2008 (8) TMI 580 - HC - Income Tax

Scientific Research Expenditure definition of scientific research not restricted to fields of applied or natural science but includes any scientific research which may lead to or facilitate extension of business Activity of import of machine and indigenizing and improving it to suit Indian market assessee entitled for deduction

Summary

Issues:
1. Whether the Tribunal was correct in holding that the definition of scientific research under section 43(4) is not relevant to claim expenditure under section 35?
2. Whether the Tribunal was correct in allowing the deduction for expenditure of a capital nature when it was not incurred for the existing business?

Analysis:

Issue 1:
The case involved the deduction claimed by an assessee for expenditure on scientific research related to the business of manufacturing and marketing an automatic coffee machine. The Assessing Officer disallowed the claim, but the Commissioner of Income-tax (Appeals) partially accepted it. The Revenue appealed to the Tribunal, which rejected the claim, stating that the definition of scientific research in section 43(4) is not connected to the deduction under section 35. The High Court analyzed the definitions of scientific research under sections 35 and 43(4) and held that the definition in section 43(4) is relevant to decide the claim under section 35. The Court emphasized that the definition of scientific research is inclusive, not limited to specific fields, and any research facilitating an extension of business falls within its ambit.

Issue 2:
Regarding the deduction for expenditure of a capital nature, the Revenue contended that no scientific research, as defined in section 35(1)(iv), was conducted, and the deduction should not have been allowed. The Court disagreed, citing a previous judgment that as long as the expenditure is used for scientific research related to the business, it qualifies for deduction. The Court further explained that systematic investigation based on science into materials and sources constitutes scientific research. The Court concluded that the assessee's activities aimed at improving the imported machine for the Indian market constituted scientific research, making them eligible for deduction under section 35(1)(i) and (iv).

Prescribed Authority Contention:
The Revenue raised a contention that only the prescribed authority under section 35(3) can decide what activity constitutes scientific research. However, the Court noted that this contention was raised for the first time during the hearing and not earlier in the proceedings. The Court also examined a judgment from the Allahabad High Court, which highlighted that the assessing authority has the power to decide on the claim for deduction for scientific research without referring it to the Board or prescribed authority. The Court concluded that section 35(3) did not apply to the case, and the assessing authority was competent to decide on the deduction claim.

In conclusion, the High Court rejected the appeal filed by the Revenue, upholding the decision that the assessee was entitled to claim the deduction for expenditure on scientific research related to their business activities.