2001 (2) TMI 284 - AT - Income Tax

Tribunal allocates R&D Expenditure based on sales turnover, upholds partial disallowance of Directors' Remuneration &D

The Tribunal upheld the CIT (A)'s decision to allocate Research and Development (R&D) Expenditure proportionately between the Agricultural and ... Scientific Research Expenditure Issues Involved:1. Deductibility and allocation of Research and Development (R&D) Expenditure.2. Partial disallowance of Directors' Remuneration.Detailed Analysis:1. Deductibility and allocation of Research and Development (R&D) Expenditure:The main issue revolves around the deductibility and allocation of R&D Expenditure incurred by the assessee-company, which operates both an Agricultural Division and a Commercial Division. The assessee-company claimed the entire R&D Expenditure as a deduction from its business income. The Assessing Officer (AO) disallowed this claim, arguing that the R&D Expenditure was exclusively for agricultural activities and should be set off against agricultural income.The CIT (A) found that the R&D Expenditure related to both divisions and should be proportionately allocated based on the sales turnover of each division. This decision was contested by both the Revenue and the assessee. The Revenue argued that the R&D Expenditure should be entirely allocated to agricultural income, as it was incurred for producing parent seeds, which is an agricultural activity. Conversely, the assessee contended that the expenditure was integral to its overall business and should be fully deductible from business income.The Tribunal examined the nature of the assessee's activities, noting that the company developed hybrid seeds and engaged in extensive R&D necessary for this purpose. The Tribunal agreed with the CIT (A) that the R&D Expenditure was related to both agricultural and commercial activities. It held that the activities of the Agricultural and Commercial Divisions constituted distinct businesses, and the expenditure should be apportioned accordingly.The Tribunal referred to the Supreme Court decision in Waterfall Estates Ltd. v. CIT, which established that where activities constitute distinct businesses, common expenses must be allocated proportionately. The Tribunal found that the CIT (A)'s method of allocation based on sales turnover was appropriate and upheld this approach, dismissing the appeals from both the Revenue and the assessee.2. Partial disallowance of Directors' Remuneration:For the assessment year 1995-96, the assessee contested the partial disallowance of Rs. 1,10,000 out of the remuneration paid to the directors. The Tribunal noted that this issue had already been decided against the assessee in a previous order (dated 17-2-1995 in ITA Nos. 1943 to 1945/Hyd/90 for the assessment year 1988-89). Consequently, the Tribunal confirmed the disallowance made by the AO.Conclusion:The Tribunal upheld the CIT (A)'s decision to allocate the R&D Expenditure proportionately between the Agricultural and Commercial Divisions based on sales turnover. It dismissed the appeals and cross-objections from both the Revenue and the assessee regarding the R&D Expenditure. Additionally, it confirmed the partial disallowance of Directors' Remuneration for the assessment year 1995-96, as previously decided.