DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-5(4), MUMBAI, MUMBAI vs. PERFECT ENGINEERING PRODUCTS LTD, MUMBAI
Facts
The assessee, engaged in manufacturing automobile parts, filed a Nil return for AY 2013-14. The Assessing Officer (AO) treated research and development expenditure of ₹27,022,304/- as capital expenditure, while the assessee claimed it as a deduction. Another issue involved a disallowance under section 14A for an investment of ₹6.37 crores.
Held
The Tribunal held that the issue of research and development expenditure was already decided in favour of the assessee by a coordinate bench, and thus dismissed the AO's ground of appeal. For the section 14A disallowance, the Tribunal noted that the assessee earned no exempt income and relied on High Court decisions, deeming the explanation to section 14A prospective. Thus, grounds 2 and 3 were also dismissed.
Key Issues
1. Whether Research and Development expenditure is capital or revenue expenditure. 2. Disallowance under Section 14A read with Rule 8D in the absence of exempt income.
Sections Cited
143(3), 37(1), 14A, Rule 8D
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
PER PRASHANT MAHARISHI, AM:
This appeal is filed by The Deputy Commissioner Of Income Tax, Central Circle – 5 (4), Mumbai (the learned AO) for assessment year 2013 – 14 against appellate order passed by the learned CIT – A – 53, Mumbai dated 19/6/2023 wherein the appeal filed against the assessment order passed under section 143 (3) of the act dated 21/3/2016 by the learned assessing officer was partly allowed.
“1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing Research and Development expenses as a revenue expenditure ignoring the fact that expenditure on Research & Development is bound to result in enduring benefit for a longer period and hence the expenditure cannot be treated as revenue expenditure and Revenue has filed appeals before Hon'ble Bombay High Court for A.Yrs. 2007-08 and 2008-09 vide ITXA/879/2014 and ITXA/375/2014 against ITAT's order No. 33 & 36 /Mum/2012 dated 31.07.2013 on this issue which are pending for adjudication?
Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting disallowance made u/s 14A read with Rule 8D without discussing the issue on merits and merely relying on the jurisdictional High Court decision rendered in the case of PCIT Vs. Ballarpur Industries Ltd. in ITA No. 51 of 2016 wherein Hon'ble High Court dismissed the Revenue appeal for the reason that no question of Law is involved therein?
Whether on the facts and circumstances of case and in law, the Ld. CIT(A) was justified in ignoring the clarificatory Explanation of section 14A(1) inserted vide the Finance Act 2022 that the provisions of this section shall apply and shall be deemed to have always applied even in a case when exempt income has not accrued or arises or has not been
Brief facts of the case shows that assessee is a company engaged in manufacturing automobile parts. Return of income was filed by the assessee on 30 September 2013 at Rs. Nil. The return was processed under section 143 (1) of the act. The case was selected for scrutiny by issue of notice under section 143 (2) of the act.
During the course of assessment proceedings it was found that assessee company has shown an addition of ₹ 27,022,304/– as research and development expenditure treating it as capital expenditure as intangible assets i.e. development expenditure. However as per the computation of total income filed by the assessee it has claimed the entire expenditure as deduction under section 37 (1) of the act. Thus assessee in its accounts treated this expenditure as capital expenditure and in computation of total income claimed it as revenue expenditure treating it as expenditure wholly and exclusively incurred for the
Assessee explained that identical issue arose in the case of the assessee for earlier assessment years and disallowances made have been allowed by the income tax appellate Tribunal. However the learned assessing officer held that revenue has challenged the decision of the coordinate bench before the honourable Bombay High Court and therefore it disallowed the resultant research and development expenditure of ₹ 27,022,304/– as capital expenditure but allowed depreciation at the rate of 25% on the same.
The another issue of the contention in the appeal is that the learned AO noted that assessee has made an investment of ₹ 6.37 crores in the balance sheet however no disallowance is made under section 14 A of the act. The AO questioned the assessee and thereafter computed the disallowance by invoking the provisions of rule 8D amounting to ₹ 1,519,149.
Several other disallowances were made but which are not in dispute before us and therefore based on this the computation of total income was made by the learned assessing officer at Rs. Nil after setting off of the brought forward depreciation by order dated 21/3/2016 passed under section 143 (3) of the act.
i. That issue of disallowance of research and development expenses is squarely covered in favour of the assessee by the decision of the coordinate bench holding it to be revenue expenditure against the finding of the learned assessing officer that it is a capital expenditure. Accordingly the net disallowance of ₹ 22,041,893/– made by the AO has deleted.
ii. With respect to the disallowance under section 14 A of the act the learned CIT – A has categorically noted that AO contended before the assessing officer that it has not incurred any expenditure for earning any exempt income and has also not claimed any income as exempt. The learned CIT – A relying on the decision of the honourable Delhi High Court in case of Era infrastructure (India) Ltd in ITA number 204/2022 and CM application 31445/2022 dated 20/7/2022 deleted the disallowance under section 14 A. He further held that when there is no exempt income earned by the assessee no disallowance can be made under that section. He further held that the introduction of explanation to section 14 A inserted by The Finance Act 2022 is not clarificatory in nature but applies prospectively.
The learned assessing officer is aggrieved with both the above issues and is in appeal before us.
Before us it was submitted by the learned authorised representative that the above assessee company has been referred to the corporate insolvency resolution process and ARCK resolution professional LLP has been appointed as resolution professional. It was the claim of the learned authorised representative that no order can be passed against the assessee in view of pending resolution process. No arguments on merits were made.
We have carefully considered the rival contention and perused the orders of the lower authorities. The basic intent of Insolvency resolution processes is that the assets of the corporate debtor should not be further impaired during the resolution process. However in the present case both the issues are covered in favour of the assessee, first by the decision of the coordinate bench in case of research and development expenditure and second by the honourable Delhi High Court and jurisdictional High Court with respect to the disallowance under section 14 A of the act.
So far as on the first issue whether the research and development expenditure claimed by the assessee is revenue expenditure or capital expenditure has already been decided by the coordinate bench in favour of the assessee where the revenue has challenged such order of the coordinate bench before the honourable Bombay High Court. But that cannot come into the way of disposal of
With respect to the disallowance under section 14 A of the act we find that assessee has not earned any exempt income during the year, so no disallowance can be made. Therefore the issue is squarely covered in favour of the assessee by the decision of the honourable jurisdictional High Court in case of PCIT versus Ballarpur industries limited. Further with respect to the introduction of explanation to section 14 A of the act by the finance act 2022, honourable Delhi High Court has dealt with this issue in case of Era infrastructure Ltd wherein it has been held that the amendment made is prospective in nature. Accordingly, we dismiss ground number 2 and 3 of the appeal.
In the result, appeal filed by the learned AO is dismissed.
Order pronounced in the open court on 22.03.2024.
Sd/- Sd/- (SANDEEP SINGH KARHAIL) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 22.03. 2024 Sudip Sarkar, Sr.PS
Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai
