TaxTMI 
TaxTMI 
TaxTMI 
2015 (8) TMI 328
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....at the assessee is a textile machinery manufacturer. In the assessment order, the Assessing Officer has observed that the assessee has incurred expenses amounting to Rs. 67,24,547/- by way of professional charges paid to Pacific Consultants for the Green Field Project executed in China and also legal fees paid of Rs. 51,00,000/- in respect of company law matters for the purpose of establishing subsidiary company in China for the Green Field Project. These expenses are incurred in connection with the feasibility studies and forming wholly owned subsidiary company in China. Since these expenses incurred are not directly related to the assessee's business activities in India and they are incurred as capital expenditure for forming new subsidiary company in China, the Assessing Officer has observed that this cannot be allowed as revenue expenditure under section 37 of the Income Tax Act and therefore, the Assessing Officer has disallowed the same. 5. The assessee carried the matter in appeal before the ld. CIT(A). The ld. CIT(A) has observed that the subsidiary in China is manufacturing only ring frames. The expenditure was incurred for expanding the existing business of the asses....
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....same on the ground that it has incurred in connection with the feasibility status for forming wholly owned subsidiary company in China and it is capital expenditure to form new subsidiary company, it cannot be allowed under section 37 of the Act. On appeal, the ld. CIT(A) has observed that the expenditure incurred in the ordinary course of the business of the company and also for finding avenues for export of the manufactured machinery of the assessee outside of India and directed the Assessing Officer to allow the expenditure under section 37(1) of the Act. We find that the expenditure incurred by the assessee was not for the purpose of exporting goods from India to China. The expenditure incurred by the assessee company to find out the feasibility of proposed new establishment in China. Therefore, the expenditure incurred by the assessee is for the purpose feasibility of establishing a new company i.e. Green Field Project in China cannot be said that it is for the purpose of the business of the assessee. It is not the case of the assessee that the project carried out by the assessee ultimately not materialized. It is only a case of the assessee that the expenditure incurred is re....
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.... the expenditure incurred would be of revenue nature. In the present case, it is not the case of the assessee that the assessee has not created any new asset. Therefore, the case law has no application to the facts of the case. 13. In so far as case law relied on by the ld. DR is concerned, in the case of Triveni Engg. Works Ltd. v. CIT (supra), the Hon'ble Delhi High Court has observed that the expenditure was attributable to capital having been incurred with a view to bringing an asset or advantage into existence and having enduring benefit. If the project is not materialized, the nature of expenditure would not change to revenue. Further, in the case of McGax-Ravindra Laboratories (India) Ltd. v. CIT (supra), in this case, the assessee company wanted to set up a manufacturing unit in Malaysia and it was a joint venture unit. The Hon'ble Delhi High Court has observed that the expenditure incurred by the assessee for the foreign travel of its employees for exploring the possibility of establishing joint venture unit in Malaysia is not revenue in nature and it was held that it is capital. 14. Keeping in view of the above, we find that the ld. CIT(A), without considering t....
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....e lessee Super Sale India Ltd. was to give feedback on the performance of the machineries to the assessee company so that it can be used by R & D department to rectify any short-comings in these machineries. So, the assessee has claimed that these machineries are used in R & D work and should be allowed under section 35(iv) of the Act. The Assessing Officer has inspected to verify the actual R & D work carried out and found that outing building 1/3rd portion of being used for the purpose of actual working of R&D and its personnel are testing on the prototype which are designed by the division. Various adjustments are being made on the prototype machinery by R&D personnel. The balance 2/3rd portion of the pilot mills is being run by Super Sales India Ltd. as textile mill on the basis of lease agreement dated 05.05.2008 and 01.04.2009. The lease is renewed every eleven months. The Super Sales India Ltd. used its own resources for purchase of raw materials, manufacture of yarn and it has own employees and yarn is being marketed by them and income admitted by that company. The assessee company only transferred pilot machinery manufactured by them to the mill premises to be run by Super....
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....tific research which may lead to or facilitate extension of such business. It is also submitted that the Ministry of Science and Technology, Government of India had recognized the in-house R & D activity of the appellant company by according periodical renewals from time to time. Copies of the report of the staff of R & D department of the appellant company regarding their observations through a study of the performance of the textile machinery under mill conditions at the Pilot project are enclosed. They were highly useful in the extension of the appellant's business and this fact has not been disputed by the Assessing Officer." 18. The ld. CIT(A), after considering the submissions of the assessee, allowed the claim of the assessee by observing as under: "5.2 I have gone through the submissions made by the appellant and also the order of the Assessing Officer. The provisions of Section 35(iv) are as under: "(iv) In respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of subsection (2) ..... (2) For the purpose of clause (iv) of sub-section (1) (i) ....
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.... SSIL has agreed for LMW's proposal to make trial run and evaluate the performance of textile machinery in mill condition and to provide expert knowledge for the running and evaluation of the performance of the machinery. The appellant after manufacturing of the machine, before commercialization, have named them as Pilot machinery and has given code number as seen from the information filed before me. I have also examined the list of R & D machines capitalized during the financial year 2008-09. It includes Blow room machinery, prototype machine and Pilot machine, Card LC 333, different pilot batches, draw frame models, speed frame models and ring frame models. The machinery was capitalized at the cost incurred by the appellant company for manufacturing of the same. The details of cost of manufacture have also been examined. 5.5 I have also examined various observation reports furnished by the appellant along with the technical details on the validation trial. There were changes made with regard to various machines. For example, in the case of validation of Comber LK 64, which was modified in the testings by improving the loading and unloading procedure, drafting units and the ....
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....ion Action taken 1. Flyer trough vibration at 1350 rpm New housing with right tolerance under manufacturing. 2. Flyer run out is more Flyer run is correct to less than 0.5 mm by bending the center stem. This is to- be monitored further. R & D to recommend the allowable run out. Spindle speed to be increased from 1000 rpm to 1350 rpm and observed. Similarly in case of other machines also, validation reports at different stages of running the machine and the consolidation reports were filed to show that the data collected during these stages is used by the Research & Development Department of the appellant company to make suitable changes before releasing into the commercial market. Staff of the appellant company was present in the pilot mill to study the performance of the machines placed in the pilot mill. The Assessing Officer has not brought on record any material to say that the activity of the scientific research did not take place. The Assessing Officer has merely denied the deduction because the machinery are used third parties for its business activities and it cannot be said to have been used directly by the assessee for doing research and development in pro....
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....ted and not by the assessee directly. M/s. Super Sales India Limited has to give a performance report of the machineries to the assessee company and thereby the R&D department rectify any shortcoming based on the report given by M/s. Super Sales India Limited. Ultimately, M/s. Super Sales India Limited has utilised the machineries installed by the assessee for the R&D facilities and thereby M/s. Super Sales India Limited manufactured yarn, sold the same and income was earned. The main purpose of M/s. Super Sales India Limited is to earn income. In that process, if any shortcoming is found, it has to be reported the assessee, thereby the machineries installed by the assessee has not directly used for the purpose of R&D. The machineries used by the 3rd party cannot be said that the assessee company only carried out R&D activities based on the report submitted by the 3rd party i.e. M/s. Super Sales India Limited. Therefore, the claim of the assessee cannot be allowed. The ld. CIT(A), without examining the basic facts of the case and by considering the agreement submitted by the assessee, directed the Assessing Officer to allow the claim of the assessee. Before the ld. CIT(A), the asse....