Brief of the case
In the case of D.C.I.T. vs Autoline Industries Ltd, Pune Tribunal on the issue whether a particular expenditure is of nature of capital or revenue held that 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. The expenditure incurred by the assessee by way of research resulted in reduction in the weight of body parts provides enduring benefit to the assessee in respect of building a reputation in the market of OEM manufacturers, which could bring more business to the assessee. In the absence of any product developed, we find no merit in the order of A.O. to treat the same as capital expenditure.
Fact of the case
The assessee was engaged in the business of auto ancillary unit and manufactured the parts needed for the vehicles of different makes. The major customers of the assessee were Tata Motors Ltd., Bajaj Auto Ltd., Kinetic Engineering Ltd., Mahindra & Mahindra Ltd., etc. The assessee for the year under consideration had developed a technique for reducing the weight of machinery, which in turn was approved by M/s. Tata Motors for manufacturing and was used by the assessee for manufacturing the body parts for the said concern. In turn, the assessee had received an amount of Rs.4.20 crores in the year 2009-10 being sharing benefits due to reduction in weight for the first 1,20,000 vehicles. Thus, the designs were utilized for the parts of vehicles manufactured by M/s. Tata Motors Ltd. The assessee also incurred certain expenditure in the development of new designs, break assembly and related parts which in turn, were used in the vehicles. The assessee capitalized the said expenditure of Rs.11,15,01,210/- in its books of account, but claimed the same as deduction in the computation of total income for the reason that such expenditure was in the nature of salary, labour charges and wages and purchases. The Assessing Officer was of the view that the expenditure had brought enduring benefit to the assessee as well as a new asset in the form of novel designs for the assessee and in order to claim deduction under section 35(1) of the Act, it was necessary that the expenditure claimed must be of Revenue in nature. The alternate plea of the assessee was that the expenditure should be allowed as deduction under section 37(1) of the Act, was also rejected by the Assessing Officer. The CIT(A) observed that the expenditure was incurred for bringing improvement in the designs and process given by the vendor companies and therefore, per-se these were apparently of the nature of Revenue expenditure. CIT(A) was of the view that the explanation of the assessee was more plausible as the research and development was not for a new product or a line of product. Since the assessee was only a vendor and had to manufacture the products as per the requirement of the principal and even if a development was made, the same actually belongs to the principal and could be implemented only on their approval. The monetary benefit received by the assessee also reflected that the same was issued as per the wish and consideration of the principal. The CIT(A) observed that the main benefit accruing to the assessee was in respect of building a reputation in the market of OEM manufacturers, which could bring more business to the assessee. Being aggrieved the revenue filed the appeal before the Tribunal.
Contention of Revenue
The learned Departmental Representative for the Revenue pointed out that the expenditure claimed by the assessee on research and development was because of the own R&D expenses carried on by the assessee. The assessee had applied for the patents of the said item but no registration was granted because of technical difficulty. He further pointed out that the assessee had shown the said amount as current assets and no claim was made in the Profit & Loss Account and hence, there was no question of allowing of said expenditure. He stressed that since the design has been made by the assessee, the expenditure was capital in nature and hence, not allowable.
Contention of Assessee
The Ld. AR for the assessee pointed out that the assessee was in line of auto parts and ancillary unit for the past several years and the main customer of the assessee was Tata Motors which was manufacturing body parts. For the said concern, because of the R&D expenses carried on by the assessee, it reduced the cost of the load and against which the assessee also received certain compensation. The learned Authorized Representative for the assessee pointed out that the said expenditure was allowed by the CIT(A) under section 35(1)(i) of the Act, but it is clear that the nature of expenses was not capital in nature. Further, reliance was placed on the decision of Pune Bench of Tribunal in Opus Software Solutions (P.) Ltd. Vs. ACIT, (2012) 139 ITD 427 (Pune) for the proposition that even if the R&D expenses were of enduring benefit, but the same were in revenue field.
Held by the Tribunal
The first aspect of the issue before the Tribunal was that where the assessee had capitalized the expenditure in its books of account, can the assessee in turn claim said expenditure by way of deduction in its computation of income? The Tribunal held that The law on this account is established that the accounting entries in the books of 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. Where any expenditure has been incurred which is capital 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 the assessee, we are of the view that the same is revenue expenditure allowable as deduction in the hands of assessee either under the provisions of section 35(1)(i) or 37(1) of the Act. The expenditure having been incurred by the assessee by way of research, which resulted in reduction in the weight of body parts and also generation of revenue in the hands of assessee to the extent of Rs.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. 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, the Tribunal found no merit in the order of Assessing Officer in this regard. Upholding the order of CIT(A), the ground of appeal raised by the Revenue dismissed.