SPECTOM ENGINEERING PVT. LTD. vs. A.C.I.T.

O/TAXAP/333/2002 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 333 of 2002 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ SPECTOM ENGINEERING PVT. LTD.....Appellant(s) Versus A.C.I.T.....Opponent(s) ================================================================ Appearance: MR JP SHAH, MR MJ SHAH, ADVOCATE for the Appellant(s) No. 1 MR KM PARIKH, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Date : 09/12/2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1. This is an appeal by the appellant- assessee, seeking to challenge the order of the learned ITAT, Ahmedabad Bench ‘A’ (for short, ‘the Tribunal’), Dated : 03.06.2002, rendered in Page 1 of 9

O/TAXAP/333/2002 JUDGMENT ITA No.5914/Ahd/1994 for the A.Y. 1990-91, whereby, the Tribunal partly allowed the appeal of the respondent-Revenue. 2. The brief facts of the case are that the assessee filed its return of income on 30.12.1991, declaring its total income at Rs.1,55,096/-. Later on, the assessee was issued notices under Sections 143(2) & 142(1) of the Income Tax Act, 1961 (‘the Act’, for brief). At the end of the aforesaid proceedings, the concerned AO, assessed the income of the assessee for

the

year

under

consideration

at Rs.5,86,032/-. Being aggrieved with the same, the assessee approached the learned CIT(A), who partly allowed the appeal of the assessee. Since, the Revenue was not satisfied with the same, it carried the matter before the learned ITAT, wherein, it passed the impugned order. Hence, the present appeal. 3. At the time of admitting the present appeal, this Court framed the following question; “Whether actual research activity is a precondition for claiming allowance under section 35 of the Income-tax Act, 1961?” 4. Mr. Shah, learned Advocate for the appellant-assessee, invited our attention to the Page 2 of 9

O/TAXAP/333/2002 JUDGMENT order of the CIT(A) and, more particularly, Para- 4 thereof, which reads as under; “4. I have considered the facts of the case. The expenditure claimed as a deduction is not allowable under Section 35-D because it relates to amortisation of expenses which may be prior to the commencement or setting up or for the extension of industrial undertaking or setting up a new unit. In this case, the appellant had an existing business and therefore Sec.35- D(1)(i) does not apply. Whether Section 35(1)(ii) is applicable has to be seen with reference to the agreement with TDICI. According to the agreement dated 13.7.90, the appellant company wanted to set up a plant for the manufacture of extrusion cooker plant. For the setting up of the unit, the TDICI agreed to finance the appellant company for certain benefit. The appellant company was to develop the product. In the explanation (a) clause (ii) to Section 35-D the cost of the project is to be worked out when the production of the new unit commences. In this case, the question of commencement of new unit does not arise because the project was abandoned for the lack of finance. The question of allowing the expenditure u/s.35-D therefore does not arise. During the course of appeal it was argued that the expenditure should be allowed u/s.35-D of the I.T. Act. The deduction under Section 35 is on account of expenditure for

scientific

research.

The development of product is a commercial venture and under no condition it can be regarded as expenditure on Page 3 of 9

O/TAXAP/333/2002 JUDGMENT scientific research. The question of any allowance under section 35 therefore does not arise. The only head under which the expenditure is allowable is Section 37 of the I.T. Act. The Supreme Court in Alembic’s case 177 ITR held that any expenditure laid down for the expansion of an existing business is a revenue expenditure and even if a new unit is being started. In this case, the appellant was trying to expand its existing

business

product development

and

manufacture

by developing a new product. The expenditure was thus fully laid for the purpose of business and it was not a capital expenditure. The expenditure has therefore got to be allowed u/s. 37 of the I.T. Act.” 5. Mr. Shah, therefore, submitted that the present appeal be allowed and the question raised in this appeal be answered in favour of the assessee and against the Revenue. 6. Mr. Shah, in support of his submission, placed reliance on the following decisions; (1) “CIT VS. GUJARAT ALUMINUM EXTRUSIONS PVT. LTD.”, [2003] 263 ITR 453; (2) “CIT VS. MASTEK LTD.”, (2013) 263 CTR (Guj) 671; 7. On the other hand, Mr. Parikh, learned Page 4 of 9

