M/s. Orient Craft Ltd., New Delhi v. ACIT, New Delhi

ITA 1718/DEL/2012 | 2008-2009
Pronouncement Date: 30-04-2015 | Result: Allowed

Appeal Details

RSA Number 171820114 RSA 2012
Assessee PAN AACOO0068M
Bench Delhi
Appeal Number ITA 1718/DEL/2012
Duration Of Justice 3 year(s) 17 day(s)
Appellant M/s. Orient Craft Ltd., New Delhi
Respondent ACIT, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 30-04-2015
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted E
Tribunal Order Date 30-04-2015
Date Of Final Hearing 12-02-2015
Next Hearing Date 12-02-2015
Assessment Year 2008-2009
Appeal Filed On 12-04-2012
Judgment Text
INCOME TAX APPELLATE TRIBUNAL DELHI BENCH E : NEW DELHI BEFORE SHRI S.V.MEHROTRA ACCOUNTANT MEMBER AND SHRI A. T. VARKEY JUDICIAL MEMBER ITA NO. 1718 /DEL/ 2012 (ASSESSMENT YEAR: 2008 - 09 ) ORIENT CRAFT LTD. F - 8 OKHLA INDUSTRIAL AREA PHASE - I NEW DELHI PAN:AAACOO0068M VS. ACIT CIRCLE - 13(1) NEW DELHI ( ASSESSEE ) (RESPONDENT) ITA NO. 2550 /DEL/ 2012 (ASSESSMENT YEAR: 2008 - 09 ) ACIT CIRCLE - 13(1) ROOM NO.406 C.R. BUILDING I.P. ESTATE NEW DELHI VS. ORIENT CRAFT LTD. F - 8 OKHLA INDUSTRIAL AREA PHASE - I NEW DELHI PAN:AAACOO0068M ( ASSESSEE ) (RESPONDENT) O R D E R PER A. T. VARKEY JUDICIAL MEMBER THIS IS AN APPEAL PREFERRED BY THE ASSESSEE AND CROSS APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF THE LD CIT(A) - XVI NEW DELHI DATED 22.12.2011 FOR THE ASSESSMENT YEAR 2008 - 09. 2. THE GROUNDS OF APPEAL OF THE ASSESSEE ARE AS FOLLOWS: - 1. THAT THE ORDER PASSED BY LOWER AUTHORITIES IS BAD IN LAW AND AGAINST THE FACTS AND CIRCUMSTANCES OF CASE. 2. THAT LD CIT(A) HAS ERRED IN LAW IN MECHANICALLY APPLYING SECTION 14A READ WITH RULE 8D(2)(III) BY SUSTAINING THE ADDITIONS OF RS.18 02 321/ - ARBITRARILY AND WITHOUT ANY JUSTIFICATION. 3. IT IS CONTENDED THAT THE PROVISIONS OF RULE 8D ARE NOT APPLICABLE. 4. THE ABOVE GROUNDS OF APPEAL ARE INDEPENDENT AND WITHOUT PREJUDICE TO ONE AND ANOTHER. ASSESSEE BY : SH. SALIL AGARWAL ADV SH. SAILESH GUPTA ADV RESPONDENT BY : P DAMKANUNJNA SR. DR DATE OF HEARING 12.02.2015 DATE OF PRONOUNCEMENT 30. 04.2015 PAGE 2 OF 11 2. THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE AS FOLLOWS: - 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) HAS ERRED IN RESTRICTING THE DISALLOWANCE U/S 14A TO RS18 02 321/ - FROM RS.1 45 72 152/ - AND NOT APPLYING RULE 8D OF THE INCOME TAX RULES WHICH IS MANDATORY FROM A.Y.2008 - 09. 2. WHETHE R ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) HAS ERRED IN NOT PROVIDING ANY FINDING THAT THERE IS NO EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT (AS REFERRED TO IN RULE 8D(2)(II). 3 . WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) HAS ERRED IN NOT ACCEPTING THE FACT THAT THE SAMPLE AND DESIGN CREATED BY THE ASSESSEE AND SUPPLIED TO ITS POTENTIAL BUYERS CREATED A MARKET AND GOODWILL FOR THE ASSESSEE WHICH HAS AND EN DURING BENEFIT IN SOLICITING CUSTOMERS FOR THE ASSESSEE NOT ONLY DURING THE FINANCIAL YEAR BUT ALSO ON A LONGER BASIS. 4. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.7 91 00 000/ - MADE BY THE AO ON ACCOUNT OF PRODUCT DEVELOPMENT EXPENSES. THE BENEFIT OF THE PRODUCT DEVELOPMENT EXPENSES OF THE COMPANY IS DERIVED BY THE COMPANY OVER A PERIOD OF THREE YEARS AS PER THE JUDGEMENT OF THE HON'BLE APEX COURT IN MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. VS. CIT 225 ITR 802. 3. THE SOLE GROUND RAISED BY ASSESSEE IS REGARDING DISALLOWANCE U/S 14A OF THE INCOME TAX ACT 1961(HEREIN AFTER THE ACT) IN RESPECT TO RELIEF PARTLY GIVEN BY THE LD CIT(A). GROUND NO.1 AND 2 OF REVENUE IS REGARDING DISALLOWA NCE PARTLY DELETED BY THE LD CIT(A) O N THIS ISSUE. SINCE THE EFFECTIVE SOLE GROUND OF THE ASSESSEE AND GROUND NOS.1 AND 2 OF THE REVENUE IS THE SAME WE PROPOSE TO DISPOSE OF THESE GROUNDS BY A COMMON ORDER. 4 . WE NOTE THAT THE ASSESSEE HAS SUO MOT U MADE DISALLOWANCE OF RS.1 72 879/ - ON DIVIDEND INCOME EARNED ONLY OF RS. 1 18 076/ - . 5 . BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN MANUFACTURING AND EXPORT OF READYMADE FASHION GARMENTS OUTSIDE INDIA TO COUNTRIES LIKE USA CANADA ETC. DU RING THE YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY HAS DONE SALES BOTH EXPORT SALES AS WELL AS DOMESTIC SALES . THE ASSESSEE HAD ELECTRONICALLY (E - RETURN) FILED RETURN OF INCOME ON 30.09.2008 AT A TOTAL INCOME OF RS.19 04 66 504/ - AFTER CLAIMING DEDUCTI ON UNDER CHAPTER VI - A OF THE ACT . THIS RETURN WAS PROCESSED U/S 143(1) OF THE ON PAGE 3 OF 11 15.03.2010. THE CASE WAS SELECTED FOR SCRUTINY ASSESSMENT AND NOTICES U/S 143(2) OF THE A CT . 6 . THE AO NOTED THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY HAS SHOWN DIVIDEND ON MUTUAL FUND/ SHARES OF RS.1 18 0 76 / - AND CLAIMED THE SAME AS EXEMPT U/S 10(33)/10(34) OF THE ACT IN THE COMPUTATION OF INCOME B UT NO DISALLOWANCE U/S 14A OF THE ACT ON ACCOUNT OF MANAGERIAL EXPENSES ETC INCURRED THEREON TO EARN THIS EXEM PT DIVIDEND INCOME WERE OFFERED FOR TAXATION. PURSUANT TO THE SAME NOTICE WAS ISSUED BY THE AO ON THIS ASPECT . THE ASSESSEE EXPLAINED ITS STAND BEFORE THE AO WHICH WAS NOT ACCEPTABLE TO HIM SO HE INVOKED RULE 8D AND COMPUTED THE DISALLOWANCE TO THE TUNE OF RS.1 45 72 152/ - . 7 . AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE PREFERRED AN APPEAL BEFORE LD THE LD CIT(A) WHO H AS GIVEN PART IAL RELIEF TO THE ASSESSEE. AGGRIEVED BY THE SAID ORDER OF THE LD CIT(A) THE ASSESSEE AND REVENUE ARE BEFORE US. 8 . THE LD COUNSEL SHRI SALIL AGARWAL SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY EARNED DIVIDEND INCOME OF RS.1 18 076/ - ONLY ON ITS INVESTMENT IN SHARES/ MUTUAL FUNDS WHICH WAS CLAIMED AS EXEMPT INCOME U/S 10(34)/10(35) OF THE AC T. ACCORDING TO HIM THE COMPANY HAS A WIDE CAPITAL BASE HAVING SHARE CAPITAL OF RS.19.29 CRORES AND RESERVES AND SURPLUS TO THE TUNE OF RS.201.15 CRORES WHICH SHOWS THAT THE COMPANY IS IN POSSESSION OF HUGE OWN FUNDS ON WHICH NO INTEREST IS BEING PAID AN D ALL THE INVESTMENT IN SHARES AND MUTUAL FUNDS