2018 (12) TMI 1502 - AT - Income Tax

Capital expenditure for scientific development expenses u/s 35(1)(iv) - revenue expenditure has not been doubted on its genuineness then the same even if not having connection with the research and development activity, is still allowable as business expenditure u/s 37(1) - Held that - Hon ble High Court of Mumbai in the case of CIT V/s Sales Magnesite (P) Ltd 1994 (11) TMI 38 - BOMBAY HIGH COURT held that commercial expediency must be decided from businessmen s point of view. Even expenditure incurred voluntarily on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business would be deductible under this section. The question whether it was necessary or commercially expedient or not is a question that has to be decided from the point of view of the businessman and not by the subjective standard of reasonableness of the revenue . Hon ble Apex Court in the case of CIT V/s Dhanrajgirji Raja Narasasingirji 1973 (3) TMI 6 - SUPREME COURT held that it is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure . As in the case of Hemraj Nebhomal V CIT 2005 (3) TMI 76 - MADHYA PRADESH HIGH COURT held that Once the conditions laid down in section 37(1) are found satisfied, it is not proper on the part of the taxing authorities to probe into the question as to whether the expenditure is legitimate or necessary etc. This type of inquiry is neither contemplated nor called for. It is only when the Assessing Officer finds that the claim made is bogus or false or not incurred as a fact, it can be disallowed, otherwise not valid Thus we are of the considered view that the alleged revenue expenditure incurred needs to be allowed as business expenditure incurred for scientific research and development activity u/s 35(1)(iv) and we therefore set aside the finding of CIT(A) making an appropriation of the expenditure between commercial and agricultural activity completely ignoring the fact that separate details were maintained by the assessee including quantitative details of goods produced under both the activities, no major abnormality in the percentage of expenditure of the total agricultural proceeds consistently shown in the preceding years and most importantly no material evidence has been placed before us which could prove that the assessee has intentionally claimed the expenditure relating to agricultural operations against the revenue from commercial activity just to evade tax. Addition made on account of disproportionate agricultural expenses - A.O disallowed this amount by taking the basis of percentage of expense of the agricultural proceeds of the preceding year and applied it to Assessment Year 2008-09 wherein the assessee claimed lower percentage of the expenditure - CIT(A) sustained this addition - Held that - The expenditure claimed by the assessee against the agricultural activities comes to 20.91% for Assessment Year 2007-08 and it decreased to 16.39% in Assessment Year 2008-09. The reason for the decrease in the percentage in expenditure given by the assessee are general in nature and the submissions mainly included the reason for increase in revenue due to better selling price and use of varieties of hybrid seeds. Nothing concrete has been placed on record to show that why the expenses decreased during the year even when other expenditure on commercial activities have increased in comparison to preceding years. No plausible reason with documentary evidences were placed before us. No reason to interfere in the finding of Ld.CIT(A) and therefore confirm the addition of ₹ 10,48,112/- made by the A.O on account of disproportionate agricultural expenses. Accordingly Ground No.3 of the assessee for Assessment Year 2008-09 is dismissed. Addition u/s 36(1)(iii) r.w.s. 40A(2)(b) - Held that - Apex Court in the case of S.A. Builders V/s CIT 2006 (12) TMI 82 - SUPREME COURT held that borrowed funds advance to a third party should be for commercial expediency, if it is sought to be allowed u/s 36(1)(iii). It can be said to be advanced to the sister concern for commercial expediency where holding company (assessee) has a deep interest in its subsidiary and the holding company holds advances the borrowed money, the subsidiary and the same is used by the subsidiary for some business purposes, the holding company would ordinarily be entitled for deduction of interest on its borrowed funds - A.O failed to appreciate the fact that similar type of addition was made in the case of the assessee for Assessment Year 2003-04 which was deleted by Ld.CIT(A) and subsequently the revenue could not succeed before the Tribunal as the decision of the Ld.CIT(A) was upheld - no disallowance was called for u/s 36(1)(iii) r.w.s. 40A(2)(b) - Decided in favour of assessee.

Summary

Issues Involved:
1. Capital expenditure for scientific research expenses u/s 35(1)(iv) of the Act.
2. Revenue expenditure relating to research and development.
3. Addition towards unaccounted expenditure incurred for earning agricultural income.
4. Disallowance of interest u/s 36(1)(iii) r.w.s. 40A(2)(b) of the Act.

Detailed Analysis:

1. Capital Expenditure for Scientific Research Expenses u/s 35(1)(iv) of the Act:
The assessee, a limited company engaged in seeds processing and trading, claimed a deduction u/s 35(1)(iv) of the Income Tax Act for capital expenditure of ?2,88,51,028/- (for AY 2008-09) and ?40,42,117/- (for AY 2009-10) related to its research and development (R&D) activities. The Assessing Officer (A.O.) disallowed the claim, doubting the necessity and genuineness of the new R&D building and machinery. The Commissioner of Income Tax (Appeals) [CIT(A)] provided partial relief, recognizing the company's involvement in R&D but proportionately disallowed some expenses, attributing them to agricultural income, which is exempt from tax. The Tribunal found that the A.O.'s disallowance was based on conjectures and that the CIT(A)'s apportionment was unjustified. It held that the capital expenditure was indeed for scientific research and allowed the full claim under Section 35(1)(iv).

2. Revenue Expenditure Relating to Research and Development:
The assessee claimed revenue expenditure of ?3,12,37,588/- (for AY 2008-09) and ?4,54,34,487/- (for AY 2009-10) for R&D activities. The A.O. disallowed these expenses, attributing them to agricultural income. The CIT(A) acknowledged the genuineness of the expenses but apportioned them between agricultural and commercial income. The Tribunal found that the expenses were genuinely incurred for business purposes and should be allowed in full under Section 35(1)(iv), rejecting the CIT(A)'s apportionment.

3. Addition Towards Unaccounted Expenditure Incurred for Earning Agricultural Income:
The A.O. disallowed ?10,48,112/- for AY 2008-09, observing a decrease in the percentage of agricultural expenses compared to the previous year. The CIT(A) upheld this addition. The Tribunal found no concrete evidence from the assessee to justify the decrease in expenses and confirmed the addition.

4. Disallowance of Interest u/s 36(1)(iii) r.w.s. 40A(2)(b) of the Act:
For AY 2009-10, the A.O. disallowed ?22,64,237/- as interest on loans and advances given to associate concerns, arguing that the assessee paid interest on its borrowings but did not charge interest on these advances. The CIT(A) deleted the addition, recognizing the advances as part of regular business transactions. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court's ruling in S.A. Builders vs. CIT, which allows interest deductions if the advances are for commercial expediency.

Conclusion:
The Tribunal allowed the assessee's claims for capital and revenue expenditures for R&D activities in full, rejected the apportionment by the CIT(A), and confirmed the addition for unaccounted agricultural expenses. It also upheld the deletion of the interest disallowance for advances to associate concerns. The appeals of the assessee were partly allowed, and those of the revenue were dismissed.