2015 (8) TMI 358 - AT - Income Tax

Disallowance of local area expenditure - CIT(A) allowing of 50 per cent - Held that - disallowance has been restricted to 50 per cent. on the basis of personal visit to the site by the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) has not raised any doubt over the expenditure incurred by the assessee on local area development. In the facts of the case, we are not inclined to interfere with the findings of the first appellate authority on this issue - Decided against revenue. Disallowance of business promotion expenses - CIT(A) allowing of 50 per cent - Held that - While allowing 50 per cent. expenditure, the Commissioner of Income-tax (Appeals) has not given any reason. The contention of the assessee is that business promotion expenditure is towards incentives/gifts given to the representatives of customer companies to maintain cordial business relations. However, the assessee has not placed on record the details of the persons to whom such incentives were given. We do not find any reason in allowing even 50 per cent. of such expenditure in the absence of any document or any other evidence.- Decided against assessee. Disallowance of research and development expenses - CIT(A) allowing disallowance - Held that -The assessee was able to establish before the Commissioner of Income-tax (Appeals) that M/s. Adwaith Textiles Ltd. suffered production loss and also the quality of yarn because of frequent interruption in production. The Commissioner of Income-tax (Appeals) in his order has categorically observed that the amount paid by the assessee to M/s. Adwaith Textiles Ltd. for using the mill floor facility has been assessed to tax in the relevant assessment years. The Revenue has not been able to controvert the findings of the Commissioner of Income-tax (Appeals). We do find any reason to interfere with the well reasoned findings of the first appellate authority in deleting the disallowance of research and development expenses. - Decided against revenue.

Summary

Issues:
- Allowance of local area expenses
- Allowance of business promotion expenses
- Deletion of disallowance on research and development expenses

Analysis:

Issue 1: Allowance of Local Area Expenses
The Revenue challenged the allowance of local area expenses to the extent of 50%. The Commissioner of Income-tax (Appeals) restricted the expenditure to 50% after a site inspection, noting the poor condition of the road temporarily laid out by the company for truck movement. The Tribunal upheld the decision, stating that there was no doubt over the expenditure incurred by the assessee. The Tribunal found no reason to interfere with the findings of the first appellate authority and dismissed the Revenue's appeal on this issue.

Issue 2: Allowance of Business Promotion Expenses
The Revenue contested the allowance of business promotion expenses totaling &8377; 29,48,957, claiming the absence of supporting documents. The Commissioner of Income-tax (Appeals) allowed 50% of the expenditure without providing reasons. The Tribunal agreed with the Revenue, disallowing the entire business promotion expenses due to the lack of evidence or documentation supporting the claim.

Issue 3: Deletion of Disallowance on Research and Development Expenses
The Revenue raised concerns regarding research and development expenses for both assessment years. The Tribunal noted that the assessee had paid amounts to another company for using its premises to conduct research activities under real working conditions. The Commissioner of Income-tax (Appeals) extensively reviewed the activities conducted, the machinery tested, and the losses incurred during the research period. The Tribunal found the Commissioner's decision well-reasoned and supported by detailed evidence provided by the assessee. As the Revenue failed to counter these findings, the Tribunal dismissed the appeal on this issue.

Additional Observations
The Tribunal rejected the Revenue's argument of violating rule 46A, stating that no new material was presented before the Commissioner of Income-tax (Appeals). The Tribunal concluded by partly allowing the Revenue's appeal for the assessment year 2007-08 and dismissing the appeal for the assessment year 2008-09.

This comprehensive analysis covers the issues of local area expenses, business promotion expenses, and research and development expenses, providing detailed insights into the Tribunal's decision-making process and the reasoning behind each judgment.