2002 (1) TMI 248 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of claim under section 35(1)(iv) for Rs. 5,46,094.
2. Definition and applicability of "scientific research" under section 43(4) of the Income-tax Act, 1961.
3. Evaluation of the activities undertaken by the assessee as scientific research.

Issue-wise Detailed Analysis:

1. Disallowance of claim under section 35(1)(iv) for Rs. 5,46,094:
The assessee made a claim under section 35(1)(iv) for Rs. 5,46,094, which the Assessing Officer disallowed. The Officer argued that engaging M/s. Buffalo Design Research for designing a machine for threshing tobacco was a business activity and not scientific research. He expressed concerns that allowing such claims could lead to all new projects being treated as scientific research, thus entitling them to deductions under section 35(1)(iv).

2. Definition and applicability of "scientific research" under section 43(4) of the Income-tax Act, 1961:
The Commissioner (Appeals) deleted the addition, observing that the appellant incurred scientific research expenses in subsequent years, including trial and error processes. The Commissioner noted that the expenses were connected to developing new processes and machinery not available in the market, thus qualifying as scientific research under section 35(1)(iv). The Commissioner referenced section 43(4), which defines "scientific research" as activities for extending knowledge in natural or applied science and includes research facilitating business extension.

3. Evaluation of the activities undertaken by the assessee as scientific research:
The learned AR reiterated that the expenditure met the criteria of scientific research under section 43(4). The assessee had engaged M/s. Buffalo Design Research to study existing tobacco processing methods, which were found to be unscientific and inefficient. The company set up an R&D Centre to develop new processes and machinery through trial and error, aimed at improving efficiency and working conditions. The AR argued that the expenditure should be viewed as scientific research and not merely capital expenditure on plant and machinery.

The learned DR supported the Assessing Officer's view, urging the restoration of the original order.

Tribunal's Analysis:
The Tribunal considered the submissions and records, noting that the assessee's business involved threshing "Bidi Patti" tobacco, initially done manually. The assessee engaged Buffalo Design Research to develop machinery for mechanical threshing, which involved trial and error. The Tribunal examined the definitions of "scientific research" and "development" from various dictionaries and the Accounting Standard AS-8. They concluded that the activities undertaken by the assessee were more aligned with "development" rather than "scientific research," as they aimed to perfect machinery for business needs rather than extending knowledge in natural or applied science.

Conclusion:
The Tribunal found that converting the threshing process from manual to mechanical did not amount to scientific research under sections 35(1)(iv) and 43(4). They referenced a similar ITAT decision (Southern Asbestos Cement Ltd. v. IAC) to support their conclusion that the activities did not qualify as scientific research. Consequently, the Tribunal set aside the Commissioner (Appeals)'s order and restored the Assessing Officer's order, disallowing the claim under section 35(1)(iv).