2020 (9) TMI 975 - HC - Income Tax

Expenditure as Scientific Research Expenditure u/s 35 - neither the project was approved by the Competent Authority, as required u/s 35 nor the payment in question was made to any approved organization for research purposes - whether Assessee was entitled to claim the said expenditure in the Residuary Provisions of Section 37? - HELD THAT - The conditions required for claiming the same under Section 35 was not satisfied by the Assessee. Nonetheless, the Assessee was entitled to claim the said expenditure in the Residuary Provisions of Section 37. Section 37 permits such allowance of Business Expenditure incurred in the ordinary course of business, if they are not allowable otherwise by Section 30 to 36. Unless the expenditure is of the capital in nature, resulting in creation of assets of enduring nature, the same cannot be disallowed under Section 37. There is no dispute that the said expenditure was incurred in the ordinary course of business. No material on record which would indicate any capital expenditure incurred in the details of said sum by the Assessee. The redesigning of the moulds to create new designs of the components manufactured by the Assessee, to the satisfaction of the customer M/s. Hyundai Motors is nothing but 'Revenue Expenditure' incurred in the ordinary course of business of the Assessee. Therefore, finding of the CIT (Appeals) as well as the Tribunal are findings of fact, which cannot be said to be wrong or perverse in any manner. No substantial question of law.

Summary

Issues:
1. Adjudication of specific grounds of appeal by the Appellate Tribunal
2. Deletion of disallowance made on scientific expenses
3. Alternate claim of deduction for scientific expenses
4. Claiming deduction under Section 37(1) without prior claim before the Assessing Officer

Adjudication of Specific Grounds of Appeal:
The appeal raised questions regarding the confirmation of the order of the CIT Appeals without adjudicating specific Grounds of Appeal 3.2 to 3.6, which were considered perverse. The Tribunal dismissed the appeal of the Revenue and allowed the expenditure incurred by the Assessee as "Business Expenditure" under Section 37 of the Act, despite the initial claim being under Section 35(1) of the Act.

Deletion of Disallowance on Scientific Expenses:
The Revenue contested the deletion of disallowance made on account of scientific expenses, arguing that the Assessee failed to provide proof of payment to a research association or institution for scientific research. The Tribunal upheld the allowance of the expenditure as "Business Expenditure" under Section 37, considering it as normal business expenses rather than scientific expenses.

Alternate Claim of Deduction for Scientific Expenses:
The Tribunal allowed the alternate claim of the Assessee towards scientific expenses under Section 35(1) of the Act as revenue expenditure, despite the absence of documentary evidence. The Tribunal found that the expenses were incurred in the regular course of the existing business of automobile component manufacturing, justifying their classification as allowable revenue expenditure.

Claiming Deduction under Section 37(1) without Prior Claim:
The issue arose when the Assessee claimed an alternate deduction under Section 37(1) before the CIT(A), which was not initially claimed before the Assessing Officer. The Tribunal deemed the order not perverse, as the expenses incurred for perfecting the manufacturing process were revenue expenses in nature, allowable under Section 37 of the Act.

In conclusion, the Court dismissed the Revenue's appeal, stating that the expenditure incurred by the Assessee was allowable as normal business expenses under Section 37 of the Act. The decision was based on the nature of the expenses, which were deemed revenue expenditure in the ordinary course of business, without creating enduring capital assets. The judgments of the lower authorities were upheld, and the appeal was found devoid of merits, leading to its dismissal.