2008 (2) TMI 655 - AT - Income Tax

Disallowance on the research and development expenses - technical collaboration for up-gradation and improvement and development of new products - business of manufacturing of capital goods i.e. plant and machinery to be employed by cement steel companies and other companies engaged in the infrastructure products - HELD THAT - We find that the activities carried on by the assessee have certainly resulted into expansion of knowledge in the field of applied sciences, hence, the expenditure incurred by the assessee can certainly be termed as expenditure incurred on scientific research . As regards the presentation of the same as the capital expenditure, in the books of account by the assessee, it is a settled principle that the treatment given in the books of account is not conclusive to determine the deductibility or otherwise of an expenditure, hence, such treatment in the books of account is not relevant for the purpose of allowability of the expenditure. We would like to further state that R D activities carried on by the assessee resulted into product development, process development, indigenization, product support and these activities have been carried on by the assessee in a continuous manner for years together and no material has been brought on record by the revenue to controvert these claims of the assessee, hence, merely for the reason that assessee is having a technical collaboration or is developing various prototypes, these activities cannot be termed as not of the nature of scientific research. Thus, we hold that the expenditure claimed by the assessee as revenue is allowable u/s 35(1) of the Act and capital expenditure incurred by the assessee in this regard is allowable u/s 31( iv ) r/w section 35(2) of the Act. Thus, this ground of the assessee stands accepted. Since we have held so, therefore, the alternate contention raised by the assessee by way of additional ground is not adjudicated. Accordingly, ground No. 1 stands accepted. Disallowance out of travelling expenses on the basis of rule 6D - HELD THAT - Admittedly, it is not a case of revenue that these expenses involve some personal element therein. The only basis for such disallowance is established is rule 6D which is not in operation in the year under consideration. In these circumstances, we hold that the order of the ld. CIT(A) is not correct in law, hence, we quash the same. Accordingly, we accept this ground of the assessee. In the result, appeal filed by the assessee stands allowed.

Summary

Issues:
1. Disallowance of research and development expenses under section 35(1) of the Income-tax Act.
2. Disallowance of traveling expenses based on rule 6D.

Issue 1 - Disallowance of Research and Development Expenses:
The appeal was filed against the order of CIT(A) upholding the disallowance of research and development expenses amounting to Rs. 25,42,620. The Assessing Officer disallowed the expenses, considering them as capital expenditure due to the development of a mixer-cum-dispenser, which was not deemed as research and development. The CIT(A) affirmed this decision, stating that the assessee did not meet the conditions of section 35(1) as they had the technical know-how and were developing products as per customer requirements. The appellant contended that the expenses were routine and revenue in nature, allowable as business expenses. The Tribunal observed that the activities undertaken by the assessee fell within the definition of scientific research under section 43(4) of the Act. The recognition of in-house research facilities by the Government indicated the carrying out of R&D activities. The Tribunal held that the expenditure claimed by the assessee as revenue was allowable under section 35(1) and capital expenditure under section 35(1)(iv) read with section 35(2)(ia). Thus, the ground of the assessee was accepted.

Issue 2 - Disallowance of Traveling Expenses:
The appellant challenged the disallowance of Rs. 28,000 of traveling expenses based on rule 6D, which was not in operation during the relevant year. The Assessing Officer and CIT(A) upheld the disallowance, but the Tribunal found that the disallowance was not justified as rule 6D was not applicable in the year under consideration. Consequently, the Tribunal quashed the decision of the CIT(A) and allowed the ground raised by the assessee.

In conclusion, the Tribunal allowed the appeal filed by the assessee, overturning the disallowances of research and development expenses under section 35(1) and traveling expenses based on rule 6D.