2011 (2) TMI 1287 - AT - Income Tax

Summary

Issues involved: Appeal against denial of deduction under section 35(2) for expenditure on scientific research.

Summary:
The appeal was filed against the order of CIT(A) for the assessment year 2006-07 under section 143(3) of the Income-tax Act, 1961. The only issue raised was the denial of the claim of deduction under section 35(2) for expenditure on scientific research. The Assessing Officer declined the claim based on the provisions of section 35(2AB) applicable to companies engaged in specified businesses. The CIT(A) upheld the decision, leading to the appeal before the ITAT.

Upon review, it was found that the assessee, engaged in manufacturing and trading, had claimed 100% deduction under section 35(1)(iv) for expenditure on building and plant and machinery for Research and Development. The Assessing Officer cited section 35(2AB) to deny the claim, stating that the higher deduction of 150% is subject to specific conditions for in-house research and development facilities approved by authorities. However, the ITAT noted that the assessee's claim fell under section 35(1) and not 35(2AB), as the latter pertains to a different set of conditions for higher deductions.

The ITAT clarified that section 35(1)(iv) allows deductions for capital expenditure on scientific research related to the business, subject to conditions under section 35(2). It highlighted that disallowing depreciation under section 32 for the same asset is the only condition under section 35(2(iv). The Assessing Officer's reliance on section 35(2AB) was deemed unjustified, as the assessee had not claimed the higher deduction rate of 150% under that provision.

Ultimately, the ITAT allowed the appeal, emphasizing that the assessee was entitled to 100% deduction under section 35(1)(iv) for the expenditure on building, plant, and machinery for Research and Development, with no further claim for depreciation under section 32 on the investment.