The Karnataka High Court deleted disallowance made in respect of Expenditure incurred from income not includible in total income under Section 14A of Income Tax Act.
The assessee, Hindustan Aeronautics Limited is a public sector undertaking of Government of India and is engaged in the business of design, development, manufacture and maintenance of aircrafts and avionic systems. The assessee caters to the requirement of defence establishment in India. The assessee for the purposes of manufacture of aircrafts and avionic systems undertakes various research and development activities in its Research and Development Centers.
In the Assessment Year 2009-10, the assessee received grants to the tune of Rs.570,61,55,000 from Government of India for conducting defence related research. The assessee also received dividend income of Rs.32,77,838 and Rs.29,40,000 from BAe HAL Software Limited and Indo-Russian Aviation Ltd. Respectively.
The assessee filed the return of income for the Assessment Year 2009-10 and claimed the grant as capital receipt. Thus, not forming part of the income chargeable to tax. The Assessing Officer by an order passed an order by which he reduced an amount of Rs.570,61,55,000/- from the deductible expenditure on the ground that the same was capital in nature. The Assessing Officer also made a disallowance under Section 14A of the Act.
The tribunal upheld the disallowance made under Section 14A of the Act. The assessee has filed the appeal to the extent the tribunal rejected its contention that Research and Development expenses were revenue in nature and so far as disallowance of its claim under Section 14A of the Act was made.
Mr. Suryanarayan, the counsel for the assessee submitted that the authorities under the Act ought to have appreciated that the expenses incurred on account of Research and Development expenses are revenue expenses and the same ought to have been allowed as deduction under Section 37 of the Act.
The division bench of Justice Alok Aradhe and Justice H.T.Nagendra Prasad noted that Section 14A (2) and (3) of the Act read with Rule 8D of the Rules prescribe a formula for determination of expenditure incurred in relation to income, which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee.
The court noted that the Assessing Officer has not recorded any satisfaction with regard to genuineness of the claim of the assessee before invoking the powers under Section 14A of the Act read with Rule 8D of the rules.
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