2013 (11) TMI 1541 - AT - Income Tax

Appeal partly allowed on research deduction, benevolent expenses remanded for further examination.

The appeal was partly allowed for statistical purposes. The deduction claimed under section 35(2AB) for in-house scientific research was rejected as the ... Weighted deduction under section 35(2AB) for in-house research and development - In-house research and development - requirement of demonstrable in-house activity (salaries, infrastructure, directed R&D) - Business expenditure - benevolent/death relief payments - Proof and reconciliation of employee collections and employer contribution for allowability - Remand for verification of quantum and supporting particularsWeighted deduction under section 35(2AB) for in-house research and development - In-house research and development - requirement of demonstrable in-house activity (salaries, infrastructure, directed R&D) - Claim for weighted deduction under section 35(2AB) was not allowable. - HELD THAT: - The Tribunal examined the particulars of expenditure submitted by the assessee and found payments made to external agencies (ARAI, VRDE, other contractors) and purchases from the market, with no separate expenditure shown for salaries or personnel engaged in carrying out in house research and development. The Bench held that mere obtaining of approvals and procurement of materials or tests from external agencies does not constitute carrying out in house research and development. Research and development eligible under section 35(2AB) requires demonstration of in house R&D activity directed to finding new technology, equipment or product, and the record before the Tribunal did not disclose such in house activity; accordingly the claim for weighted deduction was rejected. [Paras 4]Assessee's claim for deduction under section 35(2AB) is rejected.Business expenditure - benevolent/death relief payments - Proof and reconciliation of employee collections and employer contribution for allowability - Remand for verification of quantum and supporting particulars - Expenditure on death relief is in principle business expenditure, but quantum and entitlement require verification by the Assessing Officer. - HELD THAT: - Having considered the Factory Order (Part II) which contemplates employee contributions and matching employer contribution for death relief, the Tribunal concluded that such payments are, in principle, incurred wholly and exclusively for the purpose of business and are not inherently non business expenditure. However, the Assessing Officer had earlier rejected the claim outright without reconciling the collections from employees, the employer's contribution, and proof of payments to legal heirs. The Tribunal therefore set aside the order on this issue and directed that the Assessing Officer examine and reconcile the details of employee collections, employer contributions and proof of payments to legal heirs; deduction is to be allowed to the extent the contribution by the assessee accords with the Factory Order and is substantiated. [Paras 7]Ground allowed for statistical purposes and remitted to the Assessing Officer for fresh decision on quantum after verification and giving the assessee an opportunity of being heard.Final Conclusion: Appeal partly allowed: deduction under section 35(2AB) rejected; benevolent/death relief payments held to be business expenditure in principle but remitted to the Assessing Officer for verification of collection, employer contribution and proof of payment and for consequential allowance of deduction to the extent supported by evidence. Issues:1. Deduction claimed under section 35(2AB) for in-house scientific research.2. Disallowance of benevolent expenses for business purpose.Issue 1 - Deduction under section 35(2AB):The appellant contested that the Learned CIT(A) erred in confirming the deduction of Rs. 22,29,121 under section 35(2AB) of the I.T. Act, arguing that the expenses were for certification purposes and not in-house scientific research. The details of expenses included payments to various entities and organizations. The Bench questioned how these expenses qualified as in-house research and development. The appellant's representative claimed proper approval was obtained, justifying the expenses. However, the Revenue supported the lower authorities' decisions. The Tribunal analyzed the details and found no evidence of in-house research activities. Merely obtaining approval and purchasing materials externally did not constitute in-house research and development as required by the Act. Consequently, the appellant's claim for weighted deduction under section 35(2AB) was rejected.Issue 2 - Disallowance of benevolent expenses:Regarding the disallowance of Rs. 7,91,600 as benevolent expenses, the appellant argued that these expenses were for business purposes, citing a Factory Order Part-II. The Bench sought clarification on the contributions made by the employees and the employer. The Tribunal acknowledged that the expenses for death relief to employees were indeed for business purposes as per the Factory Order. However, due to discrepancies in the details provided, the matter was remanded to the Assessing Officer for further examination. The Tribunal directed the Officer to assess the quantum of expenditure based on verified employee contributions, employer contributions, and payments to legal heirs. The appellant was instructed to provide comprehensive details for a proper decision. Ultimately, the Tribunal allowed the appeal on this ground for statistical purposes.In conclusion, the appeal was partly allowed for statistical purposes, with the first issue of deduction under section 35(2AB) being rejected, and the second issue of benevolent expenses being remanded for further assessment by the Assessing Officer.