IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. Date of Decision: January 22, 2010 ITA No. 77 of 2009 (O&M) Commissioner of Income Tax, Faridabad …Appellant Versus M/s Escorts Auto Components Ltd. …Respondent ITA No. 17 of 2009 Commissioner of Income Tax, Faridabad …Appellant Versus M/s ECO Auto Components Ltd. (formerly known as Escorts Auto Components Ltd.) …Respondent CORAM: HON'BLE MR. JUSTICE M.M. KUMAR HON’BLE MR. JUSTICE JITENDRA CHAUHAN Present: Ms. Urvashi Dhugga, Advocate, for the appellant. Mr. Sanjay Bansal, Senior Advocate, with Ms. Shaveta Malhotra, Advocate, for the respondent. 1. To be referred to the Reporters or not? Yes 2. Whether the judgment should be reported in the Digest? Yes M.M. KUMAR, J. By this order we propose to dispose of ITA No. 17 of 2009 (in respect of assessment year 2002-03) and ITA No. 77 of 2009 (in respect of assessment year 2001-02). Both the appeals are filed against the same as- sessee although the assessment years differs and the Income Tax Appellate Tribunal, Delhi Bench ‘I’, New Delhi (for brevity, ‘the Tribunal’) has placed ITA No. 77 of 2009 (O&M) reliance on its earlier order (Assessment Year 2001-02) while deciding the appeal in respect of the assessment year 2002-03. These appeals have been filed under Section 260-A of the Income Tax Act, 1961 (for brevity, ‘the Act’). In ITA No. 77 of 2009, the following two substantive questions of law have been raised for determination of this Court:- “1. Whether, on the facts and in the circumstances of the case, the ITAT is right in law in upholding the order of the CIT (A) in deleting the addition of Rs. 72,60,300/- on account of new project expenses holding the same to be of revenue nature as against the admission of capital nature by asses- see in its notes to accounts even though the assessee had identified Rs. 72,60,300/- for diversification and expan- sion of new product range including acquisition of ma- chinery to aid such expansion and the amount had been shown pending technical quantification under capital work in progress? 2. Whether, on the facts and in the circumstances of the case, the ITAT is right in law in restoring the issue on account of bad debts written off Rs. 10,72,917/- to the file of the Assessing Officer with a direction to adjudicate the same afresh, as per the relevant provisions of the Act even when the assessee failed to prove its claim that the debts have actually became bad debts and also failed to furnish details of the write off of the bad debts?” 2. Brief facts of the case are that the assessee-respondent filed its return on 29.10.2001. The assessment was completed under Section 143(3) 2 ITA No. 77 of 2009 (O&M) of the Act, vide assessment order dated 31.3.2004 by assessing the income at Rs. 1,22,76,440/-. Re.: Question No. 1 3. Feeling aggrieved the assessee-respondent filed an appeal before the Commissioner of Income Tax (Appeals), who allowed the appeal vide or- der dated 5.12.2005. It is appropriate to mention that the CIT(A) recorded a finding that the return filed by the assessee-respondent on 29.10.2001 was re- vised on 28.1.2003. The assessee-respondent had initially declared total in- come of Rs. 40,20,690/-. In the revised return it was claimed that the asses- see suffered loss of Rs. 32,39,614/-. The principal reason for revising the re- turn was that in the original return it could not claim expenses debited under the head ‘capital work in progress’, which have been duly claimed in the re- vised return. The case was selected for scrutiny. The assessment was com- pleted as already noticed in the preceding para. The Assessing Officer has taken the view that in the original return the assessee had identified Rs. 72.60 lacs for diversification and expansion of new product range including acqui- sition of machinery to aid such expansion. On account of the aforesaid not- ings to the annual accounts, the Assessing Officer concluded that the expen- diture related to new projects and is of capital nature because the assessee it- self was treating it to be capital expenditure. 4. The CIT(A) noticed that details of 32 items were mentioned in the submissions made to the Assessing Officer for his comments who neither made comments on the nature of the expenditure incurred nor he had com- mented on the treatment of the accounting entries in the books of accounts. The CIT(A) had further pointed out that the Assessing Officer has simply treated the expenditure incurred on a new project although it is not for setting 3 ITA No. 77 of 2009 (O&M) up a new project. The finding recorded by the CIT(A) is that it is only a de- velopment of new product/modification of the product within the same or- ganisation, within the existing infrastructure, common fund, common man- agement and no ‘capital assets’ have been created out of the expenditure. Af- ter referring to the judgment in the case of Empire Jute Co. v. CIT, [1980] 