TaxTMI 
TaxTMI 
2015 (3) TMI 535
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....s taken up for scrutiny. The assessment was completed under section 143(3) of the Act, vide order dt.28.12.2011 wherein the income of the assessee was computed at Rs. 35,18,17,476 as against returned income of Rs. 2,54,56,986 in view of the following additions / disallowances :- (i) Product Development Expenditure : Rs.27,97,54,476. (ii) Product development expenditure debited to Profit and loss account: Rs.10,25,89,536. (iii) Disallowance u/s.14A r.w. Rule 8D : Rs.1,39,55,097. (iv) Depreciation allowed on product development expenditure treated as an intangible asset : Rs.6,99,38,619. The 'Book Profits' computed u/s.115JB of the Act were computed at Rs. 19,28,02,402 as against the declared amount of Rs. 16,78,47,305 in view of the following adjustments / additions thereto :- (i) Addition of Provision for doubtful debts : Rs. 50,00,000. (ii) Unspecified Deduction claimed : Rs. 60,00,000. (iii)Addl. Disallowance u/s. 14A : Rs. 1,39,55,097. 2.2 Aggrieved by the order of assessment for Assessment Year 2008-09 dt.28.12.2011, the assessee preferred an appeal before the CIT (Appeals) - III, Bangalore. The learned CIT (Appeals) disposed off....
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....ogy Officer' are same as the facts discussed by the Honourable ITAT in its aforementioned order. 2. Brought Forward Loss - Rs. 313,041,618 2.1 The learned CIT(A) erred in confirming the disallowance made by learned AO of the losses brought forward to be set off or carried forward for AY 2008-09 by invoking provisions of section 79. 2.2 The learned CIT(A) erred in holding that the appellant had not satisfied the 51% beneficial shareholding condition stipulated under section 79 of the Act for AY 2005-06 and AY 2006-07 as compared to AY 2008-09. 2.3 The learned CIT(A) and learned AO erred in not accepting the appellant's contention that carry forward and set off of unabsorbed scientific research expenditure was not affected by the provisions of section 79. * The learned CIT(A) erred in not accepting the appellant's contention that the unabsorbed scientific research expenditure has to be treated at par with unabsorbed depreciation based on the principles laid down by the Mumbai Tribunal in the case of Mahyco Vegetable Seeds Ltd. (122 ITD 142). 3. Disallowance under Rule 8D read with Section 14A 3.1 The learned CIT(A) and learned AO erred in making an additional dis....
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....expenditure ('R&D') and an amount of Rs. 10,25,89,536 was shown as debited towards product development expenditure. The break up of the amount of Rs. 10,25,89,536 was as under :- S.No. Nature of Expenditure Amount (Rs.) 1. Design Layout - Components & prototypes. 28,40,03,268 2. Employee Cost - Product Development 3,83,77,962 3. Employee Cost - STPI Division. 5,99,62,782 Total : 38,24,44,012 Less : Amount capitalized during the year. (27,97,54,476) Expenditure incurred / claimed on product development 10,25,89,526 Even though the amount of Rs. 27,97,54,476 was cpaitalised, it was claimed as an admissible deduction u/s.35(1)(iv) r.w.s. 35(2) of the Act in the computation of income. Therefore, in effect, the amount of Rs. 10,25,89,536 was claimed as a revenue expenditure in the profit and loss account, whereas the amount of Rs. 27,97,54,476 though capitalized and not claimed as revenue expenditure in the profit and loss account to arrive at the assessee's net profit, was claimed as a deduction u/s.35(1)(iv) r.w.s. 35(3) of the Act in the computation of income. 5.2.2 The Assessing Of....
