THE COMMR. OF INCOME TAX FARIDABAD vs. M/S A.R. INDUSTRIES PVT. LTD

Income Tax Appeal No. 272 of 2006 1 IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH. --- Income Tax Appeal No. 272 of 2006 Date of Decision: 1.12.2010 Commissioner of Income Tax, Faridabad --- Appellant Versus M/s. A.R. Industries Pvt. Ltd. Faridabad --- Respondent CORAM: HON’BLE MR. JUSTICE ADARSH KUMAR GOEL HON’BLE MR. JUSTICE AJAY KUMAR MITTAL. --- PRESENT: Ms. Urvashi Dhugga, Standing Counsel for the appellant-Revenue. Mr. S.K. Mukhi, Advocate for the respondent-assessee. --- AJAY KUMAR MITTAL, J. This appeal under Section 260A of the Income-tax Act, 1961 (for short “the Act’”) has been filed by the Revenue against the order dated 3.5.2005, passed by the Income Tax Appellate Tribunal, Delhi Bench ‘SMC’ New Delhi, (in short “the Tribunal”) in ITA No. 3706/DEL/2004, relating to the assessment year 2000-01.

The appeal was admitted for determination of the following substantial question of law by this Court:

Income Tax Appeal No. 272 of 2006 2 “Whether on the facts and in the circumstances of the case, the ITAT was right in law in holding the expenditure of Rs.9,20,000/- incurred for development of new models and samples as Revenue expenditure in nature?” The facts necessary for adjudication, as narrated in the appeal are that the assessee filed its return for the assessment year in question declaring loss of Rs. 14,23,090/-. The assessment under Section 143(3) was completed at a loss of Rs. 3,08,229/- vide order dated 28.3.2003. During assessment proceedings, it was noticed that the assessee had deducted a sum of Rs. 9,20,000/- on account of development charges. In response to the query made by the assessing officer, the assessee explained that the development charges of Rs. 9,20,000/- comprised of raw material, foundry chemicals, labour charges, fuel etc.. Finding the explanation not satisfactory, the expenditure of Rs. 9,20,000/- was treated as capital expenditure and deduction of that amount was disallowed. The assessing officer disallowed certain other deductions also, which are not being noticed as the same are not challenged before this Court. The Commissioner of Income Tax (Appeals), [hereinafter referred to as “CIT(A)”] vide order dated 26.7.2004, confirmed the disallowance made by the assessing officer. Aggrieved thereby, the assessee carried appeal before the Tribunal. The Tribunal did not approve the approach of the assessing officer and the CIT(A) and consequently deleted the disallowance made by the assessing officer and confirmed by the CIT(A). It is how the Revenue is in appeal before this Court. We have heard learned counsel for the parties and perused the record.

Income Tax Appeal No. 272 of 2006 3 The point for consideration in this appeal is, whether a sum of Rs. 9,20,000/- which according to the assessee was incurred as expenditure for development of new models and samples of the vehicles, was admissible as revenue expenses? The Tribunal, after examining the matter, recorded as under: “After considering the rival submissions, I find that assessee deserves to succeed on this ground. There is no dispute that the expenses were incurred and the payments were made by the assessee company. The expenses were incurred on castings, labour and electricity. These expenses cannot be held capital in nature because they did not have any benefit of enduring nature. The samples were prepared for getting the order from various companies i.e. Mahindra & Mahindra, Balero, Scorpio and Tata Indica. The samples were sent for approval of the product and thereafter the product was produced. Therefore, any expenditure incurred on samples and on castings for preparing the samples cannot be held capital in nature. I further note that the assessee company filed return showing loss. Therefore, it cannot be said that there was any motive behind the expenditure shown as revenue as there was no effect on revenue. The assessed income of the assessee is in negative figure, therefore, for this reason also I am of the view that the expenditure incurred by assessee are allowable as revenue in nature. In view of all these facts and circumstances, I direct the AO to treat these expenses as revenue in nature and allow the same.”

Income Tax Appeal No. 272 of 2006 4 A categorical finding has been recorded that samples were prepared for getting orders from various companies, like, Mahindera and Mahindera, Bolero, Scorpio and Tata Indica. The assessee had sent the samples for approval and after having received the consent from said companies, production was carried out. The expenditure which was incurred on the samples and casting could not be held to be capital in nature. No fault could be pointed out by the learned counsel for the appellant in the order of the Tribunal. In view of the above finding, the substantial question is decided against the Revenue and in favour of the assessee. The appeal is accordingly dismissed. (AJAY KUMAR MITTAL) JUDGE (ADARSH KUMAR GOEL) December 1, 2010 JUDGE *rkmalik*