TaxTMI 
TaxTMI 
2014 (11) TMI 445
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....or AY 2006-07, though a copy of the order was handed over to him during the proceedings. 2. In any case, the CIT (A) has disallowed this expenditure u/s 40a(ia). In that case, he should have allowed at least a sum of Rs. 33,63,231 /- being the amount on which tax was deducted and paid before 30.09.2009 being the due date of filing return of income for AY 2009-10." 3. The assessee is a company, engaged in the business of manufacture and trading in specialty silicon formulations. In the course of assessment proceedings, the Assessing Officer noticed that the assessee had shown a sum of Rs. 47,86,285 as commission outstanding. The said sum was claimed as a deduction by the Assessee while computing income from business. The aforesaid sum was payable to the directors as commission. The AO also noticed that the assessee had also paid salary to the directors, which were as follows:- (a) A.Ys. 2007-08 & 2008-0 Rs.35,26,549 (b) A.Y. 2009-10 Rs.12,59,736 Rs.47,86,285 4. The AO was of the view that as per the definition of salary u/s. 17(1)(iv) of the Act, salary includes any fees, commission, perquisites or profits in lieu of or in ....
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.... the AO. 7. Aggrieved by the order of the CIT(Appeals), the assessee has raised ground No.1 before the Tribunal. 8. At the time of hearing, the ld. counsel for the assessee submitted that identical issue came up for consideration in assessee's own case for A.Y. 2006-07 in ITA No.1004/Bang/2011 wherein this Tribunal held as follows:- "Having heard both the parties and having considered the rival contentions, we find that the assessee has been crediting sales commission as and when the liability has arisen by the sale of goods, but the right to receive would accrue o the recipient only when the sale amount is collected and remitted to the assessee. Therefore, there are two dates that are to be considered in this case. The date on which the amount is credited in the accounts of the assessee and the date on which the recipient is eligible to receive the money. No doubt sec.194H provides that the assessee shall be liable to deduct tax at source at the earliest point of either credit or payment. But this situation would arise only when the liability to pay and the right to receive would arise on the same date, but the payment is made subsequently. But in the case before us, the ....
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.... the Act. The provisions of Sec.35(2AB) of the Act read as follows: "Expenditure on scientific research. 35. (2AB)(1) Where a company engaged in the business of biotechnology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of a sum equal to two times of the expenditure so incurred. Explanation.-For the purposes of this clause, "expenditure on scientific research", in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970). (2) No deduction shall be allowed in respect of the expenditure mentioned in clause (1) under any other provision of this Act. (3) No company shall be entitled for deduction under clause (1) unless ....
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....India as having been incurred by the Assessee on carrying out scientific research. In this regard, it may be seen that u/s. 43(4)(ii) the expenditure incurred on scientific research does not include "any expenditure incurred in the acquisition of rights in or arising out of scientific research". It is for this reason that the AO called upon the assessee to show as to how the expenditure incurred did not result in acquisition of rights in or arising out of scientific research. 13. The AO thereafter observed that the Assessee has acquired Substantial Rights from the Expenditure of Rs. 1,32,44,186/- claimed to have incurred on Scientific Research u/s 35(2AB) read with section 43(4)(ii) of the Income Tax Act, 1961, (Act). In this regard the AO referred to the report submitted to the Department of Scientific and Industrial Research [DSIR], New Delhi, Ministry of Science and Technology, Government of India, dated 30th October, 2009, in which the salient features of the scientific research carried out by the Assessee was explained as: 1. New Products Developed i. Silicone Formulations ii. Organic Softeners 2. New Process Developed i. Enzymatic Preparation: Bio-Scourcing ....
