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TMI Blog2021 (2) TMI 324X X X X Extracts X X X X X X X X Extracts X X X X ..... of revenue in nature and is spent for the purpose of business activity of the appellant. The AO has not considered the appellant's claim of Research & Development (R&D Expenditure) to the tune of Rs. 14,04,48,321 (AY 2013-14) vide letter dated 23.11.2015. Further, the ld. CIT(A) has ignored the claim made and has not passed a speaking order on the same. 2. The Ld. CIT(A) has disallowed the claim as revenue expenditure on a wrong notion that the expenditure are spent for development of new product. 3. The Ld. CIT(A) has failed to appreciate the fact that, the appellant is in one line of business and the nature of the business requires huge R&D expense to be relevant in the business field, for being updated and competitive, which do not result in advantage of enduring nature, and hence the R&D expenditure incurred by the appellant are to be allowed as revenue expenditure. 4. The Ld. CIT(A) while disallowing the expenditure has failed to recognize the fact that the Hon'ble ITAT in appellant's own case for AY 2007-08 and 2008-09 having the same facts had allowed the R&D expenditure as revenue in nature. 5. In similar cases, the Hon'ble ITAT has ruled that Res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT] invoking the provisions of section 263 of the Act directed the AO to reframe the assessment and disallow Rs. 1,95,00,144 claimed as deferred revenue expenditure as it was prejudicial to the interests of the revenue. 6. Based on the direction of the Pr. CIT, the AO issued notice and completed the assessment by disallowing Rs. 1,95,00,144 claimed as R&D expenditure. The assessee brought to the notice of the AO that the ITAT in appellant's own case for AY 2007-08 and 2008-09 in ITA Nos. 1384 & 1385/Bang/2013 on the same issue by its order dated 22.01.2015 had ruled in favour of the assessee. However, the AO on the ground that the department has appealed against the aforesaid ITAT order, disallowed the claim of the appellant. 7. Aggrieved, the assessee preferred appeal before the CIT(Appeals). The assessee brought to the notice of the Ld. CIT(A) that in its own case for AY 2007-.08 and 2008-09, the Hon'ble ITAT has ruled in its favor on the issue of allowance of expenditure incurred for various R&D projects even though the same are not debited to Profit and Loss account in the financial statements as per the accounting policy of the assessee. The CIT(Appeals), however, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the AYs 2007-08 & 2008-08 had also given a finding quantifying the revenue expenditure and had listed the input cost heads as revenue and capital for the sake of describing them, however, he had held it to be one common capital expenditure, while directing the AO to grant depreciation on the same. 10. The conclusions of the CIT(Appeals) were as follows:- "5.4.11 Considering all the above, I am not convinced, with the appellant's submission that the expenditure under scrutiny is reverie in nature, reason being, that the expenditure is incurred for creating the new products which fall in the category of new inventions giving rise to intellectual property to the appellant and thus it would be an 'Intangible Asset'. The appellant itself accounted in the books of account under the head VR & D Project' and carried to the balance sheet directly. This entire expenditure is considered as capital expenditure and categorised as 'Intangible Asset'. Despite the fact of claiming the same as revenue expenditure in the computation of income, these assets remained as assets under the head 'R&D Project' and no adjustment/deletion made in the balance sheet. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The said claim was also made before the CIT(A). 15. Ld. AR submitted that the assessee was in the business of supply of equipments, technology and solutions (especially in Electro Optics field) to Defence Establishments either directly or in collaboration with foreign vendors (as a offset partner) The Ld. AR submitted that the nature of the business in which the assessee was operating required huge investment in Research and Development and the R&D undertaken by the assessee is not a green field project, i.e., something which is new but the R&D expenditure was incurred for modification, improvement of an existing product or adaption of existing products to meet the requirement of the customers. The assessee was recognized as an approved in-house Research and Development facility by the Department of Science and Industrial Research, Ministry of Science and Technology. 16. The Ld. AR submitted that the assessee's business is wide and encompasses numerous products. According to the Ld. AR, the gestation period (the period when a request for proposal/request for indent is floated culminating into a sale order) is long and can run into several years and the products offered are te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... According to the Ld. AR, the incurrence of R&D expenditure does not result in obtaining a benefit of enduring nature (sale orders) always and in many cases, the technical knowledge (repository) is important. The Ld. AR relied on the judgment of the Rajasthan High Court in the case of CIT vs. Rajasthan Spg. & Wvg. Mills Ltd. (2004) 137 Taxmann 249. The High Court held as follows: "16. From the aforesaid judgments of the Supreme Court, it is apparent that merely because the amount spent has been used for construction of a building or structure of permanent nature is not the decisive test for holding the expenses to be capital out-lay or revenue out-lay. The two tests emerging from the aforesaid decisions are that firstly where the building or construction of any permanent structure is brought into existence is by itself not sufficient to hold the expenses to be capital nature invariably. Where such construction does not result in acquisition of any capital assets to be trade of asses see or the property does not become the property of the assessee, it does result in acquisition of capital assets of the enduring nature by the assessee. Secondly, it is also clearly discernible that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herein the Apex Court ruled that merely because a different treatment was given in the books of accounts cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It was held as under:- "19. In the instant case, as noticed above, the assessee did not want spread over of this expenditure over a period of five years as in the return filed by it, it had claimed the entire interest paid upfront as deductible expenditure in the same year. In such a situation, when this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, merely because a different treatment was given in the books of account cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act (See - Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC); Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT (1997) 227 ITR 172/93 Taxman 502 (SC); Sutlej Cotton Mills ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;ble Supreme Court in the case of Empire Jute Co. Ltd. (supra) has held and accepted that the expenditure results in an enduring benefit to the assessee, yet following discussion by the Hon'ble Supreme Court would show that each and every incidence of enduring benefit would not result in classification of expenditure as a capital expenditure: "There may be cases where expenditure even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may breakdown. