income generated during trial run shall certainly be adjusted against the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the first sale was made on April 23, 1998, which would be the period relevant to the assessment year 1999-2000. Merely because some closing stock was shown as on March 31, 1998, that would not lead to the conclusion that there was commercial production as well. Even for the purpose of trial production material would be needed and there would be production which would result in stock of finished goods. The evidence produced by the assessee was accepted by the tribunal as well, from which it was clear that there was only a trial production in the assessment year 1998-99 and commercial and full-fledged production commenced only in the year 1999-2000. The order of the Tribunal allowing the benefit of deduction under section 80-IA/80IB of the Act from the assessment year 1999-2000 treating it as the initial year of production to the assessment year 2003-04 was correct in law. The Tribunal held that the assessee had not only produced the goods for trial purposes but there was, in fact, sale of one water cooler and air-conditioner in the assessment year 1998-99 relevant to the previous year/financial year 1997-98. The explanation of the assessee was that this was done to file the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te commencement of manufacture of articles for the purposes of section 15C. The assessee-company undertook a project for the manufacture of penicillin. It started actual operations for the manufacture of crude penicillin in December 1954. The first samples of crude penicillin were required to be sent to U.S.A. and U.K. for obtaining certificates as to their qualities. The certificates were obtained in June, 1955, and the assessee started regular production of sterile penicillin, the only product that could be sold in the market, in August, 1955. On the question when the manufacture of sterile penicillin had started and whether the assessee was entitled to the exemption under section 15C for the assessment year 1960-61 : Held, on the facts, that production of articles by the assessee had begun only in August, 1955. The benefit of the exemption under section 15C arose to the assessee for the first time in the assessment year 1956-57 and, therefore, it was entitled to the exemption under section 15C for the assessment year 1960-61 also. 10. We also further observe that the facts of the case law cited by the AO i.e. Tutikorin Alkali Chemicals Fertilizers Ltd.(supra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nputs and outputs have already been netted by GSFC and the net result has been capitalized. Considering the facts and circumstances of the case and the guidelines of the ICAI, we are in agreement with the Id. CIT(A) that any attempt to tax the production, which is already accounted for as input for the fertilizer plant and the captive inputs of other units utilized in Ammonia IV Plant, if not allowed to be set off against the production of the plant, would lead to a distorted picture of the accounts of M/s. GSFC. In these circumstances, especially when Revenue have not placed before us any material contrary to the aforesaid findings of the Ld. CIT(A) in so far as addition of ₹ 10, 99, 25 , 676 is concerned nor pointed out any contrary decision, we have no hesitation in upholding the findings of the Id. CIT(A) while relying upon the decision of the Hon'ble Apex Court in Bokaro Steel Ltd.. Therefore, ground no.1 in the appeal of the Revenue is dismissed. Besides, the assessee has also capitalized out of the Capital Work-in progress account in the next year as is apparent from the tax audit report filed by the assessee before us. Under these circumstances, we are not i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself in the ratio of 9:1 between product development expenses and the income received during the year then logically the other expenses should have also been incurred in the same ratio and, therefore, I agree with the A.O. Hence, this ground of appeal is rejected. 12. Before us, the learned AR vehemently submitted that the facts of the case were totally misconstrued by the ld CIT(A) by approving the disallowance. He drew our attention to the written submissions filed before the CIT(A), which contain a very comprehensive explanation as regards allocation of expenses to the Profit loss account and Project Development Expenses. The learned counsel submitted that on each item explanation has been submitted by the assessee to justify the apportionment of expenses in the ratio of 10:90 in some cases and different ratio for the remaining expenses. The learned AR tried to explain as to how expenses were apportioned to the tune of 90% towards Product Development Expenses by submitting that these expenses were specifically hired/incurred in connection with the development of the project and therefore, such ratio was adopted by the assessee. He further submitted that the reply of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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