AMOUNTING TO RS.41.68 CRORES AS ON 31.03.2008 WAS MADE OUT OF ITS OWN FUNDS. IT WAS SUBMITTED BY THE LD COUNSEL THAT THERE WAS NO FRESH INVESTMENT IN SHARES/ MUTUAL FUNDS BEING MADE DURING THE YEAR UNDER CONS IDERATION BUT THE ASSESSEE COMPANY HAS INCREASED THE BORROWED CAPITAL (LOAN FUNDS) BY RS.24.93 CRORES. TOTAL AMOUNTING TO RS.435.85 CRORES AS ON 31.03.2008. COPIES OF THE ANNUAL ACCOUNTS FOR THE YEAR ENDED 31 .03.2008 GIVING THE SCHEME OF INVESTMENTS DISCL OSES THESE FACTS. ACCORDING TO HIM THE BORROWED CAPITAL WAS MAINLY TAKEN FROM BANKS FOR THE PURPOSE OF WORKING CAPITAL OR CAPACITY EXPANSION OF THE BUSINESS AND NO BORROWED FUNDS WERE INVESTED OUTSIDE THE BUSINESS. CONSIDERING THE AFORESAID FACTS THE LD COUNSEL SUBMITS THAT THE INVESTMENT MADE BY THE COMPANY WAS OUT OF ITS OWN FUNDS (SHARE CAPITAL AND RESERVES) PAGE 4 OF 11 IN PREVIOUS YEAR AND NO INTEREST WAS INCURRED EARNING DIVIDEND INCOME DURING THE YEAR UNDER CONSIDERATION . ACCORDING TO HIM THE INTEREST PAYMENT WAS MADE FOR WORKING CAPITAL REQUIREMENT AND NO PART OF IT CAN BE ATTRIBUTED TO HAVE BEEN PAID TOWARDS INVESTMENT MADE IN SHARES AND SECURITIES. FURTHER REFERENCE WA S MADE TO THE DECISION OF C IT VS. HERO CYCLES DECIDED BY HONBLE PUNJAB AND HARYANA HIGH C OURT DECIDED ON NOVEMBER 4 2009 WHEREIN THE COURT HAS GIVEN DECISION AS UNDER (HEAD - NOTE ONLY): THE ASSESSEE EARNED DIVIDEND INCOME ON SHARES WHICH WAS EXEMPT FROM TAX. THE AO TOOK THE VIEW THAT THE INVESTMENT IN SHARES WAS' MADE OUT OF BORROWED FUNDS ON WHICH INTEREST EXPENDITURE WAS INCURRED AND CONSEQUENTLY MADE. A DISALLOWANCE U/S 14A. THIS WAS PARTLY UPHELD BY THE CIT (A). ON FURTHER APPEAL BY THE ASSESSEE THE TRIBUNAL DELETED THE DISALLOWANCE BY NOTING THAT THE ASSESSEE HAD PROVED THAT THE INVESTMENT IN SHARES WAS MADE OUT OF NON - INTEREST BEARING FUNDS. IT HELD THAT UNLESS THERE WAS EVIDENCE TO SHOW THAT THE INTEREST - BEARING FUNDS HAD BEEN INVESTED IN TH E TAX - FREE INVESTMENTS AND THE NEXUS WAS ESTABLISHED BY THE REVENUE S. 14A COULD NOT BE APPLIED ON MERE PRESUMPTION. THE REVENUE APPEALED TO THE HIGH COURT AND CLAIMED THAT IN VIEW OF S. 14A (2) AND RULE 8D (1)(B) A DISALLOWANCE COULD BE MADE EVEN IF T HE ASSESSEE CLAIMED THAT NO EXPENDITURE HAD BEEN INCURRED IN 'RESPECT OF THE TAX - FREE INCOME. HELD DISMISSING THE APPEAL: (I) IF THE INVESTMENT IN THE SHARES IS OUT OF THE NON - INTEREST BEARING FUNDS DISALLOWANCE U/S 14A IS NOT SUSTAINABLE; (II) THE CO NTENTION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPENDITURE IS ALWAYS INCURRED WHICH MUST BE DISALLOWED U/S 14A CANNOT BE ACCEPTED; (III) DISALLOWANCE U/S 14A REQUIRES A FINDING OF INCURRING OF EXPENDITURE. IF IT IS FOUND THAT FOR EARNING EXEMPTED INCOME OF EXPENDITURE HAS BEEN INCURRED DISALLOWANCE U/S 14A CANNOT STAND; 9. FURTHER THE LD AR SUBMITTED THAT THE SAME ISSUE OF DISALLOWANCE U / S14A OF THE ASSESSEE COMPANY WAS EXAMINED IN THE A. Y. 2006 - 2007 & A.Y . 2007 - 2008 AND THE CIT(A ) - X VI NEW DE LHI; IN APPEAL NO . 