TaxTMI 
TaxTMI 
2016 (8) TMI 1525
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....n in respect of patent expenditure treated as capital by the department in earlier years and which treatment had attained finality was also to be allowed. 3. The learned CIT (A) erred in confirming the action of the A.O in restricting the claim under section 35(2AB) to Rs. 737.17 lakhs as against the claim of Rs. 750.95 made by the appellant on the ground that it was not approved by Ministry of science and technology (DSIR) to the extent of 13.78 lakhs. 4. The learned CIT (A) failed to appreciate that the appellant has fully demonstrated that the said expenditure incurred were directly necessary to facilitate or carry on scientific research and therefore the parameters of section 35(2AB) were satisfied. 5. The learned CIT (A) erred in confirming the addition of Rs. 13,04,375/- on account purchase of electrical material which was capitalized by the appellant 6. The learned CIT (A) has erred in confirming the addition made by AO which was primarily based on the information received from the sales tax department about particular supplier is indulged in practice of providing bogus purchase bills and the assessee was unable to produce the said supplier before the A.O. 7. The l....
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.... with an alternative plea that in case of treatment of the same as a "Capital expenditure", depreciation of Rs. 10,64,618/-was to be allowed as regards the capitalized value of the "Patent expenses" pertaining to the year under consideration, as well as those for the preceding years. The A.O discarding the contention of the assessee company and being of the view that as per Explanation 3 to Section 32(1)(ii) of the "Act", the patents were covered in the scope and gamut of the definition of intangible assets, therefore the expenses incurred as regards the same was a 'capital expenditure', disallowed the claim of Rs. 20,76,724/- of the assessee company, but on the basis of such recharacterisation of the aforesaid expenditure as a "capital expenditure", allowed a consequential depreciation of Rs. 5,19,181/- on the aforesaid capitalized value of Rs. 20,76,724/- (supra) to the assessee company . (ii). Disallowance of deduction U/s 35(2AB): That during the course of the assessment proceedings the A.O while scrutinizing the claim of the assessee company towards deduction u/s 35(2AB) of the "Act", therein observed that while for the copy of approval received in 'Form 3CM'....
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....paper entries and had only provided the accommodation entries to the assessee company, thus in light of the aforesaid state of facts as they so remained, therein concluded that the assessee company had indulged into booking of 'bogus purchases' in its "Books of accounts". The A.O further adverting to the specific claim of the assessee company that as it had purchased 'fixed assets' viz. electrical material from the aforesaid supplier party, therefore addition of the entire amount of Rs. 13,04,375/-(supra) could not be made in its hands, therein observing that the additions as claimed to have been made by the assessee company towards 'fixed assets' during the year under consideration, on examination were neither found to be reflected in the assets categorised under the head 'electrical fittings', nor under the other heads of assets, thus being of the view that the assessee company had suppressed its income by booking "bogus purchases" of Rs. 13,04,375/-(supra), therein made an addition/disallowance of the said amount in the hands of the assessee company. 3. The assessee company being aggrieved with the assessment framed by the AO carried the matter i....
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....that the information received by the A.O from the investigation wing of the Income tax Department as well as the Sales tax Department, Government of Maharashtra, revealed that M/s Yashita trading company Pvt. Ltd. (supra) was admittedly an accommodation bill provider and no genuine purchases had been carried out by the assessee company from the said concern, therein sustained the adverse inferences drawn by the A.O as regards the genuineness and veracity of the purchase transactions in the hands of the assessee company. The CIT(A) further endorsing the observations of the A.O that as the purchases under consideration from the aforesaid party, as claimed by the assessee company to have been made towards additions in the 'fixed assets' during the year under consideration, on examination were neither found reflected in the assets categorised under the head 'electrical fittings', nor under the other heads of assets, therein rejected the said contention of the assessee company and upholding the order of the A.O, therein sustained the addition of Rs. 13,04,375/- made towards "bogus purchases" in the hands of the assessee company. 4. That the assessee company being aggrie....
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....esult thereof had allowed depreciation on the same, therefore the same would result in amortisation of the expenditure over a period, instead of the same being allowed in the year of incurring of the expenditure. Thus in light of the aforesaid factual background it was averred by the Ld. A.R that the lower authorities had erred in not allowing depreciation as regards the "Patent expenses" which had been capitalised in the preceding years and had wrongly restricted the same only as regards those incurred during the year under consideration. The Ld. A.R in order to fortify his quantification of depreciation at Rs. 10,64,618/-(supra), as against the depreciation of Rs. 5,19,181/-(supra) allowed by the lower authorities, drew our attention to Page 11 of the "APB", wherein the calculation as regards the year wise incurring of expenditure towards patents expenses by the assessee company, on the basis of which the entitlement of the assessee company towards claim of depreciation was computed at an amount of Rs. 10,64,618/-(supra) stood reflected. That on the other hand the Ld. D.R during the course of hearing, on a query by the bench as regards the inconsistent approach adopted by the A.O....
