1988 (2) TMI 92 - AT - Income Tax

Tribunal overturns disallowance of R&D expenditure, orders reassessment &D

The Tribunal allowed the appeal, overturning the disallowance of research and development expenditure under Section 35, directing reassessment of ... Deduction under section 35 for scientific research expenditure - Meaning of 'scientific research' and eligibility for deduction - Allowability of expenditure where results are used by whollyowned subsidiaries - Recognition/approval by Department of Science and Technology as relevant to eligibility - Depreciation on plant and machinery used for scientific research - Assessability of income as 'business' visavis other sources for claiming deductionDeduction under section 35 for scientific research expenditure - Meaning of 'scientific research' and eligibility for deduction - Allowability of expenditure where results are used by whollyowned subsidiaries - Recognition/approval by Department of Science and Technology as relevant to eligibility - Assessability of income as 'business' visavis other sources for claiming deduction - Claim for deduction under section 35 in respect of expenditure incurred on research and development was allowable to the assessee. - HELD THAT: - The Tribunal examined the memorandum of association, annual reports and accounts and accepted that the Corporation's main objects included promoting and developing the electronics industry and undertaking research and development in electronics. The CIT(A)'s earlier finding that the assessee had been recognised by the Department of Science and Technology, and that recognition was not controverted by Revenue, supported that the activities amounted to scientific research. The Tribunal held that 'scientific research' covers activities for extension of knowledge in natural or applied science and that expenditure incurred by the assessee carrying out such R&D, even where results were used by whollyowned subsidiaries, fell within section 35. The Tribunal therefore set aside the disallowance made by the authorities below and allowed the assessee's claim under section 35. [Paras 8, 9]Disallowance of the R&D expenditure was set aside and the claim under section 35 is allowed.Depreciation on plant and machinery used for scientific research - Deduction under section 35 for scientific research expenditure - Depreciation on machinery and plant used for research and development is admissible and requires fresh consideration by the assessing officer. - HELD THAT: - As a corollary to allowing the section 35 claim, the Tribunal held that depreciation on capital items used for R&D must be considered. The CIT(A) had rejected the depreciation claim on the basis that the assessee did not carry on R&D for its own commercial benefit; the Tribunal disagreed with that premise given its primary finding that the assessee was entitled to relief under section 35. The matter was remitted to the assessing officer to ascertain and allow admissible depreciation after verifying that prerequisite conditions are fulfilled and after giving the assessee a reasonable opportunity of being heard. [Paras 10, 11]Assessment order on depreciation is set aside and the assessing officer is directed to determine admissible depreciation and grant relief after verification and opportunity to the assessee.Assessability of income as 'business' visavis other sources for claiming deduction - Consequential adjustment of interest following appellate relief - Adjustments to interest charged under section 139(8) and section 217 are to follow any relief granted; no further direction from the Tribunal is required beyond the CIT(A)'s order. - HELD THAT: - The CIT(A) had directed that the assessing officer allow reduction in interest to the extent the assessee is entitled consequent to any relief granted on appeal, relying on relevant High Court authority. The Tribunal took note of that direction and observed no further direction was necessary, implying that interest adjustments are consequential to the substantive relief and to be computed by the assessing officer accordingly. [Paras 12]No additional direction; interest to be adjusted by the assessing officer consequent to relief allowed.Final Conclusion: The assessee's appeal is allowed: the disallowance of R&D expenditure under section 35 is set aside and the claim allowed; the assessing officer is directed to determine admissible depreciation on machinery and plant used for R&D after verification and opportunity to the assessee; interest adjustments shall be made consequentially by the assessing officer as previously directed. Issues Involved:1. Disallowance of expenditure on research and development under Section 35.2. Denial of depreciation on capital expenditure for research and development.3. Charging of interest under Section 139(8) and Section 217.Detailed Analysis:1. Disallowance of Expenditure on Research and Development Under Section 35:The first ground of appeal concerns the disallowance of Rs. 15,83,209 on account of research and development expenditure claimed under Section 35. The assessee, a corporation set up to promote and develop electronic industries in U.P., argued that the expenditure was for business purposes and hence deductible. The assessing officer denied this claim, stating that the corporation derived income from other sources like interest and dividends, and not from business activities. The officer also noted that the scientific research was not related to the business carried on by the assessee. The CIT(A) upheld this view, asserting that the subsidiary companies were independent units and the research did not relate to the business of the assessee corporation.The assessee contended that Section 35 allows deductions for scientific research, even if the research results are used by subsidiaries. The assessee emphasized that the main object of the corporation was to promote electronic industries, which inherently involved research and development. The assessee cited the Bombay High Court decision in CIT v. National Rayon Corpn. Ltd., which allowed similar deductions under Section 35(1)(i).Upon review, the Tribunal found substantial merit in the assessee's arguments. The memorandum of association clearly outlined the corporation's objective to promote and develop the electronics industry, including research and development activities. The Tribunal held that the expenditure on scientific research was indeed related to the business of the assessee and was therefore deductible under Section 35. The Tribunal also noted that the assessee was recognized by the Department of Science and Technology, which further supported the claim. Consequently, the Tribunal allowed the claim of the assessee.2. Denial of Depreciation on Capital Expenditure for Research and Development:The second issue was the denial of depreciation on the capital expenditure of Rs. 15,83,209 used for research and development. The CIT(A) dismissed this claim, arguing that the assessee did not carry on research and development for its own benefit or as a commercial unit.The Tribunal, however, linked this issue to the first one. Since the Tribunal had accepted that the assessee was entitled to the benefits under Section 35, it logically followed that depreciation on the plant and machinery used for research and development should also be allowed. The Tribunal directed the assessing officer to reassess the depreciation claim, ensuring that all prerequisite conditions were met and providing the assessee a reasonable opportunity to be heard.3. Charging of Interest Under Section 139(8) and Section 217:The final issue was the charging of interest under Section 139(8) and Section 217. The CIT(A) referred to a decision of the Allahabad High Court and directed the assessing officer to allow reductions in interest charges corresponding to any relief granted in the appellate order.The Tribunal found no need for further directions on this matter, as the CIT(A)'s instructions were clear and adequate.Conclusion:In summary, the Tribunal allowed the appeal filed by the assessee, granting relief on all contested grounds. The disallowance of research and development expenditure was overturned, depreciation on related capital expenditure was to be reassessed, and interest charges were to be adjusted in line with the reliefs granted.