TaxTMI 
TaxTMI 
2021 (7) TMI 771
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....tributable to product development and which has been consistently claimed and allowed as 'revenue expenditure' in the previous assessment years 2010-11 & 2011-12 and therefore, the finding of the CIT(A) is totally contrary to the settle law of 'Principle of Consistency'." 3. At the time of hearing, the assessee filed the common consolidated grounds of appeal, which are taken up for adjudication in lieu of original grounds of appeal raised by the assessee in its appeals in ITA Nos.1696 to 1698/Bang/2019 and 2089/Bang/2019. The common consolidated grounds in these appeals are as follows:- "1. The CIT(A) erred in not holding that the expenses incurred on design and technical consultancy towards improving the exisiting product in the same line of business as' revenue expenditure'. 2. That on the facts and in the circumstances of the case, the learned CIT(A) has erred in holding that the expenditure of design and technical services incurred towards improving the existing product which has the effect of long-term or enduring benefit to the appellant and therefore, it needs to be capitalized as 'capital expenditure'. 3. The CIT(A) ought to hav....
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....e particularly for two and four wheelers and filters for clean rooms, pollution control, and industrial requirements. 9. M/s.Filtrauto, SA of France had acquired 70% equity shares from shareholders of M.N. Ramarao Filters P Ltd in the year Nov 2008 under automatic route with due approval from Reserve Bank of India. Consequent to investment, the name of the company was changed to M/s. Sogefi MNR Filtration India Private Limited. The company has manufacturing facilities in Bangalore and in Pune. The major customers to include M&M, Bajaj, TVS and other two wheeler manufacturers. 10. The ld. AR further submitted that the assessee company is into manufacturing, distribution and sale of products such as Air intake and Cooling Systems, filters (oil filters, engine air filters, fuel filters, etc.,) suspensions and precision springs and other components for cars, trucks and other vehicles which operates, inter alia, in Europe, South America, United States, China, India and worldwide. The assessee company has developed through its R & D platform, all the necessary expertise, experience, organization and means in the development of products. It entered into 'intercompany service agr....
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....gaged in design services, mainly meant for captive consumption, for improvisation of existing products of the company and development of new products for the automotive customers. The company is also into export sale of design services to its group companies situated outside India. The costs related to design services inter-alia to include :- a) Salaries & wages of design engineers and other employees involved in development; b) Minor materials like prototypes and other testing materials; c) All other direct costs related to employees like travelling and lodging; d) Rent and electricity for the design department; e) Depreciation on fixed assets directly used for development; g) Other direct expenses to include printing and stationery, consumables, office expenses; and h) All other indirect and allocable common costs like expenses of purchase employees; salaries of common employees. i) Costs of design services imported from group companies situated outside India. 15. All the above expenses are development expenses incurred by the company in anticipation of future income and to meet the matching principle, ....
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....91,13,452 Minor Materials 16,49,214 Travelling & Conveyance 53,75,596 Salaries & wages 2,19,42,837 Particulars DR CR Amortisation charges 2,37,98,801 To Intangible 2,37,98,801 Particulars DR CR Development expenses (W/off) 81,35,401 81,35,401 81,35,401 20. It is once again retreated that the assessee company had bifurcated sum out of total expenditures, salary & wages ,telephone, traveling expenses, other administration expenses and allocated to the modification of existing product / development new product with the asset under the same machinery, with the same work force and expertise with the same machinery including the building. 21. The amount on account of the above treated as Capital expenditure under intangible assets cannot be treated as capital expenditure on disallowance under the Income tax Act. The Company on account of the above, had not purchased any new machinery or created any new capital assets and the expenditures incurred by the company is only on day to day running business. The bifurcation has been made sepa....
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.... upon the note given by the assessee in its original return, which had been regarded as insufficient. Moreover, under section 139(5), the assessee was entitled to file the revised return rectifying the error committed in showing the expenditure. Moreover, the finding of the Tribunal that the expenditure incurred was revenue expenditure and/or for business purpose, had neither been challenged, nor there was any challenge to the finding that no capital asset had come into existence. The Tribunal had recorded in its order that the revenue did not ever doubt that the expenditure incurred was exclusively and wholly for the purpose of business. Therefore, no question of law arose for determination of the High Court. [Para 7]" 23. It was therefore submitted that disallowance of any intangible assets claimed by assessee u/s. 37 of the Act was not justified and the same was allowable. 24. The ld. AR also drew our attention to Notes on clauses in respect of R&D expenses which reads as follows:- "p) Research and development expenses Revenue expenditure pertaining to research is charged to the statement of profit and loss. Development costs of products are also charged ....
