TMI Blog2021 (7) TMI 771X X X X Extracts X X X X X X X X Extracts X X X X ..... ng benefit in the long run business plan. The other contention of the ld. AR is that to meet the matching principle, the company has capitalized 70% of R D expenditure under the head intangible assets and balance 30% has been claimed as revenue expenses by charging it to P L account. However, we observe that 70% shares of assessee company is acquired by M/s. Filtrauto, SA of France, as such the assessee charges only 30% of this expenditure to P L account and 70% of R D expenditure was considered as intangible assets by showing it in the balance sheet and it is not because of matching principle the expenditure was bifurcated as above. Being so, we hold that the expenditure is in the capital field and to be considered as not allowable. On other hand, the assessee is entitled only for depreciation at applicable rate. This ground of assessee is partly allowed for all the assessment years i.e., AYs 2013-14 to 2016-17. - ITA Nos.1696 to 1698/Bang/2019, 2089/Bang/2019 & 757/Bang/2016 - - - Dated:- 15-7-2021 - Shri Chandra Poojari, Accountant Member And Smt. Beena Pillai, Judicial Member For the Appellant : Shri Venkatesh Kumar, Advocate For the Respondent : Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the case for AY 2013-14 are that the appellant company engaged in the manufacture of automotive filters for two and fourwheelers and other filtration products and systems, filed its return on 18.9.2013. The return was processed u/s 143(1) and selected for scrutiny. The AO treated lease hold improvement expenditure as capital expenditure and allowed depreciation thereon. This addition has not been contested in appeal. 5. The second addition made by the AO pertains to the expenditure of ₹ 51,67,652/- on R D activities claimed by the appellant as revenue expenditure. The AO observed that the amount was capitalized in the books but in the computation of income, it was reduced as admissible with the narration development expenses credited to P L account for capitalization allowed under I T now considered . The AO, following the order of the CIT(A) for the preceding year, disallowed the product development charges of ₹ 51,67,652/- as being capital in nature and allowed depreciation thereon. Similarly in the other assessment years the disallowance on this count is as follows:- AY Amount (Rs.) 2012- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cern)' has provided its services and assistance which are in the nature of FTS - 'cost of the personnel and other linked costs' per project basis, belonging to the R D Platform and linked to Product development projects of the assessee company. These costs are duly followed on time, materials and other expenses basis through a specific project. The copies of the invoice are filed. 12. It is submitted that the services provided by the 'Group Concern' are in the nature of 'fees for technical services' [FTS] and it is for development/improvising of existing products of the assessee company, in respect of which TDS has been deducted u/s.195 and details in the form 15CA 15CB for the remittance made outside India had been dully filed before the AO. It is submitted that FTS is in the nature of personnel cost directly employed for product development of the assessee company. All these expenses are revenue in nature which is for modification of existing products or for development of new products with the assets under the same management, with the same work force expertise, with the same existing machinery including the building. It was further submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e basis of control and future economic benefits. The costs incurred in the development phase of the identified projects are capitalized only after detailed study in terms of:- (1) the technical feasibility of completing these projects; (2) the intention to complete these projects to the commercial advantage of the company; (3) the ability to use or sell products by making use of these projects; (4) the manner with which these projects will generate probable future economic benefits; (5) the availability of technical, financial and other types of resources appropriate in completing the development of these projects; (6) the ability to reliably evaluate the cost attributable to these projects; 17. The costs capitalized under Intangible Assets are reviewed in frequent intervals and same are allocated to the projects which are in progress in proportion to their expected sales. Also, projects are reviewed in frequent intervals to identify their progress, likely success or failure. Appropriate treatment for the expenses accounted under intangible assets are provided in the books on the basis of related success or failure. If the project is succ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any on account of the above, had not purchased any new machinery or created any new capital assets and the expenditures incurred by the company is only on day to day running business. The bifurcation has been made separately for the products under which ,certain items were to be modified and certain new items were to be manufactured to earn more profits or advantage in the long run. 22. On the allowability of the above intangible asset under the Income tax Act, keeping in view the decision of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd., it was submitted that the nature of the advantage has to be seen in a commercial sense. The Hon'ble Supreme Court has held that whereas in the capital field only that the expenditure would be disallowable on an application on the tests, whereas expenditure has been incurred for obtaining an advantage of enduring benefit; but whereas the expenditures is incurred for obtaining an advantage of enduring benefits on revenue account, the position will be different i.e.,if the advantage consists merely in facilitating the assessee's trading operations or enabling it to carry on the business to be carried out more effici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses which reads as follows:- p) Research and development expenses Revenue expenditure pertaining to research is charged to the statement of profit and loss. Development costs of products are also charged to the statement of profit and loss unless a product's technical feasibility has been established, in which case such expenditure is capitalised. The amount capitalised comprises expenditure that can be directly attributed or allocated on a reasonable and consistent basis to creating, producing and making the asset ready for its intended use. Fixed assets utilised for research and development arc capitalised and depreciated in accordance with the policies stated for Fixed Assets. 