TaxTMI 
TaxTMI 
2000 (6) TMI 132
X X X X Extracts X X X X
X X X X Extracts X X X X
.... has erred in law and on facts in allowing the deductions under s. 80-O of the IT Act, 1961 amounting to Rs. 52,85,620 to the assessee company without appreciating the fact that the patents were in the name of Shri Rakesh Goel and not in the name of the company i.e. M/s S.K. Dynamics (P) Ltd. (2) The order of learned CIT(A) be set aside and that of the AO be restored. 2. Common grounds have been raised by the assessee with regard to decline of deduction under s. 80-O of the Act, in both the asst. yrs. 1999-2000 and 2002-03. Rival contentions have been heard and record perused. The brief facts of the case are that the assessee, M/s S.K. Dynamics (P) Ltd., was deriving income from research, development of patents and design, prototype manufacturing and production of electro-mechanical systems. The AO found that the assessee had following two patents only: (i) US patent: Control system for permanent magnet &....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ototype development facilities to meet research and development requirements. Further, in cl. 4 of para B of memorandum of association and article of association of the assessee having the sub-heading The Objects Incidental Or Ancillary To The Attainment Of The Main Object, it is stipulated as under: To sell and to receive royalty on embedded software in any form developed by the company which does not employ any manufacturing process. Hence, as per AO, since the inception of the assessee company not only a clear separate identity was conceptualized but also it was resolved that the assessee company would sell and receive royalty on embedded software in any form developed by the company. Hence, in view of the abovenoted facts, and the legal position in respect of the company being a separate person, it was held by the AO that the identity of the company cannot be coalesced with that of Shri Rakesh Goyal. individual, notwithstanding the fact that Shri Rakesh Goyal was the managing director of the company. 5. The AO also observed that the term of appointment and the powers to be exercised by the managing director as well as the terms of remuneration to be paid to the managing d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lso given categorical finding regarding fulfilment of all the conditions for claim of deduction as provided under s. 80-O of the Act. With regard to the quantum of deduction to be allowed out of the receipt in convertible foreign exchange, the CIT(A) directed the AO to take the net receipts after reducing 15 per cent of the total resources utilized for earning the receipt, while allowing deduction under s. 800 of the Act. 9. Aggrieved by the above order of the CIT(A), the Revenue is in appeal before us. 10. It was contended by the learned Departmental Representative Shri BP Mishra that patents were in respect of the invention made by Shri Rakesh Goyal and the assignee of the same was ADI, therefore, Rakesh Goyal was entitled to have the benefit of deduction under s. 80-O of the Act and not the assessee company. He further placed reliance on the order of the AO. 11. On the other hand, learned Authorised Representative, Shri KP Garg submitted that assessee company was set up in the year 1992 for pursuing research and developed (R&D) projects in the area of electro-mechanical engineering digital signal processing, power electronics and systems engineering. It was duly recogni....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the company and was employed by the assessee company as scientist. The patents so developed by the employee, Shri Rakesh Goyal, was for and on behalf of the assessee company. The assessee company has paid to Shri Rakesh Goyal for the services rendered by him, during the process of search, invention, physical resources of the assessee company like laboratory and equipments were used. There was an agreement between the assessee company and Shri Rakesh Goyal, according to which assessee company alone was the beneficial owner of the patents so developed by Shri Rakesh Goyal. Since the assessee company was an artificially created entity, only human being can become an inventor and not any company. A detailed finding has been recorded by the CIT(A), which is as per material on record, to the effect that beneficial ownership of the patents and designs vested with the assessee company and not with Shri Rakesh Goyal. As per provisions of s. 80-O for claiming deduction, the income should be derived by the assessee including a company who is a resident in India and such income should be received from Government of a foreign State or a foreign enterprise, as a consideration for use outside I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nion which did not empower the AO to reopen the completed assessment, when the primary facts necessary for assessment were fully and truly disclosed. For this proposition, he relied on the decisions of Hon'ble Supreme Court in the cases of CIT vs. Dinesh Chandra H. Shah (1971) 82 ITR 367 (SC) and CIT vs. Simon Carves Ltd. 1976 CTR (SC) 418 : (1976) 105 ITR 212 (SC) and Swedish East Asia Co. Ltd. vs. IAC (1989) 79 CTR (Cal) 249 : (1989) 180 ITR 47 (Cal). Learned Authorised Representative further submitted that in the instant case, the AO has reopened the completed assessment just to re-examine and review the completed assessment to find out some more facts to enable the AO to determine whether any income has escaped assessment, whereas s. 147 authorises the AO to reassess any income which has escaped assessment on the basis of positive material. As per learned Authorised Representative, it does not authorize him to review and re-examine the case, even if a different view has been taken in any subsequent years or as per subsequent information with the AO. Under the provisions of s. 147, the AO is not authorized to rectify every mistake committed by the predecessor or himself while ma....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ate reassessment proceedings where income has escaped assessment. 18. In the instant case, we have already decided the issue of deduction under s. 80-O on merits, in favour of the assessee, therefore, technical ground raised by the assessee regarding validity of reopening has become infructuous. 19. In the result, the cross-objection filed by the assessee is being infructuous, disposed of accordingly. ITA No.1700/Del/2005: 20. The appeal filed by the Revenue bearing ITA No. 1700/Del/05 relates to asst. yr. 2001-02, wherein following grounds of appeal have been raised: (1) That the learned CIT(A) has erred in law and on the facts of the case in treating the capital expenditure to be of revenue nature appreciating the fact that neither the projects, except Analog Devices, were complete nor there was any nexus between the amount of expenditure incurred and the profits to be earned in subsequent years, if any. (2) That the learned CIT(A) has erred in law and on facts of the case in ignoring the provisions of s. 35(1)(iv) of the IT Act, 1961 which state that the expenditure of capital nature can be allowed as deduction only if it is related to business. (3) That the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....der where he remarked, The income declared by the assessee during the year under consideration is by way of manufacturing/sale of E-Cycle and various other products, receipts in foreign currency in the form of royalty, interest income, etc. The assessee has been working on a number of projects during the year, but receipt in foreign currency is only from one project, namely, Analog Devices Inc.(ADI). Further, the AO remarks at para 4.1 of the order at p. 6, the reply of the assessee has been considered. The assessee itself admitted that remaining expenditure i.e. 92 per cent was spent towards sales as per P&L a/c and ongoing R&D work for which the patents were pending or R&D work had not finished. 22. Before the AO, the assessee has furnished copy of audit report under s. 44AB, wherein cl. 8(a) specifies the nature of the assessee's business. Explanation on the nature of business was also filed vide letter dt. 27th Nov., 2002 and copy of certificate of approval as R&D company under s. 80-IB of the Act was also filed. On the basis of these documents, the AO has duly accepted the fact that the assessee is an R&D company. As an R&D company, its nature of activity is not just materi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e. The assessee's method of accounting is consistent with the one followed in preceding years. 24. The action of the AO in interpreting the provisions of s. 35 was also misplaced. According to s. 35(1)(i) any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business of the assessee should be allowed as a deduction. Explanation found below s. 35(1)(i) further provides for allowing even the expenditure on payment of salary on purchase of materials for use in scientific research, even if incurred prior to commencement of business. The provision allows for deduction of a scientific research expenditure even if the assessee is not entirely engaged in the business of scientific research but carries out such research in connection with its business. However, in the instant case, the assessee company was solely engaged in the business of scientific research, therefore, any business expenditure that it incurs, would be expenditure on scientific research related to its business hence allowable under s. 35(1) of the Act. Even if the AO takes the stand of treating the said expenditure as capital expenditure, even then s.....