183/2009 - 10 VIDE ORDER DT .17/05 / 2010 HAS ACCEPTED THE CONTENTION OF THE ASSESSEE BY ALLOWING THE RELIEF U/ S 14A OF THE ACT . 10. RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS BY THE LD COUNSEL WHERE IN IT HAS BEEN HELD THAT WHERE ASSESSEE HAS INTEREST FREE FUNDS FAR IN PAGE 5 OF 11 EXCESS OF AMOUNT INVESTED IN S H ARES OF OTHER COMPANIES NO DISALLOWANCE COULD BE MADE U/ S 14 A ON THE GROUND THAT THE INTEREST BEARING FUNDS WERE INVESTE D IN EARNING TAX FREE DIVI DENDS : - CIT VS. HERO CYCLES LTD. (ITA NO. 331 OF 2009) (P & H) MA RUTIUDYOG LTD. VS. DC I T (2005) 92 FTDIL9 (DEL) ESCORTS LTD. VS. AC I T (2006) 102 ITJ (DEL) 522 SHREE SYNTHETICS. LTD VS. C I T & ANR_ (2006) 205 I TR 386 (MP) 11. ACCORDING TO THE LD COUNSEL THE SAME VIEW HAS BEEN TAKEN BY IT AT 'B' BENCH (DELHI) IN ITA NO .2381/ DEL / 2008 IN THE CASE OF M/ S COLLECTIONS . IN THAT CASE THE ASSESS EE WAS HAVING CAPITAL OF RS.4 77 49 092/ - AND HAS MADE INVESTMENT OF RS.83 72 347/ - ON WHICH TAX FREE INCOME WAS E ARNED. THE A O HAS OBSERVED THAT THE SAID INVESTMENTS WERE MADE OUT OF WORKING CAPITAL OF THE BUSINESS AND SUM BORROWED FROM THE BANK. AT THE END OF THE RELEVANT FINANCIAL YEAR THE TOTAL AMOUNT PAYABLE TO THE BANK WAS RS.96 58 766/ - . THE CO - ORDINATE BENCH O BSERVED THAT THE A O HAS NO WHERE SPECIFICALLY STATED THAT INTEREST BEARING FUNDS WERE USED OR INVESTMENT PURPOSES WHICH HAS GENERATED INTEREST FREE INCOME. IT WAS HELD BY THE TRIBUNAL THAT SINCE THE CAPITAL OF THE BUSINESS IS MUCH MORE THAN THE INVESTMENT MADE THE INTEREST EXPENSES INCURRED HAVE BEEN INCURRED FOR THE PURPOSE O F BUSINESS AND THE SAME CANNOT BE DISALLOWED ON PERIPHERAL REASONS. ON THE BASIS OF ABOVE OBSERVATION THE ITAT DELETED TH E DISALLOWANCE MADE BY THE AO U/S 14A OF THE ACT. 12. IN THE LIGHT OF THE AFORESAID FACTS AND CIRCUMSTANCES AND THE PRECEDENTS RELIED UPON THE LD COUNSEL PRAYED THAT THE DISALLOWANCE PARTLY CONFIRMED BY THE LD CIT(A) ALSO NEED TO BE DELETED . 13 . ON THE OTHER HAND THE LD DR RELIED ON THE ORDER OF THE AO AND DEFENDED THE ACTION OF THE AO IN APPLYING RULE 8D WHICH ACCORDING TO HIM WAS IN FORCE DURING THE RELEVANT ASSESSMENT YEAR AND THE LD CIT(A) ERRED IN GIVING PARTIAL RELIEF TO THE ASSESSEE WHI CH ACCORDING TO HIM NEED TO BE SET RIGHT AND SO HE PLEADED THAT THE ORDER OF THE LD CIT(A) MAY BE REVERSED AND AOS ORDER BE RESTORED. PAGE 6 OF 11 14. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORDS AND HAVE GONE THROUGH THE CASE LAWS CITED BY BOTH THE PARTIES . WE FIND THAT THE LD CIT(A) HAS NOTED THE F ACTS OF THE CASE AS GIVEN IN THE ASSESSMENT ORDER AND THE SUBMISSION OF THE AR OF THE APPELLANT IT IS SEEN THAT THE ASSESSEE HAD SHARE CAPITAL OF RS.19.29 CRORES AND RESERVES AND SURPLUS OF RS.201.15 CRORES SUM OF WHICH FAR EXCEEDED THE INVESTMENTS OF RS .41 .68 CRORES OF THE ASSESSEE COMPANY IN SHARES AND MUTUAL FUNDS AT THE END OF THE YEAR AND THEREFORE AS HELD BY VARIOUS HON'BLE COURTS NO INTEREST EXPENDITURE CAN BE HELD TO BE ATTRIBUTABLE TO EARNING TO EXEMPT INCOME