The Tax Publishers2020 TaxPub(DT) 5559 (Karn-HC)

INCOME TAX Act, 1961

Section 37(1) Section 35

Where assessee undertook various research and development activities in its Research and Development Centers for manufacture of aircrafts and avionic systems and received grants from Government of India, expenditure incurred towards research were revenue in nature and ought to be allowed as deduction under section 37(1) as expenses incurred by the assessee towards research and expenses were met out of the grants given by the government, and the fact that the grant was treated as capital receipt, was immaterial.

Business expenditure - Allowability - For manufacture of aircrafts and avionic systems, assessee undertook various research and development activities -

Assessee was public sector undertaking of Government of India and was engaged in the business of design, development, manufacture and maintenance of aircrafts and avionic systems. It catered to requirement of defence establishment in India. For manufacture of aircrafts and avionic systems, assessee undertook various research and development activities in its Research and Development Centers. It received grants from Government of India for conducting defence related research, which was claimed as capital receipt. Issue was as regards denial of expenses claimed as incurred for research and expenditure on allegation that the same was capital in nature. Held: Total research and development expenses incurred by the assessee which included expenses towards raw materials, direct expenses, salaries, interest, depreciation and other expenses. Out of the aforesaid amount, AO disallowed a sum on allegation same was made out of the grants given by Government of India. The expenses incurred by the assessee were towards research and development and therefore, the same were revenue in nature and ought to be allowed as deduction under section 37. The fact that the expenses incurred by the assessee towards research and expenses were met out of the grants given by the government, which was treated as capital receipt was immaterial. Nature of the expenditure has to be seen and not the nature of receipt and purpose for which such expenditure is made is a relevant criteria. The expenditure was incurred by the assessee for research and development for manufacture of aircrafts, which were to be sold. Thus, the expenditure was incurred for the purpose of business of the assessee and the same ought to have been allowed under section 37, instead of section 35(1)(iv).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2009-10


INCOME TAX ACT, 1961

Section 14A

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