M/S GREEN PEARL ELECTRONICS P LTD,KANCHEEPURAM vs. ACIT CORPORATE CIRCLE 2 (1), CHENNAI

against the common order of the learned CIT(A)-6, Chennai, dated 28.12.2017 and pertain to assessment years 2013-14 & 2014-15 .

Since, the facts are identical and issues are common, for the sake of convenience, they were heard together and are disposed of by way of this consolidated order.

“1. The order of The Commissioner of Income Tax (Appeals) - 6, Chennai dated 28.12.2017 in l.T.A.Nos.343 & 566/CIT(A)- 6/2016-l7 for the above mentioned Assessment Year is contrary to law, facts, and in the circumstances of the case.

2. The CIT (Appeals) erred in sustaining the disallowance of expenses on the analysis of the book treatment and the treatment given for such expenses in the income tax computation without assigning proper reasons and justification.

3. The CIT (Appeals) failed to appreciate that the disallowance of expenses on the presumption of such expenses incurred at the pre-operative stage was wholly unjustified and ought to have appreciated that the sequence of events after selling up of the business in focusing different products and incurring expenses in relation thereto was completely overlooked and brushed aside, thereby vitiating the findings in para 4.3 of the impugned order. 4. The CIT (Appeals) failed to appreciate that the expenses incurred were wrongly considered as capital in nature which formed part of the another facet of the findings to sustaining the disallowance of such expenses and ought to have appreciated that the details furnished in this regard were not examined properly, thereby vitiating the findings in para 4.3 of the impugned order. 5 The CIT (Appeals) tailed to appreciate that the distinction between the book entries/treatment and the income tax computation was completely brushed aside and ought to have appreciated that flue financial statements for the Assessment Years under consideration and income tax computation were not given due credence at the conceptual level, thereby vitiating the findings in para 4.3 of the impugned order.

6 The CIT (Appeals) failed lo appreciate that there was no proper opportunity given before passing of the impugned order and any order passed in violation of the principles natural justice would be nullity in law.”

4. Being aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A) . Before the learned CIT(A), the assessee has reiterated its arguments taken before the Assessing Officer .The assessee further submitted that expenditure incurred under the head technical consultancy charges, purchase of raw materials and advertisement expenses etc. are in the nature of revenue expenditure, which is incurred for the purpose of existing business and hence, the same cannot be considered as capital in nature, merely because the assessee has treated expenditure under the head deferred revenue expenditure pending amortization over the years.

5. The learned CIT(A) after considering the relevant submissions of the assessee observed that on the basis of the details filed by the assessee, which clearly indicates that technical consultancy charges, electricity charges, purchase of raw materials and payments to certain individuals would certainly partake the character of capital in nature as project work initiated, insofar as manufacturing of LED drives / solar lights has not been completed during the previous year relevant to the assessment year . The learned CIT(A) further observed that on the basis of details furnished by the assessee, the Assessing Officer has come to the finding of fact that expenditure is capital in nature and hence, there is no error in the findings recorded by the Assessing Officer that the products intend to manufacture are not ready for sale during the impugned assessment year and consequently any expenditure incurred for development of said products are definitely in the nature of capital expenditure which gives enduring benefit to the assessee, consequently cannot be allowed u/s.37(1) of the Act.

Aggrieved by the CIT(A) order, the assessee is in appeal before us.

6. The learned AR for the assessee submitted that the learned CIT(A) has erred in sustaining disallowance of expenses on the analysis of book treatment and the treatment given for such expenses in the income tax computation without appreciating the fact that expenses incurred are in the nature of revenue expenditure which does not give enduring benefit to the assessee. The learned AR further submitted that the learned CIT(A) has erred in holding that assessee has developed a new product which was not competed during the relevant financial year without considering the fact that assessee has already started manufacturing the products and generated revenue from sales and consequently, any expenditure incurred for development of said product, which are in the nature of revenue expenses needs to be allowed as deduction irrespective of the accounting treatment given by the assessee in the books of accounts. The learned AR for the assessee further submitted that the issue is squarely covered in favour of the assessee by the decision of Hon’ble Delhi High Court in the case of CIT Vs. Denso India Ltd.(2009) 318 ITR 140, where on identical facts and circumstances, the Hon’ble High Court held that where assessee manufacturing auto electrical parts incurred expenditure for setting up separate cell for developing import substitute parts, the expenditure in question was allowable as revenue expenditure.

