MAINI MATERIALS MOVEMENT PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4(1)(1), BANGALORE

PER WASEEM AHMED, ACCOUNTANT MEMBER:

6.1 On the other hand, the ld. DR vehemently supported the order of the authorities below.

Section 14A(1) provides that for the purpose of computing total income under chapter IV, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. In the instant case, the Tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the Tribunal held that disallowance . under section 14A could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in case of CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204 in which also the Court had observed that where the assessee did not make any claim for exemption, section 14A could have no application.

Respectfully following the orders of the Hon’ble High Court as mentioned above, we hold that disallowance under the provision of section 14A r.w.r. 8D of Income Tax Rules cannot exceed the exempted income in the given facts and circumstances. As such, there is no dividend income in the year under consideration and therefore, there cannot be any disallowances of the expenses as envisaged under the provision of section 14A r.w.r. 8D of Income Tax Rules. Hence, the ground of appeal of the assessee is allowed.

8. The second issue raised by the assessee is that the ld. CIT(A) erred in confirming the disallowance made by the AO for Rs. 64,17,825/- treating the same as capital expenses.

8.1 The assessee in the year under consideration has claimed expenditure under the head R&D Division amounting to Rs. 64,17,825/-, which was incurred for the development of new products, up gradation of existing and customization of standard products and services. However, the AO was of the view that the benefit of such expenses is of enduring nature and, therefore, the same should be treated as capital expenditure. Thus, the AO disallowed the same and added to the total income of the assessee.

“2. In ground no.2, assessee objects to treating Rs.6417825 being R&D expenses as Capital expenses. Alternately assessee wants to claim depreciation as well as deduction u/s 35(1)(iv). On verification, it was found that these expenses incurred on R&D, result in customization and upgradation . of existing products. Upgraded products will be manufactured and sold over the years. Hence, expenses incurred on R&D has enduring benefit and is rightly treated as Capital in nature. Further, assessee did not make any claim of depreciation or deduction u/s 35(1)(iv) in the ITR or before the AO during the course of assessment proceedings and hence considered only as an afterthought. The action of the AO is fully justified. The grounds on this issue are dismissed.”

13.1 Moving further, the expenses in dispute were incurred for research and development. Accordingly, even if such expenses are . treated as capital in nature, then these are also eligible for deduction u/s 35(1)(vi) of the Act but Revenue did not do so despite the assessee having made claim before the ld. CIT(A). As such, without going into the merit of the case, we note that the assessee is eligible for the capital expenditure under the provisions of sec. 35(1)(vi) of the Act. The relevant extract of the order reads as under:

(iv) in respect of any expenditure of a capital nature on scientific research 35related to the business carried on by the assessee, such deduction as may be admissible under the provisions of sub-section (2) :

13.2 In view of the above, we set aside the findings of the ld. CIT(A) and direct the AO to allow the deduction of the expenditure in dispute. Accordingly, the ground of appeal raised by the assessee is allowed.