2007 (9) TMI 132 - HC - Income Tax

R & D Expenditure - Assessee claim the expenditure as R & D expenditure which is incurred by assessee for the purchase of axial machine and computer but rejected by AO - CIT(A) held that no disallowance was made without following the procedure u/s 35(3)and upheld by the tribunal and HC

Summary

Issues:
1. Capital expenditure on purchase of Axial machine claimed as research and development expenditure under Section 35(1) of the Income Tax Act, 1961.

Analysis:
The appeal under Section 260A of the Income Tax Act, 1961, involved a dispute regarding the capital expenditure of Rs.87,22,447 incurred by the assessee on the purchase of an Axial machine, machinery spares, and computers, claimed as research and development expenditure under Section 35(1) of the Act for the Assessment Year 1999-2000. The Assessing Officer disallowed the expenditure based solely on a cursory examination of the machine's brochure, without following the prescribed procedure of referring the issue to the Department of Scientific and Industrial Research for final decision, as required under the previous Section 35(3) of the Act.

The Commissioner of Income Tax (Appeals) noted the procedural lapse by the Assessing Officer in not involving the prescribed authority for determining the use of the asset for research and development purposes. The Commissioner held that the Assessing Officer's disallowance was improper due to the failure to follow the correct procedure. The Revenue, aggrieved by this decision, appealed to the Tribunal, which upheld the Commissioner's view, emphasizing the necessity of proper verification before disallowing the expenditure.

The High Court, after hearing arguments from both parties, concurred with the Tribunal's decision, highlighting that the Assessing Officer was not the competent authority to determine the use of the machinery for research and development purposes. The Court stressed the importance of physical verification rather than relying solely on superficial observations like examining a brochure. The Court also noted that the Revenue had multiple opportunities to investigate the actual use of the machinery but failed to do so in a timely manner, leading to the dismissal of the appeal.

In conclusion, the High Court found no substantial question of law arising from the case and dismissed the appeal, affirming the Tribunal's decision. The Court declined the Revenue's request for remand to the Assessing Officer, considering the unreasonable burden it would impose on the assessee to prove the machinery's use almost a decade prior. The judgment underscored the significance of following prescribed procedures and conducting thorough investigations in tax matters to ensure fair and accurate assessments.