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....iture of Rs. 27,97,54,476 claimed u/s. 35(1)(iv) r.w.s. 35(2) of the Act, the learned CIT (Appeals) concurred with the finding of the Assessing Officer and upheld the disallowance, making the following observations :- (i) The assessee itself has treated this expenditure as capital expenditure and hence this part of the argument of the Assessing Officer is not contested by the assessee; (ii) The nature of expenditure creates an intellectual property right which is exploited by the assessee for its prototype production; (iii) The decision of the co-ordinate bench of this ITAT in the assessee's own case for Assessment Year 2002-03 (supra), is distinguishable since the issue before the Bench in that case was only with regard to the distinction between capital and revenue expenditure and the matter of it being excluded as per section 43(4)(ii) was not before the ITAT for adjudication; (iv) The view of the Tribunal that the expenditure was allowable u/s.35(1)(iv) of the Act, was rendered in a different and more general context and the facts of the case for adjudication on the issue of the exception provided for in section 43(4)(ii) of the Act are different from those befo....
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....in connection with the R & D of the telecommunication product. It was therefore contended that the entire expenditure is towards scientific research and qualify for deduction. It was submitted that even if the R&D expenditure is to be considered to be capital expenditure, it should be eligible for deduction under section 35(1)(iv) of the Act. In this context, the learned Authorised Representative placed reliance on the decision of a co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2002-03 (supra) and pointed out that at paras 19 & 20 thereof the Tribunal had held as under :- "19. In the instant case, the benefit is not derived for a period of more than five years. Hence, in the instant case, it cannot be said that the benefit is of enduring nature and the expenditure is to be treated as capital. Accordingly, we hold that the expenditure on prototype development is to be treated as revenue and not as capital. 20. We also find force in the alternative submissions of the learned AR. In view of the case laws relied on by the learned AR, we are of the view that expenditure is allowable u/s.35(1)(iv), even if the same is to be held as capital." ....
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.... business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefits is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. 13. In fact, the Apex Court in the case of Alembic Chemical Works Co. Ltd. Vs. CIT, Gujarat ( 1989 Vol. 177 page 377) held that, it would be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how cannot be said to be the element of the requisite degree of durability and nonephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect into readily pige....
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....nt rendered under section 131 of the Act of the Chief Technical Officer (CTO) to make the point that the facts involved in this year are the same as the facts involved in the earlier years and that the statement of the CTO has been wrongly quoted and interpreted. In this regard the learned Authorised Representative referred to written submissions made on this issue. 5.6.5 The learned Authorised Representative of the assessee also assailed the view of the Assessing Officer and the learned CIT(A) that the issue of the exemption to section 43(4)(ii) of the Act is a new issue in this year and was not before the authorities in earlier years. In this context, the learned Authorised Representative took us through the order of assessment for Assessment Year 2002-03 and the decision of the co-ordinate bench in the assessee's own case for Assessment Year 2002-03 (supra), to make the point that the issue of scientific research expenditure related to the provisions of section 43(4)(ii) of the Act was also before the authorities below in the earlier years. In support of the assessee's contentions, the learned Authorised Representative placed reliance on the following decisions :- ....
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....under :- " 9. It is the specific case of the Revenue that, the amount of Rs. 10.82 Crores spent by the assessee in acquiring an intellectual property is capitalized in the books. Now further amount of Rs. 9,27,34,277 is spent in developing and improving the said product. Therefore, the expenditure on further development of software which is treated as a capital in nature, is also capital in nature. This development is on account of scientific research. The evidence on record shows most of the money is spent towards cost of the employees, who had developed the product "Talisma Enterprise 2.5", multi channel customer relationship management solution, which provides sales, marketing, services, human resources and finance through the medium of e-mail, chat, wireless, fax, phone, etc. to the end users. Therefore, the expenditure in respect of the scientific research, even if it is capital in nature as it was incurred in relation to the business carried on by the assessee under section 35(1)(iv) of the Act, the said expenditure is to be deducted. That is what the Appellate Authority as well as the Tribunal have held. Accordingly, we answer the substantial questions of law in favour....
