2013 (7) TMI 1130 - AT - Income Tax

Summary

Issues Involved:
1. Order passed by the CIT(A) is grossly erroneous and bad in law.
2. Disallowance of claim of Weighted portion u/s 35(2AB) of Rs. 2,63,58,205/-.
3. Disallowance of proportionate scientific research expenses of Rs. 1,75,72,136/-.
4. Disallowance of deduction u/s 35(1)(iv) of Rs. 18,65,217/-.
5. Treatment of manufacturing service income as income from other sources Rs. 33,33,313/-.
6. Treatment of lease rental as income from other sources Rs. 1,22,50,000/-.

Summary:

1. Order passed by the CIT(A) is grossly erroneous and bad in law:
The appellant contended that the CIT(A)'s order was one-sided and against the principles of natural justice, as detailed submissions were not considered properly.

2. Disallowance of claim of Weighted portion u/s 35(2AB) of Rs. 2,63,58,205/-:
The CIT(A) confirmed the disallowance of the weighted deduction claim u/s 35(2AB). The ITAT restored the matter to the AO, directing that if the assessee gets approval from DSIR, the claim should be allowed as per the provisions of the Act.

3. Disallowance of proportionate scientific research expenses of Rs. 1,75,72,136/-:
The CIT(A) upheld the disallowance of proportionate revenue and capital expenditure on scientific research on the ground that no business was carried out. The ITAT noted that if the manufacturing service income is treated as business income, the disallowance of scientific research expenses would not arise. The issue was restored to the AO to determine the nature of services rendered and whether the income can be considered as business income.

4. Disallowance of deduction u/s 35(1)(iv) of Rs. 18,65,217/-:
The CIT(A) upheld the disallowance of deduction u/s 35(1)(iv) on the capital expenditure for the building of the in-house research center, citing no business activity. The ITAT directed the AO to re-examine the facts and determine if the activities can be considered as a separate business activity.

5. Treatment of manufacturing service income as income from other sources Rs. 33,33,313/-:
The CIT(A) upheld the AO's contention that the income from manufacturing services was assessable under 'Income from Other Sources' due to no involvement in manufacturing activity. The ITAT directed the AO to examine the nature of services rendered and whether the income should be considered as business income.

6. Treatment of lease rental as income from other sources Rs. 1,22,50,000/-:
The CIT(A) upheld the AO's treatment of lease rental income as 'Income from Other Sources'. The ITAT directed the AO to examine whether the lease rental income can be considered as business income, considering the appellant's continued involvement in developing and deploying intellectual property rights.

Conclusion:
The ITAT restored the issues related to the disallowance of scientific research expenses, deduction u/s 35(1)(iv), and the treatment of manufacturing service income and lease rental income to the AO for re-examination. The appeal was allowed for statistical purposes, with directions for the AO to provide due opportunity to the assessee in the proceedings.