AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2018 (8) TMI 675
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.... Expenditure (RCS)). 2. Without prejudice to Ground 1, the Ld CIT(A) has erred in confirming the action of the AO in not allowing deduction of indirect expenses of Rs. 44, 21, 635/- while treating the receipt on sale of 3 Alygn Machines as revenue receipt. The Ld. CIT(A) has further erred in holding that indirect expenses are overhead expenses and they are not directly connected or identifiable with the machines sold. On the facts and circumstances of the case, indirect expenses of Rs. 44, 21, 635/-, which are debited to Capital Work in Progress, ought to be allowed as deduction in taxing the receipt on sale of 3 Alygn Machines as revenue receipt. 3. Without further prejudice to Ground 1 above, the Learned CIT(A) has erred in confirming the action of the AO in adopting the cost of purchase 3 Alygn machines sold at Rs. 7, 22, 853/- as against Rs. 16, 12, 630/- being actual cost of purchase incurred by the appellant. On facts and circumstances of the case, the purchase cost ought to be taken at Rs. 16, 12, 630/- and not Rs. 7, 22, 853/- adopted by the AO. 4. Ld. CIT(A) has erred in confirming the disallowance of expenses of Rs. 51, 15, 880/- made by the AO by treating these ....
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....relied on couple of decisions viz. CIT vs. Bokaro Steel Ltd. (SC) 236 ITR 315; Indian Oil Panipat Power Consortium Ltd. vs. ITO 315 ITR 255 (Del) to defend its case. The submissions of the assessee did not find favour with the Assessing Officer and the Assessing Officer treated the sale as sale of fully developed machines as per the alterations required to suit the buyer. The Assessing Officer also distinguished the case laws relied upon by the assessee and thus, after allowing expenses of Rs. 14, 75, 553/- made net addition of Rs. 45, 09, 496/-. 4. In the appellate proceedings, the CIT(A) also confirmed the addition made by the Assessing Officer by observing as under: "5. I have considered the facts of the case and submissions of the assessee. Product development is a continuous process of the assessee and it keeps on going, whereas, A.O. has rightly observed that the machine sold must have been either complete and required no further development or they must have been at a stage which could be commercially or industrially used by the buyer and, therefore, sale of the machine should be treated as income of the assessee and need not be reduced from cost of the products. The clai....
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....by sale of demo/trial products or by recovery by way of rent on the project side were credited to Product Development Account, which is in line with the generally accepted Accounting Standard and also the ratio laid down by the Apex Court and other judicial forums. The learned AR stated that the assessee is engaged in development of integrated solutions and machine to machine technology for improving the performance of industrial equipments according to the business requirements, improve the quality of the product and enhance the product reliability. The learned AR argued that the sale of 3 Alygn machines to three parties viz. M/s. Raja Biscuits, M/s. Cole and M/s. Esdee during the year, were in fact trial/demo machines, which were part of product development process of the assessee and, thus, were sold so that further improvement could be made on these machines and the product which is finally developed as finished product is of high standard so that assessee could establish its name in the market. The learned AR submitted that even a slight defect or malfunctioning of the machine could lead to product failure, which may cause huge damage to the reputation of the assessee and enta....
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.... produce or manufactured products, the same should be set off against the indirect expenditure incurred during the period of development /test runs. He further referred to other paras of the Guidance Note viz. 15.2 and 17.11 to reinforce his arguments. Finally, the learned AR submitted that the order of the CIT(A) is bad in law in view of the fact that the sale of demo/trial products were treated as normal sale and, thus, denied the assessee set off against the revenue expenditure incurred on product development, which was in progress during the year. While relying on the decisions of the Tribunal in the case of International Seaports (Haldia) Pvt. Ltd. in ITA No. 1194/Kol/2010 for A.Y. 2004-05 and Gujarat State Fertilizers & Chemicals Ltd. in ITA No. 3228 & 3358/Ahd/2003 for A.Y 1999-2000, the learned AR pleaded that the order of the CIT(A) may be set aside and the Assessing Officer be directed to reduce the amount of sale of Alygn machines from the three parties as also the rental receipts from the Project Develop Expenses account as has been claimed by the assessee. 6. The learned DR, on the other hand, heavily relied on the orders of the authorities below and submitted that th....
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....during the trial run or product development stage, the same should be set off against the expenditure incurred in connection with the said project/products. The case of the assessee is also squarely covered by the decisions relied upon by the learned AR. In the case of International Seaports (Haldia) P Ltd.vs. ITO (supra), the co-ordinate Bench has held as under: 8. We have heard rival contentions of both the parties and perused the materials available on record. The ld. AR submitted the paper book which is running from pages 1 to 113 and highlighted that to make the berth ready for commercial operations the assessee was to undertake the responsibility of completing the work in accordance to the agreement of building the berth 4A. As per the agreement trial run was the precondition before the start of the commercial operation. The assessee treated the trial run of vessels as 'preoperative handling' of the plant and income generated from such preoperative handling has been treated as 'preoperative income'. In the books of account of the assessee for the previous year relevant to the assessment year under dispute, such preoperative income has been set off against the preoperative e....
