2010 (4) TMI 287 - HC - Income Tax

R&D expenditure allowance u/s 35(1) approval from Ministry of Science and Technology, Government of India revenue expenditure - During the scrutiny proceedings, the Assessing Officer noticed that the expenditure amounting to Rs. 1,60,21,364/- from Chandigarh Unit and Rs. 83,99,177/- from Baddi Unit, had been deferred as R&D expenditure in the computation chart. ITAT allowed the expenditure Held that - apart from the findings of fact recorded by the CIT(A) and the Tribunal, the genuineness of the expenditure has not been doubted. It has also been found that the assessee respondent has been following mercantile system of accounting and the registration certificate from the Ministry of Science and Technology further authenticate their expenditure. revenue appeal dismissed

Summary

Issues:
1. Appeal against concurrent findings by CIT(A) and ITAT regarding R&D expenditure.
2. Recognition of R&D Department by Ministry of Science and Technology.
3. Claim of expenditure as revenue expenditure under Section 35(1) of the Income-tax Act.
4. Agreement of Tribunal with CIT(A) findings.
5. Applicability of judgments from various High Courts.
6. Genuineness of expenditure not disputed by revenue.
7. Adherence to mercantile system of accounting by the assessee.

Analysis:
The case involved an appeal by the revenue against the concurrent findings of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal regarding Research and Development (R&D) expenditure incurred by the assessee for the assessment year 2005-06. The assessee had declared its income and during scrutiny, it was noted that significant R&D expenditure had been deferred. The assessee claimed that their R&D Department was recognized by the Ministry of Science and Technology and the expenditure was incurred on scientific research, thus falling under revenue expenditure as per Section 35(1) of the Act. The CIT(A) discussed the provisions of Section 35(1) and the Tribunal agreed with the findings, citing judgments from various High Courts supporting the allowance of the expenditure. The genuineness of the expenditure was not disputed by the revenue, leading to the order to allow 100% expenditure for the assessment year 2005-06.

The High Court, after considering the arguments, found that the genuineness of the expenditure was not in question, and the assessee had been following the mercantile system of accounting, further supported by the registration certificate from the Ministry of Science and Technology. The Court concluded that no substantial question of law arose for determination, dismissing the appeal. The judgment highlighted the importance of factual findings, the recognition of the R&D Department, adherence to accounting systems, and the absence of any disputed genuineness of the expenditure in determining the outcome of the case.

In summary, the judgment emphasized the significance of proper documentation, adherence to legal provisions, and factual findings in cases involving expenditure claims, particularly related to R&D. The Court's decision was based on the established recognition of the R&D Department, compliance with accounting practices, and the absence of any challenge to the genuineness of the expenditure, leading to the dismissal of the revenue's appeal.