2016 (8) TMI 1525 - AT - Income Tax

Depreciation on Patent expenses which were capitalised in the books by the appellant - HELD THAT - As pursuant to the recharacterisation of the patent expenses as Capital expenditure by the A.O, the assessee company as a result thereof was entitled towards depreciation on the Block of assets- Patents , i.e not only as regards the capitalized value of the Patent expenses pertaining to the year under consideration, but also as on the Opening W.D.V of those pertaining to the preceding years, to the extent the same had been capitalised in the said preceding years. We thus restore the issue to the file of the A.O with a direction that the entitlement of the assessee company towards deprecation on the capitalized value of the Patent expenses be computed Summarily acceptance of the Opening W.D.V of Patent expenses by the A.O while framing the assessment in the hands of the assessee company for A.Y. 2009-10, does not inspire much confidence, therefore as a word of caution the A.O is directed to work out the Op. W.D.V of the Block-Patent expenses as on 01/04/2009 after making necessary verifications to his satisfaction, and only on being convinced that no part of the said Patent expenses had in the said preceding years been allowed as a revenue expenditure in the hands of the assessee company, therein rework the entitlement of the assessee company towards deprecation on Block of assets- Patent expenses - Assessee ground allowed for statistical purposes. Disallowance of deduction U/s 35(2AB) - entitlement of the assessee company as regards weighted deduction u/s 35(2AB) - HELD THAT - As find ourselves to be in agreement with the Ld. A.R and are of the considered view that as the aforesaid expenses had been incurred by the assessee company on the scientific research pertaining to its business of manufacturing pharmaceutical formulations (not being expenditure in the nature of cost of any land or building) on in-house research and development facility approved by the prescribed authority, therefore the same in the absence of any fact which could go to prove that the said claim of expenditure by the assessee company on rent and repairs does not pertain to the R D premises, or the professional and legal charges has no nexus with the scientific research of the assessee company, thus stands duly eligible for claim of weighted deduction u/s 35(2AB) of the Act . Thus in light of our aforesaid observations, the disallowance Addition on account of bogus purchases - HELD THAT - As submitted by the Ld. A.R that the purchases of ₹ 13,04,375/- (supra) made by the assessee company towards purchase of fixed assets , inadvertently had been capitalized under the head Factory building , in support of which contention the Ld. A.R has taken us through the relevant extracts of SAP placed on record, wherein the said transactions as claimed hereinabove, stood reflected. We have perused the facts of the case and the material furnished before us, and are of the considered opinion that the lower authorities had hushed through the matter and on the basis of premature findings therein made an addition of ₹ 13,04,375/-(supra) in the hands of the assessee company. Thus taking an overall view of the issue under consideration, we in all fairness herein restore the matter to the file of the A.O for verifying the aforesaid claim of the assessee company that the purchases under consideration had been capitalized under the head factory building , and in case if the said contention of the assessee company is found to be in order, therein direct the A.O to restrict the addition upto the amount of the corresponding depreciation so claimed on the said capitalized value. Appeal of the assessee company is partly allowed.

Summary

Issues Involved:

1. Disallowance of Patent expenses.
2. Disallowance of deduction under Section 35(2AB).
3. Addition on account of bogus purchases.

Issue-wise Detailed Analysis:

1. Disallowance of Patent Expenses:

The assessee company claimed ?20,76,724/- as "Patent expenses" under "Miscellaneous expenses" in the Profit & Loss account, which the Assessing Officer (A.O) reclassified as "Capital expenditure" and allowed a consequential depreciation of ?5,19,181/-. The assessee argued that the depreciation should also include the written down value (WDV) of patent expenses from previous years, totaling ?10,64,618/-. The Tribunal agreed with the assessee, stating that depreciation should be computed on the entire block of assets, including past capitalized patent expenses. The issue was remanded back to the A.O for verification and proper computation of depreciation.

2. Disallowance of Deduction under Section 35(2AB):

The A.O restricted the deduction under Section 35(2AB) to ?7,37,17,242/- based on the amount approved by the Ministry of Science and Technology, as opposed to the assessee's claim of ?7,50,95,242/-. The Tribunal found that the lower authorities misinterpreted Section 35(2AB), which requires approval of the in-house R&D facility, not the expenditure amount. The Tribunal referenced the case of ACIT vs. Torrent Pharmaceuticals Ltd., concluding that the amount of deduction should not be restricted by the approved expenditure. The Tribunal allowed the assessee's claim and set aside the disallowance of ?13,78,000/-.

3. Addition on Account of Bogus Purchases:

The A.O added ?13,04,375/- to the assessee's income, alleging bogus purchases from M/s Yashita Trading Company Pvt. Ltd., based on information from the investigation wing and the Sales Tax Department. The assessee contended that these purchases were for fixed assets (electrical material) and should be capitalized under "Factory building." The Tribunal found that the A.O failed to properly verify the assessee's claim and incorrectly added the entire amount as revenue expenditure. The Tribunal remanded the issue back to the A.O for verification, directing that if the purchases were indeed capitalized, the addition should be limited to the corresponding depreciation amount.

Conclusion:

The Tribunal partly allowed the appeal, remanding the issues of patent expenses and bogus purchases back to the A.O for proper verification and computation, while allowing the full claim under Section 35(2AB). The decision emphasized the importance of accurate classification and verification of expenses and deductions as per statutory provisions.