Dt.16.09.2020 in T.C.A. No.11/2017 Prl. Commr. Of I.T. vs. HSI Automative Ltd. IN HIGH COURT OF JUDICATURE AT MADRAS DATED: 16.09.2020 CORAM HON'BLE DR.JUSTICE VINEET KOTHARI AND HON'BLE MR.JUSTICE KRISHNAN RAMASAMY Tax Case (Appeal) No.11 of 2017 Principal Commissioner of Income Tax 2 No.121, Mahatma Gandhi Road, Nungambakkam, Chennai Appellant vs. M/s.HSI Automative Ltd., Survey No.73, Block, 100, Thandalam Post, Mevalurkuppam, Sriperumbudur Taluk, Kanchipuram District ... Respondent Appeal filed under Section 260A of Income Tax Act, 1961 against order of Income Tax Appellate Tribunal, Chennai D Bench, dated 29.07.2016 in ITA No.2088/Mds/2015. For Appellant : Mr.T.R.Senthil Kumar For respondent : Mr.Karthik Ranganathan, Senior Standing Counsel JUDGMENT 1/14 http://www.judis.nic.in Dt.16.09.2020 in T.C.A. No.11/2017 Prl. Commr. Of I.T. vs. HSI Automative Ltd. (Delivered by DR.VINEET KOTHARI, J.) Revenue has preferred this appeal, under Section 260A of Income Tax Act, arising from order of learned Income Tax Appellate Tribunal, Madras D Bench 2. following purported substantial questions of law are raised in this appeal for our consideration :- "1.Whether on facts and in circumstances of case in law Appellate Tribunal was right in confirming order of CIT Appeals without adjudicating specific Grounds of Appeal 3.2 to 3.6 raised before it, which is perverse in nature and liable to be set aside ? 2.Whether on facts and in circumstances of case and in law Appellate Tribunal was right in deletion of disallowance made on account of scientific expenses in absence of assessee furnishing any proof for having paid sum to research association, which has as its object undertaking of scientific research or to university, college or other institutions to be used for scientific research?" 3.Whether on facts and in 2/14 http://www.judis.nic.in Dt.16.09.2020 in T.C.A. No.11/2017 Prl. Commr. Of I.T. vs. HSI Automative Ltd. circumstances of case and in law Hon ble ITAT was right in allowing alternate claim of assessee toward scientific expenses u/s 35(1) of Act as Revenue expenditure in absence any documentary evidences? 4.Whether on facts and in circumstances of case and in law, order of Hon ble ITAT is perverse, when assessee for first time claimed alternate deduction u/s 37(1) of Act before CIT(A) which was not claimed before Assessing Officer and no opportunity was afforded to Assessing Officer under Rule 46A of IT Rules ? 3. learned Tribunal dismissed appeal of Revenue and allowed expenditure incurred by Assessee to extent of Rs.11,24,32,995/- as Business Expenditure under Section 37 of Act, even though initially, Assessee claimed said amount as Scientific Expenditure under Section 35(1) of Act. 4. relevant reasons given by learned Tribunal in its order dated 29 July 2016 are quoted below for ready reference :- 9.With reference to AY 2007-08, Revenue 3/14 http://www.judis.nic.in Dt.16.09.2020 in T.C.A. No.11/2017 Prl. Commr. Of I.T. vs. HSI Automative Ltd. raised additional issue relating to scientific expenses under Section 35(1) of Act. Briefly stated relevant facts in this regard are that in AY 2007-08, Assessee claimed deduction of Rs.11,24,32,995/- under head scientific expenditure . In assessment, AO observed that amount claimed was not allowable since neither Assessee has not obtained any approval from scientific authority nor amount was paid to any university or research organization and hence not eligible for deduction u/s 35(1)(ii) of Act and disallowed said amount. Matter was carried to be in appellate authority. During first appellate proceedings, after considering submissions of assessee, CIT (A) discussed issue at length and directed AO to allow said expenditure as allowable revenue expenditure. Paras 4S and its sub-paras are relevant in this regard. Aggrieved with said decision of CIT (A), Revenue is in appeal before Tribunal. 10. During proceedings before Tribunal, Ld DR for Revenue relied on order of AO. 11. On other hand, Ld Counsel for 4/14 http://www.judis.nic.in Dt.16.09.2020 in T.C.A. No.11/2017 Prl. Commr. Of I.T. vs. HSI Automative Ltd. assessee heavily relied on order of CIT (A) and reiterated submissions made before Lower authorities. 12. After hearing both parties and on perusal of orders of Revenue Authorities in general and decision of CIT (A) vide paras 4.5 and its sub-paras are relevant in this regard. Considering significance of said paras for sake of completeness of this order, we extract relevant para 4.5.11 of impugned order for AY 2007-2008 as under: "4.5.11. Therefore, above product perfection expenses , which are classified by assessee as scientific expenses in its books, are essentially revenue expenses incurred by assessee during regular course of existing business of 'automobile component manufacturing'. Hence, these expenses are allowable as normal business expenses, for purpose of computing taxable income under head 'income from business Assessing Officer is directed to allow above expenditure of 5/14 http://www.judis.nic.in Dt.16.09.2020 in T.C.A. No.11/2017 Prl. Commr. Of I.T. vs. HSI Automative Ltd. Rs.11,24,32,995/ as aIlowable revenue expenditure. assessee succeeds in appeals in this regard." 