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....oresaid expenditure is not allowable u/s. 37(1) of the Act, as it is not revenue expenditure. For the above reasons, the AO disallowed the claim of the assessee for deduction of Rs. 1,32,44,186. 15. Before the CIT(Appeals), the assessee pointed out that the complete break up of the expenses incurred on scientific research had been given before the AO in the form of audit certificate. Appendix I to the certificate gives details of expenses and the same clearly shows that no expenditure had been incurred for purchase of any land or building, which alone is prohibited u/s. 35(2AB)(1) of the Act. The assessee also relied on the decision of the Hon'ble Madras High Court in the case of CIT v. Wheels India Ltd. 336 ITR 513 (Mad), wherein it was held that once prescribed authority approves the R&D facility, expenditure claimed by the assessee has to be allowed as a deduction. The assessee also contended that interpretation placed by the AO on the provisions of section 43(4)(ii) were not correct. In this regard, the Assessee submitted that the provisions of sub-clause (ii) above have to be properly interpreted in the context in which it is used. It was argued that the purpose of higher d....
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....tems in detail to come to his finding, the appellant has chosen to put forward its arguments in generalities and normative interpretations of the requirements of encouraging scientific research. Encouraging of scientific research and commercial usage of the rights acquired over the products/processes are two separate issues involved in this appeal. The appellant has not pointed out how the provisions of Sec 43(4)(ii) do not apply to it, once it is pointed out that the research leads to the acquisition of rights over products, processes and patents. The use of the words "rights in, or arising out of, scientific research" in the Section are clear and unequivocal. In the present case, the AO has clearly pointed out that the prosecution of scientific research by the appellant leads to the acquisition of rights over certain processes and products, and for the strengthening and protection of these rights, the appellant has obtained/is in the process of obtaining due patents. In these circumstances, the arguments raised by the appellant are clearly outside the purview of the legal position as laid down in Sec 43(4)(ii). The disallowance made by the AO is found to be in order, and the same....
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....ut of scientific research carried out by some other person. This is clear from the provisions of section 35(2AB) which talks of "inhouse research & development facilities". This aspect has been clearly overlooked by the revenue authorities. If the interpretation sought to be placed by the revenue is to be accepted, then the benefit sought to be conferred by the provisions of section 35(2AB) would be virtually denied in all cases by invoking the exclusion clause in section 43(4)(ii) of the Act. The interpretation sought to be placed by the Revenue, if accepted, will mean that only if scientific research is unsuccessful, then the deduction u/s. 35(2AB) of the Act, would be allowed. Such a consequence would never have been intended by the legislature. As already stated the object behind the provisions of Sec.35 is to encourage scientific research so that the benefit of such research would be available for all. The contention of the assessee before the CIT(A) that what is sought to be excluded in the exclusion clause of section 43(4)(ii) is only expenses incurred after the assessee successfully completes scientific research and seeks to acquire ownership rights over such scientific res....
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....ken under a programme approved in this behalf by the prescribed authority, then- (a) there shall be allowed a deduction of a sum equal to two times the sum so paid ; and (b) no deduction in respect of such sum shall be allowed under any other provision of this Act : Provided that the prescribed authority shall, before granting approval, satisfy itself about the feasibility of carrying out the scientific research and shall submit its report to the Principal Director General or Director General in such form as may be prescribed. Explanation 1.-The deduction, to which the assessee is entitled in respect of any sum paid to a National Laboratory, University, Indian Institute of Technology or a specified person for the approved programme referred to in this sub-section, shall not be denied merely on the ground that, subsequent to the payment of such sum by the assessee, the approval granted to,- (a) such Laboratory, or specified person has been withdrawn; or (b) the programme, undertaken by the National Laboratory, University, Indian Institute of Technology or specified person, has been withdrawn.] Explanation 2.-For the purposes of this section,- (a) "National....
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....he Act. The AO disallowed the claim of the assessee for deduction on the ground that the assessee did not establish that the contribution does not create acquisition of rights in or arising out of scientific research, as mentioned in the exclusion clause of section 43(4)(ii) of the Act. The ld. CIT(A) confirmed the order of the AO. Hence ground No.III by the assessee. 23. We have heard the rival submissions which are identical to the submissions made in ground No.II. We have discussed similar issue regarding applicability of exclusion clause in the definition of Scientific Research as given in Sec.43(4)(ii) of the Act while adjudicating ground No.II. The reasons given therein will apply to the claim for deduction contested by the Assessee in Gr.No.III. For the reasons stated therein, we hold that the expenditure in question is in the nature of expenditure on Scientific Research as laid down in Sec.35(1)(ii) and 35(2AA) of the Act. We also uphold the stand of the Assessee that the question whether the expenditure is capital or revenue is not relevant as what is given by the Assessee is a contribution and that cannot be said to be capital expenditure. In any event under Sec.35(1)(....
