Case Law Details
DCIT Vs Sutham Electric Ltd. (ITAT Pune)
The solitary issue in the present case relates to the allowability of the expenditure incurred on development of Tools and Designs which are used in the business and manufacturing of automotive switch gears of Rs.3,75,00,000/- as revenue expenditure. This expenditure was shown as deferred revenue expenditure written off over a period of 10 years in the books of account.
It is settled position of law that the treatment given in the books of account does not determine the true nature of the expenditure whether capital or revenue.
The Hon’ble Supreme Court in the case of Assam Bengal Cement Co. Ltd. vs. CIT, 27 ITR 34 (SC) evolved tests to determine the true nature of the expenditure whether capital or revenue. The primary test to be applied is whether as result of the expenditure incurred any enduring benefit has resulted i.e. expenditure is made for acquiring or bringing into existence and advantage or advantage for benefit of enduring of the assessee, it is properly attributable to capital. On other hand, if the expenditure has been incurred for running the business or working with a view to produce the profits, it is revenue expenditure. In cases where this test is of no avail one has to go to the test fixed or circulating capital and where the expenditure was incurred on the part of the fixed capital or circulating capital. It is part of the fixed capital or business it would be a nature of capital expenditure. Applying the above test in the facts of the present case and from perusal of the explanation filed before the Assessing Officer which is extracted vide para no.3.1 of the assessment order, it is evident that the subject expenditure was incurred for the purpose of developing designs and tools for the purpose of using in the business of manufacturing of automotive switch gears. As a result of this expenditure, it created the designs and tools which are used for the purpose of business run by the assessee.
The Hon’ble Supreme Court in the case of CIT vs. Elecon Engineering Co. Ltd., 166 ITR 66 (SC) held that the Designs, Drawings and Tools which constitutes knowhow is the fundamentals in the manufacturing business comes within the meaning of “a plant” following of its earlier decision in the case of Scientific Engineering House (P.) Ltd., 157 ITR 36 (SC). There is catena of judicial precedents to the same effect. Therefore, in the light of the settled position of law that any expenditure incurred on the development of Tools and Designs cannot be termed as revenue expenditure. It is not the case of the assessee that the expenditure was incurred only to augment revenue resources. Thus, the ld. CIT(A) without properly examining the true nature of the expenditure as well as discussing as to how the ratio laid down by the Hon’ble Supreme Court in the case of Madras Auto Service (P) Ltd. (supra) relied upon by the Assessing Officer is not applicable to facts of present case, merely granted relief to the assessee, which is not permissible under the law. Therefore, we reverse the order of the ld. CIT(A) allowing the expenditure incurred on development of Tools and Designs of Rs.3,75,00,000/- as revenue expenditure and restore the addition.
FULL TEXT OF THE ORDER OF ITAT PUNE
This is an appeal filed by the Revenue directed against the order of ld. Commissioner of Income Tax (Appeals)- 4, Pune (‘CIT(A)’ for short) dated 01.03.2017 for the assessment year 2008-09.
2. The Revenue raised the following grounds of appeal :-
“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing the deduction of Rs. 3,75,00,000/- u/s 37(1) as expenditure being revenue in nature whereas the expenses are capital in nature.
2. For this and such other reasons as may be urged at the time of hearing, the order of the CIT(A) be vacated and that of the Assessing Officer be restored.
3. The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal during the course of appellate proceedings before the Hon’ble Tribunal.”
3. Briefly, the facts of the case are as under :-
The respondent-assessee, namely, M/s. Sutham Electric Ltd. is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacturing of automotive switch gears. The return of income for the assessment year 2008-09 was filed on 30.09.2008 declaring loss of Rs.1,14,97,607/-. Against the said return of income, the assessment was completed by the Dy. Commissioner of Income Tax, Circle-6, Pune (‘the Assessing Officer’) vide order dated 29.12.2020 passed u/s 143(3) of the Income Tax Act, 1961 (‘the Act’) at a total income of Rs.2,71,12,393/- after making several disallowances. The disallowances, inter-alia, includes the Product Development Expenditure of Rs.3,75,00,000/- incurred on the development of Designs and Tools, which are used for the purpose of manufacturing of automotive switches for the customers who are manufacturer of automobiles or vehicles. This expenditure is not debited to the Profit & Loss Account but shown as a current asset in the Balance of the P&L Account. However, the expenditure incurred on product development is written off over a period of 10 years in the books of account. But, while computing the taxable income, the same was claimed as revenue expenditure in the return of income. The Assessing Officer was of the opinion that the expenditure was incurred for initiation of manufacturing of a new product applying the test laid down by the Hon’ble Supreme Court in the case of CIT vs. Madras Auto Service (P) Ltd., 233 ITR 468 (SC) held that the expenditure is a capital expenditure.