FROM SHARE AND MUTUAL FUNDS AT THE END OF THE YEAR AND THEREFORE AS HELD BY VARIOUS HONBLE COURTS NO INTEREST EXPENDITURE CAN BE HELD TO BE ATTRIBUTABLE TO EARNING OF EXEMPT INCOME FROM SHARES AND MUTUAL FUNDS. ACCORDINGLY NO DISALLOWA NCE IS WARRANTED IN THE APPELLANTS CASE UNDER RULE 8D(2)(I) AND RULE 8D(2)(II). WE ENDORSE THE FINDING OF THE LD CIT(A) TO HIS FINDING THAT NO DISALLOWANCE IS WARRANTED IN THE ASSESSEES CASE UNDER RULE 8D(2)(I) AND RULE 8D(2)(III) BECAUSE C ONSIDERING THE FACTS IT IS CLEAR THAT THE INVESTMENT MADE BY THE ASSESSEE COMPANY IN THE EARLIER YEARS WAS OUT OF SHARE CAPITAL AND RESERVES AND SURPLUS LYIN G IN THE BALANCE SHEET OF THE APPELLANT C OMPANY AND ON THIS AMOUNT NO INTEREST EXPENSES WAS INCURRED. WE FIND TH AT THE ASSESSEE HAD SUFFICIENT FUNDS TO MAKE INVESTMENT IN THE SHARES AND SECURITIES ON WHICH INTEREST FEE INCOME WAS EARNED. AND THE INTEREST PAYMENT WAS MADE FOR WORKING CAPITAL REQUIREMENT AND NO PART OF IT CAN B E ATTRIBUTED TO HAVE BEEN PAID TOWARDS IN VESTMENT MADE IN SHARE AND SECURITIES. 15 . HOWEVER WE FIND THAT THE LD CIT(A) AFTER RIGHTLY HOLDING THAT RULE 8D(2)(I ) AND (II) ARE NOT APPLICABLE TO THE CASE IN HAND HAS RESORTED TO APPLY RULE 8D(2)(III) ON THE GROUND THAT SOME ADMINISTRATIVE EXPENSES IS INEVITABLY INCURRED BY THE ASSESSEE FOR SALARY MANAGEMENT TELEPHONE STATIONARY ETC WHICH IN OUR OPINION IS NOT CORRECT BECAUSE THE ASSESSEE HIMSELF HAS SU O - MOTTO DISALLOWED ON AMOUNT OF RS.1 72 879/ - FOR EARNING EXEMPT INCOME/ DIVIDEND TO THE TUNE OF RS.1 18 076/ - . THE AO CAN PRESS INTO SERVICE THE ALTERNATE METHOD OF MAKING DISALLOWANCE U/S 14A BY INVOKING RULE 8D ONLY WHERE THE AO IS NOT SATISFIED WITH THE WORKING OF DISALLOWANCES GIVEN BY THE ASSESSEE. WE FIND THAT NO SUCH DISSATISFACTION HAS BEEN RECORDED BY THE AO PAGE 7 OF 11 TO STATE THAT THE SUO - MOTTO DISALLOWANCE MADE BY THE ASSESSEE IS INCORRECT AND HE HAS TO RESORT TO RULE 8D. THE AO SHALL BEAR IN MIND THAT INVOKING RULE 8D IS NOT MANDATORY IT WILL BE RESORTED TO ONLY IF HE IS NOT SATISFIED AS TO THE CORRECTNESS OF THE CLAIM MADE BY THE ASSESSEE AS STIPULATED AND MANDATED IN SECTION 14A ; AND INVOKING RULE 8D IS NOT AUTOMATIC ; AND HERE THE AO ERRED IN NOT RECORDING HIS SATISFACTION AS TO WHY THE SUO MOTTO DISALLOWANCE MADE BY THE ASSESSEE IS INCORRECT WITHOUT DOING SO HIS EXERCISE TO INVOKE RULE 8D LACKS JURISDICTION . 16 . HERE THE FACTS CLEARLY INDICATES AS CLAIMED BY THE ASSESSEE THAT NO BORROWED FUNDS WERE UTILIZED FOR EARNING THE EXEMPT INCOME BY THE ASSESSEE AND FURTHER THE DIVIDEND WERE DIRECTLY CREDITED IN THE BANK ACCOUNT OF THE ASSESSEE AND NO EXPENDITURE WAS CLAIMED. WHAT EVER IT MAY BE WE FIND T HAT THE ASSESSEE ONLY RECEIVED RS.1 18 076 / - AS DIVIDEND INCOME THEREFORE THERE IS NO QUESTION OF DISALLOWANCE OF RS. 18 02 321 / - BY INVOKING SECTION 14A R.W. RULE 8D (2)(III) U NDER THE FACTS AVAILABLE ON RECORD. IT WAS ALSO EXPLAINED BY THE LD. COUNSEL FOR THE ASSESSEE THAT ON IDENTICAL FACT S IN EARLIER YEARS NO