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....re held to be unconstitutional by the Calcutta High Court in Exide Industries, 292 ITR 470 (Cal), but the aforesaid decision of the Hon'ble Calcutta High Court has been stayed by the Hon'ble Supreme Court on an appeal filed by the revenue. In the given circumstances, the ld. CIT(A) confirmed the order of the AO and disallowing the claim of the assessee for deduction. 27. Before us, the ld. counsel for the assessee submitted that identical issue had come up for consideration in assessee's own case in A.Y. 2008-09 in ITA No.117/Bang/2012 and this Tribunal by order dated 14.12.2012, following the decision of the Hon'ble Supreme Court in the case of BEML (supra) and the decision of Hon'ble Calcutta High Court in the case of Exide Industries (supra) held that claim of the assessee is to be allowed. 28. We have considered the submissions of the ld. counsel for the assessee and are of the view that decision of the Tribunal rendered in assessee's own case for the A.Y. 2008-09 will not be of any help to the case of the assessee. The Tribunal in that A.Y., proceeded on the basis that section 43B(f) of the Act had been held to be unconstitutional by the Hon'ble Calcutta High Court in th....
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....vehicles on the terms & conditions contained in the agreement. Article 2 provides that LPFM will render fleet management services to the assessee. Article-2.2 clause (iii) of the Agreement provides as follows: "Registration of vehicles with Transport Authorities- LPFMI shall assist in completing the formalities of registration of the vehicle. The vehicle shall be registered as required under the Motor Vehicles Act, 1988 ('The Motor Vehicles Act") and Rules framed thereunder, in the name of the client and LPIN shall be registered therein as the financier under this Master Agreement and the client shall be fully liable and responsible for all the obligations, liabilities and duties as provided under the Motor Vehicles Act or under any other law or instrument pertaining to the use of the Vehicle. However, this shall not in any way affect the absolute ownership of LPIN on the vehicles and shall not confer upon the client any right other than that of lessee of the Vehicle." 31. The Assessee assigned vehicles that were claimed to have been taken on lease from LPIN, to its employees as per details contained in a chart set out in para 14.5 of the order of the AO. The Chart lists out ....
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....ed by the Tenor of Contract between the Lessor and the Lessee. The AO was of the view that in the case of the Assessee the Lease Agreement has been drafted to circumvent the provisions of Income Tax Act, 1961 from which both, M/s Lease Plan Fleet Management (India) Private Limited, New Delhi, and the Assessee Company will benefit mutually. In this regard, the AO also observed that the Assessee claims the entire payment of Rs. 29,35,608/- including the cost of the Vehicles of Rs. 16,52,020/- and the Interest of Rs. 12,83,588/- as Revenue Expenditure. In the case of LPIN, depreciation on Vehicles will be claimed though the Asset does not belong to it. This will in effect reduce the tax liability of both the Entities by claiming Non-Genuine Expenditure. The AO finally concluded on this issue as follows: "14.15. The above Expenditure of Rs. 16,52,020/- towards the cost of the Vehicles and an amount of Rs. 12,83,588/- towards Perquisites are to be part of Form 16 of the Individual Employees and Tax Deducted at Source accordingly. The Assessee Company has Not been able to furnish the copies of Form 16 of the Above Employees to Evidence that the above Expenditure are Reflected as Perqu....
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....the provisions of that Act, the lessee, who enjoys only special and not general property the vehicle, is the owner. In the present case, the assessee, as the lessee, being the person in possession of the vehicle has been entered as the registered owner of the vehicle in the registration certificate which is for the limited purpose of the Motor Vehicles Act to enable the police to take necessary action in the event the vehicles are misused for illegal purpose or get involved in an accident, etc. This does not mean that the assessee is the de facto owner. 37. Our attention was invited to the relevant terms as per Article 2.2 of the lease deed, which were summarized as follows:- (1) The lessor (i.e. Lease Plant Fleet Management (India) Pvt. Ltd) shall arrange for the acquisition of the vehicle. (2) The said lessor shall also arrange for the insurance, the premium in respect of which shall be borne by them and that claims if any, from the insurance company shall be paid to the lessor or designated authorized workshops and not to your appellant the lessee. (3) It is also made clear in the agreement that the registration of the vehicle is in the name of the lessee only for th....
