2014 (5) TMI 352 - AT - Income Tax

Disallowance u/s 40A(2)(b) of the Act Legal and professional charges Held that - The Assessee has made payment to the proprietary concern of the father of one of the partner of the firm and thus the payment is to a person specified in s. 40A(2)(b) of the Act - CIT(A) has noted that that though Shri Vinodkant Sanghani is highly technically professionally qualified person but there is nothing on record to lead to the conclusion that Shri Vinodkant Shangani was qualified to deal with the tasks which has been claimed to have been handled by him - assessee has not placed any material on record to controvert the findings of AO and CIT(A) - assessee was asked to file evidence showing involvement of Shri Shangani in various activities to which, the Assessee vide letter dated 28th March 2014, submitted that it could not lay hand on any evidence as the matter was more than 10 years old as the assessee has not substantiated the claim for expenses, there is no reason to interfere with the order of CIT(A) Decided against Assessee. Disallowance of expenses u/s 35 of the Act Expenses on scientific research - Whether the firm had not laid out any funds for acquisition of the capital asset Held that - Relying upon Commissioner of Income-Tax Versus Gujarat Aluminium Extrusions Pvt. Ltd. 2003 (7) TMI 65 - GUJARAT High Court CIT(A) rightly was of the view that the expenditure has to be incurred in a relevant previous year - In the Remand Report, the AO reiterated that the major capital expenditure at Baroda was incurred on 30.03.2005 for purchasing building for R&D - it cannot be established by the assessee by way of evidences that the above premises were used for R & D purpose at this place acquired on 30.03.2005 the capital expenditure cannot be considered as actually used for the above research and development activity - CIT(A) while upholding the disallowance of Rs 15 lacs has noted that property of 1700 sq ft owned by Shri Jayesh Sanghani was introduced as his contribution to the firm - introduction of capital contribution in the firm by the partner does not constitute expenditure assessee has not placed any material on record to controvert the findings of CIT(A) thus, there was no reason to interfere with the order of ClT(A) Decided against Assessee.

Summary

Issues Involved:
1. Disallowance of legal and professional charges amounting to Rs. 3,00,000/- under section 40A(2)(b) of the Income Tax Act, 1961.
2. Disallowance of Rs. 15,00,000/- claimed as expenditure on scientific research under section 35 of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance of Legal and Professional Charges (Rs. 3,00,000/-) under Section 40A(2)(b):

During the assessment proceedings, the AO noticed that the Assessee paid Rs. 3 lakhs to "International Finance and Technical Consultant," a proprietary concern of Shri Vinodkant Sanghani, the father of one of the partners. The payment was claimed for retainership services in account, finance, and investment advisory services. The AO disallowed the expense, reasoning that the Assessee failed to prove the services rendered by Shri Vinodkant Sanghani, who was not deemed an expert in the relevant fields. The AO also noted that the Assessee's investment in mutual funds yielded a minimal dividend, which did not justify the payment. The CIT(A) upheld this disallowance, noting the lack of evidence for the services rendered and considering the payment excessive and unreasonable.

Upon appeal, the Tribunal reviewed the submissions and evidence. It was confirmed that the Assessee could not substantiate the claim for expenses, and no material was presented to counter the findings of the AO and CIT(A). The Tribunal found no reason to interfere with the CIT(A)'s order and dismissed this ground of the Assessee's appeal.

2. Disallowance of Rs. 15,00,000/- Claimed under Section 35:

The AO observed that the Assessee claimed Rs. 43,43,505/- on account of Research & Development (R&D) expenditure, including Rs. 36,98,877/- as capital expenditure. The AO noted that the Assessee purchased flats from related parties and questioned the scientific activity carried out, concluding that the transactions were made to claim deductions under section 35. The AO disallowed the entire R&D expenditure.

The CIT(A) granted partial relief, allowing Rs. 28,43,505/- but upheld the disallowance of Rs. 15,00,000/-, noting that the capital introduction by a partner does not constitute expenditure. The CIT(A) emphasized that the Assessee had not incurred actual expenditure for the capital introduced and cited relevant case law to support the decision.

On further appeal, the Tribunal reviewed the facts and submissions. It was noted that the Assessee failed to provide evidence to counter the CIT(A)'s findings or present any binding decision in support. The Tribunal agreed with the CIT(A) that the introduction of capital by a partner does not qualify as expenditure under section 35. Consequently, the Tribunal upheld the CIT(A)'s decision and dismissed this ground of the Assessee's appeal.

Conclusion:

The Tribunal dismissed the appeal of the Assessee, upholding the disallowance of Rs. 3,00,000/- under section 40A(2)(b) and the disallowance of Rs. 15,00,000/- under section 35. The order was pronounced in Open Court on 29-04-2014.