2003 (12) TMI 10 - HC - Income Tax

Court emphasizes link between research and industrial units for tax deductions, remits case for thorough examination

Bush Boake Allen (India) Limited Versus Assistant Commissioner Of Income-Tax.

The court remitted the case back to the Tribunal due to the oversight in not thoroughly examining the connection between research activities in Madras and ... Deduction under sections 80HH, and 80-I – ssessee claims benefits under the above provisions after excluding the expenses on research and development carried out by it at its establishment at Madras - non-consideration of some aspect by tribunal - Instead, there was a presumption made that any technology about new flavours and essence will automatically be utilized in Chittoor unit also without examining as to whether the research and development actually carried out at Madras was of use for the unit at Chittoor, as the assessee has other manufacturing units besides the one at Chittoor. It is only on such presumption, allocation of the research and development expenses to Chittoor unit was held by the Tribunal to be justified - For the purpose of determining as to whether at all there was research and development undertaken regarding the product that is manufactured in Chittoor unit, the matter is remitted back to the Tribunal. Issues:Claim of deduction under sections 80HH and 80-I of the Income-tax Act, 1961 based on research and development expenses allocated to Chittoor unit.Analysis:For the assessment year 1989-90, the company, engaged in the manufacture and sale of flavors and essence, filed a return claiming deductions under sections 80HH and 80-I of the Income-tax Act. The Assessing Officer allocated a significant sum as expenses on research and development related to the Chittoor unit, resulting in a heavier tax burden for the assessee. The counsel for the assessee contended that the allocated amount did not relate to the Chittoor unit, where no research and development activities were conducted. It was argued that the research and development carried out in Madras did not benefit the products manufactured in Chittoor, thus challenging the validity of the allocation.Under sections 80HH and 80-I, deductions are allowed from profits and gains derived from an industrial undertaking. The assessee sought to exclude research and development expenses at its Madras establishment to claim benefits under these provisions. The Tribunal's decision to allocate expenses to the Chittoor unit was based on the presumption that research conducted in Madras automatically benefited all manufacturing units, including Chittoor, without proper examination. The Tribunal failed to address whether the research conducted in Madras was relevant to the products at the Chittoor unit, considering the assessee's multiple manufacturing units.The Tribunal's oversight in not thoroughly examining the connection between research activities in Madras and the products at the Chittoor unit led to the matter being remitted back for further consideration. The court emphasized that the allocation of expenses to the Chittoor unit would only be justified if the research and development directly related to the products manufactured at the Chittoor unit. The decision highlighted the importance of establishing a clear link between research activities and the specific industrial units claiming deductions under the Income-tax Act.In conclusion, the judgment focused on the necessity of establishing a direct correlation between research and development activities and the industrial units seeking deductions under the Income-tax Act. The court's decision to remit the matter back to the Tribunal underscored the significance of accurately determining the allocation of expenses based on the actual impact of research on the specific units involved.