124 ITR 1 (SC), the CIT(A) has held as under:- “ On overall examination of the facts of the case that emerge is that the assessee had bifurcated the sum of Rs. 72,60,300/- out of the total expenditure on salary and wages, telephone, travel- ling expenses and other administrative expenses, and allocated to the modification of existing products/development of new prod- ucts, with, the assets under the same management, with the same work force and expertise, with the same existing machinery in- cluding the buildings. The AO has not doubted that the expendi- ture incurred was not exclusively and wholly for the purposes of business. The dispute arose only because of the fact that the as- sessee himself first treated this as capital expenditure, and later on claimed as revenue expenditure in the revised return. To de- cide the issue, it will first have to be ascertained whether the ex- penditure incurred is on capital account or on revenue account. Obviously, in this case no new machinery has been purchased or now (no?) new capital asset has been purchased, the expenditure is only on the day-to-day running of the existing business. Wherein the bifurcation has been made separately for the prod- ucts under which certain items were to be modified and certain 4 ITA No. 77 of 2009 (O&M) new items were to be manufactured to earn more profits or ad- vantage in the long run. Further keeping in view the decision of the Hon’ble Su- preme Court in the case of Empire Jute Co. Ltd., the nature of the advantage has to be seen in a commercial sense. The Hon’ble Supreme Court has held that whereas in the capital field it would be only that the expenditure would be disallowable on an application on the tests, where expenditure has been incurred for obtaining an advantage of enduring benefit; but whereas the expenditure is incurred for obtaining an advantage of enduring benefit on revenue account, the position will be different i.e. if the advantage consists merely in facilitating the assessee’s trad- ing operations or enabling it to carry on the business to be car- ried out more efficiently or more profitably while leaving the fixed assets untouched, the expenditure would be on revenue ac- count, even though the advantage may endure for an indefinite future. Looking from this angle, the expenditure incurred by the assessee was with a view to earn more profits, while leaving its fixed capital untouched. It is further that in some of the items the project has been abandoned also and some were even com- pleted or continued and, therefore, although the assessee in- tended to obtain an advantage of enduring benefit and it was in the revenue field. This contention of the Ld. Counsel carries force and therefore, the expenditure has to be categorized as a revenue expenditure in the decision of the Hon’ble Supreme Court (quoted supra).” (emphasis added) 5 ITA No. 77 of 2009 (O&M) 5. The CIT(A) also placed reliance on the judgment of Hon’ble the Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. v. CIT, [1971] 82 ITR 363 (SC). Emphasising on the sanctity of the statutory provisions, Hon’ble the Supreme Court rejected one of the following conten- tions of the revenue as under:- “ The main contention of the learned Solicitor General is that the assessee failed to debit the liability in its books of ac- counts and, therefore, it was debarred from claiming the same as deduction either under Section 10(1) or under Section 10(2)(xv) of the Act. We are wholly unable to appreciate the suggestion that if an assessee under some misapprehension or mistake fails to make an entry in the books of account and although under the law, a deduction must be allowed by the Income Tax Officer, the assessee will lose the right of claiming or will be debarred from being allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. .. ….” (emphasis added) 6. Feeling aggrieved, the revenue filed an appeal before the Tribu- nal. The Tribunal under Ground No. 1 reiterated the findings given by the CIT(A) by observing that the assessee had bifurcated the sum of Rs. 72,60,300/-, out of total expenditure on salary and wages, telephone, travel- ling expenses and other administrative expenses and allocated to the modifi- cation of existing products/developments of new products with the asset un- 6 ITA No. 77 of 2009 (O&M) der the same management, with the same work force and expertise. It also observed that the revenue did not ever doubt that the expenditure was exclu- sively and wholly for the purposes of business. Accordingly, the Tribunal ac- cepted the approach adopted by the CIT(A). 