Tribunal remands patent expenses, stresses accurate verification of deductions

The Tribunal partly allowed the appeal, remanding the issues of patent expenses and bogus purchases back to the Assessing Officer for proper verification and computation, while allowing the full claim under Section 35(2AB). The decision emphasized the importance of accurate classification and verification of expenses and deductions as per statutory provisions.

---

---

Issues Involved:

1. Disallowance of Patent expenses.
2. Disallowance of deduction under Section 35(2AB).
3. Addition on account of bogus purchases.

Issue-wise Detailed Analysis:

1. Disallowance of Patent Expenses:

The assessee company claimed Rs. 20,76,724/- as "Patent expenses" under "Miscellaneous expenses" in the Profit & Loss account, which the Assessing Officer (A.O) reclassified as "Capital expenditure" and allowed a consequential depreciation of Rs. 5,19,181/-. The assessee argued that the depreciation should also include the written down value (WDV) of patent expenses from previous years, totaling Rs. 10,64,618/-. The Tribunal agreed with the assessee, stating that depreciation should be computed on the entire block of assets, including past capitalized patent expenses. The issue was remanded back to the A.O for verification and proper computation of depreciation.

2. Disallowance of Deduction under Section 35(2AB):

The A.O restricted the deduction under Section 35(2AB) to Rs. 7,37,17,242/- based on the amount approved by the Ministry of Science and Technology, as opposed to the assessee's claim of Rs. 7,50,95,242/-. The Tribunal found that the lower authorities misinterpreted Section 35(2AB), which requires approval of the in-house R&D facility, not the expenditure amount. The Tribunal referenced the case of ACIT vs. Torrent Pharmaceuticals Ltd., concluding that the amount of deduction should not be restricted by the approved expenditure. The Tribunal allowed the assessee's claim and set aside the disallowance of Rs. 13,78,000/-.

3. Addition on Account of Bogus Purchases:

The A.O added Rs. 13,04,375/- to the assessee's income, alleging bogus purchases from M/s Yashita Trading Company Pvt. Ltd., based on information from the investigation wing and the Sales Tax Department. The assessee contended that these purchases were for fixed assets (electrical material) and should be capitalized under "Factory building." The Tribunal found that the A.O failed to properly verify the assessee's claim and incorrectly added the entire amount as revenue expenditure. The Tribunal remanded the issue back to the A.O for verification, directing that if the purchases were indeed capitalized, the addition should be limited to the corresponding depreciation amount.

Conclusion:

The Tribunal partly allowed the appeal, remanding the issues of patent expenses and bogus purchases back to the A.O for proper verification and computation, while allowing the full claim under Section 35(2AB). The decision emphasized the importance of accurate classification and verification of expenses and deductions as per statutory provisions.

---