TMI Blog2021 (2) TMI 324X X X X Extracts X X X X X X X X Extracts X X X X ..... us. Hence, it is appropriate to remit the issue to the file of the CIT(Appeals) for proper classification of R D expenditure which is in the nature of revenue expenditure or capital expenditure. Thereafter the portion of revenue expenditure on R D to be allowed as business expenditure in these assessment years. On the other hand, the R D expenditure which is in the nature of capital expenditure has to be disallowed and depreciation to be granted. With these observations, we remit the issue in dispute in all these assessment years to the file of the CIT(Appeals) for fresh consideration. Appeal allowed for statistical purposes. - ITA Nos. 1516 to 1521/Bang/2019 - - - Dated:- 27-1-2021 - Chandra Poojari, Member (A) And George George K., Member (J) For the Appellant : Prashanth Chandrashekar, CA For the Respondents : Kannan Narayanan, Jt. CIT ( DR ) ORDER Per Bench All these files are filed by the assessee against the separate orders of the CIT(Appeals)-1, Bengaluru dated 01.03.2019 for assessment years 2009-10 [passed u/s. 143(3) r.w.s. 263 of the Act] AYs 2011-12 to 2015-16 [u/s. 143(3) of the Act], which were heard together and disposed of by this common ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of defense electronics and provision of services to defense establishments. It is submitted that the line of business of the assessee requires huge expense in research and development (R D) activity to stay relevant in the market and to exhibit to the customer that they have the capability to adopt and modify the products and services as per their demands and needs. As per the accounting policy, these expenditure are accounted as Intangible Assets/Intangible assets under development in the books of accounts, since the R D activity enhances the know-how, technical knowledge, skill etc., of the assessee and its technical manpower. The major expenditure incurred for R D are Remuneration to the employees, Rent of the R D centre, Professional Charges and Purchase of materials. The expenditure incurred on research and development is claimed as expenditure in the return of income due to the following counts:-- (i) The expenditure on R D has not created new product or it has not resulted in new line of business. (ii) The expenditure incurred are revenue in nature. (iii) The expenditure has not resulted in acquisition/construction of a Capital Asset. (iv) The expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remand report of the AO regarding the nature of expenditure and assumed that the claim of the assessee as to its nature i.e., staff remuneration, travel expenditure, professional charges, etc. has not been disputed by the lower authorities and further the Tribunal has assumed that in the remand report, the AO has also not doubted the genuineness of expenditure. However, as per 4 of the remand report which is extracted at page 8 of the impugned order, the CIT(A) was of the view that the AO has given a categorical finding that all these expenses have been incurred for specific projects as inputs and accordingly has given a finding that the entire expenditure on the product development by the assessee is capital in nature. Therefore the AO in the original order as well as in the remand report, had consistently held that the said expenditure incurred for development of the projects is capital in nature. In the remand report, the AO had not conceded as to the bifurcation of the expenses viz., staff remuneration, travel expenditure and professional charge. The AO simply has not questioned the genuineness of the individual input components. The CIT(A) was therefore of the opinion that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that-the expenditure incurred for developing the project proto types by the appellant relating to development of intangible asset cannot be weighed or assessed based on the input costs. It has to be treated as one item only. The expenditure incurred by the assessee on such projects is liable to be treated as capital expenditure as the same has resulted in giving rise to enduring benefit to the assessee by bringing into existence a totally new product upon which the appellant has recognized the intellectual property. The position of the settled law that the expenditure resulting in advantage of enduring nature is a capital expenditure , is not disturbed or reversed by any judicial fora. 11. The CIT(A) upheld the disallowance by terming the same as Capital Outgo and citing the reason that the said amount was treated as intangible asset under the head Development in the books of account of the assessee. 12. Against this, the assessee is in appeal before us. The Ld. AR submitted that the assessee had enclosed the following documents for the six assessment years: a. Financial Statement for the six assessment years. b. Statement of Computation of Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be able to participate in various request for proposals/request for indents to qualify for submitting the bid and participating in trials of the products/solutions. According to the Ld. AR, the outcome of these processes irrespective of securing the sale order or not is that the assessee gains technical know-how and this technical know-how (repository) helps the assessee to stay relevant in the market and to exhibit to the customer that they have the capability to adopt and modify the products and services as per their demands and needs. 17. The Ld. AR submitted that the assessee had incurred expenditure in the form of remuneration to employees of technical capability, travelling expenses and providing training to them in different spheres of technology used by Defence establishments and the expenditure incurred for these activities primarily includes remuneration to staff, purchase of material, professional charges paid to consultants and travelling expenses. Thus, it was submitted that the nature of this expense is of revenue. 