Sonjoy Sarma ORDER
Inturi Rama Rao, Member (A)
1. This is an appeal filed by the assessee directed against the order of the ld. Commissioner of Income Tax (Appeals)- 6, Pune ['the CIT(A)'] dated 31.01.2018 for the assessment year 2011-12.
2. This is a recalled matter. In the first round of litigation of appeal, the Tribunal vide order dated 31.08.2021 in ITA No. 624/PUN/2018 for the assessment year 2011-12 had partly allowed the appeal of the assessee. The Tribunal, inadvertently, did not adjudicate the second issue raised in the ground of appeal no. 8. Thereafter, the assessee moved a Miscellaneous Petition praying recall of appeal for adjudication of this ground of appeal no. 8. The Tribunal vide order dated 05.11.2021 recalled the appeal.
3. First, we reproduce the ground of appeal no. 8 which was inadvertently not adjudicated by this Tribunal, reads as under:-
"8. Learned CIT A erred in disallowing revenue expenditure of Rs. 1,42,39,571/- on product testing prototyping and verification expenses debited to the Profit and Loss Account by the appellant under the heading Product development expenses. The learned CIT A failed to appreciate that the said expenses were per se revenue expenses incurred in the ordinary course of and wholly and exclusively for the purposes of business of the appellant. The Learned CIT A failed to appreciate the attendant facts and judicial precedent in appellant's own case in that regard.
It is prayed that the disallowance be deleted."
4. The issue in the present appeal relates to the allowability of the expenditure claimed as product development expenses of Rs. 1,42,39,571/- as revenue expenditure. The factual background of the case is as under:-
During the previous year relevant to the assessment year under consideration, the appellant company incurred a sum of Rs. 1,42,39,571/- as product development expenses. The nature of the expenditure was explained by the appellant company before the Assessing Officer that the appellant is in the business of manufacture and sale of air conditioning systems and its part and components thereof for its customers Indica Car of Tata Motors Limited and Mahindra and Mahindra since 1999. In order to carry out different testing and validation for various reasons i.e. (i) Continuous improvement in the products, (ii) Change of models by the customers, (iii) Change in customer specifications, (iv) For product cost optimization through Value engineering and Value Additions to remain competitive, (v) Change of supplier for input items, (vi) Change in material grade and (vii) Due to supplier quality, customer complaints, filed complaints. The submissions made by the assessee was also extracted by the Assessing Officer in para 6.1 of the assessment order. On consideration of the said explanation, the Assessing Officer held that the expenditure was incurred on the development of products and designs for which the assessee had obtained the patents and, therefore, the expenditure is capital in nature.
On appeal before the ld. CIT(A), the ld. CIT(A) taking into consideration the fact that the appellant had tested new prototypes for which the customers have reimbursed the expenses on sale of prototypes. Ld. CIT(A) also held that there is new line of product and therefore such expenditure ought to have been capitalized and, accordingly, confirmed the action of the Assessing Officer.
5. Being aggrieved by the above decision of the ld. CIT(A), the appellant is in appeal before us.
6. It is submitted before us that as result of this expenditure no new assets had been brought into existence. The expenditure is only incurred in improving the present products. It is also submitted that in the earlier years for the assessment years 2001-02 to 2009-10, the issue was decided in favour of the assessee company by the Coordinate Bench of this Tribunal.
7. On the other hand, ld. CIT-DR submitted that the expenditure in question was incurred only on new products and the same cannot be allowed as revenue expenditure.
8. We heard the rival submissions and perused the material on record. The issue in the present appeal relates to whether or not the expenditure incurred on testing and validation of the products is capital in nature. During the previous year relevant to the assessment year under consideration, the appellant incurred expenditure of Rs. 2,45,34,542/- on testing and validation, out of which a sum of Rs. 1,02,94,971/- was recovered from the customers and balance of product development expenditure of Rs. 1,42,39,571/- was claimed as revenue expenditure. However, the Assessing Officer had treated the same as capital expenditure and allowed the depreciation thereon. The explanation given before the Assessing Officer is that the expenditure was incurred to improve the existing products. The true nature of the expenditure had not been doubted by the Assessing Officer. Undisputedly, the appellant is in the business of manufacturing of automotive components since 1999. As result of this expenditure, no new asset has been created nor new product did actually materialize. The expenditure was only incurred for the purpose of facilitating the existing business of manufacturing of automotive components and enabling the management to conduct the business operations more efficiently and productively. The Hon'ble Supreme Court in the case of (i) Empire Jute Co. Ltd. v. CIT, MANU/SC/0279/1980 : 124 ITR 1 and (ii) Alembic Chemical Works Co. Ltd. v. CIT, MANU/SC/0763/1989 : 177 ITR 377 (SC) held that expenditure incurred on the existing business incurred in connection with the existing business. Updating existing products should be allowed as revenue expenditure. Keeping in view the principles laid down by the Hon'ble Karnataka High Court in the case of CIT vs. Tejas Networks India (P.) Ltd., MANU/KA/3490/2014 : 52 taxmann.com 513 (Kar.), the Hon'ble Supreme Court in the cases referred supra held as under:-
"Having regard to the facts of this case, the expenditure that is claimed is for upgrading the existing product. Therefore, the product so upgraded goes on changing as time progresses, keeping in mind the requirement and the competition in the market. The Tribunal rightly held that the expenditure is not in the nature of capital expenditure but is revenue expenditure. Therefore, the first substantial question of law is answered in favour of the assessee and against the revenue."
9. In the light of legal position discussed above, having regard to the facts of the case that the expenditure was incurred only up-gradation of existing products, we are of the considered opinion that the expenditure is not in the nature of capital but revenue expenditure. Accordingly, we direct the Assessing Officer to allow the expenditure as revenue nature. Accordingly, this ground of appeal no. 8 filed by the assessee stands allowed.
10. In the result, the appeal filed by the assessee stands allowed.
Order pronounced on this 17th day of May, 2022.
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