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....that if the assessee carries out scientific research and is able to obtain IPRs on such research, then he was free to commercially use such IPRs and this is the reason why there is a prohibition u/s.43(4)(ii) of the Act so as to exclude expenditure incurred in the acquisition of rights in or arising out of scientific research. In our view, the aforesaid approach of the authorities below is not correct. The expenditure that is sought to be excluded u/s.43(4)(ii) of the Act is an expenditure which the assessee incurs in acquiring rights in or arising out of scientific research already done by somebody. It is possible that the assessee without carrying out any scientific research, acquires rights in scientific research, arising out of scientific research done by somebody else and claims cost of acquisition of such rights as expenditure on scientific research. It is this kind of expenditure that is sought to be excluded u/s. 43(4)(ii) of the Act in its exclusion clause as " expenditure incurred in acquiring rights in, or arising out of scientific research." It is such type of expenditure carried out by somebody else and such right is acquired by the assessee, that is sought to be disal....
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....sessment Years 2002-03, 2003-04, 2005-06 and 2006-07 from being carried forward. The Assessing Officer has attached the details of the share holding as an Annexure to the order of assessment. 6.2.1 On appeal, before the learned CIT(A), the assessee contended that out of the total amount of Rs. 31,30,41,618 carried forward as loss, an amount of Rs. 28,56,91,922 represents unabsorbed scientific research expenditure which would be considered at par with unabsorbed depreciation and the carry forward of the same cannot be denied. It was submitted by the assessee that the provisions of section 79 of the Act are applicable only to business losses and not for unabsorbed depreciation and therefore the losses to the extent of unabsorbed scientific expenditure should be allowed to be carried forward. In support of its contentions, the assessee placed reliance on the decision of the ITAT, Mumbai Bench in the case of Mahyco Vegetable Seeds Ltd. (2008) 25 SOT 46. 6.2.2 The learned CIT(A), however, did not agree with the contentions of the assessee. He observed that while the decisions cited by the assessee relate to expenses covered by section 35(1)(iv) of the Act and their relation to una....
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....ed in section 79 of the Act. As regards the unabsorbed business losses, it is the contention of the assessee that it has satisfied the provisions of section 79 of the Act regarding the change in shareholding being not more than 51% for the Assessment Years 2005-06 and 2006-07 and therefore the unabsorbed business losses for these two years should be allowed to be carried forward. 6.5.2 The issue under consideration consists of two parts / components, namely, (i) Whether unabsorbed scientific research expenditure should be treated on par with unabsorbed depreciation ? and (ii) Whether there has been a change in shareholding of more than 51% in the earlier years under consideration, as compared to the Assessment Year 2008-09. 6.5.3 As regards the first part / component of the issue, the assessee's contention that the unabsorbed scientific research expenditure is on par with unabsorbed depreciation is based on its reliance on the decision of the ITAT, Mumbai Bench in the case of Mahyco Vegetable Seeds Ltd. (supra). In that case, the expenditure in question was unabsorbed capital expenditure incurred on scientific research claimed as deduction under section 35(1)(iv) of....
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.... to examine the issue in the light of the observations made above after affording the assessee adequate opportunity of being heard and to submit details / submissions required in this regard, which shall be considered. It is ordered accordingly. Consequently, Ground No.2 is treated as allowed for statistical purposes. 7. Ground No.3 : Disallowance under section 14A of the Act. 7.1 In the course of assessment proceedings, the Assessing Officer noted that the assessee has earned dividend income of Rs. 3,14,10,280 which has been claimed as exempt under section 10(34) of the Act. The assessee had added back an amount of Rs. 22,94,435, being 0.5% of the average value of the investment, as disallowance towards expenditure for earning exempt income as per clause (iii) of sub-Rule (2) of Rule 8D of the IT Rules, 1962. The Assessing Officer, however, made disallowance of further amount of Rs. 1,39,55,097 towards interest expenditure to be disallowed under Rule 8D, for the following reasons :- i) the assessee had adequate funds for carrying on the business without approaching the banks for loans. ii) the necessity to go for secured loans has arisen only on account of diversion of....