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2015 (3) TMI 535 - AT - Income TaxProduct Development Expenditure disallowed - CIT(A) sustained the disallowance as the expenditure resulted in the acquisition of rights in or arising out of scientific research - Held that - The expenditure that is sought to be excluded u/s.43(4)(ii) of the Act is an expenditure which the assessee incurs in acquiring rights in or arising out of scientific research already done by somebody. It is possible that the assessee without carrying out any scientific research, acquires rights in scientific research, arising out of scientific research done by somebody else and claims cost of acquisition of such rights as expenditure on scientific research. It is this kind of expenditure that is sought to be excluded u/s. 43(4)(ii) of the Act in its exclusion clause as expenditure incurred in acquiring rights in, or arising out of scientific research. It is such type of expenditure carried out by somebody else and such right is acquired by the assessee, that is sought to be disallowed. The objective behind the exclusion clause in section 43(4)(ii) of the Act appears to be that expenditure on scientific research should be on the research actually carried out by the assessee in-house and it should not merely spend money in acquiring rights in or arising out of scientific research carried out by some other person. If the interpretation sought to be placed by revenue / authorities below is to be accepted, then the benefit sought to be conferred by the provisions of section 35(1)(iv) of the Act would be virtually denied in all cases by invoking the exclusion clause in section 43(4)(ii) of the Act. Such a consequence would never have been intended by the Legislature. As already stated, the object behind the provisions of section 35 of the Act is to encourage scientific research so that the benefit of such research would be available to all. In the given facts and circumstances of the case as discussed above, we are of the view that the claim of deduction under section 35(1)(iv) of the Act is to be allowed. In any event, there is no distinction as to whether the expenditure incurred is capital or revenue, because while the provisions of section 35(1) of the Act allows deduction of revenue expenditure, the provisions of section 35(1)(iv) of the Act allows deduction in respect of capital expenditure. We, therefore, direct the Assessing Officer to allow the deduction claimed by the assessee. - Decided in favour of assessee. Disallowance of Brought forward losses as per section 79 - Whether unabsorbed scientific research expenditure should be treated on par with unabsorbed depreciation ? and Whether there has been a change in shareholding of more than 51% in the earlier years under consideration, as compared to the Assessment Year 2008-09 - Held that - It is necessary that the scientific research expenditure should have been capitalised and deduction claimed under section 35(1)(iv) of the Act. If the expenditure has been claimed as revenue expenditure, as mentioned by the learned CIT(A), then the assessee cannot claim otherwise for the purposes of carry forward of the losses. If the assessee has treated the scientific research expenditure as revenue expenditure and claimed deduction as revenue expenditure, there is no case to claim that it is in the nature of unabsorbed depreciation, for the purpose of carry forward of losses. In such a case, it has to be treated as business losses and the provisions of section 79 of the Act will apply. If, on the other hand, the assessee has treated the scientific research expenditure as capital expenditure and claimed deduction under section 35(1)(iv) of the Act, then the decision of the ITAT, Mumbai Bench in the case of Mahyco Vegetable Seeds Ltd. (2008 (7) TMI 611 - ITAT MUMBAI.) shall apply to the facts of the case. This aspect requires to be examined by the Assessing Officer. As regards the issue of change in shareholding by deduction, the finding of the Assessing Officer that there has been a change in the shareholding of more than 51% for Assessment Years 2002-03 to 2004-05 is accepted by the assessee. In respect of the later two years, i.e. Assessment Years 2005-06 and 2006-07, it is the contention of the assessee that the change in the shareholding is not more than 51% and therefore the conditions stipulated in section 79 of the Act is satisfied. In support of this contention, the learned Authorised Representative has furnished the details of the grouping of shareholding, which is claimed to be the same details as filed before the Assessing Officer - Decided in favour of assessee for statistical purposes. Disallowance under section 14A - Held that - The assessee's contention is that it has sufficient funds to make investments and that the interestbearing borrowed funds were not used for making the investments in MFs during the period under consideration. This aspect of the assessee's contention, in our considered view, requires verification. - Decided in favour of assessee for statistical purposes. Disallowance of interest - inclusion of finance charges like factoring and other charges, bill discounting charges, etc. as part of interest charges - contention of the assessee that the computation made by the Assessing Officer is erroneous, since such finance charges cannot be included as interest for the purposes of Rule 8D of the IT Rules, 1962 - Held that - As find from the record that the learned CIT(A) has already directed the Assessing Officer to exclude these charges from the computation of interest and hence no adjudication is called for at this stage. - Decided in favour of assessee.
