Lakshmi Machine Works Ltd., Coimbatore vs Department Of Income Tax

The Assistant Commission of M/s. Lakshmi Machine Works Income Tax, Ltds, Company Circle IV (2), Vs Perianaickanpalayam, Coimbatore Coimbatore 641 020.

[PAN :AAACL5244N]

(अपीलाथ /Appellant) ( यथ /Respondent)

अपीलाथ क ओर से / Appellant by : Shri. S. Dasgupta, IRS, JCIT. यथ क ओर से / Respondent by : Shri. Saroj Kumar Parida, Advocate

सन ु वाई क तार ख/Date of hearing : 03.12.2014. घोषणा क तार ख /Date of Pronouncement : 02.01.2015.

आदे श / O R D E R

PER VIKAS AWASTHY, JUDICIAL MEMBER

These two appeals have been filed by the Revenue

impugning the orders of Commissioner of Income Tax (Appeals) -I, :- 2 -: I.T.A.No.1414 /Mds/2011 & I.T.A. No.585/Mds/2012.

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Coimbatore, dated 30.05.2011 for the assessment year 2007-08 and

22.12.2011 for the assessment year 2008-09, respectively.

2. In the appeal for the assessment year 2007-2008, the Revenue

has raised three issues (I) Allowing local area expenses to the extent

of 50%; (II) Allowing business promotion expenses to the extent of

50%; and (III) Deleting of disallowance on research and development

expenses. In the appeal for assessment year 2008-2009, the Revenue

has raised single issue with regard to research and development

expenses.

3. The appeal for the assessment year 2008-2009 has been filed

with the delay of 15 days. The Revenue has placed on record affidavit

of Shri. A.S. Dinesh Kumar, Assistant Commissioner of Income Tax,

Company Circle IV(2), Coimbatore, giving reasons for delay in filing of

the appeal. After perusal of the same, we find that delay in filing of

appeal is not deliberate or intentional. The delay of 15 days in filing of

the appeal is condoned and the appeal is admitted to be heard on

merits.

4. The brief facts of the case are, that the assessee is a company

engaged in manufacture of textiles machinery. The assessee filed :- 3 -: I.T.A.No.1414 /Mds/2011 & I.T.A. No.585/Mds/2012.

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return of income for the assessment year 2007-2008 on 29.10.2007

declaring income of .2,57,19,02,523/-. The case of assessee was

selected for scrutiny and notice under section 143(2) was issued to the

assessee on 26.08.2008. During the assessment proceedings, the

Assessing Officer made certain additions/disallowances which inter-alia

include disallowance of Local Area Expenses .21,65,286/-, Business

Promotion Expenses .29,48,957/- and expenditure on Research and

Development .2,00,00,000/-.

Aggrieved by the assessment order dated 30.12.2009, the

assessee preferred an appeal before the Commissioner of Income Tax

(Appeals). The Commissioner of Income Tax (Appeals) vide impugned

order restricted disallowance of local area expenditure and business

promotion expenditure to 50% and allowed expenditure on research

and development in full.

5. For the assessment year 2008-09, the assessee filed return of

income on 29.09.2008, declaring total income of .322,93,19,130/-.

During the course of scrutiny assessment, the Assessing Officer

disallowed research and development expenditure amounting to

.50,00,000/-.

:- 4 -: I.T.A.No.1414 /Mds/2011 & I.T.A. No.585/Mds/2012.

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In appeal, the First Appellate Authority reversed the findings of

Assessing Officer and allowed the claim of assessee with reference to

Research and Development expenses. The Revenue has now

impugned the findings of Commissioner of Income Tax (Appeals) on

this issue.

