2010 (11) TMI 804 - HC - Income Tax

Expenditure incurred by way of contribution to Employees Welfare Fund - Disallowance made for the reason that the funds are not approved and so much so, claim of deduction is hit by section 40A(9) of the Income-tax Act - Held that - Assessee has no case that employer s contribution was made to a Fund in terms of clauses (iv) and (v) of section 36(1) or under provision of any other Act or Rules. So much so, contribution to unrecognized Employees Welfare Fund by the employer is not allowable by virtue of the express provision contained in section 40A(9) of the Act. We find support for this position in the earlier judgment of this Court reported in Aspinwall and Co. Ltd. v. Dy. CIT 2006 (8) TMI 99 - HIGH COURT, KERALA - therefore, reject both these appeals Deduction of expenditure incurred for research and development under section 35(1) - finding of the Tribunal is that assessee, besides paying some advance for research equipments, has not carried out any research and the asset itself was acquired in subsequent year. Even though expenditure, both revenue and capital incurred by the assessee for research and development qualifies for deduction, the advance paid for acquiring assets Held that - Assessee is entitled to deduction for the year in which equipments were acquired, which happened in subsequent year and so much so, no merit for advancing the claim to this year. Consequently both the appeals are dismissed

Summary

Issues:
1. Disallowance of expenditure incurred by the assessee for contribution to Employees Welfare Fund.
2. Deduction of expenditure incurred for research and development under section 35(1) of the Income-tax Act.

Issue 1: Disallowance of expenditure for contribution to Employees Welfare Fund:
The Tribunal confirmed the disallowance of expenditure by the assessee for contribution to an unrecognized Employees Welfare Fund, citing section 40A(9) of the Income-tax Act. The appellant argued that the claim should be allowed under section 37(1) as business expenditure. However, the court held that section 40A provides restrictions on deductions, specifically dealing with the creation of Trust Funds for employee benefits. Section 40A(9) requires contributions to be made to funds falling under section 36(1)(iv) and (v) or as mandated by other laws. Since the employer's contribution was not made in accordance with these provisions, it was not allowable. The court referenced a previous judgment supporting this interpretation. Therefore, the appeals challenging the disallowance were rejected.

Issue 2: Deduction of expenditure for research and development:
In another appeal, the assessee claimed a deduction for expenditure on research and development under section 35(1) of the Act, subject to the limits in section 35(2). The Tribunal found that although the assessee had paid an advance for research equipment, no actual research had been conducted, and the asset was acquired in a subsequent year. The court agreed that expenditure for research and development qualifies for deduction, but the advance payment for assets did not constitute incurred expenditure. The deduction would be applicable in the year when the equipment was acquired, which was not the current year. As a result, the claim for deduction in the present year was dismissed, leading to the rejection of both appeals.

This comprehensive analysis of the judgment provides a detailed understanding of the issues involved and the court's reasoning behind the decisions rendered.