Issues Involved:
1. Product Development Expenditure 2. Brought Forward Loss 3. Disallowance under Rule 8D read with Section 14A Detailed Analysis: 1. Product Development Expenditure: Assessee's Appeal: - The assessee challenged the disallowance of Rs. 27,97,54,476 as product development expenditure, arguing it should be deductible under section 35(1)(iv) read with section 35(2) of the Income Tax Act, 1961, as scientific research expenditure. - The assessee contended that the expenditure was incurred for in-house research and development activities and not for acquiring rights from third parties. Revenue's Appeal: - The Revenue contested the allowance of Rs. 10,25,89,536 as an allowable expenditure under section 37(1), arguing it represented expenditure on incomplete projects and could not be capitalized since no new products were developed. Tribunal's Findings: - The Tribunal noted that the assessee had bifurcated the R&D expenditure into Rs. 21,53,40,783 for research and Rs. 10,25,89,536 for product development, with Rs. 27,97,54,476 capitalized but claimed as a deduction under section 35(1)(iv). - The Assessing Officer disallowed the expenditure, treating it as capital in nature, and allowed depreciation at 25%. - The CIT(A) upheld the disallowance of Rs. 27,97,54,476 but allowed the Rs. 10,25,89,536 as revenue expenditure. - The Tribunal relied on the Karnataka High Court's decision in the assessee's own case, which held that the expenditure on prototype development is revenue in nature and deductible under section 35(1)(iv). - The Tribunal concluded that the expenditure on in-house R&D does not fall under the exclusion clause of section 43(4)(ii) and should be allowed as a deduction under section 35(1)(iv). Decision: - The Tribunal allowed the assessee's appeal for the Rs. 27,97,54,476 deduction and dismissed the Revenue's appeal regarding the Rs. 10,25,89,536 expenditure. 2. Brought Forward Loss: Assessee's Appeal: - The assessee argued that the disallowance of brought forward losses by invoking section 79 was incorrect, as the unabsorbed scientific research expenditure should be treated on par with unabsorbed depreciation. Tribunal's Findings: - The Tribunal noted that the Assessing Officer disallowed the carry forward of business losses due to a change in shareholding exceeding 51%. - The CIT(A) upheld the disallowance, stating the entire expenditure was claimed as revenue expenditure and not under section 35(1)(iv). - The Tribunal remanded the issue to the Assessing Officer to verify if the scientific research expenditure was capitalized and claimed under section 35(1)(iv), and to re-examine the shareholding details. Decision: - The Tribunal remanded the matter to the Assessing Officer for further examination. 3. Disallowance under Rule 8D read with Section 14A: Assessee's Appeal: - The assessee argued that the additional disallowance of Rs. 1,39,55,097 under section 14A was incorrect, as the investments were made from surplus funds and not borrowed funds. Tribunal's Findings: - The Tribunal noted that the Assessing Officer disallowed the interest expenditure, attributing it to investments. - The CIT(A) confirmed the disallowance but excluded finance charges like discounting and factoring charges from the computation. - The Tribunal remanded the issue to the Assessing Officer to verify the assessee's claim that borrowed funds were not used for investments and to re-examine the disallowance in light of judicial decisions. Decision: - The Tribunal remanded the matter to the Assessing Officer for further verification. Conclusion: - The assessee's appeal was partly allowed, and the Revenue's appeal was dismissed. The Tribunal remanded specific issues to the Assessing Officer for further examination and verification.
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