7. The learned DR, on the other hand, supporting the order of the learned CIT(A) submitted that as claimed by the assessee expenditure has been treated as deferred revenue expenditure in the books of account, which itself is sufficient to come to the conclusion that expenditure gives enduring benefit to the assessee and hence, the Assessing Officer as well as learned CIT(A) have recorded correct finding to disallow expenditure claimed in the statement of total income and hence, their orders should be upheld.

The assessee is engaged in the business of manufacturing LED lights was purchasing raw materials being LED drives till assessment year 2010-11. The assessee started manufacturing these LED drives in substitute of purchase from the assessment year 2012-13 on the basis of Government policy for encouragement of manufacturing solar based lights in relation to the manufacture of the above mentioned LED drives and solar based lights. The assessee has incurred certain revenue expenditure namely technical consultancy charges, purchase of raw materials, advertisement expenses etc., which were treated as deferred revenue expenditure, pending amortization in the books of account under the head pre-operative expenses, but deduction has been claimed towards total expenditure incurred in the statement of total income for income-tax purposes on the ground that said expenditure is in the nature of revenue expenditure, which were incurred during the relevant financial years for the purpose of business. In the light of above facts, if you examined the claim of the assessee, the said claim needs to be examined independent of treatment given in the books of account. Although, the assessee has treated said expenditure as deferred revenue expenditure pending amortization over a period, but the nature of expenditure incurred by the assessee are such that they are purely in the nature of revenue expenditure incurred wholly and exclusively for the purpose of business of the assessee. Once the expenditure incurred are in the nature of revenue expenditure, which does not give enduring benefit or brought any new asset, then merely for the reason that the assessee has given different treatment in the books of account for the said expenditure, the same cannot be considered as capital in nature which gives enduring benefit to the assessee. It is well settled principle of law that entries in books of account is not detrimental to claim of deduction towards any expenditure, if such expenditure is deductible in accordance with income tax laws. In this case, the Assessing Officer having not disputed the nature of expenditure incurred being revenue has erred in himself in disallowing claim of deduction slowly on the basis of treatment given in the books of account, even though entries in books of account are not relevant criteria to decide nature of expenditure and its deductibility for the purpose of taxation. The said finding is fortified by the judgement of Hon’ble Delhi High Court in the case of CIT Vs. Denso India Ltd. (supra), where under identical set of facts the Hon’ble High Court held that where assessee manufacturing auto electrical parts incurred expenses for setting up separate cell for developing import substitute parts, the expenditure in question was allowable as revenue expenditure. The Hon’ble High Court while allowing the claim has laid down certain parameters and according to the observations of the Hon’ble High Court it is nature of expenditure that is relevant , but not treatment of the expenditure in the books of account / financial statements for determining whether or not the expenditure is of capital or revenue. The relevant findings of the Hon’ble High Court are as under:-

“3. Before the Commissioner of Income-tax (Appeals) the assessee- company contended that despite the treatment given in the backs of account by the assessee-company as deferred revenue expenditure, the fact remains that the said expenditure was of revenue nature- The Commissioner of Income- tax (Appeals) accepted the stand of the assessee-company. inter aIia, for the following reasons

“(I) Prima facie. the expenditure was of revenue nature. (ii) No capital asset was acquired or brought into existence by incurring the expenditure. (iii) Expenditure incurred for the purpose of running a business efficiently cannot for that reason be labelled as capital expenditure. (iv) The treatment of the expenditure in the books account/financial statements is not relevant for determining whether or not the expenditure is of capital or revenue nature (v) Heavy revenue expenditure incurred in one year cannot have the effect of converting it into capital expenditure. For example, expenditure incurred on advertisement. (vi) The Assessing Officer did not dispute the fact that the expenditure was incurred or question the quantum. His main problem was that the company had, in its financial statement, chosen to treat the expenditure as deferred revenue expenditure.

(vii) The Income-tax Act, 1961, does not cater for deferred revenue expenditure no matter what the principles of accountancy prescribe.

(vii,) Even, according to the appellant, the expenditure was treated as deferred revenue expenditure- In other words, irrespective of how the appellant chose to write off the expenditure, it still remained revenue expenditure.”

Tribunal should not be disturbed by the court as no substantial question or law arises.