9911796707
TMI Blog2017 (10) TMI 1257X X X X Extracts X X X X X X X X Extracts X X X X ..... and development (R&D) expenditure and claimed deduction u/s 35D(1) of the Act. According to him, it is not an allowable expenditure since assessee has got approval for in-house R&D activities from the appropriate authority only wef 9th March, 2011. Accordingly, he disallowed the above expenditure. B) Unaccounted expenditure under the head R&D On verification of annual report in Annexure-I; Form - B, the AO noticed that assessee had incurred an amount of Rs. 1,19,46,080/- towards expenditure on R&D. Whereas the assessee had debited an amount of Rs. 66.24 lakhs to P&L A/c instead of actual expenditure. AO treated the difference amount as unexplained expenditure and added to the income of the assessee. C) Weighted deduction u/s 35(2AB) of the Income-tax Act, 1961 AO noticed from the computation of total income of the assessee that it had claimed deduction u/s 35(2AB) for Rs. 4,38,34,823/-. AO asked the assessee to furnish statutory requirements for claiming this expenditure i.e. to submit Form 3CL & 3CM. However, assessee filed 3CM approved by the Department & Scientific and Industrial Research, Ministry of Science & Technology dated 09/03/2011. AO observed that approval was grant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the extent of Rs. 3,43,25,801/-. 5. Aggrieved by the order of CIT(A), the assessee as well as revenue are in appeal before us. 6. Assessee has raised the following grounds of appeal: "1) The order of the learned Commissioner of Income Tax(A) is erroneous to the extent it is prejudicial to the appellant. 2) Both the Assessing Officer and the learned CIT (A) erred in holding that the claim for deduction of Rs. 4,38,34,823/_ represent weighted deduction u/ s 35(2AB) of the I.T. Act. 3) The learned CIT (A) and the Assessing Officer ought to have seen that the said amount represent the revenue expenditure incurred during the year; debited in the books of account particularly as' deferred revenue expenditure but claimed as deduction while computing the income for the purpose of income tax. 4) The learned CIT (A) erred in confirming the addition of Rs. 3,43,25,801/- made out of Rs. 4,38,34,823/- made by the Assessing Officer without considering the fact that the entire expenditure of Rs. 4,38,34,823/- represent revenue expenditure and is allowable as deduction. 5) Any other ground or grounds that may be urged at the time of hearing." 6.1 Revenue has raised the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as well as AO is not proper. 8. The ld. DR, on the other hand, filed written submissions, which are as under: "Issue 1: The disallowance of Rs. 66.24 lakhs was made on the ground that the company has got approval from the appropriate authority w.e.f. March 2011 only. The assessee argued that the expenditure comes under the ambit of section 35(1) and not under section 35D(1) of the Act. The issue in question has been examined and it would be relevant to highlight the provisions of section 35(1)(i) which is reproduced below: "35. (1) In respect of expenditure on scientific research, the following deductions shall be allowed (i) any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business. Explanation.-Where any such expenditure has been laid out or expended before the commencement of the business (not being expenditure laid out or expended before the 1st day of April, 1973) on payment of any salary as defined in Explanation 2 below sub-section (5) of section 40A to an employee engaged in such scientific research or on the purchase of materials used in such scientific research, the aggregate of the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d revenue expenditure to the extent of Rs. 66.24 lakhs and deferred revenue expenditure to the extent of Rs. 438.55 lakhs. With regard to the revenue expenditure u/s 35(1) of the IT Act, the assessee has incurred this expenditure for R&D in the assessment year under consideration. Sec. 35(1)(i) of the IT Act is reproduced below: Section 35(1)(i): (i) any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business. Explanation.- Where any such expenditure has been laid out or expended before the commencement of the business (not being expenditure laid out or expended before the 1st day of April, 1973 ) on payment of any salary[ as defined in Explanation 2 below sub- section (5) of section 40A] to an employee engaged in such scientific research or on the purchase of materials used in such scientific research, the aggregate of the expenditure so laid out or expended within the three years immediately preceding the commencement of the business shall, to the extent it is certified by the prescribed authority to have been laid out or expended on such scientific research, be deemed to have been laid out or expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation Ltd. (supra). In our opinion, the ratio laid down in this decisions is relating to the discount on debentures. Even though the discount is offered in the year of subscription, the discount in fact relates to the tenure of the debentures. It can be spread over to the period of debenture holding. Whereas the nature of expenditure incurred in the given case is R&D. It is peculiar expenditure, it is not necessary that research should be successful all the time, the absorption of the cost depends upon the success rate of the project. It is prudent to absorb the revenue expenses in the year of expenditure incurred, when there is no benefit of enduring nature expected at the time of making such expenditure. It is not brought on record by the revenue authorities that assessee has expended this expenses and there is asset created by such expenditure. Since there is no asset created, which has enduring benefit to the business of the assessee, it is appropriate to allow these expenditure u/s 35(1). At the same time, the ratio laid down in the case of Madras Investment Corporation (supra) cannot be applied in the given situation as the nature of expenditure is different. Accordingly, gro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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