Harsha Engineers Ltd. Vs DCIT (ITAT Ahmedabad)
The issue under consideration is whether deduction can be claimed under Research and Development (R&D) for Amount incurred towards development on a mechanism to produce customised products?
ITAT states that, the nature of the expenditure noted by the AO in the reply of the assessee and extracted (supra) then it would indicate that 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, ITAT are of the view that the claim of the assessee deserves to be allowed, and delete disallowance. In the result, appeal of the assessee is allowed.
FULL TEXT OF THE ITAT JUDGEMENT
Assessee is in appeal before the Tribunal against order of the ld.CIT(A)-2, Ahmedabad dated 24.10.2019 passed for the Asstt.Year 2013-14.
2. Assessee has taken seven grounds of appeal, wherein issues agitated by it revolve around two aspects. In ground no.1, the assessee has challenged reopening of the assessment by issuance of notice under section 148 of the Income Tax Act, 1961. However, at the time of hearing, no arguments were advanced by the ld.counsel for the assessee, and therefore, we do not deem it necessary to comment on this issue. This ground is rejected.
3. Under ground no.2 to 4, the assessee has challenged disallowance of alleged R&D expenditure amounting to Rs.10,42,41,078/-.
4. Brief facts of the case are that the assessee has filed its original return of income on 31.8.2013 declaring total income at Rs.27,37,55,058/-.. An assessment order under section 143(3) was passed on 11.2.2016 wherein the income was assessed at Rs.28,28,48,150/-. The AO thereafter harboured a belief that the assessee has claimed expenditure of Rs.11,65,15,1456/- on R&D, but capitalized a sum of Rs.1,22,74,378/-. He was of the view that the revenue expenditure amounting to Rs.10,42,41,078/- claimed by the assessee as revenue expenditure ought to have been capitalized, and thus by making claim of this amount as revenue expenditure on R&D, income has escaped assessment. The AO, therefore, reopened the assessment and issued notice under section 148 on 30.3.2018. In response to the notice, the assessee has filed return and declared total income at Rs.27,39,79,540/-. The assessee has raised objection for reopening of the assessment, and this was rejected by the AO. He issued notice under section 143(2) as well as 142(1) of the Act. The AO has issued detailed show cause notice on 23.10.2018 which has been reproduced in paragraph-3 of the assessment order. Relevant part of this notice reads as under:
“6. It is relevant to mention here that the case of the assessee was reopened on findings that the assessee company has made total expenditure of Rs. 11,65,15,456/- on R&D and out of said total expenditure, Rs. 1,22,74,378/- was shown as capital expenditure and remaining Rs. 10,42,41.078/- was claimed as recurring expenditure. It remains self established that recurring expenditure on R&D results in generating enduring benefits which was required to be capitalized. It was further noticed from computation of income that recurring expenditure of Rs. 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 Rs. 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 reproduced by the AO, and we deem it necessary to take note of this reply in order to appreciate the stand of the assessee. It reads as under:
“4. In response, the assessee has submitted its reply. The undersigned, keep in mind issue in question, has carefully examined and verified the submission filed by the assessee and found not acceptable. Gist of assessee’s submission is herein under;
We are engaged in the activity of manufacturing bearing cages with steel, brass and polyamide material and stamped auto components with steel material. We are a core engineering company. These cages are being of specified measurement and are to be manufactured with the specified tools only. Both tools and cage size differs from customer to customer and order to order of various customers.
The customers provide us with the drawing and specifications at the time of each quotation/development to manufacture required bearing cages and stamped auto components. To manufacture such parts/cages, we have to evaluate various kinds of needs viz. need of material, technology, equipments, tools etc. After considering all above requirements and making them available, a sample is- being prepared which is sent to customers for their approval.
Further, the company have a dedicated development and innovation center at changodar plant and state of art tool manufacturing unit and changodar. These primary activities are being carried out to catch the emerging trends such as supply of very clean bearing to reduce noise by supplying clean cages, td develop right geometry of cage to reduce energy loss due to friction and allow bearings to consider extra load carrying capacity, increasing line production speed to make product most cost competitive so as to provide high quality product at a lesser price.
We had incurred expenditure on R&D aggregating to Rs. 11,65,15,456/- out of which, Rs. 1,22,74,378/- was capital expenditure and Rs. 10,42,41,078/-was recurring expenditure. The said fact is evident from the annual report. The company have not claimed any amount of deduction u/s. 35(2AB) of the Income Tax Act, 1961 during the year under consideration.
The assessee further stated that there is no specific head of “R&D expenses” in the profit and loss account under which, the underlying expenses have been debited. The said expenses were debited in eight different 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)
