2006 (6) TMI 415 - AT - Income Tax

Scientific research expenditure, Deductions - Royalty, etc., from certain foreign enterprises

Issues Involved:
1. Deduction under section 80-O of the Income-tax Act, 1961 for assessment years 1999-2000 and 2002-03.
2. Validity of reassessment proceedings under section 147 of the Act for assessment year 1999-2000.
3. Treatment of capital expenditure as revenue expenditure for assessment year 2001-02.

Detailed Analysis:

1. Deduction under section 80-O of the Income-tax Act, 1961:

The revenue challenged the order of the Commissioner of Income-tax (Appeals) [CIT(A)] allowing deductions under section 80-O amounting to Rs. 51,25,370 and Rs. 52,85,620 for assessment years 1999-2000 and 2002-03, respectively. The Assessing Officer (AO) had denied the deductions on the grounds that the patents were in the name of Shri Rakesh Goel and not the assessee company, M/s. S.K. Dynamics Pvt. Ltd. The AO argued that the patents were the property of Shri Rakesh Goel individually and not the company, thus disqualifying the company from claiming the deduction.

The CIT(A) found that the royalties received by the assessee company from M/s. Analog Device Inc., USA (ADI) were for patents and designs developed by the company under a development, production, and licensing agreement dated 14-5-1995. It was noted that Shri Rakesh Goel, as the Managing Director and scientist of the company, contributed his skills and labor, but the patents were developed using the company's resources. The CIT(A) concluded that the beneficial ownership of the patents vested with the assessee company, fulfilling the conditions for deduction under section 80-O.

Upon appeal, the Tribunal upheld the CIT(A)'s findings, agreeing that the patents were developed by the company and the income was derived from foreign exchange as consideration for the use of patents outside India. The Tribunal emphasized that the beneficial ownership of the patents rested with the company, and the conditions stipulated under section 80-O were met.

2. Validity of reassessment proceedings under section 147 of the Act:

The assessee filed a cross-objection for assessment year 1999-2000, challenging the reassessment proceedings initiated under section 147. The assessee argued that the reassessment was based on a mere change of opinion without any new material, which is not permissible under the law. The assessee cited various judicial precedents, including decisions from the Supreme Court and High Courts, to support their contention that reassessment cannot be initiated merely to review or re-examine the completed assessment.

The Tribunal, however, found that since the issue of deduction under section 80-O was already decided on merits in favor of the assessee, the technical ground regarding the validity of reopening had become infructuous. Consequently, the cross-objection was disposed of as infructuous.

3. Treatment of capital expenditure as revenue expenditure:

For assessment year 2001-02, the revenue appealed against the CIT(A)'s decision to treat certain capital expenditures as revenue expenditures. The AO had disallowed 92% of the expenditure incurred by the assessee on various projects, treating them as capital expenditures since the projects were not completed during the year and the future revenue was uncertain.

The CIT(A) allowed the claim, noting that the assessee was a Research & Development (R&D) company engaged in scientific research, and the expenditures were incurred in the course of its business activities. The CIT(A) observed that the expenditures were revenue in nature and were consistent with the accounting standards and past practices of the company.

The Tribunal upheld the CIT(A)'s findings, emphasizing that the nature of the assessee's business as an R&D company justified the treatment of the expenditures as revenue. The Tribunal noted that the expenditures were incurred to earn revenue and not to create capital assets. The Tribunal also referenced relevant provisions and judicial precedents supporting the deduction of scientific research expenditures, even if the projects were ongoing and not yet completed.

Conclusion:

The appeals filed by the revenue for assessment years 1999-2000, 2002-03, and 2001-02 were dismissed, and the cross-objection filed by the assessee for assessment year 1999-2000 was disposed of as infructuous. The Tribunal upheld the CIT(A)'s decisions, allowing the deductions under section 80-O and treating the expenditures as revenue in nature, thereby affirming the beneficial ownership of the patents with the assessee company and the validity of the scientific research expenditures.

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