DISALLOWANCE W AS MADE BY THE ASSESSEE AND IT WAS ACCEPTED. IN THE PRESENT ASSESSMENT YEAR ALSO NO BORROWED FUNDS WERE INVESTED BY THE ASSESSEE FOR MAKING INVESTMENT IN SHARES OR FOR EARNING DIV IDEND INCOME. DISALLOWANCE U/S 14A R.W. RULE 8D CANNOT IN ANY RATE EXCEED THE EXPENDITURE THAT HAS BEEN ACTUALLY INCURRED BY THE ASSESSEE AS PER ITS BOOKS OF ACCOUNT FOR EARNING EXEMPT INCOME AND IN THE ABSENCE OF EXERCISE NOT CARRIED OUT BY THE AO AS PRES CRIBED BY SECTION 14A BEFORE INVOKING RULE 8D AS AFORE - STATED W E FIND FORCE IN THE CONTENTION OF THE COUNSEL OF THE ASSESSEE AND DIRECT THAT ONLY RS.1 72 879/ - SUO - MOTTO DISALL OWED BY THE ASSESSEE CAN BE UPHE LD AND THE REST OF THE ADDITION MADE NEED TO B E DELETED. THE APPEAL OF THE ASSESSEE IS THEREFORE ALLOWED AND APPEAL OF THE REVENUE ON THIS GROUND IS DISMISSED. 17 . NEXT IS THE GROUND NOS. 3 AND 4 OF THE APPEAL OF THE REVENUE WHICH IS DIRECTED AGAINST THE LD CIT(A)ORDERING DELETION OF THE ADDITION OF RS.7 91 00 000/ - MADE BY THE AO ON ACCOUNT OF PRODUCT DEVELOPMENT EXPENSES AS DEFERRED REVENUE EXPENSES. PAGE 8 OF 11 18 . THE LD DR SUBMITTED THAT THE CLAIM OF THE ASSESSEE THAT THESE DESI G NS WERE GIVEN TO T H E CUS TOMERS FREE OF COST IS ONE THING BUT IT C ANNOT BE DENIE D THAT THE SAMPLE AND DESIGN CREATED BY THE ASSESSEE AND SUPPLIED TO ITS POTENTIAL BUYERS CREATE A MARKET AND GOODWILL FOR THE ASSESSEE WHICH HAS AN ENDURING BENEFIT IN SOLICITING CUSTOMERS FOR THE ASSESSEE NOT ONLY DURING THE FINANCIAL YEAR BUT ALSO ON A LONGER BASIS . ACCORDING TO THE LD AR A PERUSAL OF THE FINANCIAL STATEMENT OF THE ASSESSEE REVEALS THAT A MAJOR PART OF OVERSEAS ORDERS RECEIVED BY THE ASSESSEE ARE O N ACCOUNT OF ITS OWN EFFORTS WHICH INCLUDES PROD UCTS DESIGN AND D EVELOP M ENT. IN VIEW OF THE ABOVE THE ENTIRE PRODUCT DEVELOPMEN T EXPENSES OF RS . 11 . 87 CRORES DEBITED TO PROFIT & LOSS ACCOUNT AND CLAIMED AS REVENUE EXPENSES WAS DISALLOWED BY THE AO AND SAID EXPENSES WERE TREATED AS DEFERRED REVENUE EXPENDITURE IN ACCORDANCE TO THE JUD G E M ENT OF THE APEX COURT IN MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD VS CIT 225 ITR 802 . ACCORDING TO LD DR IT WAS RIGHTLY HELD BY THE AO THAT THE BENEFIT OF THE PRODUCT DEVELOPMENT EXPENSES OF THE COMPANY IS DERIVED BY THE COMPANY OVER A PERIOD OF THREE Y EARS . SO ONE THIRD OF THE PRODUCT DEVELOPMENT EXPENSES RS. 3.95 CRORES IS ALLOWED IN THE INSTANT ASSESSMENT YEAR AND THE B ALANCE RS .7.91 CRORES IS DISALLOWED FOR THE YEAR TO BE ALLOWABLE OVER THE NEXT TWO YEARS AS IT IS HELD BY THE AO THAT THE BENEFIT IN TERMS OF CREATING MARKET AND GOODWILL FOR THE ASSESSEE IN THE INTERNATIONAL MARKET IS AVAILABLE FOR THE ASSESSEE OVER A PERIOD OF THREE YEARS FOR THE EXPENDITURE MADE ON THE PRODUCT DEVELOPMENT EXPENSES. HOWEVER ON APPEAL BY THE ASSESSEE BEFORE THE LD CIT( A) HE ERRED IN DELETING THE SAME HOLDING THE PRODUCT DEVELOPMENT EXPENSES AS REVENUE EXPENSES. THEREFORE THE LD DR WANT S US TO REVERSE THE ORDER OF THE LD CIT(A) AND RESTORE THE ORDER