6. Shri. S. Dasgupta, representing the Department submitted that

the Commissioner of Income Tax (Appeals) erred in allowing local

area expenses to the extent of 50%. The assessee has not placed on

record any evidence in support of the said expenditure. Further, the

assessee has not deducted tax at source on the alleged payments

made to owners of the land where parking facility for the trucks have

been made. On the issue of business promotion expenses, the learned

Departmental Representative contended that no plausible reason has

been given by the Commissioner of Income Tax (Appeals) for allowing

50% business promotion expenditure. In respect of findings of the

Commissioner of Income Tax (Appeals) on the research and

development expenditure, the learned Departmental Representative

pointed out that Commissioner of Income Tax (Appeals) has allowed

such expenditure on the basis of personal visit to the premises of the

assessee company, whereas machinery has been installed at the :- 5 -: I.T.A.No.1414 /Mds/2011 & I.T.A. No.585/Mds/2012.

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premises of M/s. Adwaith Textiles Limited. The Commissioner of

Income Tax (Appeals) has granted relief to the assessee on the basis

of certain documents which were not available before the Assessing

Officer, nor any remand report was sought on the

information/documents placed before the Commissioner of Income

Tax (Appeals) for the first time. Thus, the provisions of Rule 46A have

been violated. The learned Departmental Representative vehemently

supported the order of Assessing Officer for both the impugned

assessment years.

7. On the other hand, Shri. Saroj Kumar Parida, appearing on

behalf of the assessee, vehemently defended the order of the

Commissioner of Income Tax (Appeals). The learned counsel for the

assessee contended that the impugned order is detailed and speaking.

He prayed for sustaining the same and dismissing the appeals of the

Revenue.

8. We have heard the submissions made by the representatives

of both sides and have perused the orders of the authorities below.

The first issue in appeal for the assessment year 2007-08 is with

regard to allowing of 50% of local area expenditure. The assessee has :- 6 -: I.T.A.No.1414 /Mds/2011 & I.T.A. No.585/Mds/2012.

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claimed .21,65,286/- as local area expenditure. The said expenditure

is allegedly made for creating parking facilities of the trucks carrying

inward and outward materials/goods of the assessee company. The

assessee has also alleged to have spent money for repair of link road

connecting unit of the assessee at Perianacikenpalayam. The assessee

has not placed on record the complete details of the local area

expenses. The Commissioner of Income Tax (Appeals) has disallowed

50% of the expenditure claimed by the assessee after site inspection.

The Commissioner of Income Tax (Appeals) has observed in his order

that the road was in bad shape and the same been laid out temporarily

for facilitation of the moment of the company trucks. The

Commissioner of Income Tax (Appeals) restricted local area expenses

to 50% based on his personal visit and information collected.

We observe that the disallowance has been restricted to 50% on

the basis of personal visit to the site by Commissioner of Income Tax

(Appeals). The Commissioner of Income Tax (Appeals) has not raised

any doubt over the expenditure incurred by the assessee on local area

development. In the facts of the case, we are not inclined to interfere

with the findings of First Appellate Authority on this issue.

Accordingly, this ground of appeal of the Revenue is dismissed.

:- 7 -: I.T.A.No.1414 /Mds/2011 & I.T.A. No.585/Mds/2012.

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9. The next issue in appeal is with regard to business promotion

expenses. The assessee has claimed .29,48,957/- as business

promotion expenditure. The assessee has not placed on record any

document in support of such expenditure. The First Appellate

Authority has restricted the expenditure to 50% merely on estimation.

While allowing 50% expenditure, the Commissioner of Income Tax

(Appeals) has not given any reason. The contention of the assessee is

that business promotion expenditure is towards incentives/gifts given

to the representatives of customer companies to maintain cordial

business relations. However, the assessee has not placed on record

the details of the persons to whom such incentives were given. We do

not find any reason in allowing even 50% of such expenditure in the

absence of any document or any other evidence. This ground of the

Revenue is allowed and the entire business promotion expenses are

disallowed.

10. The third issue raised by the Revenue in appeal for the

assessment year 2007-2008 is with regard to Research and

Development expenses. This issue is also raised in appeal for the

assessment year 2008-09. The assessee has made payment of

.2,00,00,000/- in assessment year 2007-2008 and .50,00,000/- in

assessment year 2008-2009 to M/s. Adwaith Textiles Limited for using :- 8 -: I.T.A.No.1414 /Mds/2011 & I.T.A. No.585/Mds/2012.