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be of revenue account, even though t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approved by M/s. Tata Motors for manufacturing and was used by the assessee for manufacturing the body parts for the said concern. It is an admitted fact that because of the aforesaid expenditure incurred by the assessee in the year 2009-10 being revenue of Rs. 4.20 crores received by the assessee in the year 2009-10 being the sharing benefit on account of reduction in weight for the first 1,20,000 vehicles. The first aspect of the issue is that where the assessee had claim the said expenditure by way of deduction in its computation of income? The law on this account of any person or how it is reflected in the balance sheet and/or the Profit & Loss Account is of no consequence, in determining whether the said expenditure is an allowable deduction or not. The law on the issue is that the accounting treatment given by the assessee in its books of account is not determinative whether or not the expenditure is allowable as a deduction. In order to be eligible for deduction, it has to be seen whether the expenditure is revenue in nature, then in such circumstances, the said expenditure is to be capitalized in the hands of the assessee. Looking at the nature of expenditure incurred by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. CIT, 229 ITR 383 (SC). In view of the above, the Ld. AR pleaded that the Tribunal may direct the Assessing Officer to allow the claim made through the revised computation filed with the Assessing Officer which was not claimed in the ITR for A.Y. 2013-14. 31. The Ld. DR relied on the orders of lower authorities. 32. We have heard the rival submissions and perused the record. The assessee in this case is engaged in the business of manufacture and supply of defence electronics and provision of services to defence establishments. The line of business requires investment in R&D activity. The assessee in these assessment years incurred research expenditure treated as capital in nature in financial statements as follows:- A.Y Salary Cost Rent Travelling expenses Finance charges Purchase of materials Technical fee/ Professional charges Maintenance and other expenses Total 2009-10 52,98,797 47,64,800 18,53,541 1,18,588 72,82,587 - 1,81,831 1,95,00,144 2011-12 5,48,55,459 1,49,14,943 1,96,00,420 2,53,73,399 2,93,35,600 1,97,42,385 89,62,788 17,32,84,974 2012-13 7,86,21,614 90,00,000 1,05,18,275 - 7,73,08,394 1,77 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ger context of necessity and expediency. Legal rights secured in the process are also relevant in deciding the issue. (iii) If the expenditure is related to the carrying on or conduct of the business or is intrinsically connected with the running of a business the expenditure is to be regarded as revenue expenditure even though the advantage may endure for some indefinite future. (iv) A payment made with a view to obtain the benefit of technical assistance for running the assessee's business more efficiently so as to earn more profits and 'not by way of transfer of fruits of research once and for all', can be treated as an item of revenue expenditure. (v) Expenditure incurred in connection with the profit earning apparatus would be revenue expenditure. (vi) Where the advantage is on the capital filed the expenditure would be treated a capital Expenditure. If the advantage leaves the fixed capital untouched, the expenditure would be on revenue account. (vii) Expenditure in the acquisition of a concern would be capital expenditure; expenditure in carrying on the concern would be revenue expenditure. (viii) An expenditure cannot be considered to be capital expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntangible property, corporeal or incorporeal right. 35. We have carefully gone through the significant accounting policies adopted by the assessee in these assessment years which are as follows:- a) A.Ys. 2009-10, 2011-12, 2012-13 & 2013-14 (4 years) "5. INTANGIBLE ASSET: The Know-How, Technical Knowledge, Designs and other intellectual properties acquired and developed are stated at cost less the accumulated amortization and accumulated impairment losses. The cost includes the Purchase price, duties and taxes and any directly attributable expenditure on making the asset ready for its intended use. The cost of self generated Intangible asset will include the cost of material and services used, the salaries and other employee costs of personnel directly engaged in generating the asset, other directly attributable expenditure and the overheads necessary to generate the asset. The intangible asset will be amortized over its useful life." b) AY 2014-15 "e) INTANGIBLE ASSET: The Know-How, Technical Knowledge, Designs and other intellectual properties acquired and developed are stated at cost less the accumulated amortization and accumulated impairment losses. The cost i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset will include the cost of material and services used, the salaries and other employee costs of personnel directly engaged in generating the asset, other directly attributable expenditure and the overheads necessary to generate the asset. g) RESEARCH AND DEVELOPMENT COST Revenue expenditure on research and development is expensed off under the respective heads of account in the year in which it is incurred. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalised, if the cost can be reliably measured, the product or process is technically and commercially feasible and the Company has sufficient resources to complete the development and to use and sell the asset. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads that are directly attributable to preparing the asset for its intended use. Other development expenditure is recognised in the Statement of Profit and Loss as an expense as incurred. h) AMORTIZATION Intangible assets are amortised in the Statement of Profit and Loss ..... X X X X Extracts X X X X X X X X Extracts X X X X
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