2014 (1) TMI 1306 - AT - Income Tax

Allowability of expenditure u/s 35(1)(iv) of the Act Expenditure on scientific research nature of expenses Capital expenses u/s 35(1)(i) or Revenue expenses u/s 37(1) of the Act Held that - The expenditure being admittedly on scientific research, there is no basis for not allowing the claim u/s. 35(1), only whereupon, i.e., on a finding of it not falling or being covered u/s. 35, could the scope of the same falling u/s.37(1) be considered - the assessee stands allowed deduction of the expenditure for that year u/s. 37(1) thus, The AO is directed to allow the assessee s claim in respect of the scientific expenditure incurred on research expenses for the current year/s u/s 35(1)(iv) of the act - the assessee having itself considered it as capital expenditure thus, no amount would survive for being carried over as the WDV of the relevant block of assets u/s. 43(6) - the assessee having already secured full deduction for the immediately preceding year/s Decided in favour of Assessee.

Summary

Issues involved: Appeal for AYs 2007-08 & 2008-09, delay in filing appeal for AY 2007-08, disallowance of expenditure on research and development.

Detailed Analysis:

1. Delay in Filing Appeal for AY 2007-08:
The appeal for AY 2007-08 was delayed by 112 days. The delay was attributed to negligence by the counsel, despite the assessee signing the papers and depositing the appeal fees on time. The Tribunal, considering the circumstances, condoned the delay and proceeded with the hearing, admitting the appeal.

2. Disallowance of Expenditure on Research and Development:
The main issue in both appeals was the disallowance of expenditure on research and development. The assessee claimed 100% depreciation on the expenditure, while the AO considered it as an intangible asset eligible for 25% depreciation under section 32 of the Income Tax Act. The assessee contended that the expenditure should be fully allowable under sections 35(1)(iv), 35(1)(i), or 37(1) of the Act. The CIT(A) upheld the AO's view for AY 2006-07, resulting in a depreciation claim of Rs. 327.42 lacs.

3. Decision on Research and Development Expenditure:
The Tribunal analyzed the nature of the expenditure and found that it was capital in nature, related to the research and development of a new product for the business. The Tribunal observed that the expenditure fulfilled the conditions for deduction under section 35(1)(iv) as it was incurred after 31.03.1967 and did not include land expenditure. The Tribunal disagreed with the Revenue's view that the expenditure created an intangible asset, as the purpose and specifics of the expenditure were not clearly identified.

4. Conclusion and Order:
The Tribunal directed the AO to allow the assessee's claim for scientific expenditure under section 35(1)(iv) for the relevant assessment years. The Tribunal clarified that no amount would be carried over as the written down value of the block of assets under section 43(6) since the full deduction was already granted. The decision was based on the material on record and arguments presented. The appeals for both years were allowed, and the order was pronounced on July 31, 2013.