Manufacturer of Automotive Switch Gears not eligible for Deduction on Expenditure incurred on developing Designs and Tools: ITAT [Read Order]

automotive switch gears - ITAT - Taxscan

The Income Tax Appellate Tribunal (ITAT), Pune bench has held that the expenditure incurred on the development of Designs and Tools, which are used for the purpose of manufacturing automotive switches for the customers who are manufacturers of automobiles or vehicles cannot be allowable as a deduction against the business income of the assessee-Company.

The assessee, a company is engaged in the business of manufacturing automotive switch gears. During the relevant year, the Company claimed income tax deduction of the Product Development Expenditure of Rs.3,75,00,000/- incurred on the development of Designs and Tools, which are used for the purpose of manufacturing of automotive switches for the customers who are manufacturers of automobiles or vehicles. However, the Assessing Officer rejected the claim on the ground that the expenditure was incurred for the initiation of manufacturing of a new product applying the test laid down by the Supreme Court in the case of CIT vs. Madras Auto Service (P) Ltd.

The Tribunal bench comprising Judicial Member Mr. Viswanethra Ravi and Accountant Member Mr. Inturi Rama Rao noted that as per the above decision of the Apex Court, the treatment given in the books of account does not determine the true nature of the expenditure whether capital or revenue.

“The Hon’ble Supreme Court in the case of Assam Bengal Cement Co. Ltd. vs. CIT, 27 ITR 34 (SC) evolved tests to determine the true nature of the expenditure whether capital or revenue. The primary test to be applied is whether as a result of the expenditure incurred any enduring benefit has resulted i.e. expenditure is made for acquiring or bringing into existence and advantage or advantage for benefit of enduring of the assessee, it is properly attributable to capital. On other hand, if the expenditure has been incurred for running the business or working with a view to producing the profits, it is revenue expenditure. In cases where this test is of no avail, one has to go to the test fixed or circulating capital and where the expenditure was incurred on the part of the fixed capital or circulating capital. It is part of the fixed capital or business it would be a nature of capital expenditure,” the Tribunal noted.

Upholding the revenue’s decision, the Tribunal held that “the Applying the above test in the facts of the present case and from a perusal of the explanation filed before the Assessing Officer which is extracted vide para no.3.1 of the assessment order, it is evident that the subject expenditure was incurred for the purpose of developing designs and tools for the purpose of using in the business of manufacturing of automotive switch gears. As a result of this expenditure, it created the designs and tools which are used for the purpose of business run by the assessee. The Hon’ble Supreme Court in the case of CIT vs. Elecon Engineering Co. Ltd., 166 ITR 66 (SC) held that the Designs, Drawings, and Tools that constitutes knowhow is the fundamentals in the manufacturing business comes within the meaning of “a plant” following of its earlier decision in the case of Scientific Engineering House (P.) Ltd., 157 ITR 36 (SC).”

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