GRP LIMITED ,MUMBAI V. DY. COMMISSIONER OF INCOME TAX CIRCLE 14(1)(2), MUMBAI

ITA 4524/MUM/2024

AI Insights

The case involves M/s. GRP Limited appealing against the order of the National Faceless Appeal Centre (NFAC), which had partly disallowed certain deductions claimed under the Income Tax Act, 1961 for the Assessment Year 2015-2016. The main issues revolved around the disallowance of professional fees paid to consultants and travel expenses related to the company's R&D Unit. The Assessing Officer had initially disallowed these deductions, viewing them as not wholly and exclusively incurred for the business purpose or as capital expenditures. The CIT(A) upheld these disallowances, leading to the present appeal before the Income Tax Appellate Tribunal.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 398321 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-06-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Assessment Year: 2015-2016
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: ASSESSEE
• Keywords: Depreciation
• Section: 143(3); 37(1)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “G” BENCH, MUMBAI SHRI VIKRAM SINGH YADAV, ACCOUNTANT MEMBER SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER ITA No.4524/MUM/2024 (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 Deputy Commissioner of Income Tax Circle 14(1)(2), Mumbai 460, M.K.Road, Aayakar Bhavan Mumbai – 400020, Maharashtra Vs …………. Respondent Appearance For the Appellant/Assessee For the Respondent/Department : : Shri Apurva R. Shah Shri Bhangepatil Pushkaraj Ramesh Date Conclusion of hearing Pronouncement of order : : 26.03.2025 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. 2. 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 ITA No.4524/Mum/2024 Assessment Year 2015-2016 2 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. ITA No.4524/Mum/2024 Assessment Year 2015-2016 3 Being aggrieved, the Assessee has preferred the present appeal on the grounds reproduced in paragraph 2 above. 4. 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. 5.1. On perusal of the Assessment Order we find that that during the 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 ITA No.4524/Mum/2024 Assessment Year 2015-2016 4 30/04/2014, with OPS was filed by the Assessee. Hence, the expenditures under consideration were allowable as deduction under Section 37(1) of the Act. 5.3. However, the Assessing Officer was not convinced. According to the 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. 5.4. In appeal before the CIT(A) preferred by the Assessee, the CIT(A) agreed with the Assessing Officer and dismissed the grounds raised. 5.5. During the course of hearing both sides reiterated their respective ITA No.4524/Mum/2024 Assessment Year 2015-2016 5 stand. 5.6. On perusal of the agreement, dated 03/01/2014, between the 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 ITA No.4524/Mum/2024 Assessment Year 2015-2016 6 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. 7. 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 ITA No.4524/Mum/2024 Assessment Year 2015-2016 7 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. Sd/- Sd/- (Vikram Singh Yadav) Accountant Member (Rahul Chaudhary) Judicial Member म ुंबई Mumbai; दिन ुंक Dated : 04.06.2025 Milan,LDC ITA No.4524/Mum/2024 Assessment Year 2015-2016 8 आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपील र्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आय क्त/ The CIT 4. प्रध न आयकर आय क्त / Pr.CIT 5. दिभ गीय प्रदिदनदध ,आयकर अपीलीय अदधकरण ,म ुंबई / DR, ITAT, Mumbai 6. ग र्ड फ ईल / Guard file. आिेश न स र/ BY ORDER, सत्य दपि प्रदि //True Copy// उप/सह यक पुंजीक र /(Dy./Asstt. Registrar) आयकर अपीलीय अदधकरण, म ुंबई / ITAT, Mumbai "