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2012 (11) TMI 16 - AT - Income TaxExpenditure on Scientific Research - disallowance of 100% deprecation for transfer of machinery from production department to research & development department - Held that - The assessee had purchased two machines namely Hot Setting Vaccum Plant and Plastic Injection Mounting Machine in the financial year 1994-95 for the purpose of manufacturing of its product. The machinery were installed and used for the purpose of production and the assessee claimed depreciation on it. In the year under appeal, assessee transferred the aforesaid machines from its production department to Research & Development (R & D) Department. The assessee could not furnish necessary evidence to support its contention that the machineries were actually transferred to the R & D Department from the Production Department and whether the machines were actually used for the purpose of stated research activity & also that the machineries were actually transferred to the R & D Department from the Production Department and the machines were actually used for the purpose of stated research activity. As under Section 35 what is allowable is expenditure incurred which means actual spending/paying of money as decided in Multi Metals Limited Versus CIT 2002 (2) TMI 98 - RAJASTHAN HIGH COURT - against assessee.
Issues:
Disallowance of depreciation under section 35(1)(iv) of the IT Act for transfer of machinery from production department to research & development department. Detailed Analysis: The case involved a dispute regarding the disallowance of Rs.14,76,411 made by the Assessing Officer against the claim of the assessee under section 35(1)(iv) of the IT Act for transferring machinery from the production department to the research & development department. The Assessing Officer disallowed the claim of 100% depreciation, allowing only 25% depreciation, as the assessee failed to provide sufficient evidence regarding the actual use of the machinery in the research & development department. The Assessing Officer argued that the transferred machinery was crucial for production, and without them, production could not continue. The CIT(A) allowed the appeal of the assessee, directing the Assessing Officer to allow depreciation at 100%. However, the Revenue challenged this decision before the Tribunal. The Tribunal remitted the matter back to the Assessing Officer for fresh consideration. The Assessing Officer, after reviewing the submissions, upheld the earlier decision of disallowing 100% depreciation. The CIT(A) dismissed the appeal of the assessee, emphasizing the lack of evidence supporting the transfer and use of machinery in the research & development department. The CIT(A) noted that the appellant failed to provide any evidence to prove that the machines were transferred to the research & development department and utilized for the stated research activity. The appellant's claim that the machines were used for developing new products was deemed unsupported and unsubstantiated. The CIT(A) highlighted that the appellant did not demonstrate how manufacturing continued without replacing the transferred machines. Legal precedents were cited to support the decision, emphasizing the requirement of actual expenditure on scientific research to claim deductions under section 35 of the Act. The CIT(A) concluded that the transfer of machinery did not constitute "expenditure incurred" as envisaged under section 35(2)(ia) of the Act, further solidifying the decision to confirm the disallowance of Rs.14,76,411. During the appeal before the Tribunal, the assessee argued that the transferred machines were essential for strengthening the research & development department to investigate and overcome faults in products, crucial for obtaining ISO registration. However, the lack of concrete evidence supporting the transfer and use of machinery for research & development purposes weakened the assessee's case. The Tribunal upheld the decision of the CIT(A) and dismissed the appeal of the assessee, citing legal interpretations and precedents to support the conclusion that the transfer of machinery did not constitute eligible expenditure under section 35 of the IT Act. The Tribunal's decision highlighted the importance of substantiating claims with evidence to support deductions under relevant tax provisions.
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