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its premises for installing machines and making observation under

actual working conditions.

The assessee had entered into an agreement dated 14.12.1998

with M/s. Adwaith Textiles Limited to undertake research and

development activities under mill conditions. The assessee has

installed different kind of machines at the premises of M/s. Adwaith

Textiles Limited to monitor their performances under real time working

conditions. During this trial period, there was a loss of production as

machinery had to be stopped on several days for number of hours.

The assessee paid .2,00,00,000/- as compensation for production loss

on account of frequent intervention during production period. The

Commissioner of Income Tax (Appeals) in his order has listed out

different machines that were put to test on the premises of M/s.

Adwaith Textiles Limited for carrying out various tests on the

machines. It has been highlighted that extra manpower was required

for observations and study of activities such as: (i) monitoring

consistency of yarn quality; (ii) Noise level, vibration study; (iii) Silver

breakage study etc. The assessee had submitted the details of the

subsystem and the technicians who were maintaining the machines

during the relevant period. The assessee further provided the details of

various tests which were conducted to improve the efficiency, :- 9 -: I.T.A.No.1414 /Mds/2011 & I.T.A. No.585/Mds/2012.

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endurance, production quality and efficacy of the machines. The

assessee company continued to experiment with different machine

models and also with different spaces and raw materials till the

machine stabilizes. The assessee has further furnished details of

actual utilization capacity of M/s. Adwaith Textiles Limited during R &

D activities. The assessee was able to establish before the

Commissioner of Income Tax (Appeals) that M/s. Adwaith Textiles

Limited suffered production loss and also the quality of yarn because

of frequent interruption in production. The Commissioner of Income

Tax (Appeals) in his order has categorically observed that the amount

paid by the assessee to M/s. Adwaith Textiles Limited for using the mill

floor facility has been assessed to tax in the relevant assessment

years. The Revenue has not been able to controvert the findings of the

Commissioner of Income Tax (Appeals). We do find any reason to

interfere with the well reasoned findings of the First Appellate

Authority in deleting the disallowance of research and development

expenses. This ground of appeal of the Revenue is dismissed,

accordingly.

11. So far as the objection of Revenue for violating the provisions of

Rule 46A is concerned, we do not find any merit in the same. The

Revenue has not been able to list out the fresh material brought for :- 10 -: I.T.A.No.1414 /Mds/2011 & I.T.A. No.585/Mds/2012.

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the first time on record before Commissioner of Income Tax (Appeals)

by the assessee.

A perusal of the impugned order shows that the Commissioner

of Income Tax (Appeals) has not accepted any fresh evidence to come

to final conclusion except personal visit to the factory premises to have

first hand information on Research and Development activities.

12. In result, the appeal of the Revenue in ITA No.1414/Mds/2011

for the assessment year 2007-2008 is partly allowed and the

Revenue's appeal in ITA No.585/Mds/2012 for the assessment year

2008-09 is dismissed.

Order pronounced on Friday, the 2nd of January, 2015, at

Chennai.

Sd/- Sd/- (ए. मोहन अलंकामणी) ( वकास अव थी) (A.MOHAN ALANKAMONY) (VIKAS AWASTHY) लेखा सद य/ ACCOUNTANT MEMBER या यक सद य /JUDICIAL MEMBER दनांक/Dated:02.01.2015. K.V

आदे श क त ल प अ े षत/Copy to: 1. अपीलाथ /Appellant 2. यथ / Respondent 3. आयकर आयु त (अपील)/CIT(A) 4. आयकर आयु त/CIT 5. वभागीय त न ध/DR 6. गाड फाईल/GF. :- 11 -: I.T.A.No.1414 /Mds/2011 & I.T.A. No.585/Mds/2012.

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