MAHINDRA AUTOMOBILE DISTRIBUTOR P.LTD,MUMBAI vs. DCIT CIR 2(2), MUMBAI

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ITA 3476/MUM/2012Status: DisposedITAT Mumbai30 March 2016AY 2007-083 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that expenses incurred for developing, testing, and validating vehicles before commercial production commenced are part of the business development process. Such expenses should not be disallowed as revenue expenditure.

What were the facts?

The assessee claimed development expenditure of Rs. 1,28,15,029/- which was capitalized in the balance sheet. The Assessing Officer disallowed this as revenue expenditure, treating it as capital expenditure. The CIT(A) confirmed this disallowance.

What were the issues?

Whether development expenditure incurred before commencement of commercial production can be treated as revenue expenditure or capital expenditure.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 32,Section 43(1)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “B”, BENCH MUMBAI

Before: SHRI R.C.SHARMA, AM & SHRI RAM LAL NEGI, JM

Hearing: 07/12/2015Pronounced: 30/03/2016

O R D E R PER R.C.SHARMA (A.M): This is an appeal filed by the assessee against the order of CIT(A), Mumbai, dated 9-2-2012, for the assessment year 2007-08, in the matter of order passed u/s.143(3) of the I.T.Act.

2.

In this appeal the assessee is aggrieved for disallowing development expenditure.

3.

Rival contentions have been heard and record perused. From the record we found that during the year under consideration the assessee had filed return of income at a loss of Rs.85.77 crores. The assessee has claimed Development expenditure of Rs.1,28,15,029/- in the computation of income. AO disallowed assessee’s claim by observing that as per the balance sheet submitted by the assessee, Schedule 4 comprising details of 2 fixed assets has been attached. As per this schedule, assessee has made Development expenditure of Rs.1,28,15,029/-. This amount has been capitalized as per the balance sheet submitted by the assessee which has been accepted by its shareholders. The balance sheet has been submitted to the Ministry of Company Affairs also. However, assessee claimed this expense as revenue expenditure in its computation of income. In view of the accounting treatment as per the annual accounts adopted by the shareholders, the established accounting principle of matching expenditure to revenue the settled position of law, the specific provisions of section 32 to treat know how as intangible asset and the facts peculiar to the assessee's case, the development expenses of Rs.1,28,15,029/- is to be treated as capital expenditure. However, depreciation at 25% of Rs.32,03,757/- on the same is being allowed.

4.

By the impugned order, the CIT(A) confirmed AO’s action and assessee is in further appeal before us.

5.

We have considered rival contentions. From the record we found that the company is in the business of designing, manufacturing, and marketing Logan vehicles. It commenced business in February 2006. It commenced production from 14th February 2007. During the year ended 31st March 2007 it produced 614 vehicles. Out of these 189 were produced as trial cars. As per industry practice these trial cars were used for development, testing and validation. Out of these, 35 cars were produced after 14th February 2007 being the date of commencement of commercial production. While cost of 154 vehicles manufactured prior to commencement of commercial production was spread over cost of plant and machinery(net of Economic

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