Payment towards research program which would benefit taxpayer in long term should be allowed as deduction u/s 37(1)

While upholding the order of the Commissioner of Income Tax (CIT), The Mumbai Bench of Income Tax Appellate Tribunal ruled that the amount paid towards sponsoring the prize at the dinner of the Royal Hospital for Women Foundation cannot be held to be incurred for the purpose of the business of the assessee.

A Division Bench of Judicial Member Vikas Awasthy and Accountant Member Padmavathy S. observed that “the purpose of claiming deduction under section 37(1), it is important for the assessee to establish that the expenditure is incurred wholly and exclusively for the purpose of business, which, in our opinion, is not established by the assessee with respect to the payment made to Royal Hospital for Women.”

Advocate R.D. Khona appeared for the Petitioner whereas Advocate Prakash Kishinchandani appeared for the Respondent. 

The brief facts of the case were that the assessee is a company engaged in the business of exporting computer software providing e-solutions, BPO activities, and other management consultancy activities. The assessee filed the return of income for assessment year 2014-15 under section 115JB of the Income-tax Act, 1961 The case was selected for scrutiny and the statutory notices duly served on the assessee. A reference was made to the Transfer Pricing Officer (TPO) in order to compute the arm’s length price of the international transactions, the assessee had with its Associated Enterprises (AEs). The TPO made an overall TP adjustment of Rs.1945.16 crores towards the provision of software, technical & consultancy services, interest chargeable from AE, corporate guarantee, and receipt of brand royalty. 

The Assessing Officer passed the final assessment order incorporating the TP adjustment. The Assessing Officer also made various adjustments on the corporate tax brand to arrive at the assessed income of Rs.18752,53,99,510/-. The assessee preferred to appeal before the CIT(A), who gave partial relief to the assessee. Here, the Assessee is in appeal before the Bench. 

After considering the submission, the Bench noted that the Assessee has made a payment to CCI as approved by the Board.  

The Bench stated that in the research program towards which, the impugned payment is made by the assessee, the employees of the assessee would undergo training in the theory of disruptive innovation.

The Bench also stated that the amount is paid under the head “donation”, the actual nature of payment is towards the research program which would benefit the assessee in the long term and the same should be allowed as a deduction under section 37(1).

The Bench mentioned that under the fellowship program, CCI trains the employees of the assessee which as per the program, would help in the future growth of the business of the assessee.

The Bench further expressed that the payment to CCI towards the research program is incurred for the purpose of the assessee’s business and therefore should be allowed as a deduction under section 37(1).

Hence, the Bench partly allowed the Assessee’s appeal. 

Cause Title: M/s Tata Consultancy Services Limited Vs. Deputy Commissioner of Income-tax LTU-1, Mumbai [ITA No.5199/Mum/2019 / 2023-Enterslice-40-ITAT-Mum]

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