OF THE AO. 20 . ON THE OTHER HAND THE LD COUNSEL SUBMITTED THAT DURING T HE YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY INCURRED AN EXPENDITURE OF RS.11.87 CR ON DEVELOPMENT OF SAMPLES/ PREPARATION OF SAMPLES AS PER THE REQUIREMENTS OF THE FOREIGN BUYERS. THESE EXPENSES ARE OF REVENUE NATURE AND NO BENEFIT OF ENDURING NATURE IS AVAILABLE TO THE ASSESSEE AS THE MARKET OF READY MADE GARMENTS IS SEASONAL AND SHORT LIVED ; AND STYLE CHANGES FROM SEASON TO SEASON. A DETAILED NOTE O N PRODUCT DEVELOPMENT EXPENSES WAS SHOWN TO US PAGE 9 OF 11 ENCLOSED ALONG WITH DETAIL EXCEEDING RS.3 000 / - TO SUBST ANTIATE THE CLAIM OF THE ASSESSEE COMPANY. IT WA S SUBMITTED THAT THE EXPENDITURES ARE IN THE NATURE OF SAMPLING EXPENSES AND NO NEW ASSET WA S CREATED AND ALSO NO BENEFIT OF ENDURING NATURE IS DERIVED FROM SUCH EXPENDITURES. KEEPING IN VIEW THE SHORT LIFE AND NATURE OF STYLES AND DESIGNS IN READYMADE GARMENTS BUSINESS IT CANNOT BE SAID THAT THE ASSESSEE HAS ACQUIRED BENEFIT OF ENDURING NATURE OF DEVELOPING SAMPLES OF GARMENTS AS PER REQUIREMENTS OF THE BUYERS AS COMPARED TO OTHER BUSINESS AREAS. THE R ATIO OF THE JUDGMENT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. 225 ITR 802 IS NOT APPLICABLE AS THE FACTS OF THE CASE ARE DIFFERENT FROM THE FACTS OF THE ASSESSEE COMPANY. IN THE SAID CASE DISCOUNT ON DEBENTURES WERE WRITTEN OFF OVER TH E PERIOD OF DEBENTURES AS DEFERRED NATURE. ACCORDING TO THE LD COUNSEL THE ASSESSEE COMPANY IS REGULARLY INCURRING SAMPLE DEVELOPMENT EXPENDITURES WHICH ARE OF SMALL AMOUNT AND FOR A PARTICULAR SEASON/STYLE AND WHICH MAY UNDERGO CHANGES WITH THE CHANGE IN THE SEASON EVEN WITHIN THE SAME YEAR AND ARE THERE FORE AR E OF REVENUE NATURE. THE LD COUNSEL POINTED OUT TO US THAT EARLIER. THESE EXPENSES WERE NEVER DISALLOWED B Y THE AO IN THE REGULAR ASSESSMENTS FOR ASSESSMENT YEARS PRIOR TO ASSESSMENT YEAR 2007 - 08. S IMILAR ADDITION WAS MADE BY THE AO FOR THE FIRS T TIME FOR ASSESSMENT YEAR 20 07 - 8 AND THE LEARNED CIT(A) - XVI NEW DELHI IN APPEAL NO.1153/2009 - 10 VIDE ORDER DATED 17.05.20 10 WAS PLEASED TO DELETE THE ADDITIONS MADE ON ACCOUNT OF PRODUCT DEVELOPMENT EXPENS E S. 21. THE LD AR RELIED ON THE CASE LAW OF CIT VS. HARING CRANK SHAFTS LTD. 207 TAXATION 737 (DEL) WHERE THE JURISDICTIONAL HIGH COURT HELD THAT THE PRODUCT DEVELOPMENT EXPENSES WERE DEDUCTIBLE AS REVENUE EXPENDITURE. IN THE CASE OF GLAX O SMITH KLINE CONSUMER HE ALTHCARE LTD. VS. ACIT 112 TTJ 94 (CHD) THE ITAT EVEN HELD THAT THE 'EXPENSES INCURRED FOR INTRODUCING AND DEVELOPING NEW PRODUCTS OF THE SAME BUSINESS WERE ALLOWABLE AS BUSINE SS EXPENSES SINCE NO NEW LINE OF BUSINESS WAS ACQUIRED '. REFERENCE WAS ALSO BE MADE TO THE CASE LAW OF CIT VS. BHARAT EARTH MOVERS LTD. ( 1986) 155 ITR 321 (KAR) WHERE IN IT WAS HELD THAT EXPENDITURE INCURRED ON DEVELOPMENT OF PRODUCTS IS A REVENUE EXPENDITURE. TO THE SIMILAR EFFECT AMRITSAR BENCH OF THE ITAT IN THE CASE OF DCIT V S. MAX INDIA LTD. (2006) 105 TTJ 1 002 (ASR) HAD ALSO HELD THAT THE PAGE 10 OF 11 EXPENSES INCURRED BY THE ASSESSEE FOR IMPROVING AND DEVELOPING NEW VARIETIES OF FILMS WERE NOT CAPITAL IN NATURE SINCE THESE DID NOT PERTAIN TO EXTENSION OF ITS BUSINES S NOR THERE WAS ANY CHANGE IN THE INSTALLED CAPACITY. ALSO THE EXPENSES WERE NOT SUBJECT TO SECTION 35D OF THE ACT AS THEY WERE ALLOWABLE UNDER SECTION 37(1) OF THE ACT EVEN IF THE ASSESSEE HAD AMORTIZED THESE EXPENSES IN ITS BOOKS OF ACCOUNT. 