TMI Blog2020 (10) TMI 404X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. Alternative argument of assessee even in that case the expenditure is allowable under section 35 - These are the expenditure which were incurred by the assessee for preparing pro-type or preparing a product specifically required by its customers. In other words, it has incurred certain expenditure for development on a mechanism which can help it to produce a product specifically demanded by a specific customer, and according to the needs of that customer. If any amount is being incurred towards R D for the purpose of business for manufacturing customized products, then that can be considered under R D which can be allowed under section 35(1)(iv) r.w.s. 35(2)(ia) of the Act. In view of the above discussion, we are of the view that the claim of the assessee deserves to be allowed. - ITA No.1735/Ahd/2019 - - - Dated:- 5-10-2020 - Shri Rajpal Yadav, Vice-President And Shri Amarjit Singh, Accountant Member For the Assessee : Shri Tushar Hemani, AR For the Revenue : Shri L.P. Jain, Sr.DR ORDER PER RAJPAL YADAV, VICE-PRESIDENT Assessee is in appeal before the Tribunal against order of the ld.CIT(A)-2, Ahmedabad dated 24.10.2019 passed for the Asstt.Y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 10,42,41,078/- on R D was not capitalized while arriving taxable income. Further, on this issue, the assessee has not fully and truly disclosed the material facts necessary for its assessment for the year under consideration. Moreover, the issue under consideration was never examined by the AO during the course of assessment proceedings and the material facts relevant for the assessment on this issue were not filed during the course of assessment proceedings. Thus, income of ₹ 10,42,41,078/- has escaped assessment. 7. Vide, above stated notice, relevant details has been called for to finalize the assessment proceedings. However, assessee has been failed to submit the details despite sufficient opportunities and time have been given. In view of the noting in above paragraphs and time barring nature of proceedings i.e. time barred on 31.12.2018, it can be construed that the assessee willfully tried to make delay in proceedings in its case to left insufficient time with the undersigned to do thorough investigation and verification which is required in assessee case. 5. In response to this notice, the assessee has filed a detailed reply which has been reprod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifferent expenses head i.e. Raw material, Stores, Power Fuel, Operative expenses, Salary Wages, Administrative expenses, Depreciation and Selling Packing Expenses. Such expenses have been incurred in the course of normal business activities and the same are revenue in nature. However, while preparing the Annual report, we have suo-motto classified a portion of such expenses towards R D activities for the purpose of disclosure and compliance as per the companies act. The following table shows the total of such eight expenses and the portion that has been classified as R D expenses (though it is a production expenses); (Rs. In Lakhs) S.No. Particular Total Expenses R D expenses Proportion of R D exps. (%) 1 Raw material 13258.98 100.43 0.76 2 Stores 1358.74 74.79 5.50 3 Power fuel 816.4 58.34 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not allow depreciation to the assessee. Dissatisfied with the order of the AO, the assessee carried the matter in appeal before the ld.CIT(A). The ld.CIT(A) rejected the contentions of the assessee and affirmed the finding of the ld.AO. 7. Before us, while impugning the order of the AO, the ld.counsel for the assessee appraised us business activities of the assessee. He filed a note as Annexure-A. He submitted that these activities were explained to the AO and also pleaded in the reply filed in response to the notice under section 142(1). For buttressing his contentions, he took us through the pleading made in the reply reproduced in paragraph-4 at page no.4 5 of the assessment extracted (supra). The note submitted by the ld.counsel for the assessee reads as under: Assessee is engaged in the activity of manufacturing bearing cages with steel, brass and polymide material and stamped auto components with steel material. Assessee is a core engineering company. Assessee consistently focuses on continuous learning experience to produce world class products. Since inception in 1972, assessee has leveraged continuous customer engagement to embed world class manufacturing practic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the assessee while presuming that incurrence of this expenditure would bring in new product range/process improvement and cost effectiveness in existing products. The ld.counsel for the assessee while repelling the reasons of the AO, submitted that the assessee manufactures customized cages based on specific requirement of the customers as against uniform products. Therefore, no new product which has an independent market was ever developed by the assessee as such. Similarly, as far as process improvement and cost effectiveness in existing product is concerned, the expenditure were incurred keeping in mind the quality of existing products of the assessee, and the same cannot be treated as capital in nature. For buttressing his contentions he relied upon judgment of the Hon ble Gujarat High Court in the case of CIT Vs. Arvind Products Ltd., 93 taxmann.com 454 (Guj). He placed on record copy of the judgment. 9. In the alternative contention, he submitted that under section 35 of the Income Tax Act, even this expenditure is being treated as capital in nature, then also it is allowable. On the other hand, the ld.DR relied upon orders of the Revenue authorities. 10. We h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tomers. Now, while evaluating this manufacturing activity of the assessee, the ld.AO took a very simplistic view. He analysised breakup of the expenditure which has been tabulated in the reply of the assessee and extracted by us in the upper part of this order. He was of the view that the assessee had itself segregated certain expenditure amounting to ₹ 104.41 lakhs but debited this R D Expenditure as revenue expenditure. He was of the view that it would give enduring benefit to the assessee, and therefore, this should be capitalized. According to us, ld.AO lost sight in appreciating the business activity of the assessee particularly product made by the assessee for a particular customer. In that exercise, the assessee would need material, technology, equipment and tools. It may have to design certain dies, certain tools and that exercise would call for deployment of material, fuel, tangible and intangible technical knowhow etc. It is not necessary that a particular bearing cages or stamped auto tool manufactured by the assessee for a particular customer will be uniformly required by others. Auto part design for a particular model of a particular auto design/program may not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k us through section 35(1)(iv) and 35(2)(ia) as well as judgments of Hon ble Gujarat High Court in the case of CIT Vs. Gujarat Aluminium Extrusions, 263 ITR 453 (Guj). On the other hand, the ld.DR submitted that no such plea was raised before the AO, and the issue was not examined by the AO with the above angle. 14. We have duly considered rival submissions and gone through the record carefully. We deem it take note of the relevant provisions, which reads as under: Section 35(1) (iv) in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of subsection (2) : Section 35(2)(ia) .. (ia) in a case where such capital expenditure is incurred after the 31st day of March, 1967, the whole of such capital expenditure incurred in any previous year shall be deducted for that previous year : 15. A bare perusal of the above provision would indicate that if an assessee has incurred expenditure on R D and its capital in nature, then also it is to be allowed under these provisions. At the time of hearing, judgment of Hon ble Gujarat Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the assessee to put the asset to actual use, it would not be open to the Revenue to deprive the assessee of the benefit of deduction under the provisions of Section 35 of the Act if the asset is not used in the previous year in which the capital expenditure is incurred. 24. It is also relevant to note that the deduction is given not on the count of user. Had it been so, the assessee would have been given benefit in the nature of depreciation. It cannot be disputed that depreciation is allowed when the asset is used by the assessee and when he suffers loss on account of wear and tear of the asset. Had the intention of the Legislature been to grant additional depreciation, we would have agreed with the submissions made by standing counsel appearing for the Revenue but the position is different in the instant case. Here, the Legislature wants the assessee to spend more amount for scientific research and it also wants the assessee to get the benefit immediately in the year in which he incurs the expenditure in the nature of revenue or capital for scientific research and therefore the Legislature refers to incurring of the expenditure and not the using of the asset. 25. Onc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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