2009 (1) TMI 365 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of consultancy charges paid to Mr. Manoj Modi.
2. Allowability of expenditure u/s 35(1)(iv) of the IT Act.

Summary:

Issue 1: Disallowance of Consultancy Charges Paid to Mr. Manoj Modi

The assessee contested the CIT(A)'s decision to restrict consultancy charges paid to Mr. Manoj Modi to Rs. 24 lakhs against the claimed Rs. 1.2 crores. The AO had allowed only Rs. 1 lakh per month, disallowing Rs. 1.08 crores, citing insufficient evidence of services rendered. The CIT(A) reduced the disallowance to Rs. 96 lakhs, considering the executive director's lower salary and the principle of res judicata not applying to income-tax proceedings.

The Tribunal noted that the AO did not request evidence of services rendered but only details of services and benefits derived, which the assessee provided. The AO disallowed the expenditure u/s 37, not applying s. 40A(2) despite Mr. Modi being covered under s. 40A(2)(b). The Tribunal emphasized the principle of consistency, referencing the Hon'ble Delhi High Court's observation that a mere change of opinion does not justify disallowance when facts remain unchanged. The Tribunal also cited the Hon'ble apex Court's interpretation of "for the purpose of business" in S.A. Builders Ltd. vs. CIT(A), emphasizing that the authorities should consider the viewpoint of a prudent businessman.

The Tribunal concluded that the nexus between the expenditure and the purpose of business was established, and no disallowance was warranted under s. 37 or s. 40A(2). The assessee was granted relief of Rs. 96 lakhs.

Issue 2: Allowability of Expenditure u/s 35(1)(iv) of the IT Act

The Revenue appealed against the CIT(A)'s direction to allow expenditure u/s 35(1)(iv). The AO had disallowed Rs. 18,93,285 out of Rs. 21,60,851 claimed under "R&D," allowing only Rs. 2,67,566 towards software as revenue expenditure. The CIT(A) allowed the expenditure, noting that the assets were used for research and upgradation of tally solutions accounting packages, and directed the AO to withdraw the depreciation allowance.

The Tribunal upheld the CIT(A)'s decision, agreeing that capital expenditure incurred for scientific research is allowable u/s 35(1)(iv). The appeal of the Revenue was dismissed.

Conclusion:

The appeal of the assessee was allowed, granting relief of Rs. 96 lakhs for consultancy charges, while the appeal of the Revenue was dismissed, upholding the allowability of expenditure u/s 35(1)(iv).