2010 (2) TMI 761 - AT - Income Tax

Expenditure on Scientific Research - ad hoc disallowance of conveyance expenses and telephone and postage expenses and local and foreign travel expenses - disallowance out of professional fees and contract payments u/s 40(a)(ia) - disallowance of product development, laboratory expenses, quality control expenditure, etc as expenditure on scientific research and capital expenditure.- held that - When the assessee furnished complete details, ad hoc disallowance cannot be made. - Decided in the favour of Assessee. - TDS made in the last month of the accounting year and if the same is paid before filing of the return under section 139(1) of the Act, no disallowance is warranted. Decided in the favour of Assessee. - The object behind the enactment of section 35 of the Act is to encourage research and development activities by the assessee. The Legislature has given benefit of deduction in respect of the capital expenditure also. - Decided in favour of Assessee

Issues Involved:

1. Ad hoc disallowances out of conveyance expenses, telephone and postage expenses, local and foreign travel expenses.
2. Disallowance of professional fees and contract payments under section 40(a)(ia) of the Income-tax Act for the payment of tax deduction at source.
3. Disallowance of product development, laboratory expenses, quality control expenditure, and enhancing the addition by considering the items as capital expenditure.

Issue-wise Detailed Analysis:

1. Ad hoc Disallowances:

The assessee contested the ad hoc disallowances made by the Assessing Officer (AO) and partially upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO disallowed 10% of conveyance, telephone, postage, and local travel expenses, and 25% of foreign travel expenses due to lack of verification. The CIT(A) reduced the disallowance to 5% for conveyance, telephone, postage, and local travel expenses but upheld the 25% disallowance for foreign travel expenses. The assessee argued that all relevant details were provided, and ad hoc disallowances were baseless. The Tribunal found that the assessee had indeed furnished complete details, and thus, ad hoc disallowances were unwarranted. Consequently, the Tribunal deleted the additions sustained by the CIT(A) for these expenses.

2. Disallowance under Section 40(a)(ia):

The AO disallowed Rs. 3,50,880 for late remittance of tax deducted at source (TDS) on professional fees and contract payments. The CIT(A) allowed Rs. 52,800 but directed the AO to allow the remaining items in the subsequent year. The assessee argued that the TDS for the remaining items was deposited before the due date of filing the return under section 139(1) of the Act, making them allowable in the current year. The Tribunal agreed, noting that TDS made in the last month of the accounting year and paid before the filing deadline should not be disallowed. Thus, the Tribunal modified the CIT(A)'s order and allowed the claim for the remaining items.

3. Disallowance of Product Development and Related Expenses:

The AO disallowed Rs. 32,25,600 as capital expenditure for product development, allowing 1/5th of it subject to amortization. The CIT(A) upheld this view, treating the expenditure as capital in nature and not allowable under sections 35 or 37 of the Act. The Tribunal examined the provisions of section 35, which allows deductions for capital expenditure on scientific research related to the business. The Tribunal found that the assessee's expenses were indeed capital in nature and related to scientific research, thus qualifying for deduction under section 35(1)(iv) read with section 35(2)(ia). The Tribunal set aside the CIT(A)'s order and allowed the assessee's claim for the full deduction.

Conclusion:

The Tribunal allowed the appeal partly, deleting ad hoc disallowances for conveyance, telephone, postage, and travel expenses, and allowing the full deduction for TDS payments and capital expenditure on scientific research under the relevant sections of the Income-tax Act.

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