25. He also relied on the following judgments:- PCIT V. Vijayeshwari Textiles Ltd. (2020) 121 taxmann.com 20 (Madras) Held that, product development expenses are deductible even though said expenditure was to be amortised over a period of 3 years as per accounting practice adopted by assessee. CIT v. Arvind Products Ltd. (2018) 93 taxmann.com 454 (Guj) Held, where assessee incurred expenditure on product development and claimed deduction for same under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings, the question of the exemption of the assessee appellant should not have been reopened. Strictly speaking res judicata does not apply to income-tax proceedings. Though, each assessment year being a unit, what was decided in one year may not apply in the following year; where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. [The Court emphasized that the decision is confined to the facts of the case and may not be treated as an authority on aspects which have been decided for general application]. PCIT v. Quest Investment Advisors (P) Ltd. (2018) 96 taxmann.com 157 (Bom) Held, Where entire expenditure of assessee for earlier years and subsequent years was set off against professional income and no expenditure was allocated to capital gain, in absence of any change in circumstances, following rule of consistency, Tribunal was justified allowing same in relevant assessment years also. Perfect Engineering Products ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed by the AO. The claim of assessee before us is that the said expenditure to be treated as revenue expenditure though a portion has been claimed by assessee as capital expenditure in the balance sheet by placing reliance on the judgment of Supreme Court in the case of Empire Jute Co. Ltd. (supra) . 29. Now the question is, whether this expenditure incurred by the assessee towards R D should be treated as revenue or capital expenditure? It is a well-accepted legal preposition that no test of universal application can be laid down to determine the question whether an expenditure incurred by the assessee is revenue or capital. It depends on the overall facts and circumstances of each case. Such matters have to be decided from a practical view and on application of the proper principles of law. Courts are of the view that keeping in mind the ground realities of business, AO should consider the purpose of a particular expenditure. A few principles in this regard can be enumerated as under:-- (i) One of the guidelines for distinguishing revenue expenditure from capital expenditure is that if the expenditure is incurred for obtaining an advantage of enduring benefit it woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of capital expenditure or revenue expenditure, would depend upon several factors., namely, whether the assessee obtained a completely new plan with a complete new process and completely new technology for manufacture of the product or the payment was made for the technical know-how which was for the betterment of the product in question which was already being produced; whether the improvisation made is part and parcel of the existing business or a new business was set up with the so-called technical know-how for which payments were made; whether on expiry of the period of agreement the assessee is required to give back the plans and designs which were obtained, but the assessee could manufacture the product in the factory that has been set up with the collaboration of the foreign firm; the cumulative effect on a construction of the various terms and conditions of the agreement; whether the assessee derived benefits coming to its capital for which the payment was made. If from the terms of the agreement between the parties it transpires that the purpose be the acquisition of an asset/a right of a permanent character was a pre-requisite to the commencement or continuance of the busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in any enduring benefit to the assessee and even if it is enduring benefit, the said expenditure is in the nature of revenue and deduction to be allowed. 32. This argument of the ld. AR holds no field. The assessee itself has treated the said expenditure as capital expenditure in its books of account and reiterated the same in its annual report that it is capital expenditure. Contrary to this, the assessee is trying to establish that the expenditure is in revenue field. However, the expenditure is not incurred in the conduct of day to day affairs of the assessee company. On the other hand, it was incurred for securing enduring benefit which is for a longer period not pertaining to a single year when it was incurred for. In other words, the benefit of R D is not for running business, but for securing advantage in the capital field and it was not established by the assessee that it was incurred out of circulating capital. In these circumstances, we are not in a position to apply the ratio laid down by the Hon ble Supreme Court in the case of Empire Jute Co. Ltd. cited supra . Further, the assessee has also not established that the expenditure was incurred to face severe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % of R D expenditure under the head intangible assets and balance 30% has been claimed as revenue expenses by charging it to P L account. However, we observe that 70% shares of assessee company is acquired by M/s. Filtrauto, SA of France, as such the assessee charges only 30% of this expenditure to P L account and 70% of R D expenditure was considered as intangible assets by showing it in the balance sheet and it is not because of matching principle the expenditure was bifurcated as above. 36. Being so, we hold that the expenditure is in the capital field and to be considered as not allowable. On other hand, the assessee is entitled only for depreciation at applicable rate. This ground of assessee is partly allowed for all the assessment years i.e., AYs 2013-14 to 2016-17. 37. For AY 2012-13, this issue was already considered by the Tribunal vide order dated 22.12.2017. Accordingly there is no requirement of adjudication of this ground and the appeal is recalled by the Tribunal vide MP No.36/Bang/2018 dated 18.5.2018 only to decide the issue on principle of consistency. Accordingly, now we will deal with regard to ground No.2 on allowability of expenditure on the princi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs either before CIT, CIT(A) or Tribunal. 39. In the present cases, the issue was decided by the AO against the assessee after going thoroughly with the facts of the case and examining the same with the accounting policies followed by assessee and he disallowed the claim by treating the R D expenditure as a capital expenditure. It has travelled to CIT(Appeals) and he has also given a concrete finding that it is capital expenditure. We are also agreeing with the same after examining the issue in the light of facts enumerated before us. We find that there is considerable force in the reasons given by the lower authorities. In our opinion, going through the facts of the case, the entire complexion of the case has been changed compared to assessee s case in the earlier AYs 2010-11 2011-12. Being so, the lower authorities are entitled to take a different view when altogether different case was presented before them. At this stage, it is appropriate to refer to the caselaws wherein it is held that Bench can draw different conclusion if there is adequate justification to depart from the earlier view i.e., where subsequently new or more facts come to light [ Raja Bahadur Visheshwara ..... X X X X Extracts X X X X X X X X Extracts X X X X
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