2013 (9) TMI 882 - HC - Income Tax

Allowability of Research and Development expenditure - CIT(A) observed that expenses can be allowed u/s 35D in three installments Held that - Section 35-D has no application on the facts of the present case. The assessing officer has not recorded any finding based on any material whatsoever in support of his observation as to applicability of Section 35D of the Act. Regarding allow-ability of 1/3 of the total expenditure - held that - Expenditure incurred by the assessee was of revenue nature. As per provision of Section 37 of the Act, any expenditure not being expenditure of the nature described under Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly or exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head of profits and gains of business or profession - Once a finding of fact has been recorded that the expenditure is of revenue nature and has been spent wholly and exclusively for the purposes of the business, the same is allowable expenditure and has to be deducted while computing the total income. Reliance has been placed upon the judgment in the case of Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax ( Central) Calcutta 1971 (8) TMI 10 - SUPREME Court , wherein it has been held that Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter - Entire expenditure incurred by the assessee being revenue in nature was allowable and the assessee was entitled to claim the entire expenditure as deduction Decided against the Revenue.

Summary

Issues:
1. Disallowance of entertainment expenses.
2. Disallowance of product development expenses.

Analysis:

Issue 1: Disallowance of Entertainment Expenses
The Tribunal had previously settled the entertainment expenses issue in the assessee's favor for the assessment year 1990-91. The High Court upheld the Tribunal's decision based on similar grounds and dismissed the appeal by the Revenue. The Tribunal found no error in the impugned order and confirmed the decision in favor of the assessee, citing consistency with past rulings and the Delhi High Court's precedent.

Issue 2: Disallowance of Product Development Expenses
The dispute revolved around the treatment of product development expenses incurred by the assessee. The assessee claimed the entire expense as deductible, while the assessing officer disallowed a portion, citing lack of specifics on the developed system. The CIT(A) allowed deduction for 1/3rd of the expense, which was further contested by both the Revenue and the assessee before the ITAT. The ITAT ruled in favor of the assessee, emphasizing the revenue nature of the expenditure and rejecting the applicability of Section 35D of the Income Tax Act.

The High Court concurred with the ITAT's decision, emphasizing that tax liability is based on the "real income" received or accrued. It clarified that deferment of revenue expenditure is not recognized under the Act and that expenditure should be allowed as a deduction when incurred, based on the nature of the expense. Citing legal precedents and the provisions of Section 37 of the Act, the High Court upheld the ITAT's ruling that the entire product development expense was allowable as a deduction. Consequently, the appeal by the Revenue was dismissed, and the judgment favored the assessee in both issues.

In conclusion, the High Court dismissed the appeal, ruling in favor of the assessee on both issues of disallowance of entertainment expenses and product development expenses, highlighting the revenue nature of the expenditures and the correct treatment under the Income Tax Act.