13. Considering above, we are of opinion that decision taken by CIT (A) is fair and reasonable and it does not call for any interference. Accordingly, relevant ground raised by Revenue for AY 2007-2008 is dismissed. 5. learned Commissioner of Income Tax (Appeals) had also allowed appeal of Assessee on this count, with following observations :- 4.5.5 next claim of assessee is that though above amount was claimed under head scientitic expenditure , it was actually regular revenue expenditure incurred by Assessee in respect of product perfection process. As explained by assessee, company is manufacturing various parts of automobile components required by Hyundai Motors etc. As per models and specifications given by them, assessee has to manufacture and supply automobile components. Since these components are high precision required in car manufacturing, Assessee has to first produce them on trial basis 6/14 http://www.judis.nic.in Dt.16.09.2020 in T.C.A. No.11/2017 Prl. Commr. Of I.T. vs. HSI Automative Ltd. and supply to Hyndai Motors etc. for their quality checking and approval. If they are not upto their satisfaction and specifications, Assessee has to carry out necessary modifications in moulds etc. used for manufacturing components, and produce components once again and supply to Hyndai Motors for approval. This process continues till customers (Hyundai Motors) etc. are finally satisfied with quality, specifications and precision of components. All components models produced up to final approval by customer have no sale value and becomes waste. 4.5.6 Thus, above expenses, claimed by assessee under head scientiflc expenses , are actually incurred for purpose of perfecting process of manufacturing components as per designs and specifications and to satisfaction of customers. Hence, these expenses are nothing but product perfection expenses , which are basically revenue expenses in nature. 4.5.7 In field of automobile industry designs and models of cars are fast changing. Consequently, components required for their manufacture also keep on changing 7/14 http://www.judis.nic.in Dt.16.09.2020 in T.C.A. No.11/2017 Prl. Commr. Of I.T. vs. HSI Automative Ltd. frequently. Hence, customers keep on requesting assessee for manufacture and supply of components as per new designs and specifications. And, for every new design and specification, assessee has to modify and make necessary changes in its plant and machinery (like moulds etc.) and manufacture components on trial and supply for quality approval. Only after such approval, assessee can go for commercial production of components. 4.5.8 above process is continuous process and assessee has to undertake it for each and every new component/ specification ordered by customers. These expenses are incurred during ordinary course of business and for running business. All components i.e. newly designed ones as well as old (already under commercial manufacturing) ones are manufactured from same factory and by using same plant and machinery. only difference is in designing of certain moulds etc. which are product (component) specific. Since major plant and machinery are used for manufacturing new components as well as old components, production of new components (specification) cannot even be considered as new line of 8/14 http://www.judis.nic.in Dt.16.09.2020 in T.C.A. No.11/2017 Prl. Commr. Of I.T. vs. HSI Automative Ltd. manufacturing. 4.5.9 Further, as furnished by assessee, details of expenses incurred by assessee in above process of "product perfection", and classified by Assessee under "scientific expenses" are 1. Raw material : Rs. 9, 72,11,824/ 2. Power and Fuel : Rs.85,20,396/ 3. Raw material cleaning charges : Rs.13,94,558/ 4. Freight Charges : Rs.3,50,338/ 5. Labour Charges : Rs.26,44,806/ 6. Consumables &SPA : Rs.7,33,527/ 7. Repairs & Maintenance : Rs.12,80,697/ 8. Repairs & Maintenance Electrical : Rs.2,97,389 Total : Rs.11,24,32,995/- 4.5.10 Thus, above scientific expenses are basically (mainly) cost of raw material,labour charges, power 8:. fuel charges, etc. These expenses are essentially revenue expenses in character. Further by incurring these expenses, assessee is not generating any capital asset in any form and hence expenses cannot be termed as capital expenses. Further, since designs and specifications of components required to be 9/14 http://www.judis.nic.in Dt.16.09.2020 in T.C.A. No.11/2017 Prl. Commr. Of I.T. vs. HSI Automative Ltd. manufactured by assessee keep on changing at frequent intervals, no design/specification is long- lasting. assessee has to keep-on perfecting product every time design/ specifications. are changed. Hence, it is even difficult to presume that above expenses have enduring benefits for number of years. 