4. Being aggrieved by the above additions, an appeal was preferred before the ld. CIT(A), who vide impugned order, considering the explanation filed before him, which is same as filed before the Assessing Officer, held that the expenditure incurred is revenue expenditure as the same was recurring in nature and also taking into account the fact that the expenditure was written off as a current asset in the books of account. The ld. CIT(A) also held that the expenditure on development of Designs and Tools for manufacturing of automotive switches is revenue in nature.
5. Being aggrieved by the decision of the ld. CIT(A), the Revenue is in appeal before us in the present appeal.
6. The ld. Sr. DR contended that as result of this expenditure it resulted in creation of new asset which is used for the purpose of manufacturing of automotive switches, tools and designs form part of the fixed asset and, therefore, the same cannot be allowed as revenue expenditure.
7. On the other hand, none on behalf of the assessee had appeared when the case was called on despite due service of notice. The ld. Sr. DR also confirmed the service of notice of hearing posting the case for today. Even on earlier occasion this matter was posted for 01.07.2020, 04.08.2020, 08.09.2020, 08.10.2020, 09.11.2020, 11.01.2021 and 03.05.2021. On last occasion i.e. 03.05.2021, we directed the Departmental Representative to serve the notice of hearing on assessee. Today, the ld. Sr. DR had confirmed that the service of notice was made on the assessee. Thus, despite due service of notice, the respondent-assessee has chosen not to make any appearance. Therefore, we presume that the respondent-assessee is not interested in defending the order of the ld. CIT(A). In the circumstances, we proceed to dispose of this matter in the absence of respondent-assessee or his representative.
8. We heard the ld. Sr. DR and perused the material on record. The solitary issue in the present case relates to the allow ability of the expenditure incurred on development of Tools and Designs which are used in the business and manufacturing of automotive switch gears of Rs.3,75,00,000/- as revenue expenditure. This expenditure was shown as deferred revenue expenditure written off over a period of 10 years in the books of account. It is settled position of law that the treatment given in the books of account does not determine the true nature of the expenditure whether capital or revenue. The Hon’ble Supreme Court in the case of Assam Bengal Cement Co. Ltd. vs. CIT, 27 ITR 34 (SC) evolved tests to determine the true nature of the expenditure whether capital or revenue. The primary test to be applied is whether as result of the expenditure incurred any enduring benefit has resulted i.e. expenditure is made for acquiring or bringing into existence and advantage or advantage for benefit of enduring of the assessee, it is properly attributable to capital. On other hand, if the expenditure has been incurred for running the business or working with a view to produce the profits, it is revenue expenditure. In cases where this test is of no avail one has to go to the test fixed or circulating capital and where the expenditure was incurred on the part of the fixed capital or circulating capital. It is part of the fixed capital or business it would be a nature of capital expenditure. Applying the above test in the facts of the present case and from perusal of the explanation filed before the Assessing Officer which is extracted vide para no.3.1 of the assessment order, it is evident that the subject expenditure was incurred for the purpose of developing designs and tools for the purpose of using in the business of manufacturing of automotive switch gears. As a result of this expenditure, it created the designs and tools which are used for the purpose of business run by the assessee. The Hon’ble Supreme Court in the case of CIT vs. Elecon Engineering Co. Ltd., 166 ITR 66 (SC) held that the Designs, Drawings and Tools which constitutes knowhow is the fundamentals in the manufacturing business comes within the meaning of “a plant” following of its earlier decision in the case of Scientific Engineering House (P.) Ltd., 157 ITR 36 (SC). There is catena of judicial precedents to the same effect. Therefore, in the light of the settled position of law that any expenditure incurred on the development of Tools and Designs cannot be termed as revenue expenditure. It is not the case of the assessee that the expenditure was incurred only to augment revenue resources. Thus, the ld. CIT(A) without properly examining the true nature of the expenditure as well as discussing as to how the ratio laid down by the Hon’ble Supreme Court in the case of Madras Auto Service (P) Ltd. (supra) relied upon by the Assessing Officer is not applicable to facts of present case, merely granted relief to the assessee, which is not permissible under the law. Therefore, we reverse the order of the ld. CIT(A) allowing the expenditure incurred on development of Tools and Designs of Rs.3,75,00,000/- as revenue expenditure and restore the addition. Thus, the grounds of appeal raised by the Revenue are allowed.
9. In the result, the appeal filed by the Revenue stands allowed.
Order pronounced on this 24th day of August, 2021.