18. Further, the Ld. AR submitted that the R D expenditure incurred by the assessee is allowable under section 37, since the said expenditures meet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from or reduction in incurring of other expenses which would have been ordinarily allowable as revenue expenditure of assessee's business, such expenses are to be treated as having been incurred wholly and exclusively for business of the assessee and revenue expenditure. Such expenses cannot be construed as a capital expenses. ......... 22. The principle was considered by the Supreme Court in Empire Jute Co. Ltd. vs. CIT (1980) 124 ITR 11. In the said case, the Court observed that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit may none the less, be on revenue account and the test of enduring benefit may break down. 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 the 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 consist merely in facilitating the assessee's trading operations or in enabling the management in conduct of the assessee's business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue and Capital, is not proper as the entire expenditure was incurred for a specific purpose. 24. The Ld. AR further relied on the decision of the Tribunal in the case for A.Ys. 2007-08 and 2008-09 wherein a similar issue was considered. On examination of the remand report of the Assessing Officer and the order of the CIT(A), the Tribunal allowed revenue expenditure as such and allow depreciation on the items of capital items present in the R D expense. The Ld. AR relied on the decision of the Tribunal in the following cases where the Tribunal had ruled R D expenses as revenue in nature when the same does not result in new product or new line of business: i) Opus Software Solutions Pvt. Ltd. vs. ACIT (ITA 584/PN/2011) ii) DCIT vs. Autoline Industries Ltd. (ITA 1711/PN/2012) (Pune) iii) Dr. Reddy's Laboratories Ltd. vs. Addl. CIT (ITA 2229/Hyd/2011 85/Hyd/2013) (Hyderabad). 25. In the case of Opus Solutions (supra), the Tribunal held that expenditure incurred for the development of new product in the line of business carried on by the assessee is in the revenue field since the same would improve the profitability of the assessee and the enduring benefit c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld, inasmuch as it seeks to improve the profitability of the assessee and the enduring benefit cannot be regarded to be in the capital field. The parity of reasoning laid down by the Hon'ble Apex Court in the case of Empire Jute Co. Ltd. (supra), as extracted above, clearly supports the stand of the assessee, inasmuch as the expenditure in question merely results in development of new products by the assessee in its existing line of business. Even otherwise, it is noteworthy that none of the expenditures in question are of capital nature and in fact, the expenditure which has been referred to by us in the earlier paragraph clearly are such expenditure, which are incurred in the course of carrying on of business. 26. Further, the Ld. AR submitted that the Tribunal held that the treatment in the books of accounts does not have interference in the claim of the expenditure as revenue in nature as follows:- 11. The other objection of the Revenue that the assessee had treated the impugned expenditure as a deferred revenue expenditure in the books of account and claimed it as a revenue expenditure in the computation of income, is of no consequence. The Hon'ble Supreme Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resulted in reduction in the weight of body parts and also generation of revenue in the hands of assessee to the extent of ₹ 4.20 crores cannot be said to be capital expenditure. Even if the expenditure is of enduring benefit, but having not been incurred in the capital field, is to be allowed as deduction in view of the ratio laid down by Pune Bench of Tribunal in Opus Software Solutions (P) Ltd. vs. ACIT (supra). As referred by us in the paras hereinabove, the nature of expenditure is not such that it can be said to be capital expenditure and in the absence of product developed by the assessee having been patented, we find no merit in the order of Assessing Officer in this regard. Upholding the order of CIT(A), we dismiss the ground of appeal No. 1 raised by the Revenue. 28. Further, the Ld. AR submitted that in the case of Dr. Reddy's Laboratories Ltd. vs. Addl. CIT (supra), the Tribunal held that an expenditure for developing new drug in the same line of business of the assessee is to be allowed as revenue expenditure. 29. In view of the above judgments of the Tribunal, the Ld. AR submitted that the R D expenses incurred for modification/adaption of existing p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 1,77,98,554 32,61,890 19,65,08,727 2013-14 8,55,26,000 90,00,000 92,15,000 - 2,56,38,821 76,50,000 34,18,500 14,04,48,321 2014-15 3,52,00,000 1,58,50,000 - - 1,88,08,949 3,58,50,000 - 10,57,08,949 2015-16 75,00,000 - - - 5,36,60,585 6,20,00,000 - 12,31,60,586 33. The assessee capitalized this expenditure in the books of account as intang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th 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 expenditure merely on the ground that the amount involved is large. The quantum of expenditure involved cannot alter the nature and character of the expenditure. (ix) The source or manner of the payment are of no consequence in deciding the issue. (x) The question whether a particular payment made by an assessee under the terms of an agreement forms a part of capital expenditure or revenue expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ensed 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 over their estimated uses lives, from the date that they are available for use based on the expected pattern consumption of economic benefits of the asset. Accordingly, at present, these are being amortised on straight line basis. An intangible asset is derecognized on disposal or when no future economic benefits are e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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