Tribunal directs re-examination of R&D expenditure & leasehold rights depreciation, emphasizes factual verification &DExpenditure

The Tribunal allowed the assessee's appeal for statistical purposes, directing the AO to re-examine the disallowance of R&D expenditure and to follow the Tribunal's earlier decision regarding the depreciation on leasehold rights. The Tribunal stressed the importance of verifying records and making decisions based on established facts and applicable law.

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Issues Involved
1. Disallowance of Rs. 12,69,409/- in R&D expenditure not certified by DSIR.
2. Disallowance of depreciation on leasehold rights amounting to Rs. 77,85,255/-.

Issue-wise Detailed Analysis

1. Disallowance of Rs. 12,69,409/- in R&D expenditure not certified by DSIR:

The assessee, a company engaged in the manufacture and export of performance and specialty chemicals, claimed a weighted deduction of Rs. 2,93,68,763/- under Section 35(2AB) of the Income Tax Act for AY 2015-16. The deduction included Rs. 1,42,74,409/- as revenue expenditure and Rs. 4,09,973/- as capital expenditure. However, as per Form 3CL, the DSIR certified only Rs. 1,34,14,000/- as eligible for deduction, leading to a shortfall of Rs. 12,69,409/- in revenue expenditure. Consequently, the AO disallowed the excess claim of Rs. 25,40,763/-.

The assessee contended before the CIT(A) that the AO disallowed the entire weighted deduction of uncertified amount without allowing the actual expenditure of Rs. 12,69,409/- under Section 37 of the Income Tax Act. The CIT(A) upheld the disallowance, stating that the expenditure must be wholly and exclusively for the business purpose and the assessee failed to establish the connection of the expenditure with its business activities.

Upon appeal to the Tribunal, it was observed that the assessee provided a detailed breakup of the expenditure, and the disallowance was due to the non-certification by DSIR. The Tribunal noted that the CIT(A) did not conclusively determine the connection between the expenditure and the business activities. Therefore, the Tribunal restored the issue to the AO for a fresh examination, directing verification of records and a decision based on facts and law after giving the assessee an opportunity to be heard.

2. Disallowance of depreciation on leasehold rights amounting to Rs. 77,85,255/-:

The AO disallowed the depreciation claimed by the assessee on leasehold rights, amounting to Rs. 77,85,255/-, on the grounds that the premium paid for leasehold rights should be amortized over 33 years and not treated as an intangible asset eligible for depreciation. The AO considered the premium as a capital expenditure to be amortized annually.

The CIT(A) upheld the AO's decision, stating that the leasehold rights do not qualify as intangible assets under Section 32(1)(ii) of the Income Tax Act. The CIT(A) rejected the assessee's reliance on various court decisions, considering them irrelevant to the facts of the case.

Upon appeal, the Tribunal referred to its earlier decision in the assessee's own case for AY 2014-15, where it was held that leasehold rights qualify as intangible assets eligible for depreciation. The Tribunal cited the Supreme Court's decision in Taparia Tools Ltd. vs. JCIT, which supports the claim of revenue expenditure without splitting it over several years. The Tribunal also referenced its Special Bench decision in ACIT vs. Progressive Constructions Ltd., which held that the right to operate an asset forms an intangible asset entitled to depreciation.

Given the consistency in facts and the Tribunal's earlier decision favoring the assessee, the Tribunal set aside the CIT(A)'s order and directed the AO to follow the Tribunal's previous decision and compute the depreciation accordingly.

Conclusion

The appeal by the assessee was allowed for statistical purposes, with the Tribunal directing the AO to re-examine the disallowance of R&D expenditure and to follow the Tribunal's earlier decision regarding the depreciation on leasehold rights. The Tribunal emphasized the necessity of verifying records and ensuring that decisions are based on established facts and applicable law.

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