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Income Tax Appellate Tribunal, MUMBAI BENCH “G” MUMBAI
Before: SHRI PAWAN SINGH & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2010-11. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-10, Mumbai [in short ‘CIT(A)’] and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).
The ground of appeal filed by the assessee reads as under: “The Ld. CIT(A) erred in confirming the disallowance of Expenditure of Research and Development of Rs.16,51,786/- in utter disregard to the facts and circumstances of the case.”
3. Briefly stated, the facts of the case are that the assessee, engaged in manufacturing of drugs and pharmaceuticals, filed its return of income for the assessment year (AY) 2010-11 on 15.10.2010 showing total income of Rs.83,22,450/-. It had incurred an expenditure Rs.16,51,786/- towards research and development. The Assessing Officer (AO) observed that the total turnover of the assessee for the impugned assessment year was Rs.15.81 crore as compared to the turnover of Rs.13.42 crore of the previous year. Further, during the year under consideration, the export turnover of assessee increased from Rs.9.71 crore to Rs.13.44 crore. It is noted by the AO that in response to a query raised by him to show cause as to why the research and development expenses should not be capitalized, the assessee failed to file the details of expenditure. Therefore, the AO made an addition of Rs.16,51,786/- as capital expenditure.
4. In appeal, the CIT(A) observed that the research and development expenditure is in the nature of giving lasting benefit to any organization though it is in the nature of recurring revenue expenditure. Observing that such research and development expenses, unless approved by the statutory authority, the same cannot be allowed as revenue expenditure, the CIT(A) upheld the order of the AO disallowing the same as capital expenditure. 5. Before us, the Ld. counsel of the assessee files a copy of the Paper Book (P/B) containing (i) copy of letter dated 30/11/2016 filed with CIT(A), submitting groupings of ‘Manufacturing & Other Expenses’ to establish that research & development expenditure had been claimed M/s Stellar Chemical (ii) copy of reply dated 29.11.2016 submitted to CIT(A) in response to remand report, (iii) copy of remand report dated 15/11/2016 and (iv) copy of application under Rule 46A submitted to CIT(A) along with paper book in duplicate. The Ld. counsel submits that the expenditure of Rs.16,51,786/- incurred by the assessee towards research and development is nothing but revenue expenditure and the same be allowed. On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A).
We have heard the rival submissions and perused the relevant materials on record. A perusal of the records clearly indicates that the expenditure of Rs.16,51,786/- incurred by the assessee is operational in nature and solely intended for the furtherance of the enterprise. In the case of CIT v. Ciba of India Ltd. 69 ITR 692, the Hon’ble Supreme Court ruled payments made for the right to have access to the technical knowledge and the fruits of continued research and experience of a foreign company and to use its patents and trademarks are on the revenue account. Also in CIT v. IAEC (Pumps) Ltd. 232 ITR 316, the Hon’ble Supreme Court held the amount paid by the assessee to a foreign company for granting a license to use its patents and design exclusively in India for a period of 10 years with a right to renew it further to be of revenue in nature. In CIT v. Carburettors Ltd. 221 ITR 680, a company manufacturing carburettors made an outright purchase of drawings to manufacture M/s Stellar Chemical certain special types of carburettors for the defence department. The drawings are likely to lose their usefulness after the contract with the defence department was performed. The Madras High Court held the cost of drawings to be revenue expenditure. Similarly, in Alembic Chemical Works Co. Ltd. v. CIT 177 ITR 377 (SC), a lump sum consideration paid for technical knowhow to achieve higher levels of production by better technology was held by the Hon’ble Supreme Court to be on revenue account. In these cases, the Court rightly understood the needs of business in this age of rapidly advancing technology and rejected the department’s claim that the expenditure brought into existence an advantage of enduring benefit. In the instant case, the AO has made the addition of Rs.16,51,786/- as capital expenditure on the basis of the turnover of the assessee over two assessment years. One wonders the basis of such an addition. Also the CIT(A) confirms the above addition made by the AO on the ground that such research and development expenses, unless approved by the statutory authority, the same cannot be allowed as revenue expenditure. He has not mentioned the name of the authority. Be that as it may, an assessee engaged in manufacturing of drugs and pharmaceuticals need research and development expenses. In view of the factual matrix and the position of law delineated hereinbefore, the addition of Rs.16,51,786/- made by the AO is deleted.