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....wards deduction u/s 35(2AB) was liable to be restricted to the amount approved by the "Prescribed authority". It was thus submitted by the Ld. D.R that the order of the CIT(A) be sustained and the appeal of the assessee company as regards the said issue under consideration be dismissed. 4.2. That the Ld A.R further challenging the sustaining of the addition of Rs. 13,04,375/-(supra) by the CIT(A) as regards 'bogus purchases', therein submitted that the assessee company had carried out purchases of Rs. 13,04,375/- (supra) towards purchase of "fixed assets" (electrical material from the concerned supplier party, i.e M/s Yashita trading company Pvt. Ltd), which inadvertently had been capitalized under the head "Factory building". The Ld. A.R in order to substantiate his aforesaid contention, therein took us through the relevant extracts of SAP placed on record, wherein the said transactions stood reflected. It was thus in the aforesaid factual background submitted by the Ld. A.R that though not admitting, however even if the genuineness and veracity of the purchase transactions under consideration were to be disbelieved by the lower authorities, the resultant disallowance cou....
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....y worded Sec. 32(1)(ii) of the "Act", which reads as under:- "32(1). In respect of depreciation of - (ii).Know how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998" there can be no escape from the conclusion that the "Patent expenses" incurred by the assessee company takes the color and character as that of a capital expenditure, on which capitalized value the assessee company would stand duly entitled towards depreciation, as a result whereof the same would result in amortisation of the said expenditure over a period, instead of the same being allowed in the year of incurring of the expenditure, but however are unable to subscribe to the view of the lower authorities that the entitlement of the assessee company towards depreciation is liable to be restricted only as regards the capitalized value of the patent expenses pertaining to the year under consideration, while for no cognizance is to be taken of the capitalized value of the "Patent expenses" incurred by the assessee company in the preceding years. We are of the considered opinion ....
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....s- Patents", i.e not only as regards the capitalized value of the "Patent expenses" pertaining to the year under consideration, but also as on the Opening W.D.V of those pertaining to the preceding years, to the extent the same had been capitalised in the said preceding years. We thus restore the issue to the file of the A.O with a direction that the entitlement of the assessee company towards deprecation on the capitalized value of the "Patent expenses" be computed and therein given effect to in light of our aforesaid observations, to which the Ld. D.R is in agreement. However, before parting, we are of the view that though the assessee company had drawn our attention to the relevant extract of the assessment order passed in its case u/s 143(3) for the immediately preceding year, i.e A.Y. 2009-10 (Page 64 - 65 of "APB"), wherein it stands reflected that the A.O had allowed depreciation, both on the capitalized value of the "Patent expenses" of Rs. 4,51,282/- pertaining to the said preceding year, as well as the Op. W.D.V of "Patent expenses" amounting to Rs. 24,57,716/- as on 01/04/2008, pursuant whereto the "Op. W.D.V" of the "Block -Patent expenses" as on 01/04/2009, i.e for the....
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....or building) as approved by the prescribed authority, is entitled for deduction contemplated therein, subject to the condition that it enters into an agreement with the prescribed authority for co-operation in such research & development facility and audit of the accounts maintained for that facility, and submits with the "Prescribed authority" by 31st day of October of the relevant assessment year the details as regards the expenditure incurred by it on the in-house research and development facility, on the basis of which the "Prescribed authority" records its approval and submits the details of the expenditure approved to the "Director General (Exemptions)" in "Form 3CL". Thus a bare perusal of Sec. 35(2AB) reveals that what is required to be approved by the "Prescribed authority" is the "in-house R & D facility", and not the "amount of expenditure incurred by R&D approved unit". That for the sake of clarity the relevant extract of Sec. 35(2AB) is reproduced as under:- "Sec. 35(2AB). Where a company engaged in the business of .........incurs any expenditure on scientific research............on in-house research and development as approved by the prescribed authority then, there....
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....nt entitled for claim of deduction u/s 35(2AB) of the "Act", in itself pertained to the premises at which the research and development facility was located, as well as the legal and professional charges had been incurred in the course of and to facilitate the scientific research, therefore the said nature of the expenses read in light of the underlying purpose behind incurring of the same, ipso facto established beyond any scope of doubt the inextricable nexus of the said expenses and the scientific research activities of the assessee company, as regards which no infirmity had ever been pointed out by the A.O. The Ld. A.R in support of his aforesaid contention placed reliance on the order of a coordinate bench of the Tribunal in the case of :- USV Ltd. Vs. DCIT, Central Circle-32, Mumbai (2012) 24 taxmann.com 218 (Mum) , wherein it was held: "The repairs, rent, etc., the expenditure incurred relating to R & D premises cannot form part of cost of land or building. In the absence of any fact that the said claim of the assessee aggregating to Rs. 62,00,689/- , is not the expenditure on rents, rates and taxes relating to R &D premises, we are of the considered view that the said ex....
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.... the case and though find ourselves to be in agreement with the lower authorities that the assessee company had failed to have effected strict compliance of the directions of the A.O, and majority of the queries and compliances sought for by the A.O did never see the light of the day, thus it could safely be held that the assessee company had failed to discharge the onus as stood cast upon it as regards proving the genuineness and veracity of the purchase transactions under consideration, but thereafter the lower authorities before arriving at any conclusion, remained under a statutory obligation to consider the explanation of the assessee company, to the extent the same was made available on record, and on the said basis ought to have arrived at a logical conclusion. However, we find that the A.O dealing with the alternative contention of the assessee company that as it had purchased "fixed assets" (i.e electrical material from the aforesaid supplier party, i.e M/s Yashita trading company Pvt. Ltd), and thus if adverse inference as regards the genuineness and veracity of the said purchase transactions were to be drawn, even then the addition was liable to be restricted only as reg....