2007 (8) TMI 373 - AT - Income Tax

Appellate Tribunal Upholds Disallowance of Research Expenditure

The Appellate Tribunal upheld the disallowance of expenditure on scientific research under section 35(1)(iv) as it was not deemed related to the business ... Deduction under section 35(1)(iv) - scientific research related to the business - business to include consultancy services - distinction between carrying on research and carrying on a businessDeduction under section 35(1)(iv) - scientific research related to the business - distinction between carrying on research and carrying on a business - Whether capital expenditure on scientific research is deductible under section 35(1)(iv) where the assessee is exclusively engaged in specialised research and supplies data/results to other companies. - HELD THAT: - The Tribunal held that section 35(1)(iv) permits deduction of capital expenditure on scientific research only where such expenditure is 'related to the business carried on by the assessee.' The term 'business' may include activities such as consultancy or preparation of feasibility reports, as recognised by the Allahabad High Court in U.P. Electronic Corpn. Ltd., but the entitlement to deduction depends on the assessee carrying on a business distinct from, and to which the research is related. On the facts, the assessee was solely engaged in specialised scientific research and supplied the resulting data and information exclusively to two foreign companies; it did not carry on an independent business (such as consultancy) for others. Consequently the research activity amounted to an extended research unit for those two concerns rather than research carried out in relation to a separate business of the assessee. The Allahabad High Court decision was distinguished on its facts because there the assessee derived income from consultancy and related activities and thereby carried on a business to which the research related. Applying the statutory language and these factual distinctions, the Tribunal concluded that the capital expenditure on scientific research incurred by the assessee was not 'related to the business carried on by the assessee' and therefore not allowable under section 35(1)(iv). [Paras 9, 10, 11, 12]Claim for deduction of capital expenditure on scientific research under section 35(1)(iv) disallowed as the assessee was not carrying on any business to which the research related.Final Conclusion: The order of the CIT(A) confirming disallowance of the capital expenditure under section 35(1)(iv) is upheld and the assessee's appeal is dismissed. Issues involved:The issues involved in this judgment are the disallowance of expenditure on scientific research under section 35(1)(iv) of the Income Tax Act, 1961 and the computation of interest under section 234B.Issue 1: Disallowance of expenditure on scientific research under section 35(1)(iv):The assessee claimed a deduction of Rs. 96,99,624 under section 35(1)(iv) for engaging in specialized research activities and joint ventures. The Assessing Officer (AO) disallowed the expenditure, stating it was not related to the business. The assessee argued that providing consultancy services based on scientific research activities constituted their main business. The Tribunal referred to a case where consultancy services were considered a business activity and allowed deduction for scientific research expenditure related to the business. However, in this case, as the assessee only provided scientific research results to foreign companies and did not engage in any other business activities, the expenditure was not considered related to their business. Therefore, the deduction under section 35 was denied.Issue 2: Computation of interest under section 234B:The assessee also raised a ground regarding the computation of interest under section 234B. However, the judgment primarily focused on the disallowance of expenditure on scientific research under section 35(1)(iv) and did not provide detailed discussion on this issue.In conclusion, the Appellate Tribunal upheld the disallowance of the expenditure on scientific research under section 35(1)(iv) as it was not considered related to the business activities of the assessee. The appeal was dismissed, and the order of the CIT(A) was confirmed.