2017 (10) TMI 1257 - AT - Income Tax

Tribunal validates R&D expenditure claim, clarifies deferred revenue treatment &D

Celon Laboratories P. Ltd. Versus Dy. Commissioner of Income tax, Circle – 1 (2), Hyderabad And Vice-Versa

The Tribunal upheld the CIT(A)'s decision to allow the R&D expenditure claimed under Section 35(1) of the Income-tax Act, 1961, stating that no ... Disallowance of R&D Expenditure u/s 35(1) and unaccounted expenditure under the head R&D - Held that:- Any expenditure relating to business which may be relating to current year or relating to previous expenditure incurred before commencement of the business and restricted to expenses expended within 3 years immediately proceeding the commencement of the business. As per explanation to this sub-clause, the assessee has to submit certificate from the prescribed authority to get the deduction under this head for the expenses incurred before commencement of the business. There is no restriction with regard to expenses expended during the current assessment year. Hence, there is no requirement on the part of the assessee to claim revenue expenditure incurred during the current assessment year. Accordingly, the assessee is eligible to claim deduction u/s 35(1) relating the current year expenditure on R&D. We are in agreement with the findings of Ld. CIT(A). Therefore ground raised by department is dismissed. With regard to deferred revenue expenditure, the assessee has incurred revenue expenditure during this year and classified the same as ‘deferred revenue expenditure’ in order to defer the expenditure in the financial statement. For the purpose of determining taxable income under the IT Act, it has claimed total revenue expenditure incurred during the year, even though classified as deferred revenue expenditure, as expenditure u/s 35(1). Even though the discount is offered in the year of subscription, the discount in fact relates to the tenure of the debentures. It can be spread over to the period of debenture holding. Whereas the nature of expenditure incurred in the given case is R&D. It is peculiar expenditure, it is not necessary that research should be successful all the time, the absorption of the cost depends upon the success rate of the project. It is prudent to absorb the revenue expenses in the year of expenditure incurred, when there is no benefit of enduring nature expected at the time of making such expenditure. It is not brought on record by the revenue authorities that assessee has expended this expenses and there is asset created by such expenditure. Since there is no asset created, which has enduring benefit to the business of the assessee, it is appropriate to allow these expenditure u/s 35(1). - Decided against revenue. Issues Involved:1. Disallowance of R&D Expenditure under Section 35(1).2. Unaccounted expenditure under the head R&D.3. Weighted deduction under Section 35(2AB) of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Disallowance of R&D Expenditure under Section 35(1):The Assessing Officer (AO) disallowed the R&D expenditure of Rs. 66.24 lakhs claimed by the assessee under Section 35(1) of the Income-tax Act, 1961, on the grounds that the assessee received approval for in-house R&D activities only from 9th March 2011. The CIT(A) allowed the assessee's claim, stating that the deduction was claimed under Section 35(1) and not under Section 35(2AB)/35D, and no prescribed form is required for Section 35(1). The CIT(A) also noted that the expenses are permissible under Section 37. The Tribunal upheld the CIT(A)’s decision, clarifying that there is no requirement for a certificate from the prescribed authority for expenses incurred in the current assessment year under Section 35(1). Thus, the assessee is eligible to claim the deduction.2. Unaccounted expenditure under the head R&D:The AO added Rs. 1,19,46,080/- as unexplained expenditure, noting a discrepancy between the amount debited to the P&L account (Rs. 66.24 lakhs) and the total R&D expenditure reported in the annual report. The CIT(A) allowed the assessee's claim, explaining that the total R&D expenditure included both revenue expenditure (Rs. 66.24 lakhs) and capital expenditure (Rs. 53.22 lakhs), with the latter being charged as depreciation. The Tribunal agreed with the CIT(A), concluding that there was no unexplained expenditure since the details were not called for by the AO.3. Weighted deduction under Section 35(2AB):The AO disallowed the claim of Rs. 4,38,34,823/- under Section 35(2AB) as the assessee failed to furnish the necessary statutory forms (3CL & 3CM) for claiming the deduction. The assessee revised its computation, withdrawing the claim and instead classifying the expenditure as deferred revenue expenditure. The CIT(A) allowed the deduction to the extent of 20% of the total expenditure, relying on the Supreme Court’s decision in Madras Industrial Investment Corporation Ltd. vs. CIT, and sustained the disallowance for the remaining amount. The Tribunal found that the expenditure categorized as deferred revenue expenditure could be claimed as revenue expenditure under Section 35(1), as it does not provide enduring benefits and is not an asset creation. Consequently, the Tribunal allowed the assessee's appeal and dismissed the revenue's appeal.Conclusion:The Tribunal upheld the CIT(A)’s decision on allowing the R&D expenditure under Section 35(1) and found no unexplained expenditure. It also allowed the assessee’s claim for deferred revenue expenditure under Section 35(1), dismissing the revenue's appeal. The judgment emphasizes the eligibility of current year R&D expenditures for deductions under Section 35(1) without the need for a certificate from the prescribed authority and clarifies the treatment of deferred revenue expenditures.