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....of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency. * Radhasoami Satsang v. CIT (1992) 193 ITR 321 (SC) Held that, in the absence of any material change justifying the Department to take a different view from that taken in earlier proceedings, the question of the exemption of the assessee appellant should not have been reopened. Strictly speaking res judicata does not apply to income-tax proceedings. ....
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.... 27. We have heard both the parties and perused the material on record. The assessee is engaged in the manufacture of automotive filters for two and four wheelers and other filtration products and systems. In these assessment years the assessee incurred and claimed R&D expenditure which was disallowed by the AO as follows:- AY Amount (Rs.) 2012-13 89,47,220 2013-14 51,67,652 2014-15 61,89,234 2015-16 53,28,482 2016-17 68,13,452 28. The assessee has capitalized 70% of R&D expenditure in its balance sheet as capital expenditure and charged 30% as R&D expenditure to P&L account in these assessment years. However, while filing the return of income, the assessee claimed the entire R&D expenditure as a deduction by treating it as revenue expenditure which was disallowed by the AO. The claim of assessee before us is that the said expenditure to be treated as revenue expenditure though a portion has been claimed by assessee as capital expenditure in the balance sheet by placing reliance on the judgment of Supreme Court in the case of Empire Jute Co. Ltd. (supra). 29. Now the question is, whether this expenditure incurred by the assessee towards ....
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....paratus would be revenue expenditure. (vi) Where the advantage is on the capital filed the expenditure would be treated a capital Expenditure. If the advantage leaves the fixed capital untouched, the expenditure would be on revenue account. (vii) Expenditure in the acquisition of a concern would be capital expenditure; expenditure in carrying on the concern would be revenue expenditure. (viii) An expenditure cannot be considered to be capital expenditure merely on the ground that the amount involved is large. The quantum of expenditure involved cannot alter the nature and character of the expenditure. (ix) The source or manner of the payment are of no consequence in deciding the issue. (x) The question whether a particular payment made by an assessee under the terms of an agreement forms a part of capital expenditure or revenue expenditure, would depend upon several factors., namely, whether the assessee obtained a completely new plan with a complete new process and completely new technology for manufacture of the product or the payment was made for the technical know-how which was for the betterment of the product in question which was ....
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.... loss as incurred. Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditure is capitalised only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalised includes the cost of materials, direct labour, overhead costs that are directly attributable to preparing the asset for its intended use, and capitalised borrowing costs. Other development expenditure is recognised in profit or loss as incurred." NOTES TO ACCOUNTS : INTANGIBLE ASSETS are enclosed as Annexure-I to this order. 31. The argument of the ld. AR is that it has not resulted in any enduring benefit to the assessee and even if it is enduring benefit, the said expenditure is in the nature of revenue and deduction to be allowed. 32. This argument of the ld. AR holds no field. The assessee itself has treated the said expenditure as capital expenditure in its books of account and reiterat....
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....ch are environmental friendly with the help of its group Sogefi who are pioneers in automotive filters and filter assemblies. d) Specific expenditure on R & I) - Refer to the audited financials." 34. A reading of the above makes it clear that the assessee has been incurring this expenditure for improving existing products as well as developing of new products, thereby existing business from the existing customers has been increased as well as new additional customers added. It has also resulted in reduction in rejection on account of quality issues. As such, it cannot be held as expenditure incurred in the ordinary course of carrying day to day business of assessee. On the other hand, it is for deriving enduring benefit in the long run business plan. 35. The other contention of the ld. AR is that to meet the matching principle, the company has capitalized 70% of R&D expenditure under the head "intangible assets" and balance 30% has been claimed as revenue expenses by charging it to P&L account. However, we observe that 70% shares of assessee company is acquired by M/s. Filtrauto, SA of France, as such the assessee charges only 30% of this expenditure to P&L acc....
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....id not take into consideration particular facts and if the second AO is satisfied that if this material facts had been taken into consideration, decision of the first AO would have been different which would justify the second AO in not adhering to the decision of the first AO. On applying the said legal principle to the facts of the present case, it was found that the first AO in earlier AYs 2010-11 & 2011-12 taken a decision in a routine manner, without going into the facts of the case properly, examining the nature of expenditure incurred by assessee with reference to the accounting policies disclosed by assessee and in a mechanical manner he has taken the decision, though it was wrong, it was not scrutinized by the higher forum. The Tribunal had no occasion to examine the issue because it reached finality by the order of AO only and there was no further proceedings either before CIT, CIT(A) or Tribunal. 39. In the present cases, the issue was decided by the AO against the assessee after going thoroughly with the facts of the case and examining the same with the accounting policies followed by assessee and he disallowed the claim by treating the R&D expenditure as a capital e....