Tribunal decision favors assessee on R&D expenditure disputes.

The Tribunal upheld the CIT(A)'s decisions, allowing the assessee's appeal on the deferred revenue expenditure issue and dismissing the revenue's appeal on the disallowance of R&D expenditure and unaccounted R&D expenditure discrepancies. The Tribunal ruled in favor of the assessee, stating that the R&D expenses were permissible under Section 37 and that the unexplained expenditure was clarified by the CIT(A). The judgment was delivered on 27th October 2017.

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Issues Involved:
1. Disallowance of R&D expenditure under Section 35(1) of the Income Tax Act.
2. Unaccounted R&D expenditure added as unexplained expenditure.
3. Weighted deduction under Section 35(2AB) for deferred revenue expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of R&D expenditure under Section 35(1):

The Assessing Officer (AO) disallowed an R&D expenditure of Rs. 66.24 lakhs, arguing that it was not allowable since the assessee received approval for in-house R&D activities only from 9th March 2011. The CIT(A) overturned this disallowance, stating that the assessee did not claim the deduction under Section 35(2AB) or 35D and that there was no prescribed form to claim deduction under Section 35(1). The CIT(A) further noted that the expenses were permissible under Section 37, thus deleting the addition made by the AO. The Tribunal upheld the CIT(A)'s decision, agreeing that the assessee was eligible to claim the deduction under Section 35(1) for current year expenditure on R&D without needing approval from the prescribed authority.

2. Unaccounted R&D expenditure added as unexplained expenditure:

The AO observed a discrepancy between the R&D expenditure reported in the annual report (Rs. 1,19,46,080) and the amount debited to the P&L account (Rs. 66.24 lakhs). The AO treated the difference as unexplained expenditure. The CIT(A) clarified that the total R&D expenditure included Rs. 66.24 lakhs of revenue expenditure and Rs. 53.22 lakhs of capital expenditure, with the latter being depreciated. The Tribunal confirmed this, noting that there was no unexplained expenditure and the addition was made without calling for details.

3. Weighted deduction under Section 35(2AB) for deferred revenue expenditure:

The AO disallowed an expenditure of Rs. 4,38,34,823 claimed under Section 35(2AB), as the assessee failed to furnish the required forms (3CL and 3CM). The assessee revised the computation, withdrawing the claim under Section 35(2AB) and reclassifying it as deferred revenue expenditure. The CIT(A) allowed 20% of the expenditure as deductible, relying on the Supreme Court's decision in Madras Industrial Investment Corporation Ltd. vs. CIT. The Tribunal found that the expenditure did not create any enduring asset and was appropriate to be allowed under Section 35(1). The Tribunal allowed the assessee's appeal, dismissing the revenue's appeal.

Conclusion:

The Tribunal upheld the CIT(A)'s decisions on all issues, allowing the assessee's appeal regarding the deferred revenue expenditure and dismissing the revenue's appeal on the disallowance of R&D expenditure and the unaccounted R&D expenditure. The judgment was pronounced in the open court on 27th October 2017.

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