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TMI Blog2000 (6) TMI 132X X X X Extracts X X X X X X X X Extracts X X X X ..... 0-O of the IT Act, 1961 amounting to Rs. 52,85,620 to the assessee company without appreciating the fact that the patents were in the name of Shri Rakesh Goel and not in the name of the company i.e. M/s S.K. Dynamics (P) Ltd. (2) The order of learned CIT(A) be set aside and that of the AO be restored. 2. Common grounds have been raised by the assessee with regard to decline of deduction under s. 80-O of the Act, in both the asst. yrs. 1999-2000 and 2002-03. Rival contentions have been heard and record perused. The brief facts of the case are that the assessee, M/s S.K. Dynamics (P) Ltd., was deriving income from research, development of patents and design, prototype manufacturing and production of electro-mechanical systems. The AO found that the assessee had following two patents only: (i) US patent: Control system for permanent magnet Synchronous motor (ii) US patent: Gate driver and hysteresis circuit. 3. The assessee has shown the following patents as pending for approval: (1) US patent pending: Apparatus and method for generating gravitational force/gravitational field. (2) Indian patent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per AO, since the inception of the assessee company not only a clear separate identity was conceptualized but also it was resolved that the assessee company would sell and receive royalty on embedded software in any form developed by the company. Hence, in view of the abovenoted facts, and the legal position in respect of the company being a separate person, it was held by the AO that the identity of the company cannot be coalesced with that of Shri Rakesh Goyal. individual, notwithstanding the fact that Shri Rakesh Goyal was the managing director of the company. 5. The AO also observed that the term of appointment and the powers to be exercised by the managing director as well as the terms of remuneration to be paid to the managing director, were explicitly stipulated in the memorandum of association and article of the association of the assessee company. As regards the assessee's condition that A genuine remuneration for this technical task in shape of commission for technical development etc. has to be paid by M/s SK Dynamics (P) Ltd., the AO noticed that the payment of remuneration cannot make the company owner of the patents which are the property of Shri Rakesh Goyal, notwi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the CIT(A), the Revenue is in appeal before us. 10. It was contended by the learned Departmental Representative Shri BP Mishra that patents were in respect of the invention made by Shri Rakesh Goyal and the assignee of the same was ADI, therefore, Rakesh Goyal was entitled to have the benefit of deduction under s. 80-O of the Act and not the assessee company. He further placed reliance on the order of the AO. 11. On the other hand, learned Authorised Representative, Shri KP Garg submitted that assessee company was set up in the year 1992 for pursuing research and developed (R D) projects in the area of electro-mechanical engineering digital signal processing, power electronics and systems engineering. It was duly recognized by the Department of Scientific and Industrial Research, Ministry of Science Technology, Government of India, as an in-house R D unit. He further observed that in recognition of and in the course of R D activities, the assessee company has won several prestigious awards. The deduction under s. 80-O was consistently allowed by the Department in earlier years and there was no change in the facts and circumstances during the year under consideration, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , according to which assessee company alone was the beneficial owner of the patents so developed by Shri Rakesh Goyal. Since the assessee company was an artificially created entity, only human being can become an inventor and not any company. A detailed finding has been recorded by the CIT(A), which is as per material on record, to the effect that beneficial ownership of the patents and designs vested with the assessee company and not with Shri Rakesh Goyal. As per provisions of s. 80-O for claiming deduction, the income should be derived by the assessee including a company who is a resident in India and such income should be received from Government of a foreign State or a foreign enterprise, as a consideration for use outside India of any patent, invention, design or registered trademark. Such income should be in convertible foreign exchange or should be received outside India and converted outside India in convertible foreign exchange and should be brought into India by or on behalf of the assessee in accordance with law within six months from the end of the previous year or within such extended time as competent authority may allow in this regard. However, for claiming of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned