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2019 (2) TMI 631 - AT - Income TaxDisallowance of Research & Development capital expenditure - no documentary evidence of any real R&D activity by the assessee, was furnished - Held that:- We find that the assessee claimed to have incurred capital expenditure of ₹ 1,26,100/-. Despite the AOs’ requirement, the assessee could not produce any evidence to show that it was really engaged in doing some research activity. Similar position prevailed before the CIT(A). As recorded that no documentary evidence on real Research & Development activities was furnished. The position is no better before us as well. On a specific requisition, the ld. AR could not draw our attention towards any cogent material or evidence to demonstrate that it was engaged in carrying out any real research activity. Under such circumstances, action of the authorities below in allowing depreciation @15%, as against 100% claimed by the assessee on the capital expenditure, is unimpeachable. This ground is not allowed. Disallowance of Warranty expenses - Held that:- For the year under consideration, when the amount of sales dipped to ₹ 3.78 crore, amount of provision increased multifold from ₹ 9 lakh to ₹ 22 lakh as against the actual expenditure incurred on repairs standing only at ₹ 11,39,474/-. This narration of facts amply proves that the creation of warranty provision was not based on any scientific calculation but was rather an ad hoc exercise. Under such circumstances, we cannot grant deduction in respect of warranty provision. Once it is held that the creation of provision cannot be allowed as deduction, it is further clarified that the reversal of provision should also not be brought to tax, if the creation of such provision was earlier not allowed as deduction. To put it simply, neither the creation of provision nor its reversal, if earlier not allowed as deduction at the time of making it, would lead to deduction or taxability of any sum but the actual expenditure incurred by the assessee on repairs on year to year basis would qualify for deduction. With these observations, we set aside the impugned order to this extent and remit the matter to the file of AO for deciding the issue in accordance with our above directions. Research & Development capital expenditure cannot be allowed as deduction @100% but depreciation should be allowed at the eligible rate. Similarly, in so far as warranty provision is concerned, it is held that provision for warranty should not be allowed as deduction; reversal of the provision in the year, if not allowed as deduction at the time of its creation, should not be charged to tax but the actual expenditure incurred should be allowed as deduction.
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