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Income Tax Appellate Tribunal, DELHI BENCH: ‘G’ NEW DELHI
Before: SHRI R. K. PANDA & MS SUCHITRA KAMBLE
This appeal is filed by the Revenue against the order dated 23/02/2015 passed by CIT(A)-22, New Delhi for Assessment Year 2011-12.
The grounds of appeal are as under:-
“1. Whether advance paid for acquiring research equipments can be held to be expenditure incurred for Research & Development u/s 35(1).
2. Whether on the facts and circumstances or me case, CIT(A) was correct in holding that the assessee is entitled to a deduction of Rs. 1,35,96,001/- u/s 35(l)(iv) of the Income Tax Act, 1961, when machine was not acquired during the year.
Whether on the facts and circumstances of the case, CIT-(A) was legally justified in allowing the expenditure of Rs.17,86,515/- for constructing external roads to the factory premises as permissible deduction u/s 37(1) of the Income Tax Act, 1961, when the ownership remains with government.
"The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of appeal."
3. During the year under consideration the assessee was engaged in the business of manufacturing of essential oils, perfumery and flavor compounds. The return of income was electronically filed on 23.09.2011 vide acknowledgement no. 289542701230911 declaring total income of Rs. 2,49,11,990/- which was processed u/s 143(1). The case was selected for scrutiny and notice u/s 143(2) dated 13.09.2012 was issued by the Assessing Officer and duly served upon the assessee. The questionnaire was issued on 30.05.2013 along with notices u/s 142(1) of the Income Tax Act, 1961. Notice u/s 142(1) was issued on 08.10.2013. After the change of the Assessing Officer, fresh notice u/s 142(1) was issued on 22.11.2013. On behalf of the assessee Chartered Accountant and Authorized Representative attended the proceedings from time to time and filed submissions and necessary details which were placed on record by the Assessing Officer. The assessment was completed u/s 143(3) of the Act by making following disallowances/additions:-
i) Capital expenditure u/s 35(1 )(v) considering that the machine was not delivered during the year Rs.1,35,96,001/- ii) Construction of road u/s 37 Rs.17,86,515/- iii) Receipts not included (ClB transaction) Rs.6,288/- iv) Interest on TDS/Excise/Sales Tax/disallowed Rs.1,28,404/- Total income as assessed Rs.4,04,29.200/-
4. Aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.
As regards Ground No. 1, the Ld. DR submitted that the CIT(A) ignored the fact that the assessee wrongly claimed deduction u/s 35 of the Income Tax Act as there was no expenditure incurred for research and development u/s 35(1) by the assessee during the year. As regards Ground No. 2, the Ld. DR further submitted that the CIT(A) was not correct in holding that the assessee is entitled to a deduction of Rs. 1,35,96,001 u/s 35(1)(iv) of the Income Tax Act, 1961 when machine was not acquired during the year. As regards Ground No. 3, the Ld. DR submitted that construction of road being capital expenditure the Ld. DR relied upon the Assessment Order.
As regards to Ground No. 1, the Ld. AR submitted that the CIT(A) has rightly held the same to be an expenditure in view of the facts, law and judgment. The Ld. AR submitted that as per Sec 35(1)(iv) read with Sec 35(2)(ia) of the Act, ‘the whole of such capital expenditure incurred in any previous year shall be deducted for that previous year'. The Ld. AR submits that the meaning of the word ‘incurred’ is wider in connotation than ‘put to use’ or 'acquisition of capital asset’. The Ld. AR relied upon a decision of the Hon’ble Supreme Court in case of CIT vs. Nainital Bank Ltd., wherein the Hon’ble Supreme Court explained that in the normal meaning, the expression ‘expenditure’ denotes ‘spending’ or ‘paying out or away’ i.e. something that goes out of the coffers of the assessee. The Ld. AR submitted that the total cost of the machine appearing in balance sheet as on 31.03.12 was Rs 1,53,72,083/- inclusive of custom duty, freight, insurance and clearing charges. Therefore Rs. 1,35,96,001/- paid as advance represented substantial amount of the total landed cost of the machine. Further the advance was paid on 19.01.2011 whereas machine was delivered on 14.09.2011 and installed on 06.02.2012. The fact that there was substantial time gap of several months between order and delivery and then between delivery and installation supports the assessee’s case that the machine was customized to specifications. The fact that the assessee showed the advance made towards the R&D machine as capital work in progress as on 31.03.2011 also supports the above contention. Further M/s Fricke Abfulltechnik Gmbh & Co, Germany is a global giant and the Indian assessee much smaller in size and stature had to accept the conditions of Fricke in order to secure supply of the specialized R&D machine. The Ld. AR further submitted that the advance given to the M/s Fricke Abfulltechnik Gmbh & Co, Germany was non refundable and was subject to forfeiture in view of above facts that the specialized machine was under development in terms of their quotation/ confirmation of order dated 19.01.2011 placed at Page No. 59- 71 in the paper book and therefore