2014 (11) TMI 769 - AT - Income Tax

Expenses incurred on contract research u/s 35(1)(iv) revenue was of the view that such expenditure would facilitate the business of a third party and not that of the assessee Held that - Assessee is involved in R & D activities and has employed its activities of research for commercial purposes also - Assessee s unit is recognized R&D unit and there is evidence that assessee is also indulging its own research - It has also exploited commercially and also has patents to its own in CIT vs. Yamuna Digital Equipments P. Ltd., 1998 (8) TMI 56 - ANDHRA PRADESH High Court it has clearly held that expenditure should be wholly and exclusively used for research and development - In the absence of word wholly and exclusively used for research and development the contention of the Revenue cannot be accepted - the expenditure which is of a capital nature when used for scientific research relating to the business carried on by assessee, the assessee is entitled to the deduction of the claim - assessee has used the assets for scientific research and expenditure incurred is for the business carried on by assessee Decided against revenue. Admission of additional evidence Held that - Since the CIT(A) undertook examination of documents placed and has also coterminus powers with that of AO - both AO as well as Addl. CIT misdirected themselves in rejecting the contentions of assessee - both A.O. and Addl. CIT acknowledges that assessee s capital R & D expenditure was incurred with reference to in-house products as well as contract research decided against revenue. Judgment delivered in M/s. Enem Nostrum Remedies P. Ltd., vs. ACIT 2008 (8) TMI 384 - ITAT BOMBAY-E considered or not Held that - The facts in the case is entirely different from the facts of assessee, wherein the present assessee is not only involved in research for in-house products which are also commercially exploited but also for contract research of the excess capacity available in R & D, which is also yielding good returns to assessee - the case law relied on by Revenue does not apply to the facts of the case Decided against revenue.

Summary

Issues:
Disallowance of expenditure under section 35

Analysis:
The case involved a Revenue appeal against the Order of the Ld. CIT(A)-II, Hyderabad for A.Y. 2005-06 concerning the disallowance of expenditure under section 35(1)(iv) as capital expenditure incurred for research. The Assessing Officer disallowed the claimed amount, arguing that the company was engaged in contract research for third parties and not in its own research and development activities. However, the company contended that it was involved in manufacturing special chemicals and intermediates, with an approved R & D unit conducting scientific research since its inception, holding patents for products developed in its laboratories.

The Ld. CIT(A) found that the company had been engaged in research and development activities since 1995, focusing on various projects and obtaining patents. The company had also undertaken contract research projects, optimizing laboratory processes and production. The Ld. CIT(A) noted the company's previous successful claims for R & D expenses and concluded that the company was genuinely involved in its own research and development, making it eligible for the claimed deduction under section 35(1)(iv).

Regarding the legal aspects, the Ld. CIT(A) analyzed the provisions of section 35(1)(iv), section 43(4), and relevant case law, including the decision in CIT vs. Yamuna Digital Equipments P. Ltd., 238 ITR 717. It was established that even if the company undertook contract research for third parties, it did not disqualify them from claiming the deduction under section 35(1)(iv) as long as the expenditure was for scientific research related to the business. The Ld. CIT(A) allowed the deduction based on these findings, rejecting the Revenue's contentions.

The Tribunal upheld the Ld. CIT(A)'s decision, emphasizing that the company was genuinely involved in research and development activities, exploiting its own research commercially and holding patents. The Tribunal dismissed the Revenue's grounds, highlighting the adamant attitude of the Assessing Officer in not examining additional evidence properly and the misdirection in rejecting the company's contentions. The Tribunal also distinguished the cited case laws from the present case, where the company was engaged in both in-house research and contract research, unlike the cases where the expenditure was disallowed for not being related to the assessee's business.

In conclusion, the Tribunal dismissed the Revenue's appeal, criticizing the Assessing Officer's approach and affirming the legitimacy of the company's research and development activities, allowing the claimed deduction under section 35(1)(iv).