COMMISSIONER OF INCOME TAX-II CHD. vs. M/S ESSEB DEINKI CHANDIGARH

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ITA/280/2012HC Punjab & HaryanaPHHC01099361201209 January 2013Bench: MR. JUSTICE HEMANT GUPTA,MS. JUSTICE RITU BAHRI3 pages
AI SummaryDismissed

What did the High Court hold?

The High Court dismissed the appeal, finding no substantial question of law arose. The Court agreed with the ITAT's observation that Research & Development is a continuous process, and technological advancements necessitate ongoing improvements. Even if a product has been sold, further development or refinement of its prototype can still occur. The Court noted that the ITAT had recorded a finding of fact that the assessee had indeed incurred expenditure for research and development activities. The Revenue's entire argument was based on the product being marketed, but the Court found that the mere fact of marketing does not preclude further R&D. Therefore, the ITAT's decision to uphold the CIT's order, which allowed the R&D expenses, was affirmed. The operative direction was the dismissal of the appeal.

What were the facts?

The Revenue, Commissioner of Income Tax-I, Chandigarh, filed an appeal under Section 260A of the Income Tax Act, 1961, against an order dated 24.05.2012 passed by the Income Tax Appellate Tribunal (ITAT), Chandigarh Bench 'A'. The ITAT had upheld an order of the Commissioner of Income Tax (CIT) which set aside the Assessing Officer's (AO) disallowance of Research & Development (R&D) expenses claimed by the assessee, M/s Essen Deinki, Chandigarh, for assessment year 2000-01. The assessee claimed Rs.45,57,784/- as capital expenditure for developing a 14 Pin Double Decker Relay Socket and a 48x96 panel meter. The AO disallowed this, stating the items were already being sold, thus not qualifying for deduction under Section 35(1)(iv). The CIT and subsequently the ITAT allowed the claim.

What were the issues?

1. Whether the ITAT was right in law and on facts in allowing Research & Development expenses where the items for which R&D was claimed as capital expenditure were already developed and sold by the assessee? (Question of law and mixed fact and law, turning on Section 35(1)(iv) of the Income Tax Act, 1961). Assessee's Contentions: The judgment does not record specific contentions made by the assessee before the High Court. However, the ITAT's reasoning, upheld by the High Court, suggests the assessee argued that R&D is a continuous process, and even if a product is sold, further improvements or prototypes may require ongoing development. Revenue's Contentions: The Revenue argued that the ITAT was wrong in allowing R&D expenses because the products for which the expenditure was claimed were already being marketed and sold by the assessee. The Revenue contended that the AO had rightly disallowed the expenditure and that the ITAT's decision to set aside the AO's finding lacked adequate reasoning.

Which sections of the Income-tax Act were involved?

Section 260A,Section 35(1)(iv)

AI-generated summary — verify with the full judgment below

ITA No. 280 of 2012 -1- IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH ITA No. 280 of 2012 Date of decision: 09.01.2013 The Commissioner of Income Tax-I, Chandigarh ...Petitioner Versus M/s Essen Deinki, Chandigarh ..Respondent CORAM: HON'BLE MR. JUSTICE HEMANT GUPTA HON'BLE MS. JUSTICE RITU BAHRI Present:- Ms. Urvashi Dhugga, Advocate for the petitioner. HEMANT GUPTA, J. (Oral) The Revenue is in appeal under Section 260A of the Income Tax Act, 1961 (for short 'the Act') against the order dated 24.05.2012 passed by the Income Tax Appellate Tribunal, Chandigarh Bench 'A' Chandigarh (for short 'the Tribunal) in ITA No. 704/CHD/2010 for the assessment year 2000-01. The Revenue has framed the following substantial question of law:- “Whether ITAT was right in law as well as on facts in allowing the Research & Development expenses where items for which Research & Development had been claimed as capital expenditure and the same were already developed and sold by the assessee?” The assessee claimed that a sum of Rs.45,57,784/- is capital expenditure incurred on Research and Development during the relevant assessment year. The assessee furnished the information that such

ITA No. 280 of 2012 -2- expenditure was incurred for development of 14 Pin Double Decker Relay Socket and for 48x96 panel meter. The Assessing Officer found that such articles were already being sold by the assessee, therefore, it was found that the Research and Development expenditure claimed by the assessee is not allowable expenditure under Section 35(1)(iv) of the Act and consequently made addition to the income of the assessee. The said order of the Assessing Officer was set aside by the Commissioner of Income Tax on 26.03.2010. The said order has been affirmed by the Tribunal vide order dated 24.05.2012. The Tribunal observed that development of new project through Research is a continuous process because technology is changing very fast . Thus, even if assessee has developed 14 Pin Double Decker Relay Socket and 48x96 panel meter but still the prototype may require further improvement. Mere selling of units will not show that the assessee already has the technology of the same product. Consequently, the order of the Commissioner of Income Tax was upheld. Learned counsel for the appellant has vehemently argued that the product on which the assessee has claimed capital expenditure was already being marketed, therefore, such expenditure has been rightly disallowed by the Assessing Officer and that such finding has been set aside without any adequate reasoning. We have heard learned counsel for the appellant and do not find any merit in the present appeal. It could not be disputed that the assessee has carried out Research and Development activities. The entire basis of argument is that the product for which the assessee has claim expenditure

ITA No. 280 of 2012 -3- during the course of assessment proceedings was already being marketed. We find that the capital expenditure incurred on the Research and Development activities is a continuous process and even if a specific product has been sold at one stage, but still the developments in the product can be carried out. It is finding of fact recorded by the Learned Tribunal that the assessee has incurred expenditure for research and development activities. Consequently, we find that no substantial question of law arises for consideration by this Court in the present appeal. The same is accordingly dismissed. (HEMANT GUPTA) JUDGE ( RITU BAHRI ) JUDGE January 09, 2013 G.Arora/Vimal

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