the advance given by the assessee did not represent a general advance but was made as a condition precedent to secure the customized machine and hence the money paid upto 31.03.11 is nothing but expenditure incurred. The Ld. AR further submitted that this fact is further strengthened by the fact that the terms of trade did not have any cancellation clause and in any case would have meant forfeiture of advance so made. Therefore the money paid could not have been received back from the German company at will and represented firm commitment towards the purchase of R&D machine and as such the facts of the assessee’s case are distinguishable from the facts of case of TOM Ltd. vs. Commissioner of Income Tax (2010) 78 CCH 0883 (Ker HC). The Ld. AR submitted that the CIT(A) has rightly distinguished the judgment of Hon’ble Kerala High Court in the case of TCM Ltd. vs. Commissioner of Income Tax (2010) 78 CCH 0883 (Ker HC). In view of the judgment of the Hon’ble Jurisdictional Delhi High Court in the case of CIT(V) vs. Panacea Biotech Ltd. as cited below, wherein the purchase of machinery, which was not even paid for & delivered has been held to be allowable. The judgment of the Hon’ble Kerla High court in TCM Ltd. vs. CIT has to be distinguished. Thus, the Ld. AR submitted that in view of above submissions, Ground no.1, deserves to be answered in favour of the assessee.
As regards to Ground No. 2, the Ld. AR submitted that the contention of the revenue is that the capital expenditure so made should have been allowed in AY 2012-13, when the machine was actually delivered and not in AY 2011- 12 when the payment for the machinery was made. In this regard, the Ld. AR relied upon the following judicial pronouncements, in which it was held that acquisition and installation of the R&D machine is not a pre-requisite for allowing deduction u/s 35(1)(iv) and the expenses incurred for constructing and acquiring the fixed assets are allowable with reference to the work in progress and machinery in transit also:-
The Hon’ble Madras High Court in case of the Commissioner Of Income i) Tax vs M/s. TVS in Tax Case (Appeal) Nos. 173 and 174 of 2009 order dated 09.01.2014. ii) The Hon’ble Delhi High Court in case of the Commissioner Of Income Tax -V vs Panacea Biotech Ltd. on 27 July, 2009 in ITA No. 422/2007 iii) The Hon’ble Karnatka High Court in case of the Commissioner Of Income-Tax vs H.M.T. Ltd. on 21 March, 1992 - 1993 199 ITR 235 KAR iv) The Hon’ble Gujarat High Court in case of the Commissioner Of Income- Tax vs Gujarat Aluminium Extrusions 2003 263 ITR 453 Guj The Ld. AR further submitted that the Ground nos.1 & 2 of the revenue are tax neutral as the R&D machine had been delivered and installed in the next financial year. The Ld. AR submitted that if in any case the claim of the assessee is not admissible in the AY 2011-12, then it is admissible in AY 2012- 13 and therefore there is no revenue loss involved. The Ld. AR submitted the Computation of Income for AY 2012-13 enclosed to the paper book. The Ld. AR also relied upon the Hon’ble Supreme Court decision in case of Excel Industries 358 ITR 295 (SC). In view of above facts and judicial pronouncements and considering the fact that the issue raised in ground nos.1 & 2 is tax neutral, the Ld. AR submitted that the said grounds deserve to be decided against the revenue and in favour of the assessee.
As regards to Ground No. 3, the Ld. AR submitted that the undisputed facts on the issue as is also borne out from the ground of the revenue, are that the external road to the factory premises was constructed/repaired, ownership of which remains with government. The Ld. AR submitted that the Assessing Officer has relied upon the judgment of the Hon’ble Supreme court in the case of Travancore Cochin Chemical Ltd vs. CIT(SC) 106 ITR 900, which is distinguishable on fact, as in that case new road was constructed by the assessee securing for it an enduring benefit. In the another case relied upon by the Assessing Officer i.e. L.H. sugar Factory & Oil Mills (P) Ltd. vs. CIT(SC) 125 ITR 293, it has been found that there was nothing to show that the road was in any way advantageous to the assessee or that the contribution had anything to do with its business and therefore the impugned amount was not deductable as expenditure. While in the present case, it is apparent on record that the existing government road to factory premises has been constructed / repaired and was advantageous to the assessee for carrying on the assessee’s business. As the ownership of the road was in government, the CIT(A) has correctly directed the allowance expenses on the road construction/repair as revenue expenditure, relying upon the various judgments. Thus, the Ld. AR further submitted that the expenditure incurred by the assessee in laying water pipe- lines for a locality around the factory of the assessee by which the assessee was absolved from the payment of municipal taxes for a definite period and the pipelines laid became the property of the municipality shall be allowed as business expenditure under s. 10(2)(xv). The assessee further relies upon the judgment the Hon’ble Calcutta High Court in the case of CIT vs. Birla Jute Manufacturing Co. Ltd. (1990) 182 ITR 0497.
