If expenditure incurred has direct nexus with its income generating apparatus can be claimed as revenue expenditure

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH “C” New Delhi

BEFORE SHRI R.P. TOLANI AND SHRI T.S. KAPOOR

ITA No. 4458/Del/11

A.Yrs. 2004-05

DCIT Cir. 11(1),

New Delhi.

(Appellant)

Vs.

M/s India International House Ltd.,

4686, Ansari Road, Darya Ganj,

New Delhi.

PAN/ GIR No.AAACI 2399P

(Respondent)

AND

C.O. No. 377/Del/11

(In ITA No. 4458/Del/11

A.Yr. 2004-05

M/s India International House Ltd.,

4686, Ansari Road, Darya Ganj, New Delhi.

(Appellant)

Vs.

DCIT Cir. 11(1),

New Delhi.

 (Respondent)

Department by: Smt. Anusha Khurana Sr. DR

Respondent by: Sh. P.K. Rastogi CA

O R D E R

PER R.P. TOLANI, J.M:

This is revenue’s appeal and assessee’s cross-objection against CIT(A)’s order dated 8-8-2011 relating to A.Yr. 2004-05. Both the matters are heard together and are being disposed of by a consolidated order.

2. Sole effective ground taken by the revenue in its appeal is as under:

 “On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of Rs. 93,48,300/- made on account of treatment of design and other charges as capital in nature.”

3. Brief facts are: The assessee is engaged in the manufacturing of hardware made of brass such as electric switch cover, door handles and lock handles etc. Prior to this year the assessee was into exports of these goods to U.S. market. During the year under consideration, the assessee entered for the first time into European and U.K. market, which is totally different in regard to designs, fittings, mechanism and working. One M/s Builders Hardware Ltd. (“BHL”), an England concern, was supplying such products to major chain store called Home Base in UK and other European countries. The assessee tied up with BHL by way of a renewable agreement for one year. Accordingly, the BHL gave particular designs etc. for manufacture and supply of such goods, marketable in U.K. The agreement was for one year and subsequently it was not renewed by the parties. Assessee claimed the designing charges of Rs. 1,24,64,400/- paid to BHL in P&L A/c. The agreement was not renewed as the assessee was not able to get repeat orders and marketability. Assessing Officer, however, held the design charges paid by the assessee were capital expenditure and not revenue expenditure. They were held to be commercial assets eligible for depreciation @ 25%, which was allowed at Rs. 31,16,100/- disallowing the remainder of Rs. 93,48,300/-.

3.1. Aggrieved, assessee preferred first appeal where assessee relied on plethora of judgments in the cases of:

- CIT Vs. Elecon Engg. Co. Ltd. 170 CTR 267;

- CIT Vs. Greaves Cotton Ltd. 244 ITR 149 (MP);

- CIT Vs. IAEC Pumps Ltd. (1998) 232 ITR 316 (SC);

- CIT Vs. Westerewrk Engineers Ltd. 124 CTR 174 (Bom);

- CIT Vs. Kirloskar Pneumaic Ltd. 202 ITR 309 (Bom.);

- CIT Vs. Praga Tools Ltd. 157 ITR 282;

- CIT Vs. Modi Olivetti Ltd. (2004) 3 SOT 22 (Del.);

- CIT Vs. Indian Carbon Ltd. 221 ITR 264;

- CIT Vs. Leke Place Hotels Ltd. 131 Taxman 836 (Raj.);

- CIT Vs. Hari Vignesh Motors Pvt. Ltd. 282 ITR 338 (Mad.);

- Crescent Capacitor Vs. CIT 149 ITR 285 (Del.); and

- ITO Vs. Bharat Heavy Plate & Vessels Ltd. 38 ITD 299.

3.2. CIT(A) allowed the claim of the assessee by holding that the expenditure in question was revenue in nature. Aggrieved, revenue is in appeal before us. The assessee has filed cross-objection in support of CIT(A)’s order.

4. Learned D.R. relies on the order of Assessing Officer .

5. Learned counsel for the assessee , on the other hand, contends that:

(i) development and remaking of designs is a regular feature of the assessee’s business and is thus process of change of designs is inextricably linked with the profitability of the assessee’s business.

(ii) Assessee was in U.S. market and to develop U.K. market it was imperative for the assessee to manufacture the hardware on the basis of new designs acceptable in U.K. market and thus the design charges were revenue in nature for earning better profits.

(iii) Had assessee not paid designing charges to HBL in that case the alternate assessee would have paid the royalty on the goods exports which would have been clearly allowable. In this case

since HBL insisted for a contract based on providing designs and marketing the assessee’s goods, accordingly it was a commercial decision, based on business acumen.

(iv) Such engineering designs development are incurred for the purpose of expansion/ extension and increasing the range of the products and their utility. The same is done in the regular course of business.

5.1. In this case the agreement was not renewed after one year as the assessee was not able to obtain sufficient number of orders from U.K and thus renewing the agreement would have costed more, resulting in wasteful expenditure. Thus by non-renewal the assessee saved itself from getting into further losses to protect the revenue generating apparatus. Reliance is placed on Hon’ble Supreme Court judgment in the case of Empire Jute Co. Ltd. Vs. CIT 124 ITR 1 (SC) for the proposition that the expenditure incurred by the assessee to conduct its business more effectively and more profitably has integral connection with the profit making process, the same is to be held as revenue expenditure.

5.2. The assessee has relied on number of other judgments which are mentioned in CIT(A)’s order.

6. We have heard rival contentions and gone through the relevant material available on record. As the facts emerge, the assessee was already into the business of manufacture and supply of manufacture in U.S. Market. The entry into the supply of U.K. market necessitated the designs which are popular in European market. The design charges paid by the assessee to make its product better useful and attractive in European market constitute revenue nature. The reliance placed on Hon’ble Supreme Court judgment in the case of Empire Jute Co. Ltd. (supra) is well placed as the expenditure incurred by the assessee has direct nexus with its income generating apparatus. Respectfully following various judgments mentioned and relied on by CIT(A) we see no infirmity in his order, which is upheld. The assessee’s cross objection being only in support of CIT(A) order, is rendered infructuous.

7. In the result, Revenue’s appeal as well as assessee’s cross-objection stand dismissed.

Order pronounced in open court on 13-07-2012.

                                                         Sd/-                               Sd/-

                                             (T.S. KAPOOR)             (R.P. TOLANI)

                                    ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 13-07-2012.

MP

Copy to:

1. Assessee

2. AO

3. CIT

4. CIT(A)

5. DR