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....s required to be mandatorily followed by the assessee in the absence of any other specific provisions for not allowing the same under other provisions of Sections 28 to 44 of the Act. 41. The learned DR relied on the order of the Revenue authorities. 42. We have given a very careful consideration to the rival submissions. A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time. A lease can be either a finance lease or an operating lease. A finance lease is a lease that transfers substantially all the risks and rewards incident to ownership of an asset. An operating lease is a lease other than a finance lease. In an operating lease the payments made for right to use the vehicle are treated as rent. In a finance lease the payments made to the lessor are treated as interest. The lessor is entitled to claim depreciation in an operating lease. In a finance lease the lessee will be able to claim depreciation as owner of the asset leased. There are a series of decisions of Hon'ble High Courts/Supreme Court explaining the nature of the hire-purchase agreement and mostly these....
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....the second transaction is not taxable, but it is so because the customer is ordinarily not a dealer within the meaning of the Act, but they contend that inasmuch as under that transaction the appellants become transferees of the rights of the customer in the vehicle under the sale letter, when by the operation of cl. 6 of the hire-purchase agreement the rights of the appellants are extinguished, there results a sale in favour of the customer which is taxable under the Act. The question was with regard to exigibility to tax of what the State of Kerala contends is a sale resulting from the payment of all the instalments under the hire-purchase agreement. The company submitted that execution of a "sale letter" by the customer acknowledging sale of the vehicle to them does not create in them any right of ownership, the "sale letter" being merely one of a set of documents under which arrangement for granting a loan and for ensuring repayment of the money advanced by the appellant's is made. The company contended that they do not become owners of the vehicle under the "sale letter", that the true effect of the transaction on the execution of the nine documents is to hypothecate the v....
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.... may be the form of the documents. An owner of goods who purports absolutely to convey or acknowledges to have conveyed goods and subsequently purports to hire them under a hire-purchase agreement is not stopped from proving that the real bargain was a loan on the security of the goods. If there is a bona fide and completed sale of goods, evidenced by documents, anterior to and independent of a subsequent and distinct hiring to the vendor, the transaction may not be regarded as a loan transaction, even though the reason for which it was entered into was to raise money. If the real transaction is a loan of money secured by a right of seizure of the goods, the property ostensibly passes under the documents embodying the transaction, but subject to the terms of the hiring agreement, which become part of the buyer's title, and confer a licence to seize. When a person desiring to purchase goods and not having sufficient money on hand borrows the amount needed from a third person and pays it over to the vendor, the transaction between the customer and the lender will unquestionably be a loan transaction. The real character of the transaction would not be altered if the lender himself....
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....re installments and complying with the other terms of the agreement. The Assessee (client) has no other rights. On a consideration of the terms of the Agreement between the parties, we are of the view that the lease in question is an operation lease and therefore the Assessee would be entitled to claim the lease rentals as deduction as revenue expenditure. The conclusions to the contrary by the revenue authorities are neither correct in law nor on facts. We therefore allow Gr.No.V raised by the Assessee. 44. Consequently, the appeal by the assessee is partly allowed. ITA 1578/B/13 45. Ground No. I raised by the assessee reads as follows:- "Disallowance of a sum of Rs. 5,213 under Section 14A read with Rule 8D, said to be 0.5% of the average investment in shares 1. The CIT (A) has erred in upholding the disallowance of Rs. 5,213/- in connection with exempt dividend income as both authorities have not found that any expenditure was incurred at all in earning this exempt income. The fact that the investment was made out of owned funds was upheld by the Commissioner of Income Tax (Appeals)-III in his appellate order relating to the AY 2006-07. This has not been followed ....