2012 (7) TMI 697 - AT - Income Tax

Research & Development expenses as well depreciation claimed on the assets engaged in carrying out this work. - Section 35 - whether a company not in the manufacturing activity but only in the trading activity is entitled for claim of deduction u/s.35 of the I.T.Act. Section 35 is in respect of expenditure on scientific research and prescribed deduction to an eligible claim. - held that - assessee changed the stand and contested for allowance as revenue expenditure - . This subtle change in the stand of the assessee cannot be entertained at this stage of second appeal unless and until duly verified as also investigated by the Revenue Authorities. - matter remanded back. Foreign exchange fluctuation loss - held that - the statement of account of exchange rate variation needs to be verified by the Assessing Officer. - matter remanded back.

Summary

Issues:
1. Disallowance of Research & Development expenses and associated depreciation.
2. Addition made under section 40A(2) of the Act.
3. Disallowance of balance foreign exchange fluctuation loss.

Issue 1: Disallowance of Research & Development expenses and associated depreciation:

The appellant, engaged in trading, claimed expenses under "Research and Development Activities," which were disallowed by the Assessing Officer. The Assessing Officer found no evidence of R&D activity during a spot verification. The CIT(A) affirmed the disallowance, noting that the majority of expenses related to salary, consumables, and environment protection. It was suggested that R&D activities were carried out by a sister concern. The appellant argued that the expenses were normal business expenditure under section 37(1) of the IT Act. The Tribunal directed the Assessing Officer to re-examine the claim, emphasizing the distinction between capital and revenue expenditure, and the need for proper verification before allowing the claim.

Issue 2: Addition made under section 40A(2) of the Act:

The appellant contested the addition made under section 40A(2) of the Act, arguing that the accounts were audited. Due to the small quantum involved, the appellant decided not to press this ground, leading to its dismissal.

Issue 3: Disallowance of balance foreign exchange fluctuation loss:

The appellant claimed a foreign exchange fluctuation loss in the Profit & Loss account, which was disallowed by the Assessing Officer. The CIT(A) upheld this disallowance, stating lack of submissions from the appellant. The Tribunal directed the Assessing Officer to verify the statement of account regarding exchange rate variation and provide the appellant with an opportunity to be heard. The ground raised by the appellant was treated as allowed for statistical purposes.

In conclusion, the Tribunal partly allowed the appellant's appeal for statistical purposes, directing the Assessing Officer to re-examine the Research & Development expenses claim and the foreign exchange fluctuation loss, emphasizing the importance of proper verification and opportunity for the appellant to present their case.