We have heard both the parties and perused the all relevant material available on record. As regards to Ground Nos. 1 and 2 of the Revenue’s appeal, it is pertinent to note that the total cost of the machine appearing in balance sheet as on 31.03.12 was Rs 1,53,72,083/- inclusive of custom duty, freight, insurance and clearing charges. Therefore Rs. 1,35,96,001/- paid as advance represented substantial amount of the total landed cost of the machine. Further, the advance was paid on 19.01.2011 whereas machine was delivered on 14.09.2011 and installed on 06.02.2012. There was substantial time gap of several months between order and delivery and then between delivery and installation supports the assessee’s case that the machine was customized to specifications. The fact that the assessee showed the advance made towards the R&D machine as capital work in progress as on 31.03.2011 also supports the above contention. The advance given to the M/s Fricke Abfulltechnik Gmbh & Co, Germany was non refundable and was subject to forfeiture in view of above facts that the specialized machine was under development in terms of their quotation/ confirmation of order dated 19.01.2011 placed at Page No. 59-71 in the paper book and therefore the advance given by the assessee did not represent a general advance but was made as a condition precedent to secure the customized machine and hence the money paid upto 31.03.11. Thus, we agree that the money paid was nothing but expenditure incurred by the assessee. This fact is further strengthened by the fact that the terms of trade did not have any cancellation clause and in any case would have meant forfeiture of advance so made. Therefore the money paid could not have been received back from the German company at will and represented firm commitment towards the purchase of R&D machine and as such the facts of the assessee’s case are distinguishable from the facts of case of TOM Ltd. vs. Commissioner of Income Tax (2010) 78 CCH 0883 (Ker HC). Thus, The CIT(A) has rightly allowed the claim of the assessee. The CIT(A) held as under:- “Ground No. 1 After going through, the observations of the A.O. and submissions of the AR of the appellant, this ground is being finalized after making the following observations:- a) The A.O. has made the disallowance primarily relying upon the decision of TCM Ltd., (Ker.) (supra) and stating that the advance paid for acquiring research equipment cannot be held to be expenditure incurred for research & development u/s 35(1) of the I.T. Act 1961. The deduction would be allowed in the year in which the equipment are acquired. I have gone through the decision of TCM Ltd., and the relevant extract is reproduced as under:-
“So far as the other issue is concerned, which arise in IT A No. 297 of 2010, the claim raised is deduction of expenditure incurred for research and development U/s 35(1) of the Act subjected to the ceiling contained in subsection (2) of section 35. The Finding of the Tribunal is that assessee, besides paying some advance for research equipment, has not carried out any research and the asset itself was acquired in subsequent year. Even though expenditure, both revenue and capital incurred by the assessee for research and development qualifies for deduction, the advance paid for acquiring assets, in our view, was rightly held to be not the expenditure incurred by the assessee. " The AR also emphasized that the facts in that case were completely different and the appellant had not carried out any research. The aspect has not been appreciated by the A.O. In the present case the appellant has being doing research and development for over two decade. b) The AR had submitted that this amount has been shown as capital work in progress in the balance sheet and there are various decisions clearly stating that capital work in progress has to be allowed U/s 35 (1)(iv) of the I.T. Act 1961.
On going through the decision of TVS Motor Ltd., 364 ITR (2014), it is clear that the Hon'ble High Court has allowed capital work in progress to be eligible for the deduction u/s 35(1 )(iv). Reliance was also placed on Rane Brake Linings 255 ITR (2002). In the present case, copy of balance sheet was also provided where in this amount is reflected as capital work in progress. c) The AR has also submitted that there is no dispute regarding the fact that the machine were installed in A.Y. 2012-13 and the AR has emphasized that no claimed U/s 35 of the I.T. Act 1961 has been claimed by the appellant in the next year.
