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Facts
The Assessee, engaged in reclaiming rubber, claimed deductions for professional fees paid to a consultant and an advisory firm, and for travel expenses, for its R&D Unit. The Assessing Officer disallowed these as they were not claimed under Section 35(2AB) and were considered capital in nature or not for in-house research. The CIT(A) upheld the disallowances.
Held
The Tribunal allowed the deduction for consultancy fees paid to Dilip Ravatkar, holding it was for the execution phase of a project and not in-house research. The deduction for travel expenses was dismissed due to lack of supporting documents. The expenditure for the advisory firm was held to be capital in nature, and the Assessee was directed to claim depreciation.
Key Issues
Whether professional fees and travel expenses related to R&D are allowable as revenue expenditure under Section 37(1) or capital expenditure, or if they qualify for weighted deduction under Section 35(2AB). Whether expenditure for setting up an R&D unit is capital in nature.
Sections Cited
37(1), 35(2AB), 143(3), 250
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
(Assessment Year: 2015-2016) M/s. GRP Limited 510, Wing A, Kohinoor City, Commercial – I, Kirol Road, Off.L.B.S.Marg, Kurla West, Mumbai - 400070. Maharashtra. [PAN:AAACG1890M] …………. Appellant Vs Deputy Commissioner of Income Tax Circle 14(1)(2), Mumbai 460, M.K.Road, Aayakar Bhavan Mumbai – 400020, Maharashtra …………. Respondent Appearance For the Appellant/Assessee : Shri Apurva R. Shah For the Respondent/Department : Shri Bhangepatil Pushkaraj Ramesh Date Conclusion of hearing : 26.03.2025 Pronouncement of order : 04.06.2025 O R D E R [ Per Rahul Chaudhary, Judicial Member: 1. The present appeal preferred by the Assessee is directed against the order, dated 19/07/2024, passed by the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘the CIT(A)’] under Section 250 of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’] whereby the Ld. CIT(A) had partly allowed the appeal against the Assessment Order, dated 07/12/2017, passed under Section 143(3) of the Act for the Assessment Year 2015-2016.
The Assessee has raised following grounds of appeal :
1. Erred in not allowing a deduction for professional fees of Rs.12,00,000 paid to consultant Dilip Ravatkar by holding that the same was in connection with Research and Development Assessment Year 2015-2016 Centre of the appellant and since it was not claimed as a weighted deduction u/s.35(2AB) the same could not be allowed u/s.37(1).
2. Erred in not allowing a deduction of Rs.14,00,000 paid to Offshore Planning Services P. Ltd. by holding that the same was in connection with Research and Development Centre of the appellant and since it was not claimed as a weighted deduction u/s.35(2AB) the same could not be allowed u/s.37(1).
3. Erred in holding that Travelling expenses of Rs.1,11,445 were not eligible for a deduction u/s.35(2AB) though it was expenditure incurred in connection with the in house Research and Development Centre of the appellant.”
3. The relevant facts in brief are that the Assessee is a company, inter alia, engaged in the business involving reclaiming of rubber from waste rubber. The Assessee also has a approved Research & Development Unit [for short ‘R&D Unit’] in respect of which the Assessee was claiming deduction under Section 35(2AB) of the Act. For the Assessment Year 2015-2016 the Assessee filed return of income on 30/09/2015 declaring income of INR.7,84,39,628/- which was selected for limited scrutiny. The Assessing Officer completed the assessment vide Assessment Order, dated 07/12/2017, passed under Section 143(3) of the Act at assessed income of INR.8,12,37,610/- after making, inter alia, the following disallowances:
(a) Deduction claimed by the Assessee under Section 37(1) of the Act in respect of INR.12,00,000 paid to consultant Dilip Ravatkar and INR.14,00,000 paid to Offshore Planning Services Pvt. Ltd. (b) Weighted Deduction claimed under Section 35(2AB) of the Act in respect of travel expenses amounting to INR.1,11,445/- In appeal, the CIT(A) rejected the grounds raised by the Assessee challenging the above disallowances while disposing off the appeal vide order, dated 19/07/2024.
We have heard both the sides and have perused the material on record.
Ground No. 1 & 2 5. We would first take up disallowance of deduction claimed under Section 37(1) of the Act.
On perusal of the Assessment Order we find that that during the 5.1. assessment proceedings, the Assessing Officer noted that the Assessee had debited INR.26,00,000/- to the Profit & Loss Account for the relevant previous year as legal and professional expenses. The Assessing Officer was of the view that the said expenses were related to R&D Unit and therefore, the Assessee was asked to explain why the same should not be disallowed under Section 37(1) of the Act. In response, the Assessee submitted that INR.26,00,000/- consisted of payment of INR.12,00,000/- to Sh. Dilip Ravetkar (for short ‘the Consultant’) and INR.14,00,000/- to Offshore Planning Service Pvt. Ltd. (for short ‘the OPS’).
