2015 (4) TMI 881 - HC - Income Tax

Disallowance u/s 14A - Held that - A judgment of a Division Bench of this Court in the case of Godrej & Boyce Manufacturing Company Limited vs. Deputy Commissioner of Income Tax 2010 (8) TMI 77 - BOMBAY HIGH COURT wherein held that Rule 8D is prospective and not retrospective. Even otherwise the AO must give finding with respect to the nexus of this expenditure with that of the exempted income before disallowance and must point out to any expenditure, whatsoever, which is relatable to the exempted income - no disallowance at all should be made covers the controversy against the Revenue - Decided in favour of assessee. Disallowance u/s 35 - expenses on scientific research development - AO found that this claim cannot be granted as the expenditure has not been capitalised in the books of account but shown as waiting as such - whether there was no requirement of any project being completed or the entire amount capitalised in the books of account as reported by the auditors? - Held that - . The Tribunal found that once there is no dispute that such expenditure is incurred and the legal provision not warranting any further capitalisation of the amont and in the books of account, the Assessing Officer and the Commissioner erroneously rejected this claim. The Tribunal has also taken care to observe that when the Assessing Officer found that the expenditure on research and development is eligible for deduction under the same provision in the subsequent year then the view taken by the Assessing Officer all the more cannot be sustained. - Decided against revenue. Deduction U/S 43B - Held that - There was no question of section 43B being invoked and at the stage when the interest was not payable. The loan itself was availed of on 26th December, 2002, and for one year. It was payable with interest. However, the interest had not become payable and hence the question of relying on section 43B to disallow the claim does not arise. By the plain language of this provision and given the factual and admitted position, we do not think that the Tribunal erred in the view that it has taken and hence even with regard to this question. No substantial question of law. - Decided against revenue.

Summary

Issues:
1. Whether the appeal raises substantial questions of law for assessment years 2003-04 and 2006-07.
2. Interpretation of section 35 of the Income Tax Act, 1961 regarding capitalization of research expenses.
3. Application of section 43B in relation to interest payable on a loan.

Analysis:

1. The judgment addresses the issue of whether the appeal by the Revenue against the order passed by the Income Tax Appellate Tribunal raises substantial questions of law for assessment years 2003-04 and 2006-07. The court noted that the Revenue must independently satisfy that the appeal raises substantial questions of law. The court found that the questions raised did not meet this criterion and dismissed the appeal, emphasizing the need for substantial legal questions to be raised for admission.

2. The judgment delves into the interpretation of section 35 of the Income Tax Act, 1961 concerning the capitalization of research expenses. The Tribunal found that the Assessing Officer's understanding of the section was flawed and did not adhere to the plain language of the provision. The Tribunal recognized that the assessee had incurred expenses on scientific research development, duly approved by the competent authority. It was highlighted that there was no requirement for the expenditure to be capitalized in the books of account for the provision to apply. The Tribunal's decision was in line with the factual position and the plain language of the Income Tax Act, ultimately rejecting the Revenue's claim.

3. Another issue discussed in the judgment pertains to the application of section 43B in relation to interest payable on a loan. The Tribunal found that section 43B was not applicable as the interest had not become payable at the relevant stage. The court agreed with the Tribunal's interpretation, stating that the view taken was not erroneous or vitiated by any legal error apparent on the record. Consequently, the court dismissed the appeal, concluding that it lacked merit and did not raise substantial questions of law.

In conclusion, the judgment provides a detailed analysis of the issues raised in the appeal, focusing on the interpretation of relevant provisions of the Income Tax Act, 1961 and the application of legal principles to the specific facts of the case. The court's decision highlights the importance of substantiating substantial legal questions for the admission of appeals and underscores the need for a thorough understanding and application of tax laws in assessing claims and appeals.