22. IN T HE LIGHT OF THE AFORESAID FACTS AND CASE LAWS CITED BEFORE US THE LD COUNSEL DOES NOT WANT US TO INTERFERE WITH THE ORDER OF THE LD CIT(A). 23. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORDS AND CASE LAWS CITED BY BOTH THE PARTIES. WE FIND THAT LD CIT(A) HAS FOLLOWED THE ORDER OF HIS PREDECESSOR WHO HAS HELD AS FOLLOWS: - THERE IS NO DOUBT THAT THE ASSESSEE COMPANY IS INTO THE BUSINESS OF MANUFACTURING READYMADE GARMENTS AND EXPORTING THEM OUTSIDE THE COUNTRY. IT IS AN ESTABLISHED TRADE PRACTICE THAT BEFORE THE START OF THE SEASON OR EVEN DURING THE SEASON ITSELF THE MANUFACTURERS ARE SUPPOSED TO DEVELOP SAM PLES AND SEND TO THE PROSPECTIVE BUYERS ON THE BASIS OF WHICH THE ORDERS ARE PLACED. IN VIEW OF THE FACT THAT THE DEPARTMENT HAS CONSISTENTLY ALLOWED THESE EXPENSES IN THE ASSESSEE CASE IN EARLIER YEARS THERE SEEMS TO BE NO REASON ON WHICH THE AO CAN DISAL LOW THESE EXPENSES ESPECIALLY WHEN THE AO HAS NOT MADE OUT ANY CASE THAT THESE EXPENSES ARE EITHER BOGUS IN NATURE OR CAPITAL IN NATURE. 24. AND THE LD CIT(A) CONCLUDED AS UNDER : - ALSO THE EXPENSES WERE NOT SUBJECT TO SECTION 35D OF THE ACT AS THEY WER E ALLOWABLE UNDER SECTION 37(1) OF THE ACT EVEN IF THE ASSESSEE HAD AMORTIZED THESE EXPENSES IN ITS BOOKS OF ACCOUNT. IN CONCLUSION I HOLD THAT HAVING REGARD TO THE AFORESAID DISCUSSION THE CLAIM OF THE APPELLANT FOR ALLOWABILITY OF IMPUGNED EXPENDITURE AS REVENUE EXPENDITURE IS JUSTIFIED. ACCORDINGLY THE ASSESSING OFFICER IS D IRECTED TO DELETE THE ADDITION. 25. WE FIND THAT SUCH EXPENSES WERE CLAIMED BY THE ASSESSEE IN EARLIER YEAR S TOO AND WERE BEING ALLOWED BY DEPARTMENT. SO BY APPLYING THE RULE OF C ONSISTENCY AS LAID BY THE HONBLE SUPREME COURT IN RADHASOAMI SATSANG VS. CIT (1992) 193 ITR 321 (SC) WE ARE OF THE OPINION THAT THERE WAS NO NEED TO TAKE A DIFFERENT VIEW BECAUSE THE FACTS PERMEATING IN EARLIER YEARS HAVE NOT PAGE 11 OF 11 CHANGED. WE CONCUR WITH THE OPINION OF THE LD CIT(A) THAT EXPENSES INCURRED FOR DEVELOPING SAMPLES AS PER THE REQUIREMENT OF CUSTOMERS ARE ALLOWABLE EXPENSES U/S 37(1) OF THE ACT AND ARE NOT COVERED BY SECTION 35 D OF THE ACT. WE DO NOT FIND ANY INFIRMITY IN THE IMPUGNED ORDER AND WE UPHOLD THE SAME AND DISMISS THE APPEAL OF THE REVENUE ON THIS ISSUE. 26. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLOWED AND REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 . 04.2015 . - SD/ - - SD/ - ( S.V.MEHROTRA ) (A. T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 30 / 04 / 2015 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT NEW DELHI