2012 (6) TMI 471 - AT - Income Tax

Appeal partially allowed: R&D expenses upheld, 80IB deduction denied due to lack of facts &D

The Tribunal partly allowed the revenue's appeal. It upheld the CIT (A)'s decision on the allowability of R&D expenditures under Sections 35(1)(i) and ... Whether CIT(A) erred in deleting the addition made by the AO on account of dis-allowance of expenditure on R&D being capital in nature - expenses relating to material/consumable/spares - details of material used for lab trials for process development – Held that:- All these items are in the nature of material/consumables in the process of R&D. It is not the case of the AO that the said material was not consumed in the R&D process and some part thereof was remaining in the closing stock. Therefore, this expenditure incurred on material used for lab trials cannot in any manner be considered as expenditure being in the nature of capital. no infirmity in the order of CIT(A) vide which the assessee has been held eligible for deduction of these expenditure under both the sections either u/s 35(1)(i) or u/s 37(1) of the Act. ground of the revenue is dismissedWhether CIT(A) erred in directing the AO to allow the deduction u/s 80IB of the I. T. Act, 1961 if it is otherwise allowable without appreciating the fact that the assessee has not made any such claim in its return of income – Held that:- claim was not made by the assessee in the return of income, it was also not made during the course of assessment proceedings. The facts relating to that deduction have also not been shown to be existing on record. Ld. CIT(A) without considering this aspect has directed the AO to examine the claim of the assessee in accordance with law. When the facts regarding such deduction were not available on record and the ground was also not arising out of assessment order, CIT (A) has committed an error in entertaining such ground. ground of the revenue is allowed. appeal filed by the revenue is partly allowed Issues Involved:1. Deletion of addition due to disallowance of R&D expenditure as capital in nature.2. Direction to allow deduction under Section 80IB of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Deletion of Addition Due to Disallowance of R&D Expenditure as Capital in Nature:The assessee, a limited company engaged in manufacturing bulk drugs and fine chemicals, filed its return of income declaring Nil total income after claiming a weighted deduction of Rs. 7,82,53,487/- on in-house Scientific Research & Development under Section 35(2AB). The Assessing Officer (AO) disallowed Rs. 7,10,95,947/- of this amount, treating it as capital expenditure because it was shown under 'miscellaneous expenditure' in the balance sheet.The assessee argued that these expenditures were revenue in nature, incurred on materials, salaries, etc., used for in-house R&D. The CIT (A) admitted an additional ground, considering the claim under Sections 35(1)(i) and 37(1) of the Act. The CIT (A) held that the accounting treatment in the books of accounts does not determine the allowability of the expenditure and that non-approval by DSIR does not change the character of the expenditure from revenue to capital. The CIT (A) also observed that the assessee had been in the business since 1996, and the R&D expenditure could not be considered as a trial run for a new venture.The CIT (A) classified the total expenditure of Rs. 7,82,53,487/- into capital equipment (Rs. 44.41 lakh), materials/consumables/spares (Rs. 611.78 lakh), salaries and wages (Rs. 19.57 lakh), and other R&D expenditures (Rs. 106.77 lakh). The CIT (A) found that these expenditures were genuine and revenue in nature, incurred for business purposes, and thus allowable under Sections 35(1)(i) and 37(1) of the Act.The Tribunal upheld the CIT (A)'s decision, stating that the expenditures were incurred in the course of business and did not create any enduring benefit or capital asset. The Tribunal found no infirmity in the CIT (A)'s order and dismissed the revenue's ground.2. Direction to Allow Deduction Under Section 80IB:The CIT (A) directed the AO to allow the deduction under Section 80IB if it was otherwise allowable, even though the assessee had not claimed this deduction in its return of income. The Tribunal noted that the claim was not made during the assessment proceedings, and the relevant facts were not on record. Therefore, the CIT (A) erred in entertaining this ground without the necessary facts being available. The Tribunal allowed the revenue's ground on this issue, setting aside the CIT (A)'s direction.Conclusion:The appeal by the revenue was partly allowed. The Tribunal upheld the CIT (A)'s decision on the allowability of R&D expenditures under Sections 35(1)(i) and 37(1), dismissing the revenue's ground on this issue. However, the Tribunal allowed the revenue's ground regarding the deduction under Section 80IB, as the CIT (A) had erred in directing the AO to allow the deduction without the relevant facts being on record.