The Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench held that the deduction can be claimed under Research and Development (R&D) for Amount incurred towards development on a mechanism to produce customised products.
The assessee, Harsha Engineers Ltd. has filed its original return of income declaring total income at Rs.27,37,55,058. An assessment order under section 143(3) was passed wherein the income was assessed at Rs.28,28,48,150.
The AO harboured a belief that the assessee has claimed expenditure of Rs.11,65,15,1456 on R&D, but capitalized a sum of Rs.1,22,74,378. He was of the view that the revenue expenditure amounting to Rs.10,42,41,078 claimed by the assessee as revenue expenditure ought to have been capitalized, and thus by making claim of this amount as revenue expenditure on R&D, income has escaped assessment.
The AO held that expenditure incurred for development of new product range as well as valued engineering of existing product ranges and same resulted into enduring benefit to the assessee. He accordingly disallowed the claim of the assessee for revenue expenditure, and treated this expenditure as capital in nature.
However, in spite of that, he did not allow depreciation to the assessee. Dissatisfied with the order of the AO, the assessee carried the matter in appeal before the CIT(A). The CIT(A) rejected the contentions of the assessee and affirmed the finding of the AO.
The two-member headed by Vice President Rajpal Yadav noted the expenditure which were incurred by the assessee for preparing pro-type or preparing a product specifically required by its customers.
The ITAT clarified that the assessee has incurred certain expenditure for development on a mechanism which can help it to produce a product specifically demanded by a specific customer, and according to the needs of that customer.
The tribunal observed that if any amount is being incurred towards R&D for the purpose of business for manufacturing customized products, then that can be considered under R&D which can be allowed under section 35(1)(iv) read with section 35(2)(ia) of the Act.
Therefore, the tribunal while allowing the claim of the assessee deleted the disallowance of Rs.10,42,41,078 made by the AO.
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