2015 (10) TMI 1604 - AT - Income Tax

Disallowance of expenses of Research & Development - Held that - Assessee has debited a sum of project expenses written off, which was incurred by the assessee in past years in respect to testing of multi fuel system by Automotive Research Association of India. We find that the AO disallowed the claim in view of specific provision of section 37(1) of the Act by holding that the expenses are not expended wholly and exclusively for the purpose of business as no business activity in past years or in the relevant year are carried out, which can be said to be related to Multi Fuel System. He further opined that these expenses relates to prior period i.e. incurred in FY 2004-05 relevant to AY 2005-06 and not to the FY 2005-06 relevant to AY under dispute 2006-07. Today, when Ld. counsel for the assessee was enquired about the year of incurring of these expenses and also whether the assessee is in the business of pollution control devices, he categorically admitted that this is a new line of business, which was to be started. According to him, this was on- going process and these expenses are for earning of future income. We find no substance in the argument of the Ld. counsel for the assessee and the lower authorities have given a concurrent finding that there is no business relating to this project, which is abandoned. In such circumstances, we confirm the orders of the lower authorities and this issue of assessee s appeal is dismissed. - Decided against assessee.

Summary

Issues:
Disallowance of expenses of Research & Development.

Analysis:
The appeal arose from the order of CIT(A) confirming the disallowance of expenses of Research & Development by the Assessing Officer (AO). The sole issue in the appeal was the disallowance of expenses related to Research & Development work for control of vehicle pollution. The assessee contended that the expenses were essential for its business operations and should be allowed as business expenses. The facts revealed that the assessee had debited a specific amount as project expenses written off, which was incurred in connection with testing a Multi Fuel System by a research association. The AO disallowed the expenditure under section 37(1) of the Income-tax Act, stating that it was not wholly and exclusively for the purpose of business. The CIT(A) upheld the AO's decision, emphasizing that the expenses were not related to any prior business activity and were not allowable. The Tribunal concurred with the lower authorities, noting that the project was abandoned, and there was no business activity related to it. The Tribunal dismissed the appeal, affirming the disallowance of the expenses.

The Tribunal analyzed the nature of the expenses and the business context in which they were incurred. It noted that the expenses were related to a new line of business for the assessee, involving pollution control devices, which was yet to be started. The assessee argued that the expenses were for future income generation, but the Tribunal found this argument unsubstantiated. The Tribunal agreed with the lower authorities that there was no existing business activity related to the project for which the expenses were incurred, leading to the confirmation of the disallowance.

The Tribunal's decision was based on the interpretation of section 37(1) of the Income-tax Act, which requires expenses to be wholly and exclusively for the purpose of business to be allowable. Since the expenses in question were not linked to any ongoing business activity and were related to a project that was ultimately abandoned, the Tribunal upheld the disallowance. The Tribunal emphasized the importance of expenses being directly connected to the business operations to qualify for deduction, which was not the case in this scenario. Consequently, the appeal was dismissed, and the disallowance of Research & Development expenses was upheld.