2018 (10) TMI 291 - AT - Income Tax

Tribunal upholds CIT(A)'s order allowing deductions for R&D machine and road construction expenses.

DCIT Circle-27 (1), New Delhi Versus Ultra International Ltd.

The Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s order, allowing deductions for the advance paid for the R&D machine and the ... Expenditure incurred for Research & Development u/s 35(1) - advance paid for acquiring research equipments - Held that:- We found that various judicial decision submitted by the Ld. AR upheld the view that the acquisition and installation of the R&D machine is not a prerequisite for allowing deduction u/s 35(1)(iv) and the expenses incurred for constructing and acquiring the fixed assets are allowable with reference to the work in progress and machinery in transit also. Thus, there is no need to interfere with the finding of the CIT(A). Ground Nos. 1 and 2 of the Revenue’s appeal are dismissed. Expenditure for constructing external roads to the factory premises as permissible deduction u/s 37(1) - the ownership remains with government - Held that:- The AO has made the disallowance by observing that as per the contractor the amount was spent on ‘laying and making of RCC Road.’ The AO also observed that this road was exclusively the asset of the assessee, or even otherwise there was no obligation on the assessee to constructed this road. The A.O treated the amount as capital expenditure by relying on Travencore Cochin chemical Ltd. [1977 (1) TMI 2 - SUPREME COURT]. However, in this case the issue was related to construction of new roads and not repairs of existing roads. As going through the decision of the Apex Court and also the fact that the road were only being strengthened through RCC, the observations of the A.O are not based on findings regarding ownership of the road with the appellant or whether new roads had been laid out from scratch. - Decided against revenue Issues Involved:1. Whether advance paid for acquiring research equipment can be considered as expenditure incurred for Research & Development under Section 35(1) of the Income Tax Act, 1961.2. Whether the assessee is entitled to a deduction of Rs. 1,35,96,001 under Section 35(1)(iv) of the Income Tax Act, 1961, when the machine was not acquired during the year.3. Whether the expenditure of Rs. 17,86,515 for constructing external roads to the factory premises is permissible as a deduction under Section 37(1) of the Income Tax Act, 1961, when the ownership remains with the government.Issue-wise Detailed Analysis:1. Advance Paid for Acquiring Research Equipment:- The Revenue argued that the CIT(A) wrongly allowed the deduction under Section 35(1) as there was no expenditure incurred for research and development during the year.- The assessee contended that under Section 35(1)(iv) read with Section 35(2)(ia), the term 'incurred' is broader than 'put to use' or 'acquisition of capital asset.' The assessee cited the Supreme Court's decision in CIT vs. Nainital Bank Ltd., which explained that 'expenditure' denotes spending or paying out.- The assessee paid Rs. 1,35,96,001 as an advance for a customized R&D machine, which was shown as capital work in progress. The machine was delivered and installed in the subsequent financial year.- The Tribunal agreed with the CIT(A) that the advance represented a substantial amount of the total cost and was non-refundable, thus constituting expenditure incurred for R&D. The Tribunal upheld the CIT(A)'s decision, distinguishing it from the Kerala High Court's decision in TCM Ltd. vs. CIT.2. Entitlement to Deduction under Section 35(1)(iv):- The Revenue contended that the deduction should be allowed in the year the machine was delivered, not when the payment was made.- The assessee relied on judicial pronouncements, including decisions from the Madras High Court, Delhi High Court, Karnataka High Court, and Gujarat High Court, which held that acquisition and installation of the R&D machine is not a prerequisite for allowing deduction under Section 35(1)(iv).- The Tribunal noted that the total cost of the machine was Rs. 1,53,72,083, and the advance represented a substantial part of this cost. The advance was paid to secure a customized machine, and the terms did not allow for cancellation or refund.- The Tribunal upheld the CIT(A)'s decision, stating that the expenditure was incurred for R&D and was allowable under Section 35(1)(iv), even if the machine was delivered and installed in the next financial year.3. Expenditure for Constructing External Roads:- The Revenue argued that the expenditure for constructing external roads should be treated as capital expenditure since the ownership remained with the government.- The assessee contended that the road construction was necessary for business operations and relied on the Supreme Court's decision in Travancore Cochin Chemical Ltd vs. CIT, which distinguished between new road construction and repair/strengthening of existing roads.- The Tribunal agreed with the CIT(A) that the expenditure was for strengthening an existing road, not constructing a new one, and that the road's ownership remained with the government.- The Tribunal upheld the CIT(A)'s decision, allowing the expenditure as a revenue deduction under Section 37(1).Conclusion:- The Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s order, allowing the deductions claimed by the assessee for the advance paid for the R&D machine and the expenditure on road construction. The Tribunal emphasized the importance of interpreting tax provisions liberally to encourage research and development activities.