The AR also submitted that in view of the decision of Gujarat Aluminium Extrusions 133 Taxman the Hon'ble High Court has made the following observations in paras 16 to 19 which are reproduced as under:-
“16. The object behind the enactment of s.35 of the Act is to encourage research and development activities by the assessee. As an incentive, the legislature has given this benefit by way of deduction in respect of the capital expenditure incurred by the assessee. This is a provision for the benefit of the assessee ad if the assessee incurs capital expenditure for the purpose of research and development during the relevant previous year, in our opinion, the Revenue should not deprive the assessee of the benefit of deduction under the provisions of s.35 of the Act even if the asset is not put to use for research and development. It is a settle legal position that the provision for exemption or relief should be construed liberally and in favour of the assesse. If the section is interpreted in the manner suggested by the standing counsel for the revenue, in our opinion, we would be depriving the assessee of the benefit which legislature desires to give to the assessee.
It is also pertinent to refer to Circular No. 5-P (LXXVI-63) of 1967 dt. 9th Oct., 1967 issued by the Department. The relevant extract of the said circular reads as under:
“(ii) The amount of capital expenditure incurred by an assessee after 31st March 1967, on scientific research related to his business will be allowed to be deducted in full in computing his business profits of the year in which such expenditure is incurred. "
From the provisions of the above referred to circular also, intention of the Revenue is patent. The intention is to give benefit to the assessee who incurs expenditure of scientific research related to his business. Even the circular issued by Department does not make use of the capital asset a condition precedent for claiming deduction under the provisions of s.35 of the Act.
In our opinion, both the appellate authorities have rightly considered the spirit with which s.35 of the Act has been enacted by the legislature and the circular referred to hereinabove while allowing deduction to the assessee under the provisions of s.35 of the Act.”
After considering these observations of the Hon’ble Gujarat High Court it is clear that the capital asset sought to be created can be put to actual use even after the end of the financial year. The High Court held that once the intention of the legislature has been established, the section has to be interpreted liberally as the deduction is intended to provide an incentive to the assessee. d) After considering the contentions and the facts of the present case, it is clear that there is no dispute regarding the amount having been shown as capital work in progress, the capital asset having been put to use in the next financial year and also that the appellant had been doing research and development for the past several years. It has also been stated that this claim has not been made in the next financial year. After careful consideration of the facts of the present case, it is clear that the -f acts in the case of TCM Ltd., were different as the assessee had not carried out any search and further in view of the latest decisions of TVS Motors (supra), Gujarat Aluminum Extrusions (supra), the claim made by the appellant U/s 35(1)(iv) is fully justified. Therefore, I am inclined to accept the contention of the AR regarding this ground. The A.O. is directed to allow this ground of the appellant.
Accordingly, this Ground is allowed in favour of the appellant.”
We found that various judicial decision submitted by the Ld. AR upheld the view that the acquisition and installation of the R&D machine is not a pre- requisite for allowing deduction u/s 35(1)(iv) and the expenses incurred for constructing and acquiring the fixed assets are allowable with reference to the work in progress and machinery in transit also. Thus, there is no need to interfere with the finding of the CIT(A). Ground Nos. 1 and 2 of the Revenue’s appeal are dismissed.
As regards Ground No. 3, the external road to the factory premises was constructed/repaired by the Assessee for which the ownership remains with government. The Assessing Officer has relied upon the judgment of the Hon’ble Supreme court in the case of Travancore Cochin Chemical Ltd vs. CIT(SC) 106 ITR 900, which was rightly distinguished on fact by the CIT(A), as in that case new road was constructed by the assessee securing for it an enduring benefit. The CIT(A) held as under:
“After going through the facts of the case, observations of the AO and submission of the AR, this ground is being finalized after making of the following observations:- a) The AO has made the disallowance by observing that as per the contractor the amount was spent on ‘laying and making of RCC Road.’ The AO also observed that this road was exclusively the asset of the assessee, or even otherwise there was no obligation on the assessee to constructed this road. The A.O treated the amount as capital expenditure by relying on Travencore Cochin chemical Ltd., 106 ITR. However, in this case the issue was related to construction of new roads and not repairs of existing roads. b) After going through the decision of the Apex Court and also the fact that the road were only being strengthened through RCC, the observations of the A.O are not based on findings regarding ownership of the road with the appellant or whether new roads had been laid out from scratch.
Therefore, in view of the decision of the Hon’ble Supreme Court relied upon by the AR of the appellant I am in agreement with the contentions of the AR.”
Thus, there is no need to interfere with the finding of the CIT(A). Ground No. 3 of the Revenue’s appeal is dismissed.