2018 (4) TMI 1686 - HC - Income Tax

Disallowance of weighted deduction u/s.35(2AB) - repairs of buildings and payments of municipal taxes and brokerage after treating the same as expenses incurred for R & D activity covered u/s. 35(2AB) - HELD THAT - A part of the question suggested referring to the brokerage paid by the assessee and treating the same as part of the expenditure for its R & D activity covered under section 35(2AB), we have combined it with the first question which we have admitted. The remaining portion of sole question pertains to the expenditure incurred by the assessee on lunch, refreshment etc of the visiting scientists and other guests at the R & D facilities. CIT (Appeals) and the Tribunal have come to a facutal finding that it had a direct relation to the assessee s R & D activity. This question is therefore, not entertained. Deduction u/s. 10B - Determination of book profit relying on the decision of Ajanta Pharma reported in 2010 (9) TMI 8 - SUPREME COURT . Conversion of convertible bonds into equity shares - HELD THAT - CIT (Appeals) therefore observed that, it was undisputed that the FCCB works for the purpose of capital expansion of the business since the proceeds could be used only for such purpose. He was therefore of the opinion that the proceeds for the purpose of capital expansion would be on capital account only and therefore not taxable. It was this view that the Tribunal upheld in further appeal by the Revenue. The Tribunal clubbed two issues for common consideration viz. the present one as well as the question of taxing the receipts arising out of cancellation of forward foreign exchange fluctuation hedging contract. We have given brief separate reasons for not entertaining a corresponding questions raised by the Revenue in Revenue s connected Tax Appeal. Broadly adopting the same parameters, this question is also not considered in the present Tax Appeal.

Summary

Issues Involved:
1. Disallowance of weighted deduction under section 35(2AB) for repairs, municipal taxes, and brokerage.
2. Disallowance of expenses incurred on behalf of another company.
3. Weighted deduction for gifts to R&D employees and expenses for R&D unit employees.
4. Consideration of deduction under section 10B for book profit determination.
5. Treatment of foreign exchange fluctuation gain as revenue or capital receipt.

Analysis:

Issue 1: Disallowance of weighted deduction under section 35(2AB)
The High Court admitted the appeal to consider whether the ITAT was justified in setting aside the CIT (A)'s finding and directing the AO to delete the disallowance of weighted deduction under section 35(2AB) for repairs, municipal taxes, and brokerage. The Court found that the expenses were incurred for R&D activities covered under section 35(2AB) and upheld the ITAT's decision.

Issue 2: Disallowance of expenses incurred on behalf of another company
The Court combined a part of this issue with the first question related to R&D activities covered under section 35(2AB). The remaining part regarding expenses incurred on lunch, refreshment, etc., for visiting scientists and guests at the R&D facilities was not entertained as it was found to have a direct relation to the assessee's R&D activity.

Issue 3: Weighted deduction for gifts to R&D employees and expenses for R&D unit employees
The Court did not entertain the question related to a small amount for gifts to R&D employees. The question regarding expenses incurred for lunch, refreshment, and brokerage paid for the R&D unit employees was combined with the first issue and not separately considered.

Issue 4: Consideration of deduction under section 10B for book profit determination
The Court rejected this question based on a previous judgment and did not entertain it in the present appeal.

Issue 5: Treatment of foreign exchange fluctuation gain
The issue arose from the gain on account of conversion of convertible bonds into equity shares. The Court observed that the funds were utilized for capital expansion as per RBI guidelines, and the proceeds were used for the intended purpose. The CIT (A) and Tribunal held in favor of the assessee, considering the gain as non-taxable capital receipts. The Court upheld this view and did not consider the question raised by the Revenue.

In conclusion, the High Court addressed various issues related to deductions, expenses, and capital receipts in the context of income tax appeals, providing detailed analysis and reasons for each decision while upholding the ITAT's findings in most instances.