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Issues involved: Appeal by Revenue against order u/s 143(3) for AY 2002-03; Addition of R&D expenditure u/s 80IB; Disallowance u/s 40A(2)(a) & (b); Cross objection by assessee for leave encashment provision.
R&D Expenditure Issue: The Revenue appealed against the deletion of Rs. 25 lakhs as R&D expenditure attributable to the manufacturing unit of the assessee. The Commissioner of Income-tax (Appeals) found that the R&D establishment was supporting non-eligible units and had been functioning since 1994. As the Assessing Officer failed to specify the exact nature of the R&D expenditure related to the eligible unit, the Commissioner upheld the deletion of the addition. Hence, the order deleting the Rs. 25 lakhs addition was upheld. Disallowance Issue u/s 40A(2)(a) & (b): The Revenue contested the deletion of Rs. 91,44,127 disallowance under sec.40A(2)(a) & (b). The Commissioner observed that the assessee's purchase prices from associate firms were not proven to be higher than market rates. In contrast, the associate concerns sold products at higher rates to outside parties. As no evidence indicated overstatement of purchase values, the Commissioner rightly deleted the disallowance. Consequently, the appeal by the Revenue was deemed liable for dismissal. Cross-objection for Leave Encashment Provision: The assessee's cross-objection challenged the non-deletion of Rs. 93,815 provision for leave encashment. Citing the decision in Bharat Earth Movers case and the striking down of sec.43B(f) by the Calcutta High Court, the assessee's stance was supported. The assessing authority was directed to allow the deduction for the provision made towards leave encashment. As a result, the appeal by the Revenue was dismissed, and the cross objection by the assessee was allowed.
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