2017 (11) TMI 55 - AT - Income Tax

Claim deduction u/s 35(1) on current year expenditure on R&D - Held that - Any expenditure relating to business which may be relating to current year or relating to previous expenditure incurred before commencement of the business and restricted to expenses expended within 3 years immediately proceeding the commencement of the business. As per explanation to this sub-clause, the assessee has to submit certificate from the prescribed authority to get the deduction under this head for the expenses incurred before commencement of the business. There is no restriction with regard to expenses expended during the current assessment year. Hence, there is no requirement on the part of the assessee to claim revenue expenditure incurred during the current assessment year. Accordingly, the assessee is eligible to claim deduction u/s 35(1) of the IT Act relating the current year expenditure on R&D. Deferred revenue expenditure - Held that - Even though the discount is offered in the year of subscription, the discount in fact relates to the tenure of the debentures. It can be spread over to the period of debenture holding. Whereas the nature of expenditure incurred in the given case is R&D. It is peculiar expenditure, it is not necessary that research should be successful all the time, the absorption of the cost depends upon the success rate of the project. It is prudent to absorb the revenue expenses in the year of expenditure incurred, when there is no benefit of enduring nature expected at the time of making such expenditure. It is not brought on record by the revenue authorities that assessee has expended this expenses and there is asset created by such expenditure. Since there is no asset created, which has enduring benefit to the business of the assessee, it is appropriate to allow these expenditure u/s 35(1).

Summary

Issues Involved:
1. Disallowance of R&D expenditure under Section 35(1) of the Income Tax Act.
2. Unaccounted R&D expenditure added as unexplained expenditure.
3. Weighted deduction under Section 35(2AB) for deferred revenue expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of R&D expenditure under Section 35(1):

The Assessing Officer (AO) disallowed an R&D expenditure of ?66.24 lakhs, arguing that it was not allowable since the assessee received approval for in-house R&D activities only from 9th March 2011. The CIT(A) overturned this disallowance, stating that the assessee did not claim the deduction under Section 35(2AB) or 35D and that there was no prescribed form to claim deduction under Section 35(1). The CIT(A) further noted that the expenses were permissible under Section 37, thus deleting the addition made by the AO. The Tribunal upheld the CIT(A)'s decision, agreeing that the assessee was eligible to claim the deduction under Section 35(1) for current year expenditure on R&D without needing approval from the prescribed authority.

2. Unaccounted R&D expenditure added as unexplained expenditure:

The AO observed a discrepancy between the R&D expenditure reported in the annual report (?1,19,46,080) and the amount debited to the P&L account (?66.24 lakhs). The AO treated the difference as unexplained expenditure. The CIT(A) clarified that the total R&D expenditure included ?66.24 lakhs of revenue expenditure and ?53.22 lakhs of capital expenditure, with the latter being depreciated. The Tribunal confirmed this, noting that there was no unexplained expenditure and the addition was made without calling for details.

3. Weighted deduction under Section 35(2AB) for deferred revenue expenditure:

The AO disallowed an expenditure of ?4,38,34,823 claimed under Section 35(2AB), as the assessee failed to furnish the required forms (3CL and 3CM). The assessee revised the computation, withdrawing the claim under Section 35(2AB) and reclassifying it as deferred revenue expenditure. The CIT(A) allowed 20% of the expenditure as deductible, relying on the Supreme Court's decision in Madras Industrial Investment Corporation Ltd. vs. CIT. The Tribunal found that the expenditure did not create any enduring asset and was appropriate to be allowed under Section 35(1). The Tribunal allowed the assessee's appeal, dismissing the revenue's appeal.

Conclusion:

The Tribunal upheld the CIT(A)'s decisions on all issues, allowing the assessee's appeal regarding the deferred revenue expenditure and dismissing the revenue's appeal on the disallowance of R&D expenditure and the unaccounted R&D expenditure. The judgment was pronounced in the open court on 27th October 2017.