O/TAXAP/333/2002 JUDGMENT Advocate for the respondent-Revenue, supported the order of the Tribunal and submitted that there being no merits in the present appeal same be dismissed. 8. We have heard the learned Counsels for the parties and perused the material on record as well as the orders passed by the learned CIT(A) and the Tribunal. 9. Before proceeding with the matter, here, it would be relevant, first, to refer to the decision of this Court in “CIT VS. GUJARAT ALUMINUM EXTRUSIONS PVT. LTD.”(Supra), wherein, this Court has observed as under in Para-16, “16. The object behind the enactment of section 35 of the Act is to encourage research and development activities by the assessee. As an incentive, the legislature has given this benefit by way of deduction in respect of the capital expenditure incurred by the assessee. This is a provision for the benefit of the assessee and if the assessee incurs capital expenditure for the purpose of research and development during the relevant previous year, in our opinion, the revenue should not deprive the assessee of the benefit of deduction under the provisions of section 35 of the Act even if the asset is not put to use for research and development. It is a settled legal position that the provision for exemption or relief should be construed Page 5 of 9

O/TAXAP/333/2002 JUDGMENT liberally and in favour of the assessee. If the section is interpreted in the manner suggested by the standing counsel for the revenue, in our opinion, we would be depriving the assessee of the benefit which legislature desires to give to the assessee.” 10. This Court, further, held in that case that the Tribunal was right in holding that deduction under Section 35(2) of the Act was allowable on capital expenditure for the building which was under construction and not put to use for research and development purpose in the relevant previous year. 11. In “CIT VS. MASTEK LTD.” (Supra), this Court observed and held as under in Paras-25 and 28; “25. It can thus be seen that the term scientific research in the context of the deduction allowable under section 35(1) of the Act would include wide variety of activities. It can also be appreciated that every scientific research need not necessarily result into the ultimate goal with which it may have been undertaken. Often times in the field of research and invention, the efforts undertaken may or may not yield fruitful results. What is to be ascertained is whether any scientific research was undertaken and not whether such scientific research resulted into the ultimate aim for which such Page 6 of 9

O/TAXAP/333/2002 JUDGMENT research was undertaken. It can be easily envisaged that the scientific research undertaken often times would completely fail to achieve desired results. That by itself does not mean that no scientific research was undertaken. What the Legislature desired to encourage by granting deduction under section 35(1) of the Act was a scientific research and not necessarily

only

the

successful scientific research undertaken by an assessee. XXX XXX XXX 28. We are, however, of the opinion that insofar as the second aspect of the matter is concerned, the Tribunal was perfectly justified in holding in favour of the assessee. Section 35(3) of the Act as noticed requires a reference to be made by the Board to the prescribed authority when a question arises as to whether and if so to what extent, any activity constitutes or constituted or any asset is or was being used for scientific research. The decision of the prescribed authority on such a question would be final. In our opinion, therefore, whenever any such question arises, the Assessing Officer cannot decide the issue but must place the issue before the Board who, in terms of section 35(3) of the Act, would refer the question to the prescribed authority. The decision of the prescribed authority would govern the parties. Therefore, if an assessee puts forth a claim of deduction under section 35(1) for expenditure incurred on scientific research and if the Assessing Officer is not inclined to accept such a claim, the question can be stated to have arisen. In such a Page 7 of 9

O/TAXAP/333/2002 JUDGMENT situation, the Assessing Officer cannot take a decision but must seek the opinion of the prescribed authority, We may hasten to add that only when such a question arises that the reference would be competent. For example, if in a given case, the assessee lodges a claim without any supporting material, it cannot be stated that the question has arisen which would require a reference by the Board. Similarly, if the Assessing Officer accepts the claim of the assessee, no such question can be stated to have arisen. We are, however, unable to accept Shri Bhatt's contention that such a question would arise only when the assessment is finally framed and that thereafter the onus would be on the assessee to seek a reference. No such intention is emerging from section 35(3) of the Act. Whenever an Assessing Officer is not inclined to accept the assessee's case for deduction, we fail to see how at that very stage, the question cannot be stated to have arisen.” 12. In the case on hand, the CIT(A) has recorded that the appellant was trying to expand its existing business of product development and manufacture by developing a new product, and thus, the expenditure was fully laid for the purpose of business and it was not a capital expenditure, which is liable to be allowed u/s. 37 of the I.T. Act. 13. In view of the above discussion and in view of the ratio laid down by this Court in CIT Page 8 of 9

O/TAXAP/333/2002 JUDGMENT VS. GUJARAT ALUMINUM EXTRUSIONS PVT. LTD.” (Supra) and “CIT VS. MASTEK LTD.” (Supra), present appeal deserves to be allowed. 14. In the result, present appeal is allowed. The order of the Tribunal, Dated : 03.06.2002, is quashed and set aside. It is, however, clarified that while granting benefit of this judgment, the assessee shall be allowed deduction of only 100 per cent and not 133 per cent. The question raised in this appeal is answered in favour of the assessee and against the Revenue, accordingly. No order as to costs. (K.S.JHAVERI, J.) (K.J.THAKER, J) UMESH Page 9 of 9