4.5.11 Therefore, above product perfection expenses , which are classified by assessee as scientific expenses in its books, are essentially revenue expenses incurred by assessee during regular course of existing business of automobile component manufacturing . Hence, these expenses are allowable as normal business expenses, for purpose of computing taxable income under head income from business . Assessing Officer is directed to allow above expenditure of Rs.11,24,32,995/ as allowable revenue expenditure. assessee succeeds in its appeals in this regard." 6. learned Counsel for Revenue Mr.Karthik Ranganathan urged before us that though Assessee could not satisfy conditions for claiming said expenditure as Scientific Research Expenditure under Section 35 of Act, as neither project was approved by Competent Authority, as 10/14 http://www.judis.nic.in Dt.16.09.2020 in T.C.A. No.11/2017 Prl. Commr. Of I.T. vs. HSI Automative Ltd. required under Section 35 of Act, nor payment in question was made to any approved organization for research purposes. But even if such expenditure was also to be allowed as Business Expenditure under residuary provisions of Section 37 of Act, matter was required to be examined again by learned Assessing Authority as sum of Rs.11,24,32,995/- might have included replacement of plant and machinery of capital nature and it required investigation and since such investigation was made earlier by Assessing Authority while disallowing said expenditure under Section 35 of Act, matter deserves to be remanded back to Assessing Authority. 7. Per contra, learned Counsel for Respondent / Assessee supported impugned order and submitted that even if conditions of claim under Section 35 was not satisfied, there is no dispute that expenditure in question was incurred in ordinary course of business for creating new designs of moulds etc. to satisfaction of customers viz., Hyundai Motors and since it involved constant process of perfecting process of manufacturing components, it was entirely 'Revenue Expenditure' incurred by Assessee during year in question, which was undoubtedly allowable under Section 37 of Act and therefore, two Appellate Authorities have rightly allowed same and appeal of Revenue does 11/14 http://www.judis.nic.in Dt.16.09.2020 in T.C.A. No.11/2017 Prl. Commr. Of I.T. vs. HSI Automative Ltd. not give rise to any question of law, requiring consideration of this Court. 8. Having heard learned Counsel for parties, and having gone through orders of two authorities as quoted above, and having perused details of expenditure incurred to extent of Rs.11,24,32,995/-, we are satisfied that no question of law arises in appeal filed by Revenue. 9. Assessee gave up its claim of deduction under Section 35 of Act as admittedly, conditions required for claiming same under Section 35 was not satisfied by Assessee. Nonetheless, Assessee was entitled to claim said expenditure in Residuary Provisions of Section 37 of Act. Section 37 permits such allowance of Business Expenditure incurred in ordinary course of business, if they are not allowable otherwise by Section 30 to 36 of Act. Unless expenditure is of capital in nature, resulting in creation of assets of enduring nature, same cannot be disallowed under Section 37 of Act. There is no dispute that said expenditure was incurred in ordinary course of business. We are unable to find any material on record which would indicate any capital expenditure incurred in details of said sum of Rs.11,24,32,995/- by Assessee. redesigning of moulds to create new designs of components manufactured by 12/14 http://www.judis.nic.in Dt.16.09.2020 in T.C.A. No.11/2017 Prl. Commr. Of I.T. vs. HSI Automative Ltd. Assessee, to satisfaction of customer M/s. Hyundai Motors is nothing but 'Revenue Expenditure' incurred in ordinary course of business of Assessee. Therefore, finding of learned CIT (Appeals) as well as learned Tribunal are findings of fact, which cannot be said to be wrong or perverse in any manner. 10. In our considered opinion that they do not give rise to any question of law, requiring our further consideration under Section 260A of Act. appeal of Revenue is thus found to be devoid of merits and is liable to be dismissed and accordingly, it is dismissed. No costs. (V.K.,J.) (K.R.,J.) 16.09.2020 Index : Yes/No tar To 1. Income Tax Appellate Tribunal, 'D' Bench, Chennai. 13/14 http://www.judis.nic.in Dt.16.09.2020 in T.C.A. No.11/2017 Prl. Commr. Of I.T. vs. HSI Automative Ltd. DR.VINEET KOTHARI, J. and KRISHNAN RAMASAMY, J. (tar) T.C.A.No.11 of 2017 16.09.2020 14/14 http://www.judis.nic.in Principal Commissioner of Income-tax 2, Chennai v. HSI Automative Ltd