2021 (8) TMI 231 - AT - Income Tax

Expenses under the head research and development - deduction of such expenses under the provisions of section 37(1) OR u/s 35 - whether the assessee has incurred the impugned expenses wholly and exclusively for the purpose of the business as mandated under the provisions of section 37? - HELD THAT - In the case on hand the assessee is harping upon that the expenses in question are genuine as admitted by the Revenue and therefore the same should be allowed as deduction. CIT (A) has given very clear-cut finding that the expenses in dispute have been incurred by the assessee but its outcome has been used by the group as a whole. Thus, the assessee has not availed the benefit of the impugned expenses in entirety and therefore the entire expenses cannot be allowed as deduction while computing the income of the assessee. Accordingly, the learned CIT (A) has allowed the relief to the assessee to the tune of 50% of the total expenses incurred under the head research and development activities. The provisions of section 37(1) of the Act mandates that the assessee can claim the deduction if the expenses have been incurred wholly and exclusively for the purpose of the business. In the event the conditions stipulated under the provisions of section 37(1) of the Act are not complied with, then the assessee cannot claim the deduction under the section. The finding of the learned CIT (A) has not been controverted by the learned AR at the time of hearing and therefore the genuineness of the expenses cannot be a criteria for allowing the deduction under section 37(1) of the Act in the given facts and circumstances. R D facility was not exclusively used by the assessee for its own activities. Thus, we do not find any merit in the argument advanced by the learned AR for the assessee. Hence we concur with the finding of the authorities below. Thus the ground of appeal of the assessee is dismissed.

Summary

Issues:
1. Disallowance of research and development expenses claimed by the assessee under section 37(1) of the Income Tax Act, 1961 for Assessment Years 2005-2006 & 2006-07.

Detailed Analysis:

Issue 1: Disallowance of Research and Development Expenses
The assessee, a private limited company engaged in trading pharmaceutical products, claimed research and development expenses of ?28,48,708 under section 37(1) of the Act for AY 2005-06. The AO disallowed the claim, stating the activities were related to testing and sampling, not research and development. The AO also noted similar expenses were disallowed in the previous year for a sister concern. The CIT (A) upheld the disallowance but reduced it to 50%, amounting to ?14,24,354, as the research outcomes benefited group companies, not solely the assessee. The ITAT found the expenses were not incurred exclusively for the assessee's business, as the research outcomes were used by the group as a whole. The ITAT upheld the CIT (A)'s decision, emphasizing that section 37(1) allows deductions only for expenses wholly and exclusively for business purposes. The ITAT dismissed the appeal, stating the expenses did not meet the criteria for deduction under section 37(1) due to their utilization by group companies and lack of exclusive benefit to the assessee.

Issue 2: Similar Disallowance in Another Appeal
In a related appeal for the same AY 2005-06, the assessee raised a similar ground regarding the disallowance of research expenses. The ITAT noted that the decision made in the first appeal applied mutatis mutandis to this case. Therefore, the ITAT dismissed this appeal as well, in line with the findings of the first appeal.

In conclusion, both appeals filed by the assessee against the disallowance of research and development expenses under section 37(1) for AY 2005-06 were dismissed by the ITAT, upholding the CIT (A)'s decision to restrict the deduction to 50% due to the shared utilization of research outcomes by group companies.