TaxTMI 
TaxTMI 
2021 (7) TMI 771
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 have appreciated that the expenditure of designing and technical consultancy s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ments. 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 agreement' with the subsidiaries of Sogefi SAS, France, for taking assistance and advice in the above field and to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....evelopment 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, the company is capitalizing 70% of the above expenses under "Intangible Asset" and the balance 30% is expensed out in the income statement as revenue expenses. 16. Every development ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....evelopment 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 separately for the products under which ,certain items were to be modified and certain new items were to be manufactured to earn more profits or advantage in the long run. 22. On the allowability of the above intangible asset under the Income tax Act, keeping in view the decision of the Hon'ble Supreme Court in the case of Em....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re 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 to the statement of profit and loss unless a product's technical feasibility has been established, in which case such expenditure is capitalised. The amount capitalised comprises expenditure that can be directly attributed or allocated on a reasonable and consistent basis to creating, producing and making the asset ready for its intended use. Fixed ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....en 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. Though, each assessment year being a unit, what was decided in one year may not apply in the following year; where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. [The Court emphasized that the decis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....% 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 R&D should be treated as revenue or capital expenditure? It is a well-accepted legal preposition that no test of universal application can be laid down to determine the question whether an expenditure incurred by the assessee is revenue or capital. It depends on the overall facts and circumstances of each case. Such matters have to be decided from a practical view and on application of the proper principles of law. Courts are of the view that keeping in mind the ground realities of business, AO should cons....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ved 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 already being produced; whether the improvisation made is part and parcel of the existing business or a new business was set up with the so-called technical know-how for which payments were made; whether on expiry of the period of agreement the assessee is required to give back the plans and designs which were obtained, but the assessee could manufacture the product in the factory that has been set up with the collaboration of the foreign firm; the cumulative effect on a construction of the various terms and conditions of the agreement; whether the assessee derived benefits coming ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. 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 reiterated the same in its annual report that it is capital expenditure. Contrary to this, the assessee is trying to establish that the expenditure is in revenue field. However, the expenditure is not incurred in the conduct of day to day affairs of the assessee company. On the other hand, it was incurred for securing enduring benefit which is for a longer period not pertaining to a single year when it was incurred for. In other words, the benefit of R&D is not for running business, but for securing advantage in the capital field and it was not established by the assessee that it was incurred out of circulating capital. In these circumstances, we are not in a pos....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eriving 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 account and 70% of R&D expenditure was considered as intangible assets by showing it in the balance sheet and it is not because of matching principle the expenditure was bifurcated as above. 36. Being so, we hold that the expenditure is in the capital field and to be considered as not allowable. On other hand, the assessee is entitled only for depreciation at applicable rate. This ground of assessee is partly allowed for all the assessment years i.e., AYs 2013-14 to 2016-17. 37. For AY 2012-13, this issue was already considered by the Tribunal vide order dated 22.12.2017. Accordingly there is no requirement of adjudication of this ground and the appeal is recalled by the Tribunal vide MP No.36/Bang/2018 dated 18.5.20....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er 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 expenditure. It has travelled to CIT(Appeals) and he has also given a concrete finding that it is capital expenditure. We are also agreeing with the same after examining the issue in the light of facts enumerated before us. We find that there is considerable force in the reasons given by the lower authorities. In our opinion, going through the facts of the case, the entire complexion of the case has been changed compared to assessee's case in the earlier AYs 2010-11 & 2011-12. Being so, the lower authorities are entitled to take a different view when altogether different case was presented before them. At this stage, it is appropriate to refer to the caselaws wherein it is held that Bench can draw different conclusion if there....