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In Deputy Commissioner of Income-tax vs. Metalman Auto (P.) Ltd. (78ITD327) the assessee was OE supplier to M/s Kinetic Honda Motors Ltd. The assessee spent certain sum as design and development expenditure as R&D expense for the development of tools to manufacture some components. It was claimed by the assessee that it was a continuous process for alteration in the tools for achieving the maximum output by reducing mechanical processes and for saving in material consumption. As a result of consultation and designs of various tools and processes, the assessee has saved a number of manufacturing processes resulting in increase of manufacturing and sale and profitability. The assessee had cited specific items like side bumper, luggage carrier, side pipe, plate up etc. whereas a result of consultation, maximum saving in regard to processes was made. The assessee had claimed the entire expenditure as revenue in this case under the head R&D head in the profit and loss account.

The Assessing Officer noted that expenditure incurred on designs and development of tools was a part and parcel of the plant and machinery being used to manufacture the components. Expenditure incurred on designing of these tools would give the assessee benefit of enduring nature and, therefore, the same was treated as capital expenditure. The Assessing Officer hence allowed depreciation on such expenditure.

The Chandigarh Tribunal while holding in favour of the assessee gave the following finds in this case:

1) There is nothing to suggest that expenditure was incurred resulting in increasing the value of capital asset. It only resulted in improving the quality of the existing product already manufactured by the assessee;
2) The assessee has carried out improvements in the items/components already manufactured by it.
3) The assessee had only carried out modification and improvements in the existing designs.

The Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT (177 ITR 377) held as under: –

“That the improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. The further circumstance that the agreement pertained to a product already in the line of the appellant’s established business and not to a new product indicated that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day to day business of the appellant’s established enterprise. The financial outlay under the agreement was for the better conduct and improvement of the existing business and was revenue in nature and was allowable as a deduction in computing the business profits of the appellant.”

In Commissioner of Income-tax v. Singh (N.P.) (207ITR183) the assessee-firm incurred an expenditure of Rs. 2,96,682 which it incurred as total costs for the new gearboxes fitted to its steamer. The Income-tax Officer held that the fitting of gearboxes to the steamer resulted in an enduring benefit to the assessee and so the expenditure should be treated as capital expenditure. The Appellate Tribunal held that fitting of L. C. T. M. V. (bridge) with two gear boxes had rendered the machine more efficient, for earning more income and it is not a case where it resulted in an enduring benefit to the assessee.

Following the Alembic case (supra) the Patna High Court held that there is only an improvement in the operation of the existing business and its efficiency and profitability. In other words, the expenditure incurred was for the better conduct and improvement of the existing business.

Andhra Pradesh High Court in CIT v. Praga Tools Ltd. (157 ITR 282), which is relied on by the Chandigarh Bench of the ITAT (supra), held that expenditure for development of parts by carrying out certain modification and improvements in the design was not capital in nature.

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