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TMI Blog2012 (9) TMI 264X X X X Extracts X X X X X X X X Extracts X X X X ..... research activities? 3. We may notice facts in brief. The respondent assessee M/s. Mastek Ltd. is a company registered under the Companies Act and is regularly assessed to tax. For the assessment years 1992-93, 1993-94 and 1994-95, the assessee claimed certain expenditure, revenue as well as capital, by way of deduction under section 35 of the Income Tax Act, 1961 ('the Act', for short) expended on scientific research. The case of the assessee was that the assessee incurred expenditure of Rs.31,58,882/- in the previous year relevant to the assessment year 1992-93 in setting up a Product Development Centre at Pune. The new product developed at this centre was marketed in the name and style of a package called MAMIS during the financial year 1993-94. On such expenditure, the assessee claimed deduction under section 35 of the Act. In support of such a claim, the assessee produced advice of the Expert Advisory Committee of the Institute of Chartered Accountants. 4. The Assessing Officer, however, was of the opinion that such claim was not sustainable. He was of the opinion that such product MAMIS was already developed in the year 1989. The basic features of the package projected to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uct. The Tribunal was of the opinion that such reports suggested that there were salient features of the product MAMIS which would achieve a major breakthrough in the field of software technology. Such program would provide a complete solution to the medium- sized manufacturing companies. Before the Tribunal, the assessee contended that such reliable evidence of the experts' opinion could not have been discarded by the revenue authorities. If the Assessing Officer had any doubt about the nature of activity carried on and whether the same amounted to scientific research or not, he ought to have taken recourse to the provisions of section 35(3) of the Act by making a reference to the Board requesting for an opinion of the prescribed authority on the issue. 9. The Tribunal was of the opinion that the expression "scientific research" defined under section 43(4) was of wide amplitude. The Tribunal was of the opinion that the Legislature had provided incentive for providing deduction of capital and revenue expenditure incurred for the research and developmental activities. Such provision should, therefore, be liberally construed. The Tribunal accepted the assessee's contention that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further appeals of the revenue arising out of the counter appeals before the Tribunal pertaining to same assessment years. 12. In view of the above facts, counsel for the revenue submitted that the Tribunal erred in granting benefit of section 35 of the Act to the assessee. Any development of software per se would not amount to scientific research, in the present case all the more so since all that the assessee had done was to modify its existing product to suit the requirements of individual buyers. No scientific research was needed, none carried out, no deduction under section 35(1) of the Act was available to the assessee. 13. Counsel further submitted that the Tribunal without examining highly technical and complicated aspects came to the conclusion that the assessee had carried out scientific research. 14. Counsel further submitted that the question whether the activity carried out by the assessee amounted to scientific research or not could be decided having regard to section 35(3) of the Act for which purpose the assessee ought to have made a reference to the Board for the opinion of the prescribed authority. This not having been done, the Tribunal erred in granting bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term 'scientific research' has wide amplitude. Such term cannot be equated with a scientific invention. He referred to section 43(3) of the Act where the term scientific research has been defined. 16.3 Counsel further submitted that the Assessing Officer ought to have accepted the claim of the assessee on the basis of material already produced. The question of reference by the Board under section 35(3) of the Act would arise in exceptional cases involving a class of assessees and such provision is not required to be resorted to in individual cases. 16.4 The counsel for our consideration brought to our notice following decisions with respect to the question of reference by the Board under section 35(3) of the Act:- (1) In case of J.K. Synthetics Ltd. v. O.S. Bajpai, Income-Tax Officer, Central Circle V, Kanpur and Another reported in 105 ITR 864 (All.) wherein the Allahabad High Court referring to section 35(3) of the Act expressed an opinion that if the Income Tax Officer does not accept the claim of the assessee under section 35, he has to refer the matter to the Board and the Board in turn will make a reference to the prescribed authority. Neither the Income Tax Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions shall be allowed - (i) any expenditure (not being in the nature of capital expenditure) laid out or expended on scientific research related to the business. [Explanation.-Where any such expenditure has been laid out or expended before the commencement of the business (not being expenditure laid out or expended before the 1st day of April, 1973) on payment of any salary (as defined in Explanation 2 below sub-section (5) of section 40A) to an employee engaged in such scientific research or on the purchase of materials used in such scientific research, the aggregate of the expenditure so laid out or expended within the three years immediately preceding the commencement of the business shall, to the extent it s certified by the prescribed authority to have been laid out or expended on such scientific research, be deemed to have been laid out or expended in the previous year in which the business is commenced;] (iv) in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of sub-section (2). (3) If any question arises under this section as to whether, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. In the Advanced Law Lexican by P. Ramanathan Iyer, 3rd Edition, it is explained as to mean study or scientific investigation of any biological reference or technological application for use to biological systems, living organisms or derivatives thereof to make or modify products or processes of any use. Original and planned investigation undertaken with the prospect of gaining new scientific or technological knowledge or understanding. An investigation directed to the discovery of some fact; careful study of a subject. 23. The term 'scientific research' has been explained as to mean any activities for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries. Research and development, if any, of the sciences or in technology. Any activities in the fields of knowledge or applied science for the extension of knowledge. 24. The terms 'research' and 'scientific research' respectively thus have a wide scope. It does not necessarily mean only invention. The term 'invention' on the other hand has somewhat narrower meaning and is explained as: "An invention is the finding out; the contriving; the creating of something w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a new product was developed through scientific research. The expenditure incurred for such purpose was, therefore, allowable deduction under section 35(1) of the Act. The second ground on which the Tribunal accepted the assessee's case was that under section 35(1) of the Act, the Assessing Officer could not have rejected such a claim without making a reference to the Board. 27. Insofar as the first aspect of the matter is concerned, we are of the opinion that the Tribunal without discussing full materials on record, came to such conclusion which, in our opinion, ought not to have been done. These are matters of extreme scientific complexities. What was the nature of the research undertaken, what was the improvement in the existing software aimed at or desired, whether ultimately the product which was launched by the assessee after undertaking such so called scientific research, was a new product substantially different from the existing one or not were some of the issues on which the Tribunal, in our humble opinion, without bestowing sufficient attention ruled in favour of the assessee. We may caution that such issues of extreme scientific complexities, should not be decided witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Allahabad High Court in the case of J.K. Synthetics Ltd. v. O.S. Bajpai, Income-Tax Officer, Central Circle V, Kanpur and Another (supra), Punjab & Haryana High Court in the case of Commissioner of Income-Tax v. F.C.S. International Marketing P. Ltd. (supra) and Delhi High Court in the case of Commissioner of Income-Tax v. Deltron Ltd. (supra). We are conscious that the Himachal Pradesh High Court in the case of Commissioner of Income-Tax v. Engineering Innovation Ltd. (supra) has taken a somewhat different view. We are unable to persuade ourselves to accept the reasoning of the Himachal Pradesh High Court. The High Court was of the opinion that neither section 35(3) of the Act nor any other provision under the Act or the rules empowers the revenue authorities to refer the matter to the Board. We are of the opinion that the very scheme of section 35(3) of the Act would require a revenue authority whenever a question arises as to whether the expenditure was incurred for scientific research or not before the Board who, as provided under section 35(3) of the Act, would have to refer the issue for the decision of the prescribed authority. In such a case, the revenue authority is not ma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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