7. Having heard learned counsel on the first issue, we are of the view that by no stretch of imagination the expenditure incurred by the asses- see-respondent could be regarded as capital expenditure. Merely because the assessee-respondent has declared by giving a note in its original return that it was an expenditure pertaining to new project and is of capital in nature, the Assessing Officer could not have treated the same as the capital expenditure. Moreover, when the CIT(A) asked for the comments of the Assessing Offi- cer, he did not comment on the nature of the expenditure incurred nor com- mented on the treatment of the accounting entries in the books of account. The Assessing Officer simply placed reliance on the note given by the asses- see-respondent in its original return, which has been regarded as insufficient. Moreover, under Section 139(5) of the Act, the assessee-respondent was enti- tled to file the revised return rectifying the error committed in showing the expenditure. Moreover, the finding of the Tribunal that the expenditure in- curred was revenue expenditure and/or for business purpose, has not been challenged, nor there is any challenge to the finding that no capital asset has come into existence. The Tribunal has recorded in para 4 of its order that the revenue did not ever doubt that the expenditure incurred was exclusively and wholly for the purpose of business. In that regard reliance may be placed on the judgment of Delhi High Court in the case of CIT v. Denso India Ltd., [2009] 318 ITR 140 (Delhi), where expenditure incurred for setting up a separate cell for developing import substitute components, was regarded as 7 ITA No. 77 of 2009 (O&M) revenue expenditure. It was found as a fact that the expenditure by the asses- see was incurred on salaries, wages, travelling expenses, as is the factual situation in the instant appeals. Therefore, we do not find that the first ques- tion of law would arise for determination of this Court. Re: Question No. 2 8. The second question claimed by the revenue would also not arise for our determination. The Tribunal has remanded the matter back on the aforesaid issue on the file of the Assessing Officer, as is evident from the pe- rusal of paras 6, 7 and 8 of its order, which reads thus:- “6. In Ground no. 2:- The assessee company claimed deduc- tion of Rs. 10,72,917/-, on account of provisions for doubtful debts written off during the year. The Assessing officer gave a finding that the basis for the provision created was not given nor the details of the write off for bad debts were supplied. How- ever, the CIT(A) deleted the addition without reference to and appreciation of the provisions of section 36(1)(vii) read with sub-section 92) thereof. A perusal of section 36(1)(vii) indicates that the section opens with “subject to the provision of sub sec- tion (2)” meaning thereby that strict compliance with the provi- sion of sub section (2) is a statutory condition. However, CIT (A) had not discussed whether the said statutory condition had been satisfied by the assessee. 7. In the course of appellate proceedings both the ld. AR and DR expressed the view that the matter should be restored back to 8 ITA No. 77 of 2009 (O&M) the file of the AO, with a view to ascertaining the compliance with the relevant statutory conditions, on the issue in question. 8. In view of this the issue in question raised in this ground of appeal is restored to the file of the AO, with a direction to ad- judicate the same afresh, as per the relevant provisions of the Act and after providing reasonable and proper opportunity both to the assessee and revenue.” 9. A perusal of the aforesaid paras would show that the departmen- tal representative along with the counsel for the assessee had submitted to the Tribunal that the matter should be restored back to the file of the Assessing Officer. It is not, thus, open to the revenue now to urge that a substantive question of law would arise and accordingly the same be adjudicated by this Court. Moreover, the issue is yet to be finally determined and whenever it is finally determined the aggrieved party would be entitled to avail remedies in accordance with law. In that regard reliance may be placed on the observa- tion made by a Division Bench of this Court (of which one of us, M.M. Ku- mar, J., was a member) in para 5 of the judgment rendered in the case of Pun- jab Small Industries and Export Corporation Limited v. Deputy Com- misisoner of Income Tax, [2007] 171 Taxman 312. The Division Bench has observed that once the matter has only been remanded back to the As- sessing Officer for fresh determination then the issue cannot be considered to have been finally determined and after determination it would remain open to the parties to avail the remedies in accordance with law. Therefore, we do not find any reason to adjudicate on the second question at this stage. 10. No other question has been claimed nor any other argument has been urged. 9 ITA No. 77 of 2009 (O&M) 11. Accordingly, these appeals fail and the same are dismissed. 12. A photocopy of this order be placed on the file of connected ap- peal. (M.M. KUMAR) JUDGE (JITENDRA CHAUHAN) January 22, 2010 JUDGE Pkapoor 10