2012 (11) TMI 95 - AT - Income Tax

Expenditure on Research and Development - Capital or revenue in nature alleged that since the assessee had already sold these products, therefore, the technology was with the assessee Held that - Research is a continuous process. Even if the assessee had developed some protype Pin Double Decker they may still require further improvements. Mere selling of protype of production would not show that the assessee already had the technology of the same production - in favour of the assessee Valuation of closing stock alleged that valuation given to the bank was higher Held that - stock was not pledged with the bank and it was only hypothecated - it was a case of hypothecation of stock. Therefore, there can be difference in valuation - valuation given to the bankers has no co-relation with the actual value to be adopted for the balance sheet purposes. Bankers are generally given the market value of stock whereas the actual value is shown at the lower of cost or net realizable value in the accounts - in favour of assessee

Summary

Issues Involved:
1. Disallowance of interest under Section 36(1)(iii)
2. Disallowance of Research and Development (R&D) expenditure
3. Difference in valuation of closing stock
4. Late payment of EPF and ESI dues

Detailed Analysis:

1. Disallowance of Interest under Section 36(1)(iii):
The revenue appealed against the relief of Rs. 32,61,829/- granted by the CIT(A) on the disallowance of Rs. 45,24,042/- made by the Assessing Officer (AO) under Section 36(1)(iii) of the Income Tax Act. The AO initially disallowed the interest because the assessee had given interest-free advances to its sister concerns. The Tribunal had earlier set aside the assessee's objections to the AO for reworking the disallowance, resulting in a revised disallowance of Rs. 4,62,825/-, which the assessee accepted. Consequently, the Tribunal deemed the revenue's ground as infructuous and dismissed it.

2. Disallowance of Research and Development (R&D) Expenditure:
During assessment, the AO disallowed the assessee's claim of Rs. 45,57,784/- for R&D expenditure, arguing that the products were already developed and sold, indicating no actual research. The CIT(A) allowed the claim, recognizing the assessee's in-house R&D unit approved by the Department of Scientific and Industrial Research. The Tribunal upheld the CIT(A)'s decision, acknowledging that research is a continuous process and mere prototype sales do not negate the R&D activities. The Tribunal emphasized that technological advancements require ongoing research, and the AO's conclusion was incorrect.

3. Difference in Valuation of Closing Stock:
The AO added the difference in stock valuation reported to the bank and shown in the balance sheet to the assessee's income. The CIT(A) ruled in favor of the assessee, citing that stock valuation for bank purposes (market value) can differ from the balance sheet valuation (lower of cost or net realizable value). The Tribunal confirmed the CIT(A)'s decision, noting that the stock was hypothecated, not pledged, and followed the precedent set by the Chandigarh Bench in ITO V. Luvkush Hosiery Factory.

4. Late Payment of EPF and ESI Dues:
The AO initially added the late payment of EPF and ESI dues but later deleted this disallowance following the Supreme Court's decision in CIT V. Alom Extrusions Ltd. and the Punjab & Haryana High Court's decision in CIT V. Nuchem Ltd. The Tribunal dismissed this ground as infructuous since the relief had already been granted by the AO based on jurisdictional High Court rulings.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on all grounds. The judgments recognized the legitimacy of the assessee's claims and the procedural correctness of the CIT(A)'s rulings. The Tribunal emphasized the continuous nature of R&D, the acceptable variance in stock valuation for different reporting purposes, and adherence to higher court rulings on EPF and ESI dues.