5.2. It was explained that the Assessee was in the business of reclaim rubber by recycling of rubber scrap. The Assessee has established R&D Unit for in-house research for the existing line of business for recycling of scrap rubber. Payment to the Consultant was made for execution of Phase III of the R&D Project – Blue Nile and not for in- house research. In support a copy of the agreement, dated 03/01/2014, between the Assessee and the Consultant was furnished by the Assessee. It was further explained that the payment to OPS was made for management advisory that was required for getting approval for the R&D Unit and not for in-house research. In support, copy of engagement agreement, dated However, the Assessing Officer was not convinced. According to the 5.3. Assessing Officer, the Consultancy Fees of INR.12,00,000/- paid to the Consultant was in respect to R&D Project - ‘Blue Nile’ [for short ‘R&D Project’]. The Assessee was claiming deduction under Section 35(2AB) of the Act in respect of expenditure incurred on research and development activity in respect of R&D Project and was maintaining separate books of accounts for the same. The Consultant was hired for R&D Project. Therefore, the expenditure incurred in respect of the same should have been debited to separate books of accounts maintained in respect of R&D Project and should have claimed deduction under Section 35(2AB) of the Act. The aforesaid expenditure could not be said to have been incurred wholly and exclusively for the purpose of the business of the Assessee. Therefore, deduction of INR.12,00,000/- claimed by the Assessee under Section 37(1) of the Act in respect of payment made to the Consultant was disallowed by the Assessing Officer. Adopting identical reasoning, the Assessing Officer disallowed INR.14,00,000/- paid to OPS holding that the said professional charges were paid for in-house research & development activity and the same could not be regarded as expenditure incurred wholly and exclusively for the purpose of the business of the Assessee. Further, the Assessing Officer observed that the aforesaid expenses related to setting up of R&D Unit were capital in nature and could not be allowed as deduction under Section 37(1) of the Act.
In appeal before the CIT(A) preferred by the Assessee, the CIT(A) 5.4. agreed with the Assessing Officer and dismissed the grounds raised.
During the course of hearing both sides reiterated their respective 5.5.
On perusal of the agreement, dated 03/01/2014, between the 5.6. Assessee and the Consultant we find that the same clearly states that the Consultant has been engaged for ‘Phase – III of Blue Nile Project’. The scope of work stated therein supports the contention of the Assessee that the engagement was for execution phase and not for in-house research. The Assessing Officer has explained before the authorities below that the Phase III of R&D Project involved extraction of nylon used as raw material of existing Engineering Plastic Business of the Assessee resulting in optimization of the manufacturing process. Therefore, accepting the contention of the Assessee, we direct the Assessing Officer to grant deduction for the same. Thus, disallowance of INR.12,00,000/- made by the Assessing Officer is deleted and Ground No.1 raised by the Assessee is allowed.
5.7. On perusal of the engagement agreement, dated 30/04/2014, we find that OPS was required to provide management advisory for obtaining approval for the R&D Unit. The advisory was clearly related to the setting up of R&D Unit and not an expenditure on in- house research. During the course of hearing reliance was placed on behalf of the Assessee on the written submission, dated 29/01/2021, filed before the Tribunal wherein a different stand has been taken by the Assessee. It has been contended that the expenditure was incurred for enhancing the efficient of the existing business. However, there is nothing on record to support the same and therefore, we are not inclined to accept the same. As a result, we decline to interfere with the order passed by the CIT(A) confirming disallowance of INR.14,00,00/- made by the Assessing Officer under Section 37(1) of the Act.
At the same time, we note that the Assessing Officer has returned Assessment Year 2015-2016 finding that the expenditure disallowed were capital in nature. It was contended on behalf of the Assessee, on without prejudice basis, even if the aforesaid expenditure was considered to be capital in nature, the Assessee was entitled to claim depreciation in respect of the same. This was opposed by the Learned Departmental Representative on the ground that once the Assessee had not claimed deduction for the same under Section 35(2AB) of the Act, no deduction could be allowed. In this regard, we note that specific ground in this regard was taken by the Assessee before the CIT(A). However, the CIT(A) failed to return any finding on the same. While dismissing Ground No. 1,2, & 3 raised by the Assessee, the CIT(A) merely observed - „Expenses pertaining to set up of the R&D Centre is in the nature of capital expense and cannot be allowed under Section 37(1)‟. Taking note of the concurrent findings of the Assessing Officer and CIT(A) as well as the material on record, we hold that the expenditure of INR.14,00,000/- paid to OPS pertaining to set-up of R&D Unit is capital in nature. The Assessing Officer and the CIT(A) have returned finding that the payments were made to OPS for setting-up R&D Centre. We note that Section 35(2AB) of the Act also excluded from its scope the expenditure in the nature of cost of land and building. Therefore, accepting the plea of the Assessee, we direct the Assessing Officer to treat the expenditure of INR.14,00,000/- as part of cost of building and allow deprecation accordingly.
Ground No. 3 6. Ground No.3 raised by the Assessee pertains to disallowance of deduction of INR.1,11,445/- claimed by the Assessee under Section 35(2AB) of the Act.
On perusal of record we find that the Assessee had contended before the authorities below that INR.1,11,145/- represented air fare and related expenses incurred for the purpose of a visit to Italy for the Assessment Year 2015-2016 purpose of review of new machinery which was imported during the relevant previous year for use in the R&D Unit. Since the aforesaid expenses were directly related to the acquisition of assets used for scientific research by the R&D Unit, deduction was claimed for the same Section 35(2AB) of the Act. The aforesaid submission were rejected by the Assessing Officer and thereafter, by the CIT(A) on the ground that no supporting documents were furnished by the Assessee. The relevant extract of the decision of the CIT(A) reads as under: “As noted by the appellant has failed to provide specific details of foreign travel under taken such as the person visiting, place of visit, purpose of visit, nature of activity under taken along with any supporting documentary evidence. No supporting documents have been submitted during the appellate stage. Hence, the addition of Rs.1,11,445/- made on account of disallowance of foreign travel is confirmed. Consequently, the ground 4 of the appeal is dismissed.” No corroborating documents, except for the details of expenses, have been placed on record. As there is nothing on record to controvert the concurrent findings returned by the Assessing Officer and the CIT(A), we decline to interfere with the order passed by the CIT(A) confirming disallowance of INR.1,11,145/-. Accordingly, Ground No. 3 raised by the Assessee is dismissed.
In result the appeal preferred by the Assessee is partly allowed.
Order pronounced on 04.06.2025.