2020 (11) TMI 114 - AT - Income Tax

Disallowance of R D expenditure - assessee claimed deduction u/s 35 (1) (iv) on the ground that it related to research and development capital expenditure - AO rejected the claim of deduction by observing that assessee was involved in the manufacturing and testing of auxiliary groomed aluminum ammonia heat pipes used in spacecrafts by using the technology provided by Indian Space Research Organization (ISRO), and not out of it s own research and development - HELD THAT - As submitted by assessee in written submission filed before CIT(A) dated 12/04/2013 that, though said intimation may not be relevant for the year under consideration, however the fact that this recognition has come after continued and sustained activities carried on in the field of research over several years as observed by Government of India cannot be ignored. Under such circumstances it is relevant that necessary steps may be taken to ascertain if assessee could be considered to be carrying out research and development activities during the relevant period. Ld.CIT(A) having observed the same has not taken necessary steps. The issue considered by Ld.CIT(A) needs to be ascertained based upon the facts in present case. We therefore find it proper to remand the issue back to Ld.CIT(A) to take necessary actions/steps to ascertain, whether assessee could be considered to be carrying out with research and development activity during the relevant period under consideration, based on the recognition issued by Ministry of Department of Science and Technology Government of India in January 2012. We remand the issue Ld.CIT(A) for necessary steps. Issues raised by revenue stands allowed for statistical purposes.

Summary

Issues:
1. Disallowance of R&D expenditure under section 35(1)(iv) of the Income Tax Act for assessment year 2002-03.
2. Imposition of penalty under section 271(1)(c) for furnishing inaccurate particulars of income.

Analysis:

Issue 1: Disallowance of R&D expenditure under section 35(1)(iv)
The appellant, a revenue authority, challenged the order of the CIT(A) allowing the appeal of the assessee regarding the disallowance of R&D expenditure. The appellant contended that the facts of the case were different from the relied-upon case and that the addition was made due to a false claim in the written income, deemed as "inaccurate particulars of Furnishing of income" by the Assessing Officer (AO). The AO rejected the deduction claimed by the assessee under section 35(1)(iv) as it was related to research and development capital expenditure, stating that the technology used was provided by ISRO and did not fulfill the conditions under the Act. The penalty proceedings were initiated by the AO. The CIT(A) dismissed the appeal against the disallowance, leading to the appellant filing an appeal before the Tribunal. The Tribunal remanded the issue to the CIT(A) for deciding on merits. The CIT(A) considered fresh facts and a recognition received from the R&D Unit, Government of India. The CIT(A) observed that the AO should have referred the matter to the board to determine if the activity involved scientific research and development. Consequently, the penalty levied by the AO was deleted by the CIT(A).

Issue 2: Imposition of penalty under section 271(1)(c)
The AO imposed a penalty under section 271(1)(c) for furnishing inaccurate particulars of income, as the assessee did not respond to the intimations issued. The CIT(A) deleted the penalty based on the grounds that a mere disallowance of the claim towards research does not constitute furnishing inaccurate particulars or concealment by the assessee. The senior DR submitted that necessary actions regarding verification with the board were not taken by the CIT(A). The Tribunal noted that the AO passed the penalty order without considering the submissions of the assessee and decided to remand the issue back to the CIT(A) to ascertain if the assessee was carrying out research and development activities during the relevant period based on the recognition received from the Government of India.

In conclusion, the Tribunal remanded the issues back to the CIT(A) for necessary steps, allowing the appeal filed by the revenue for statistical purposes.