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....any income earned on such operation during trial run was incidental to the building of assets for setting up the Berth. Therefore, income earned during preoperative stage was a capital receipt, which would go to reduce the cost of asset and it is settled that the deposit of money was directly linked with the purchase of plant and machinery. Hence, any income earned on such deposits was incidental to the acquisition of assessee for setting up the plant and machinery. Thus, the interest was a capital receipt which would go to reduce the cost of the asset and Ld AR relied on the decision of Hon'ble Supreme Court in the case of CIT v. Karnal Co-operative Sugar Mills Ltd. (2000) 243 ITR 2 (SC) and C.I.T. Vs. Bokaro Steel Limited.(1999) 236 ITR 315 (SC) 9. From the aforesaid discussion, we find that the assessee has made some income during the period of trial run and the same was adjusted against the pre-operative expenses. The AO rejected the working of assessee and held that the income generated during the trial run income period cannot be adjusted against the preoperative expenses and the same was confirmed by the Ld. CIT(A). However, we observe that it was the condition in the agr....
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....at production commenced. The Commissioner (Appeals) confirmed the order of the Assessing Officer but the Tribunal reversed that order holding that section 80-IA/80-IB of the Act being beneficial legislation, the benefit should be extended to the assessee. It further held that as on March 20, 1998, only trial production started which was different from commercial production and the benefit of that section should be allowed in the year in which commercial production started, i.e. in the assessment year 1999- 2000 and, therefore, would be extendable up to the assessment year 2003-04. On appeal : Held, that the initial assessment year, for the purpose of section 80-IA, was the assessment year relevant to the previous year in which the "industrial undertaking begins to manufacture or produce articles or things". The trial production began on March 20, 1998, as per the details given in the audit report furnished by the assessee along with its returns of income for the assessment years 2003-04 and 2004-05. There was no dispute that the first sale was made on April 23, 1998, which would be the period relevant to the assessment year 1999-2000. Merely because some closing stock was shown ....
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....d below : "The word "articles" used in the expression "has begun or begins to manufacture or produce articles "in section 15C(2)(ii) must be interpreted regard being had to the object for which the section was enacted. The provision was enacted with a view to encouraging the establishment of new industrial undertakings and the object was sought to be achieved by granting exemption from tax on profits derived from such undertakings during the first five years. The object of the section presupposes that profits are capable of being earned. Hence, until an assessee reaches a stage where it is in a position to decide that a final product which can be ultimately sold in the market can be manufactured it cannot be said to have started manufacture of the articles. If it becomes necessary for an assessee to produce a trial product at an earlier stage to verify whether it can be used ultimately in the manufacture of the final article, the commencement of operation for the manufacture of the trial product would not constitute commencement of manufacture of articles for the purposes of section 15C. The assessee-company undertook a project for the manufacture of penicillin. It started act....
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.... stage. It is well settled that under the accounting practices, all expenditure including interest cost incurred during the project construction period are accumulated and disclosed as capital work-in-progress until the assets are ready for commercial use. Income earned from investment of surplus borrowed funds during construction/trial run period is reduced from capital work-in-progress for accounting purposes while expenditure/income arising during trial run is added to/reduced from capital work-in-progress. Hon'ble Apex Court in the case of Bokaro Steel Vs. CIT, 236 ITR 315 held that if the assessee receives any amount which are inextricably linked with the process of setting up its plant and machinery, such receipts would go to reduce the costs of assets and would be receipt of a capital nature, which cannot be taxed. In the case under consideration, undisputedly and as found by the Id. CIT(A), the plant is under testing for its efficiency prior to commencement of commercial production and the inputs and outputs have already been netted by GSFC and the net result has been capitalized. Considering the facts and circumstances of the case and the guidelines of the ICAI, we are....
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....hereas in some other expenses charged to profit and loss account the same ratio has not been followed by the assessee, details whereof is appended in para 6 of the assessment order. The Assessing Officer came to the conclusion that the assessee has debited to the profit and loss account the expenses without justification and accordingly, the assessee was show caused as to why the same ratio of 10:90 should not be applied to other expenses also. Thereafter, the assessee replied to the show cause notice, which did not find favour with the Assessing Officer and he worked out the disallowance of Rs. 51, 15, 880/- and added it to the total income of the assessee, the details thereof is given in para 6.3 of the assessment order. 11. In the appellate proceedings, the learned CIT(A) affirmed the assessment order by observing and holding as under: "I have considered the facts of the case and submissions of the assessee. If common expenses have been apportioned by the assessee itself in the ratio of 9:1 between product development expenses and the income received during the year then logically the other expenses should have also been incurred in the same ratio and, therefore, I agree with....