TaxTMI 
TaxTMI 
2020 (10) TMI 404
X X X X Extracts X X X X
X X X X Extracts X X X X
....at 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.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ctured 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 expenditu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stence consequent to incurring such expenses nor any enduring benefit has accrued to us for a period of more than one year. Further, the expenses are not at all out personal expenses. Further, these expenses have undoubtedly been incurred wholly and exclusively for our business. Thus, the expenses in question are very much revenue in nature and hence, no disallowance is called for in respect of the same by treating it as capital expenses." 6. The ld.AO thereafter gone through submissions of the assessee. He rejected contentions of the assessee and recorded a finding that the expenditure of Rs. 10,42,41,078/- was incurred for development of new product range as well as valued engineering of existing product ranges and same resulted into enduring benefit to the assessee. He accordingly disallowed the claim of the assessee for revenue expenditure, and treated this expenditure as capital in nature. However, in spite of that, he did not allow depreciation to the assessee. Dissatisfied with the order of the AO, the assessee carried the matter in appeal before the ld.CIT(A). The ld.CIT(A) rejected the contentions of the assessee and affirmed the finding of the ld.AO. 7. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s at Changodar. "R & D activities" are being out to capitalize on emerging trends such as very clean bearing to reduce noise by supplying clean cages, to develop right geometry of cage to reduce energy loss due to friction and allowing bearing for extra load carrying capacity, increasing line production speed to make product most cost competitive for new product development and process improvement in different types of bearing cages. Efforts put in for R & D has helped the assessee to meet the customer needs in accordance with delivery schedules. With assessee's expertise in design and manufacturing complex tooling components in house, assessee has engaged with its customers, developing and manufacturing many products to meet their changing requirements." 8. The ld.counsel for the assessee raised two fold submissions. In his first fold of contentions, he pleaded that this expenditure deserves t o be allowed as revenue expenditure to the assessee. The AO failed to appreciate the contentions of the assessee while presuming that incurrence of this expenditure would bring in new product range/process improvement and cost effectiveness in existing products. The ld.counse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessee would be in the nature of capital expenditure and not an allowable. 11. In the light of the above, let us evaluate the product manufactured by the assessee or its business activity. The assessee has emphasised before the AO that it is engaged in the manufacturing of bearing cages with steel, brass and plymide material and stamped auto components with steel material. According to the assessee, it is a core engineering company. These cages are being of specified measurement, and are to be manufactured with specified tools only. Both tools and cages differ from customer to customer and order to order of various customers. In other words, the customer gives drawings and specification requirement for manufacturing of bearing cages and stamped auto components. The assessee would evaluate various kinds of needs i.e. material, technology, equipment etc. Thereafter, it will prepare a sample product, and if finalized by the customer, then the product will be manufactured as per requirement of the customers. Now, while evaluating this manufacturing activity of the assessee, the ld.AO took a very simplistic view. He analysised breakup of the expenditure which has been tabulated in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly is to be reimbursed either by allowing as revenue or by depreciation, which will recoup the cost over a period of time. But in the present case, the AO has not even granted depreciation. Therefore, overall analysis of the record would indicate that the assessee has incurred this expenditure for fulfilling the requirement of a specified product required to be supplied to a particular customer. The rawmaterial, tools designs ultimately determined by the assessee and used for manufacture of customised products were not meant for uniform application for other customers also, and therefore the expenditure incurred for development of customized products and manufactured and sold by the assessee need not to be capitalized. These are to be treated as revenue expenditure and deserve to be allowed under section 37 of the Income Tax Act. 13. Alternative argument has been raised by the assessee even in that case the expenditure is allowable under section 35 of the Act. The ld.counsel for the assessee took us through section 35(1)(iv) and 35(2)(ia) as well as judgments of Hon'ble Gujarat High Court in the case of CIT Vs. Gujarat Aluminium Extrusions, 263 ITR 453 (Guj). On the other hand, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... said circular reads as under : `"(ii) The amount of capital expenditure incurred by an assessee after March 31, 1967, on scientific research related to his business will be allowed to be deducted in full in computing his business profits of the year in which such expenditure is incurred." 21. From the provisions of the above referred to circular also, the intention of the Revenue is patent. The intention is to give benefit to the assessee who incurs expenditure on scientific research related to his business. Even the circular issued by the Department does not make use of the capital asset a condition precedent for claiming deduction under the provisions of Section 35 of the Act. 22. In our opinion, both the appellate authorities have rightly considered the spirit with which Section 35 of the Act has been enacted by the Legislature and the circular referred to hereinabove while allowing deduction to the assessee under the provisions of Section 35 of the Act. 23. We are of the view that when the Legislature has not expected the assessee to put the asset to actual use, it would not be open to the Revenue to deprive the assessee of the benefit of de....