2021 (9) TMI 18 - AT - Income Tax

Nature of expenditure - expenditure incurred on Research Development - revenue or capital expenditure - whether such expenditure would be eligible for deduction under section 28 to 44DB - HELD THAT - As decided in own case for AY grants received by the assessee is not taxable being a capital receipt, as the same is bringing into existence a capital asset being technology for manufacturing Aircrafts - We find that research is related to the business of assessee and can be found from the same order of the ITAT. The expression related to business is used in section 35(1)(iv) of the I.T.Act is an expression of wide import and it means associated with or connected with. The assessee is using research outcome for its business of manufacturing Defence Aircrafts, and hence, it cannot be denied that research is related to its business - It is clear that the claim of expenditure incurred towards research and development activities u/s 35(1)(iv) of the I.T.Act is to be allowed, provided other conditions are satisfied. Disallowance u/s 14A r.w.r. 8D - addition being 0.5% of average value of investment held by the assessee and proportionate interest expenditure not directly attributable - HELD THAT - The discussion made by the A.O. in the assessment order would show that the A.O. was not satisfied with the contentions of the assessee, and accordingly, we are of the view that the same would satisfy the requirement of recording of dissatisfaction by the Assessing Officer within the meaning of section 14A of the I.T.Act. We noticed that the A.O. has mechanically applied the provisions of Rule 8D of the I.T.Rules. We noticed that the assessee has received dividend income from only one company named M/s.Indo Russian Aviation Limited - we are of the view that the provisions of Rule 8D of the I.T. Rules should not have been applied mechanically - disallowance u/s 14A of the I.T.Act may be estimated in order to meet the requirement of section 14A of the I.T.Act, since dividend has been received only from one company - disallowance of ₹ 50,000 would meet the requirements of section 14A of the Act and the same will put a quietus to the issue. Therefore, we set aside the order passed by the learned CIT(A) on this issue and direct the A.O. to restrict the disallowance u/s 14A accordingly.

Issues Involved:

1. Disallowance of research and development expenses under section 37.
2. Alternative claim for deduction under section 35(1)(iv).
3. Non-allowance of depreciation on research and development expenditure.
4. Disallowance of prior period expenditure.
5. Non-consideration of brought forward losses.
6. Non-granting of MAT credit.
7. Non-granting of TDS credit.
8. Levy of interest under sections 234B, 234C, and 234D.
9. Disallowance under section 14A read with Rule 8D.

Detailed Analysis:

1. Disallowance of Research and Development Expenses under Section 37:

The assessee, a Public Sector Undertaking engaged in defense aviation technology, received grants from the Central Government for research and development (R&D). The expenditure incurred was claimed as revenue expenditure under section 37. The Assessing Officer (A.O.) disallowed this, treating the expenditure as capital in nature since it was funded by government grants. The CIT(A) upheld this disallowance, stating the expenditure did not relate to the business carried on by the assessee.

The Tribunal referred to the High Court's decision in the assessee's own case for earlier years, which held that the nature of the expenditure (whether revenue or capital) should be the determining factor, not the source of the funds. The High Court had allowed the deduction under section 37, emphasizing that the expenditure was for the purpose of the business. The Tribunal directed the A.O. to examine the nature of each expenditure and allow deductions accordingly.

2. Alternative Claim for Deduction under Section 35(1)(iv):

The assessee's alternative claim was for deduction under section 35(1)(iv) for capital expenditure on scientific research. The CIT(A) denied this, stating the assessee was not engaged in the business of technology development or selling technology. The Tribunal, however, noted that the research was related to the assessee's business of manufacturing defense aircrafts and directed the A.O. to examine the claim under section 35(1)(iv) if the expenditure was found to be capital in nature.

3. Non-Allowance of Depreciation on R&D Expenditure:

The Tribunal did not specifically address this issue separately, as it was rendered redundant by the directions given for the examination of deductions under sections 37 and 35(1)(iv).

4. Disallowance of Prior Period Expenditure:

This ground was not pressed by the assessee and was therefore dismissed.

5. Non-Consideration of Brought Forward Losses:

The Tribunal directed the A.O. to allow the set-off of brought forward losses in accordance with the law.

6. Non-Granting of MAT Credit:

The Tribunal directed the A.O. to allow appropriate MAT credit in accordance with the law.

7. Non-Granting of TDS Credit:

The Tribunal directed the A.O. to allow appropriate TDS credit.

8. Levy of Interest under Sections 234B, 234C, and 234D:

The Tribunal noted that the levy of interest is consequential and dismissed this ground.

9. Disallowance under Section 14A Read with Rule 8D:

The A.O. made a disallowance under section 14A for expenditure related to earning exempt income. The CIT(A) upheld this disallowance. The Tribunal, however, noted that the A.O. had not recorded proper satisfaction before invoking Rule 8D, as required by the Supreme Court's decision in MAK Data P. Ltd. v. CIT. The Tribunal estimated a reasonable disallowance and directed the A.O. to restrict the disallowance accordingly for each assessment year.

Conclusion:

The Tribunal's consolidated order addressed multiple appeals and cross-objections, providing specific directions to the A.O. for re-examining the nature of R&D expenditures and allowing appropriate deductions under sections 37 and 35(1)(iv), as well as ensuring the correct application of MAT and TDS credits. The disallowance under section 14A was also adjusted to reflect a more reasonable estimate. The appeals were partly allowed for statistical purposes, and the cross-objections by the Revenue were dismissed.

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