Authorised Representative further submitted that in the instant case, the AO has reopened the completed assessment just to re-examine and review the completed assessment to find out some more facts to enable the AO to determine whether any income has escaped assessment, whereas s. 147 authorises the AO to reassess any income which has escaped assessment on the basis of positive material. As per learned Authorised Representative, it does not authorize him to review and re-examine the case, even if a different view has been taken in any subsequent years or as per subsequent information with the AO. Under the provisions of s. 147, the AO is not authorized to rectify every mistake committed by the predecessor or himself while making assessment for earlier years. In support of his contention reliance was placed on the various decisions of High Courts reported as CIT vs. B.A. Rajakrishnan (1996) 136 CTR (Ker) 120 : (1997) 226 ITR 323 (Ker), CIT vs. Sun Engg. Works (P) Ltd. (1992) 107 CTR (SC) 209 : (1992) 198 ITR 297 (SC), s. Hariniwas Chowdry vs. Asstt. CIT (2000) 246 ITR 256 (Mad) and Arjun Singh vs. Director of IT (2000) 159 CTR (MP) 53 : (2000) 246 ITR 363 (MP). As per learned Au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Revenue bearing ITA No. 1700/Del/05 relates to asst. yr. 2001-02, wherein following grounds of appeal have been raised: (1) That the learned CIT(A) has erred in law and on the facts of the case in treating the capital expenditure to be of revenue nature appreciating the fact that neither the projects, except Analog Devices, were complete nor there was any nexus between the amount of expenditure incurred and the profits to be earned in subsequent years, if any. (2) That the learned CIT(A) has erred in law and on facts of the case in ignoring the provisions of s. 35(1)(iv) of the IT Act, 1961 which state that the expenditure of capital nature can be allowed as deduction only if it is related to business. (3) That the learned CIT(A) has erred in law and on facts of the case in not appreciating the fact that the assessee had itself admitted that only 8 per cent of the total expenditure was spent towards the project, namely, Analog Devices which earned the income. (4) That the learned CIT(A) has erred in law and on facts of the case in treating the appellant company as R D company without appreciating the fact that the certificate for the purpose of s. 80-IB(8) was effective f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee has been considered. The assessee itself admitted that remaining expenditure i.e. 92 per cent was spent towards sales as per P L a/c and ongoing R D work for which the patents were pending or R D work had not finished. 22. Before the AO, the assessee has furnished copy of audit report under s. 44AB, wherein cl. 8(a) specifies the nature of the assessee's business. Explanation on the nature of business was also filed vide letter dt. 27th Nov., 2002 and copy of certificate of approval as R D company under s. 80-IB of the Act was also filed. On the basis of these documents, the AO has duly accepted the fact that the assessee is an R D company. As an R D company, its nature of activity is not just material to the facts of the present case, but most important and relevant, conclusive and determinative in deciding the issue whether the expenditure in question was allowable or not. The expenditures debited in the P L a/c which have been disallowed by the AO are of the following heads of accounts: S. No. Head of Account Amount (a) Salary and other benefits 43,60,365 (b) Administrative expenses 50,86,649 (c) Interest and ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut such research in connection with its business. However, in the instant case, the assessee company was solely engaged in the business of scientific research, therefore, any business expenditure that it incurs, would be expenditure on scientific research related to its business hence allowable under s. 35(1) of the Act. Even if the AO takes the stand of treating the said expenditure as capital expenditure, even then s. 35(2)(ia) allows for deduction of said capital expenditure against business income of the assessee. Hon'ble Karnataka High Court in the case CIT vs. H.M.T. Ltd. (1992) 108 CTR (Kar) 215 : (1993) 199 ITR 235 (Kar) has held that deduction under s. 35(l)(iv) r/w s. 35(2) is available in respect of the value of capital represented by work-in-progress and machinery in transit and under erection in the assessee's research division. 25. Hon'ble Allahabad High Court in the case of J.K. Synthetics Ltd. vs. ITO 1975 CTR (All) 256 : (1976) 105 ITR 864 (All) held that if the ITO does not accept the claim of the assessee made under s. 35, he cannot outrightly reject the claim. He is required to refer the matter to the CBDT and the Board has to refer the question to the prescri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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